Showing posts with label lending/financing. Show all posts
Showing posts with label lending/financing. Show all posts

Tuesday, December 29, 2020

The End of 2020: Now What?

2020 has been a life-changing year for everyone, literally everyone. From the global pandemic, to the fluctuating economy, not to mention the seismic shift in the perception of "going to work," it is safe to say that the world is different place than it was 12 months ago. Now what?

Every year Bloomberg Business Week puts out its "Bloomberg 50"--a list of 50 individuals that have made their mark during the prior year. Although this year's list contains a number of impressive men and women who were able to quickly mobilize and make moving, positive contributions during this tumultuous year, it is notable that not one member of this list was mentioned for contributions to the real estate market. In fact, there are many executives on the list that are touted for reducing the size and/or the footprint of their companies, which in many instances includes real estate divestment. Furthermore, Blackrock, a private equity that is well know for its real estate investments, has made the list, not for real estate, but for its renegotiation of national debts in South America.

The lack of presence of real estate in this list is yet another illustration of what was obvious to all real estate professionals--2020 was not the year of the major real estate transaction. As people hunkered down during to quarantine, the economy fluctuated and work-from-home became the norm, the real estate market dramatically changed. Mortgage delinquencies rose, office spaces became more available, the cost of materials trended upward and permits for new projects trended downward. Migrations from urban areas also took place en masse in March and April as those with the means and desire to seek less crowded surroundings during the spread of the pandemic did so. Although the amount and duration of this recent migration may be disputed, the effects of this exodus have noticeably shifted the dynamic in many local real estate markets, for better or for worse.

As asked earlier, "Now what?" Anyone that has paid even a little bit of attention to this blog over the years knows that I do not "do" doom and gloom. There is always opportunity in change and if there is one thing that 2020 has done well, it is that it has exposed a number of opportunities. From the rise of Special Purpose Acquisition Companies to the consideration of rezoning in urban areas, opportunities to add value, create wealth and thrive in the real estate market are going to present themselves throughout 2021. Rather than make a brief list of some of these opportunities in this post, I will attempt to explore them more in depth in posts throughout the upcoming year. 


Instead of looking back on notable movements in the real estate market during an unprecedented time, I have decided to look forward to the apparent opportunities of the upcoming year. So, please join me as The Real Estate Think Tank.com celebrates its 10th year in existence in 2021. It has been a wild ride thus far, let's conquer next year together. 

See you in 2021.

Friday, June 12, 2020

Social Justice Real Estate


I try my best on this blog to focus on the issues effecting the real estate market and offer a perspective uninfluenced by political factors. To the extent that social factors effect the real estate market, I am happy to address them, but I work diligently to ensure that this blog does not serve the dual purpose of promoting any particular political ideology. With that said, we are all contextual creatures and I, as an African-American male, cannot ignore the current outcry regarding police brutality against my fellow brothers and sisters.

Although the issue of police brutality against black and brown people is nothing new, it is refreshing to see all of the momentum that we are generating toward a solution. I am prayerful and hopeful that the demonstrations being made, the dialogues taking place and the changes that have begun are indicative of a new direction that our country is taking, toward working on resolving the clearly apparent and lingering racial biases found in our country. Police brutality is certainly an important issue that must be resolved, but is a symptom of an American history of racially stratified policies, both formal and informal, that have lasted for centuries and preserve advantages for those not of color. Given that the “complexity” of race relations in our country has developed over centuries, it is reasonable to expect that the solution to this issue, will not be a quick fix, but it absolutely necessary that every American commit to working toward a resolution of this issues. Until we heal our racial wound and deal with our checkered past, we cannot truly move forward as a nation.

What does this have to do with real estate?

Well, I’m glad that you asked that question. Real estate, in fact, has frequent been used to either preserve a status quo or to begin drastic change. From the mortgage redlining of the 50’s, 60’s and 70’s to racially restrictive land covenants, to blockbusting, to redistricting, to urban planning, to affordable housing programs, it is abundantly clear, real estate can influence the path of a society. The issues of the oft mentioned “inner city” are the result of urban planning, which has used zoning laws, covenants, variance hearings and other land use methods to ensure that some areas thrive and others flounder. These planning decisions had lasting effects, as communities were shaped by these decision, many of which have lasted for generations. 


