Showing posts with label real estate ownership. Show all posts
Showing posts with label real estate ownership. Show all posts

Sunday, August 16, 2020

Lesson From the Pandemic For Residential Landlords

The effects of Covid-19 on the residential rental market are apparent—many jurisdictions have enacted rent freezes, landlord/tenant courts have been shut down and moratorium on evictions and foreclosures have been set. Moreover, the accompanying downturn in the economy has left many without the ability to pay rent on time, if at all.

Considered rationally, the need for all of the social safety nets put in place for renters is obvious. The only way to truly survive a global disaster is to band together and implement a series of solutions. Radical measures had to be taken to mitigate the global pandemic. “We’re all in this together,” is not just a motto, it’s a reality. As a society, we are tasked with taking care of our most vulnerable populations, because the repercussions of not doing so are far more expensive than the costs of their protection. In this instance in particular, increased homelessness and/or a wave of relocations due to a rise in home displacement would only serve to exacerbate infection rates around the nation. That said, here are some clear lessons that residential landlords can learn in the wake of this global event.

1.       Paying Tenants Are Worth Their Weight In Gold

Those who were able to enjoy relatively uninterrupted streams of cashflow during the past few months are truly ahead of the game. Finding tenants with the ability to pay rent on time and the willingness to do so is a difficult, but not impossible task. Great systems for vetting renters are key to doing so, but active, just and appropriate property management also plays a big part in the search and retention of paying tenants. Happy tenants are more likely to prioritize their rent expenses.

The compatibility of the property to its neighborhood is also key to the retention of paying tenants. Properties that effectively service the neighborhood’s population, such as those that are accommodating to the social and/or economic needs of the community tend to have renters that are more willing to pay their rent expenses. Although some of these characteristics can be relatively immutable, such as proximity to a popular bus or train line or to certain religious institutions, others are within the control of the building owner, such as providing high-speed Wi-Fi in areas that cater to the tech workforce. Whether immutable or not, these factors influence the rental experience of each tenant and can facilitate the connection that tenants have to the property, giving them further incentive to pay rent on time.

2.       Location Determines Approach

Once again the old real estate adage rings true—location, location, location. The location of a property, better stated, the laws of the jurisdiction of a property have a direct effect on the method of mitigation that a landlord can take for a loss of rent. In areas with more tenant protections, long term planning should be the order of the day. Tenant negotiations and/or buyouts, when legal, may be a viable, but time-consuming option. Analyzing and maximizing the value of one’s property in the interim will also be key. Utilization of advertising space, cosmetic upgrades of vacant units or even a higher standard of efficiency in building operations may all be necessary, as non-payments begin to resolve.

The same techniques can also be applied in jurisdictions with less tenant protections, as well, and will yield results. Their application, however, becomes more critical in areas where the law favors the tenant. Before writing off jurisdictions with strong tenant protections, please keep in mind that these areas typically boast lower cap rates, so if the price and time are right, exiting a property may be a viable option.

3.       Affordable Housing Is The Wave

Rental assistance programs, like Section 8, have been a lifeline to many landlords during this time. Some building owners have sworn by these programs prior to the pandemic and have been proven right. The government has not waivered in its consistency in rental payouts during the pandemic. Moreover, the relative scarcity of these programs makes them highly coveted by tenants, who tend to pay regularly to maintain their eligibility. The government has made it a priority to ensure housing program payments to stabilize rental housing and building owners should take advantage

By no means an exhaustive list, these three points are some of the many lessons that landlords can learn in the wake of this devastating pandemic. That is my take on this topic. Please feel free to leave your comments below.


Friday, June 26, 2020

Real Estate in the Time of Pandemic

Photo by CDC

With our country beginning to find its way to a new normal at the end of months of quarantine, we in the real estate market are all left with one nagging question—What should we expect from here? 

Like most people, I do not have definitive answer. If you are over the age of thirteen, however, this pandemic is certainly not the first market disruption that you have experienced and with each such occurrence, we all learn some valuable lessons about the real estate industry. With that said, here are a couple of lessons that we can learn from this particular time of change: 

1. COVID-19 Wasn't The End Of The World
Photo by Anna Shvets

The Corona virus pandemic is clearly a historical event and one of the most pervasive pandemics ever. Pandemics are an unfortunate part of human history and have happened a number of times in the last century. The world-wide nature of this particular pandemic, coupled with the inter-connectivity of today’s world, may make our current situation historically novel, however, despite the idyiosyncracies of this pandemic, humans have a history of overcoming pandemics and moving forward. The loss that COVID-19 has caused, in lives, wealth and production cannot be replaced. It is important to remember, however, that while the results of this destruction must be mourned, the real estate market will come back and has rebounded from worse. 


2. With Every Disruption Comes Opportunity

Large market disruptions and crises are much like forest fires--they are extremely destructive to everything effected. Also like forest fires, these events clear a path for growth that may not have been possible prior. The real estate market, like most other markets, will rebound and it is the duty of every real estate professional to be diligent in looking for ways to contribute toward the structuring of a new normal in our changing world. 

