Category Archives: Real Estate


by Paul Braungart, President, Regional Capital Group

In the current commercial real estate market multifamily properties appear to be outperforming other income producing property types. Investors have targeted apartment projects for acquisition partly due the availability of funds for this sector of the marketplace. In the past 18 months there has been some downward pressure on property values as a result of a decrease in average rental rates and an increase in the vacancy rate across some markets. Many in the industry feel that from an economic standpoint, the worst is over for multifamily properties and that a small recovery has begun in this sector, but it may not be fully realized until 4th quarter of this year or until early 2011. Buyers and sellers appear to be motivated to work together to complete transactions.

Over the past year many markets have experienced a decrease in capitalization rates as the demand for higher quality projects among the larger players has heated up. Existing apartment properties have a distinct advantage over new projects due to the barriers to entry including a difficult and lengthy process of project approvals along with the challenge of finding construction financing.
With supply being somewhat constrained, it is expected that the children of baby boomers will have a major impact on the multifamily industry. As a result household demographics expect a substantial increase in new renters over the next 10 years which will contribute to the growth of the industry. Employment rates appear to be declining while new job creation has helped tremendously to improve this sector of the commercial real estate market. Those new to rental housing have exhibited more confidence in the economy and have helped the decline of vacancy rates. The housing market is still struggling and the lack of homebuyers contributes to the growth in multi-family occupancy rates. Declining housing starts, weak existing home sales, and difficulty in obtaining residential mortgages have also helped the rental housing market.

Although most of the commercial real estate markets are in flux, the multifamily arena continues to be a positive indicator that real estate capital is available in the market. The most active players are the agencies including FNMA, FHLMC, and HUD which are typically financing acquisitions or refinances. The life companies have also stepped back into the game with lower leverage loans, but have shown a steady stream of loan closings. The CMBS market has reappeared on a smaller scale as well as a number of bridge lenders, all capable of closing in a shorter period of time. Leverage, sponsorship, and performance are all critical factors when trying to secure financing in today’s market. Equity is also available for multifamily and student housing project types in proven markets. The interest rates are still very attractive and most of the commercial real estate closings in the market are for this sector.

Several of our clients and partners are looking to acquire new projects either performing or non-performing. RCG continues to be very active in all sectors of the multifamily marketplace as historically the firm has been a real estate opportunity fund manager participating in all pieces of the capital stack. RCG has expanded its services to coordinate the funding for both short and long term loans for borrowers and to really meet every financing need a borrower may have.


Small Biz Jobs Bill Approved! Will it help?

Finally, after months of discussion and debate, a new small business initiative was launched yesterday, as President Obama signed the Small Business Jobs Act of 2010 into law!    The bill has several major components, including the creation of a “small business lending fund”, SBA loan program changes to both the 7(a) and 504 loan programs, temporary tax breaks for small business investments and more favorable tax treatment of certain business expenses.    But what will the net effect be to small businesses that need money, especially those that own or want to own commercial real estate?

Small Business Lending Fund – First, let’s address this new pot of money available to small banks.  Under this program, banks with assets under $10 billion will be able to obtain very attractive additional funds from the U.S. Treasury.     To qualify, banks will have to submit a ‘small business lending plan’ to Treasury.   This truly should stimulate some additional small business lending by smaller, capital-constrained banks.    Unfortunately, it does not appear the Treasury will be able to require that certain lending targets be met by banks, so there is a risk that the capital will be borrowed by banks but (much like with some TARP funds) not re-deployed to borrowers/businesses.   However, from initial feedback in the marketplace, some banks are in fact putting plans together to immediately ramp up lending once they receive these new Treasury funds.    Will they be a little less conservative in their underwriting, though?    Will more businesses qualify for financing?    Unfortunately, this is not at all certain.     

Increased Loan Guaranties – Also impacting the banks and potentially their willingness to lend is the increase in the percentage of the government’s guarantee on SBA loans, from 75% to 90%.    This is meaningful to banks but is only being offered per the bill until the end of 2010.     So, while it could help push banks to be a tad more aggressive in their lending standards, in reality there is no time for it to have any real effect.  