Few issues are more political than land use and few are more hotly contested. Proposed major changes in zoning draw large numbers of reactions on both sides. Elections are won and lost over the location of new developments or the violation of the ubiquitous NIMBY. In fact, in most cities, big and small, there is no group more powerful and wealthy than the real estate lobby, which works to ensure that either status quo is maintained or that their notification of any changes is advanced as possible.


So if real estate can garner so much focus and convey so much influence, then the importance of acquiring as much of it as possible is clear. As Master P recently said, you have own blocks to create influence. In actuality, few things speak louder than the concerns of a collective of the largest landowners. If you are skeptical, look at how many of the largest campaign contributors of most local, mayoral and gubernatorial elections are directly tied to the real estate market. Also look at the amount of tax benefits, such as PILOTs and tax credits are given to large developers or businesses that intend to open headquarters in an area. Governments have in some instances taken land from smaller private landowners through eminent domain to ensure that such developments or headquaters are able to be built.

When it comes to real estate not much has changed from the days of feudalism—land equals influence, so if people of color want to be heard in a lasting way and establish generational change, one way to do so is to own land and/or to influence land policy. Real estate has always been a powerful tool for social change. If we do not mobilize and acquire, then we will continue to be at the mercy of the planning decisions of a group that does not share our interest. Diversity has many benefits, but it is important that we do everything that we can to secure our seat at the table, so our inclusion is a necessity and not a mere act of benevolence. 

Well that’s my take on social justice real estate. I’d love to hear your thoughts. Please comment below.

Friday, July 27, 2018

How To Approach A Defaulting Second Mortgage


Default happens, hopefully not often, but it is a fact of lending. Upon default, however, a holder of a second mortgage must find an objective, value-driven manner in which to evaluate its options. Unfortunately, in many instances second position lienholders opt for one of two extreme approaches—accepting a nominal amount in exchange for the release of the lien or demanding an unreasonably high sum for satisfaction of the lien. Both approaches are harmful for different reasons. Despite such prevalent behavior, with proper management, a defaulting second mortgage can provide a lienholder with a number of options.


So, You Agreed To Be Second

Financing a second mortgage is making a conscious decision to maintain an interest in a property that is subject to the interests of the first lienholder. The most cogent concern of a second lender is that upon default of the first mortgage, all of the second lienholder's interest can be extinguished. Such subordination is not only a concern at default, but an ongoing concern, as any changes to the property or its rights that the second position lender would like to make may possibly trigger a default in the first mortgage. 

Upon default, the relationship between the first and second lienholders undergoes a slight alteration. To understand this shift, it is probably most beneficial to think of a second position lien as converting into an option or right of first refusal upon default. When either mortgage is in default, the second lien holder has to assess whether it wishes to incur the cost of litigation, in the case of the second lien’s default, or satisfaction, in the case of a default on the first mortgage. In the same manner, the money lent for the second lien can similarly be seen as the cost of the option, which bears interest for the lender. Viewing its lien from this property rights perspective will enable the second lien holder to conduct an objective risk-weighted cost-benefit analysis of the second mortgage.

Which Approach Should Be Taken Upon Default?

When it comes to defaulting second mortgages, objectivity is essential. Accepting a nominal payoff leads to lost profits. Alternatively, overly aggressive demands for a payoff will lead to either foreclosure of the first lien position and extinguishment or a longer period of nonpayment, followed by ownership of the property subject to the first mortgage. An active approach is necessary to avoid entering either situation unwillingly. Second lien holders should assess the value of the property and determine if the remaining equity after satisfaction of the first lien and additional litigation/acquisition costs makes the exercising of the lien holder’s rights worth the cost of doing so. In addition to this course of action, it is important for the second lienholder to understand the secondary market pricing for performing second mortgages, defaulting mortgages and the typical payoff discount for defaulting second mortgage in the property’s local area. The state of title of property is also an important determining factor. Armed, with this information, a second position lienholder can make an informed decision on how it will proceed upon default.

Unfortunately, second lienholders and their authorized agents are not always optimally informed at the time of default, leading to frequent instances of idiosyncratic behavior. That said, I thought it prudent to provide my take on how to approach the default of a second position mortgage. Please feel free to provide your prospective on the matter below.