3.Things Will Not Be The Same

There are a number of lessons that the past couple of months have taught us, not the least of which are the capabilities of our remote learning and working infrastructures and the importance of residential real estate in times of crisis. Unfortunately, the pandemic has also made many of us leery of in-person interaction and created a hypersensitivity around perceived health. Some of the changes that have resulted from the pandemic may dissipate over time, but no one who has lived through the quarantine will ever forget the experience. That said, it is important that real estate professionals stay alert to changing trends as we all quickly try to determine which of the adjustments made will become a regular part of our lives. 



4. Home Will Take On A New Role

One thing that has been apparent throughout the quarantine is that there is no place like home. Residential real estate will certainly be viewed differently going forward. Consumers are bound to be much more beholden to their preferences and the sanitary status of a property may be its selling point. Newer construction may be able to demand more of a premium initially, given its modern features and shorter owner history. Additionally, working-from-home will become a continued reality for many. Homes that are best able to accommodate remote workers, may also be able to demand premiums.

Photo by August de Richelieu

5. Workplaces Will Have To Adapt

Photo by Ivan SamkovThe concept of work has definitely been redefined during this time of pandemic, as we have learned that the nation will not fall apart if most of us work remotely. This realization, coupled with the shriveling of the economy during the past few months has caused some serious adverse effects in the commercial real estate market. Although warehouse space and industrial properties may be less effected by the move to remote working, as these property types are driven by the physical needs of companies, all property classes have been effected by the slowing of the economy. Social distancing has not been kind to office and retail properties. These property types may need to undergo some significant reimagining, as they are tailored to inter-personal interaction. Further, the required increase in online-purchasing has only served to further accelerate what has been an apparent reality in retail real estate for sometime—a new normal is on the horizon. Flexibility will be key in the office and retail markets, where the spoils will go to the nimble. 

6. Sanitary And Sterile May Be Trendy

Photo by cottonbro In the wake of this national health crisis, sterile is in. As the nation continues its path toward reopening, we have already begun to see businesses retooled in order to work toward the eradication of COVID-19. The concern over this virus will inevitably lead to an increased concern for the sterility of dwellings and structures. Demonstrable sanitary feature, systems and practice can allay health concerns and are certainly welcomed, if not mandatory, additions to any property. 


7. Fundamentals Still Rein Supreme

In the end, real estate is still real estate. It will continue to be a relatively illiquid asset and it will continue to have significant market lags. It will also continue to be a valuable resource and a viable way to build and shield wealth. All of these factors are why we love real estate so much. It’s indicators will remain the same: e.g. the employment rate, housing starts, mortgage rates, local economic factors, locations of major employers, etc., although, it is wholly possible that some new indicators may arise. I will avoid trying to speculate on which indicators may be significant, but one thing is clear, change is coming and it is important to be ready to navigate toward our new way of life. 

This has been my take on the impending changes to real estate coming in the wake of the pandemic. I’d love to hear your thoughts. Please comment below.

Tuesday, July 31, 2018

Change Is A Coming: How Current Economic Conditions Should Affect Real Estate Investment


Many economist and market pundits are predicting a market downturn, beginning some time in 2019 or 2020. All of the indicators of an overheated boom seem to be present--increasing margin debt, decreasing dividends, stock market price inflation and increased levels of corporate debt. Essentially, low interest rates have made credit more accessible. As a result, businesses are using credit to buy back some of their outstanding stock. In response to the relative decrease in availability of stock, stock market prices are rising, increasing household wealth across the nation. Spurred on in part by technological development, the economy seems to be booming at present, but it is important to note that mechanism that is fueling this increase in wealth is debt.

The Dangers of Debt

Although the use of debt in an economy is not an inherent cause for alarm, the financing of an economic boom through debt can lead to some undesirable outcomes. An increase in corporate debt without an accompanying increase in productivity simply means that companies are borrowing to appear more profitable, merely because money is available at low rates. Cheap money, however, has to be paid back at some point and without an increase in productivity to support the increased leverage, companies that borrow cheaply will have repay their obligations at their current rate of production with future dollars, which have less purchasing power.

Compounding this issue further is that the resulting increase in stock prices leads to an increase in the values of the portfolios of consumers throughout the nation. This increase in household wealth leads to an increase in consumer spending and borrowing. In turn, prices increase in response to the uptick in consumption. In the presence of increased productivity, such economic functionality is normally a mechanism of economic growth. Without increased production, leading to an increase in value created by this cycle of price increasing, inflation results.

Increased productivity is important to sustainable economic growth, unfortunately, it has been outpaced in the present economy by corporate and consumer consumption. The dislocation between interest rate activity and production growth is a clear indication that the monetary policy of the Federal Reserve is the true underlying cause of the economic boom. Unfortunately federal monetary policies alone cannot be the support an economic boom, as these policies will have to change once the economy show signs of overheating. Naturally, a change in the underlying support of an economic boom will cause a market crash.

What Does All of This Have to Do with Real Estate Finance?