Wednesday, July 25, 2018

Real Estate Crowdfunding

Real estate crowdfunding has been a hot topic for the past few years and continues to gain notoriety. Praised for its flexibility and low barrier to entry, crowdfunding enables investors to directly invest in real estate properties without having to amass the funds necessary for a mortgage down-payment. For an amount as low as $500, in some instances, investors can contribute to a pool of investor capital that will enable a real estate entity to acquire a property. Open to both accredited investors and the public at large, crowdfunding offers access to the risks and rewards of direct real estate ownership in a passive manner with relatively little out-of-pocket costs.

Why Didn’t This Happen Sooner?

Crowdfunding is not a new idea, real estate investors for decades have pooled money to purchase properties, in an attempt to share risk and/or acquisition costs. These attempts at crowdfunding typically took the form of private “offerings” of shares or interest in a real estate holding entity, such as a limited partnership, LLC or corporation. Such private offerings were frequently limited to the immediate network of the party organizing the offering for one primary reason—securities laws made offering such investment opportunities to the public onerous and costly.

The various federal and state securities laws that regulate investment opportunities in the United States all share one common motivation—to ensure that investors are given enough information to make a informed investment decisions during the offering of an investment opportunity. In an attempt to protect the public from overly complex investment opportunities that it may not fully understand, federal and most securities laws have classified certain classes of investments as too complex to be offered to the public. All other investments must undertake numerous steps to retain the transparency necessary for public investment, including distributing an investment prospectus, filing IRS form 10-K's annually and adhering to certain required accounting procedures, among other requirements. Complying with the various requirements of public offerings can be time consuming and costly, thus federal securities law offers certain exemptions from these requirements for certain non-public offerings. Most states offer similar exemptions in their investment laws, as well.

In the past, offerors of real estate investment opportunities were careful to ensure that their real estate offerings were structured in such a way that they qualified for the federal and state exemptions, as non-compliance with these laws could lead to stiff penalties and even criminal prosecution. In so doing, such offerings were limited to investor that fit the federal and state definition of “sophisticated.” This all changed, however, with the passing of the JOBS Act in 2012. This act expanded the exemptions offered under federal securities laws to include crowdfunding. Coupled with the 2015 SEC regulations on crowdfunding, the JOBS Act has served to facilitate the explosion of crowdfunding in general and real estate crowdfunding in particular.

Crowdfunding for All?

Real estate crowdfunding, with its open access to funding from the public at large, may seem the answer to all real estate funding needs. In fact, many crowdfunded projects are funded with equity or no-interest debt. This form of financing, however, is by no means a panacea for all real estate capital woes. First and foremost, all crowdfunding is limited by SEC regulations, which means that a crowdfunding offering cannot raise more than the current SEC limit of $1,070,000.00 within a 12-month period. Any additional funding needs will have to be obtained through other fundraising or financing efforts. Furthermore, crowdfunding offerors must also comply with various SEC and tax reporting requirements.

Types of Crowdfunding

There are many different types of crowdfunding offerings. In exchange for their investment, investors are able obtain equity in a real estate entity that acquires a property, provide loans or debt financing to an acquiring company or even become a limited partner in a small investment collaboration. Real estate companies have used crowdfunding in a myriad of ways from individual residential property acquisition to purchases of commercial property portfolios. Despite the various uses of the capital raised by crowdfunding, regulations on these offerings have led to similarities in the appearances and investor interfaces of most real estate crowdfunding portals. As such, most crowdfunding investors need only visit a crowdfunding portal to browse real estate investment opportunities available to fund. Companies such as Fundrise, Rich Uncle, RealtyMogul and Lending Home, among others, all offer access to real estate crowdfunding opportunities. The following articles provide more information on the most well-known real estate crowdfunding sites:



Not Crowdfunding, but…

In addition to crowdfunding, full-service real estate investor websites have also begun to gain popularity. These websites provide listings of properties available for real estate investment along with access to a myriad of support services to facilitate the purchase of the listed properties, such as financing, property management, etc. Companies like Roofstock, Own America and HomeUnion offer such investor listing services. Please feel free to check out the article below on real estate investor listing websites:


The key difference between investor listing websites and crowdfunding websites is that listing websites offer properties for purchase, whereas crowdfunding websites offer opportunities to invest in a real estate entity without directly owning a property.
At this point, it may be prudent to mention that passive investment in the real estate market is still possible through more traditional methods, such as real estate investment trusts (REIT’s), government sponsored entity debt (Ginnie, Fannie and Freddie debt) and mortgage-backed securities (MBS). Crowdfunding, however, is distinguished from these methods in its ability to provide direct exposure to real estate acquisitions and direct access to the acquiring entities.

Well, that is my take on real estate crowdfunding, please feel free to provide your prospective on the matter below.

Thursday, February 23, 2017

Property Maintenance Laws and Lending


The fight against property blight is a battle that has been waged for many decades. Some areas of the nation, have struggled with abandoned properties and even abandoned neighborhoods since the shrinking of the nation’s industrial sector beginning in the 1970’s. Other areas became intimately acquainted with blight as a result of the wave of foreclosures that took place at the end of the first decade of the century. However it may have arrived, the real estate finance market is certainly now affected by the palpable concern of property blight and has had to adjust to attempts to mitigate its damaging effects. 

Why Worry About Blight?

To be clear, blight is a real issue that can lead to a number of undesirable effects. Abandoned properties that are poorly maintained cause safety issues. Poorly maintained building systems and structure will eventually fail at some point, causing unsafe buildings. Overgrown landscaping leads to health concerns. These health and safety concerns become a problem for neighboring properties, as neighbors must then focus on how to curb the spread of these issues onto their properties. More generally, well-maintained properties inspire a pride of ownership that carries over to neighboring property owners. The opposite is also true—abandoned and poorly maintained properties drain the neighborhood of pride of ownership and lead to less diligent maintenance throughout the neighborhood.

Sunday, January 22, 2017

In the Weeds: How a Multidisciplinary Approach to Real Estate Can Lead to Increased Success

I once had a conversation with a coworker in which I expressed my frustration regarding the siloed view of real estate that many real estate professionals seem to employ as a matter of course. I complained that so few real estate professionals truly attempted to view real estate as a multifaceted asset and instead cared only to focus on their specialization within the industry. I wondered out loud how productive the industry could truly be if, in addition to their own professional perspectives, appraisers attempted to see the industry a little more like attorneys and attorneys tried to orient themselves to view the market like investors and investors like Relators, etc. 

My coworker listened politely until I was finished and wisely stated that the reason such cross-pollination of perspectives was not present in the real estate industry was that everyone was too “in the weeds” in their various roles and on their various projects to even attempt to take such a view. It was at that moment that I realized that I realized that my coworker had accurately described a condition that plagues much of the real estate industry—myopia. Indeed, many real estate professionals become so great at their specialization that cannot see the forest for trees or better yet, the weeds. 

Monday, January 9, 2017

Cooperatives

Welcome to another year at the Real Estate Think Tank. I enjoy writing about real estate and am thankful that I have this forum to share my thoughts on the subject. With that said, let’s get into Cooperatives.

A Cooperative, also known as a Real Estate Cooperative or Co-op, is a form of real estate ownership in which owners purchase shares in a corporate entity that owns a building. This entity is usually called an Apartment Corporation. Despite the name “Apartment Corporation,” a co-op can be both residential and commercial. Although residential co-ops, known as Housing Cooperatives, are more prevalent, commercial co-ops are not uncommon. 

In exchange for the purchase of shares in a co-op, each owner is given both an ownership interest in the Apartment Corporation, usually in the form of shares of stock, and a proprietary lease. The proprietary lease entitles each owner to occupy a certain portion of the building exclusively and confers most, if not all, of the rights of property ownership over the designated space, called an apartment.


Since the Apartment Corporation owns the building and not the owners, owners in a co-op are referred to as shareholders. Furthermore, shareholders do not technically own real estate or real property, but instead own shares, which are considered personal property. This distinction has certain legal ramifications that are noteworthy, but beyond the scope of this post. The ownership characteristics of a co-op, however, are also very interesting.

Wednesday, November 30, 2016

Easements

Easements are a common occurrence in real estate, but what are they really?