As discussed, in a previous post, an economic downturn is the time to acquire real estate exposure, however, it is also a time during which credit is scarce. Accordingly, given the prevailing prediction of a market crash, capital acquisition should be the focus of savvy real estate investors. Therefore, now is the time to forgo acquisition in favor of increased occupancy and monetization. Given the low cost of money, now is also the perfect time to finance repairs that will facilitate higher rates and increased capitalization.

Although the argument could be made that once indicators point to a market downturn, it is already too late to begin preparation, it is better to adjust to eminent market conditions to the extent possible than not at all. The upcoming downturn, although unfortunate, can serve as an opportunity for the liquid, well-prepared real estate investor. A change is certainly on the horizon, be prepared and 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.

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.

Monday, December 26, 2016

Condominiums

Condominium ownership is a form of real estate ownership that has unique characteristics. For those not well-versed in condominiums, here is a quick overview of their definition and purpose:

A condominium or condo allows a property, typically a multistory building, but not infrequently a large parcel of land, to be split into sections and owned by multiple owners. The unique aspect of condominium ownership is that it entitles an owner to ownership of a specific portion of a property and the space or “air” bounded by that portion. For example, through condominium ownership, one can convey the first floor of a three story building to one party, the second to another party and the third to yet another party. Interestingly, the units are frequently not required to be the same size, so one could create a two-unit condominium out of a three story building and convey the first floor to one party and the second and third floors to another party. A condominium is formed by recording a document, typically called a declaration in most jurisdictions, but also referred to by other names, such as a master deed, against the property. This document informs the public that the property is now a condominium, outlines the sizes of the units and common areas and provides other relevant information about the condominium.  Once a condominium is formed the property can no longer be sold as an undivided whole, unless the condominium regime is abandoned. The condominium regime will remain in effect until either the unit owners decide to abandon the condominium, the government dissolves the condominium, the property somehow loses the condominium status through the violation of local laws or the government condemns the property.

Wednesday, January 20, 2016

My Take On Tax Liens

Tax liens have always been of interest to me. As a teen, I would remember the infomercials advertising tax lien investments as the way to own tons of property for pennies on the dollar. Since my father was a contractor and property manager, I was introduced to real estate ownership at a young age and read my first book on tax liens in my late teens. At the time, I could not figure out why more people were not investing in tax liens. As an adult, real estate professional and attorney, I can now appreciate the risks/reward trade off that comes with this asset class. So, here is my take on tax liens.

Tax liens are a low cost way to obtain exposure to the real estate market. Although the supply and demand of tax liens is very much influenced by local events, tax liens will be around as long as there are municipalities in need of money and property owners who do not pay their taxes. Although cheap and available, investments in tax liens propose some unique risks and benefits.

One of the unique benefits of tax liens is that they initially offer passive income at high rates of return. Most tax liens are purchased via auction and most auctions employ one of two bidding methods--bidding up price or bidding down interest. Whether the price of the lien is bid up or the interest rate is bid down, the amount of back taxes owed does not increase and statutory penalty rates of interest typically offer an attractive return to purchasers that do not overbid. Moreover, upon the purchase of a tax lien, the municipality continues to serve as the collection agency for a statutorily mandated length of time, in most cases. This allows investors to collect on the purchased lien with minimal effort, for a period of time.

Thursday, January 14, 2016

Taxes, Taxes, Taxes

This may be stating the obvious, but the tax consequences of a real estate transaction are one of the most important aspects of the deal. Although most generic measures of property value, such as cap rate and NOI seek to exclude taxation in order to generate values that can be comparable across investors, an individualized tax assessment of any real estate acquisition is essential to determining its true rate of return of and its opportunity costs.

Although I am not a tax professional, tax expert or tax adviser, I would like to briefly discuss various real estate investment tax considerations. I will attempt to address a few of the more popular tax considerations at the property, entity and security level:

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.”

Wednesday, February 11, 2015

Why I Choose Real Estate

A number of times throughout my career, I have been asked a very poignant question—why real estate? Admittedly, other asset classes do carry a certain level of prestige, which is typically more associated with the asset’s mystique, yet I find that real estate can be as involved and complex as any other asset class. Although the mathematics for risk curves and certain derivative transactions may be more intricate than those used in a typical commercial real estate property acquisition, such transactions and risk analysis can be structured around real estate financing structures. In fact, the mathematical aspects of some of the more “complex” investment vehicles are not as esoteric as they seem and most can be understood, given enough time and exposure to them. The legal issues specific to each class of investment can also be considered complex, but not beyond the comprehension of most competent lawyers. Ultimately, the decision to prefer one asset class over another boils down to a matter of preference.

So, why do I so closely follow real estate? The reason is that underlying any real estate-related transaction is a relationship to a tangible hard asset. A tangible hard asset that has a value influenced by easily understood factors. Real estate markets for every property class are motivated by the economy, real estate demand and the market for the business that the property serves. The real estate market is also relatively stable and changes over the course of years, not months or weeks. Finally, real estate is one of the few assets that lends itself to owner-operation in a way that a company or payment stream may not.

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.