Essentially, an easement is the right to use a property granted by the owner of the property to a non-owner or class of non-owners. An easement is by no means the only way for a property owner to confer use to a non-owner, but unlike other forms used to grant usage rights, such as licenses and permits, easements are recorded against the title of the property over which they are granted and remain in effect despite the transfer of the land. The ability of an easement to survive the transfer of title is called “running with the land.”

Easements differ from leases, which also confer the usage rights of a property to non-owners and also run with the land, in that easements exist in perpetuity, whereas leases have a term with a termination date. As a result, in order to terminate or “extinguish” an easement, an affirmative action must be taken like merger or abandonment. A lease, however, automatically terminates upon the end of its term, without any further action by the parties to it.

There are different types of easements and easements are generally categorized in different ways. The first way that an easement can be categorized is based on to whom or what the rights of usage are granted. If the easement grants rights of usage to the owner or occupant of another property, it is called an easement appurtenant. In this instance, the property on which the easement is established is called the servient estate and the property that receives the right of usage is called the dominant estate.

Thursday, September 8, 2016

My How Local Lending Has Changed!

Today's banks are unabashedly international businesses which thrive on providing services and taking advantage of opportunities throughout the world. Long gone are the days of the local Savings and Loan as the provider of the community's mortgage needs. Instead, behemoths of consolidations dominate today's lending scene, thriving off of large economies of scale that make any potentially smaller competitors shutter. This change in the role of banking in the community, although the largely the product of intentional moves by the banking industry and Congress, is not without its effects on the real estate industry, particularly the residential market.

In order to explain the effect of big banks on the residential real estate market, one must understand the role of local banks prior to the expansion and consolidation of banks that led to the current situation. Until the 1980's, US mortgage lending was dominated by small local banks and Savings and Loan Associations (S&L's), local banking entities that engaged in lending and offering savings deposit accounts. Initially, S&L's were heavily regulated and restricted from offering consumer loans and investing deposits in most of the investment vehicles available in the market. The Savings and Loan model relied on a favorable treatment by the Federal Reserve to allow for an increased spread between the rate charged on mortgage lending and the rate offered on deposit accounts. S&L's also frequently managed underwriting risk with local market knowledge.

Friday, May 27, 2016

Monte Carlo Mortgages


In his book Mortgage Wars, former CFO of Fannie Mae, Timothy Howard explains how Fannie's realization that mortgages behave like bonds with embedded call options revolutionized its ability to value its portfolio and manage risk. Prior to this change in thinking, Fannie Mae's methods for reserving capital were consistently shown to be inadequate. Today, the valuation of mortgages and mortgage-related securities as bonds with embedded calls is nothing new.

A call option is a type of derivative, which conveys the right (but not the obligation) to purchase another financial instrument (the underlying asset) for a specified price (the strike price) at a specified time (the expiration date). Purchasing a call option offers the right to purchase the underlying asset and selling a call options impose the obligation of delivering the underlying asset at the strike price on the execution date.

Mortgages are freely refinanceable at any point. In this way, they function as bonds in which the payments from the homeowner serve as the coupon payment and the ability to refinance serves as a call option sold to the homeowner by the mortgage holder. Typically the refinance rates increase as interest rates decrease. Although mortgage prepayment penalties are included in mortgages to discourage refinancing, a large enough drop in interest rates can make refinancing worthwhile to a property owner in spite of the prepayment penalty. For mortgage and MBS investors, prepayments are undesirable. Given that most mortgage investors look to invest anywhere between 5 and 30 years, an early decline in interest rates can leave many investors with cash from prepayments that must be invested in a market offering lower interests rates. This undesirable situation is the double-edged sword of prepayment risk for mortgages.

Sunday, October 4, 2015

Mortgage Backed Securities and Personal Bankruptcy

At long last, the end of the series!

Personal bankruptcy is usually filed by an individual for very different reasons than corporate bankruptcies. Whereas the primary motivation behind filing a business bankruptcy may be protection of the business or satisfaction of debts, personal bankruptcies are frequently filed for asset protection, in addition to satisfaction of debts.

The two sections of the bankruptcy code that apply to personal bankruptcies are chapter 7 and chapter 13. As with business bankruptcies, chapter 7 for personal bankruptcies is a process of liquidation and seeks include all non-exempt assets of the petitioner in the bankruptcy estate in order to liquidate them to pay off debts. Chapter 13, on the other hand, seeks to reorganize the debt of a petitioner pursuant to a payment plan, which typically last from 3 to 5 years.

Tuesday, March 3, 2015

Special Purpose Entity Bankruptcy Concerns for Mortgage-Backed Securities

Let us continue the bankruptcy theme begun in my last post and discuss the effects of Special Purpose Entity (SPE) bankruptcies and their effect on mortgage-backed securities. Obviously, most bond covenants designate the bankruptcy of a SPE an event of default and restrict the likelihood of its happening. In the unlikely event that such a bankruptcy does happen however, here is an overview of the process.

As a quick review, I would like to restate that mortgage-backed securities are the result of a process of securitization that takes place when a real estate lender sells a package of its loans to an entity, called and SPE. The SPE receives the money to purchase the loans from the sale of either securities, beneficial interests in the entity or trust certificates from a trust set-up to hold the loans. If securities or trust certificates are sold, they are called mortgage-backed securities (MBS). Through the securitization process, real estate lenders are provided with cash to originate more loans and investors are able to purchase MBS and invest in the real estate market without having to hold real property. If you question why one would want to invest in the real estate market at all, please see my earlier post, “Why I Choose Real Estate.”

Tuesday, February 24, 2015

Lender Bankruptcy and Mortgage-Backed Securitization

Mortgage-backed securitization is an essential part of the mortgage secondary market, as it provides both liquidity and expanded sources of funding for real estate lender. Securitization also allows for more widespread participation in the real estate market, since MBS bonds are an asset class that can be held by classes of investors that are restricted by law from retaining extended ownership in real property. More participation in the real estate secondary market, of course, translates to a more robust market with more available real estate funding and more real estate activity.

Despite its role in the market down-turn of 2007/2008, securitization of real estate assets has been and continues to be an important part of the U.S. real estate finance market. Securitization, however, heavily depends on a bankruptcy remote structure.

Friday, January 30, 2015

Second Mortgages: Why They Are Less Prevalent In Commercial Real Estate Than In Residential Real Estate

Early in my whole loan trading career, an investor once offered to fund a partnership that would purchase second position liens, also known as second mortgages, secured by commercial real estate. The investor promised to pledge a substantial amount of capital, if I was able to assemble a portfolio of target assets. Understanding the risk/reward profile of such an investment and desiring to deliver for what seemed to be a potential source of new business, I quickly began to work on finding commercial seconds to underwrite and select. After a few days on the phone with a number of commercial lenders, real estate debt funds and large financial institutions, I began to realize that commercial real estate second mortgages were not easy to find. Finally, after a few weeks of searching, I informed the investor that I was unable to find any asset worth purchasing that met his mandate.

Nearly ten years later, I now understand why the second mortgage, an established method of financing in the world of residential finance, is so infrequently used in commercial real estate. To state it plainly, the property-income focus of commercial real estate, makes commercial seconds more of a liability than an asset. It is this income focus that leads most commercial lenders to emphasize property performance over the qualifications of the borrower. As a result, most commercial financing is offered with no recourse to the buyer upon default, giving the lender as much control over a distressed asset as possible and incentivizing the owner of a distressed property to “walk away” when there are no more options. In order to maintain as much control over the property as possible, most commercial real estate lenders will insist that they be on the only creditor of the property and that the property be structured in such a way that it is remote from the bankruptcy of the borrower. These goals are typically accomplished by establishing a holding entity for the property to be financed, placing the borrower in the equity position of the entity and making the lender a creditor of the entity, secured by its largest asset.

Tuesday, August 30, 2011

Lender’s Fees: How Should One Account For Them?


Lender’s fees are a fact of life in real estate acquisitions. I was recently reading a chapter in a real estate handbook that outlined the justifications of a number fees commonly associated with mortgage origination and it offered a number of options for reducing their amounts. The relative negotiability of each lender fee, however, depends greatly on the lender, the credit worthiness of the borrower, the size of the asset, the size of the down-payment and market conditions. Generally, the stronger the buyer, the larger the asset and the larger the down-payment, the more negotiable lender’s fees are. Below is a discussion of some of the most common lender fees and how to account for them.