SBA Loan Limit Increases – The bill makes some temporary and some permanent changes to the most popular SBA loan programs – the 7(a) and 504 programs.    The biggest news is the permanent change to the maximum loan sizes allowed under each program.  The 7(a) program will now allow loans up to $5 million, and the 504 program will now also allow loans to $5 million (but given the structure of 504 loans, that translates into development projects or purchases of $12.5 million potentially now qualifying.)    These loan limit increases will definitely benefit small businesses refinancing or acquiring commercial real estate, some of whom had needs for higher dollar amount that the SBA programs could historically accommodate.    

SBA 504 Loans for Refinances – Also benefitting businesses owners that own their real estate, the 504 program will for two years be available for use in refinancing commercial mortgages that meet certain somewhat strict criteria.   Though only a small % of businesses will be eligible, the main benefit of using the 504 program for refinances is in providing small businesses with fixed-rate loans at record low interest rates (recently under 5% fixed for 20 years.)     Although temporary and narrow in eligibility, count this as a small win for small businesses with commercial real estate.

Elimination of SBA Loan Fees – Another notable element of the bill is the temporary elimination, yet again, of the loan fees associated with SBA loans.     These fees, up to 3% of the total financing, will be waived but only through the end of 2010.      This means that applicants only have a couple of months to start the loan application process if they want to benefit from these reduced fees.     This is a great benefit for businesses, especially those borrowing larger amounts (loan fees on a $2 million loan would otherwise be over $50,000), but the short-lived nature of the provision is a frustrating déjà vu from earlier bills waiving these fees only for short periods.

Bottom line?   The bill should provide some stimulus to small business lending, with some banks putting their toe back in the lending water, more businesses becoming eligible for financing, and more financing requests becoming eligible for approval.   However, in counterbalance, some very helpful features will be short-lived, and there is not significant emphasis placed on incenting banks to expand qualification criteria for businesses or find opportunities to qualify more borrowers than they do today.

Houston Distressed Sale a Pre-Cursor to 2010 Deal Pick-Up?

In December, a group of investors purchased the West Oaks Mall, a 40% vacant shopping mall in Houston, for $15 million – a long way from the $102 million paid for it in 2005.   The recent article Distress Watch: Real Estate Sell-Off Starts Small highlights the sale and suggests that while this does not likely portend a flood of distressed asset sales, hopefully it signals a “tide” of trading in these properties.   

It is always hard to call a trend from a single transaction, and especially one with the added dimension of the original owner/buyer being sentenced to 100 years in prison for defrauding clients of his 1031 advisory firm (he is appealing the sentence).   However, given the continued unwinding of the RE transactions from the heady days of 2004-2007, it seems inevitable that more notable distressed sales will follow throughout the year.

Year of Reckoning for Commercial-Property Lenders?

Today the Wall Street Journal has an article that is a must read for anyone in the commercial real estate industry.

The gist of the article is that this may be the year that banks, “begin biting the bullet and accepting losses to get distressed commercial real-estate assets off their books.” Past blogs have discussed the trillions of dollars raised by Opportunistic investors that are sitting on the sidelines. This may be the year that they get to deploy their capital. In the last month I’ve met with private equity investors that have $350million, $400million and $500million war chest brimming with cash. These three investors have a combined $1.25billion to invest. In 2009 they invested less than $100million. This may be the year they get to acquire real estate and loans for a fraction of what they feel is the true intrinsic value. I’m looking to be part of it.

Read complete article

Congress is voting on a bill to destroy the investment real estate industry

BLOGGER COMMENT: Immediate action is required. This Bill has already been passed by the House. Our only chance to stop it is in the Senate.

This week Congress will be considering legislation that will impose the most sweeping and potentially most disruptive new tax on real estate since the Tax Reform Act of 1986, which contributed unmistakably to the recession of the late 1980s and early 1990s. The current tough economic environment is already stalling new real estate projects, but this increase, if enacted, will significantly dampen future investment.

The proposal being considered this week will increase the taxation of carried interest (also known as “the promote” or “the sponsor’s share”) from the current and more favorable capital gain rate of 15% to the higher ordinary income tax rate of 35%. This increase will dramatically change the way real estate partnerships have operated for more than 50 years, as most real estate ventures are organized as limited partnerships or LLCs. While the original stated intent of this proposal is to address the perceived tax rate inequity applied to private equity and hedge fund managers, it will disproportionately impact the real estate industry.

Unlike private equity firms, the carried interest for the general partner in a real estate partnership is not compensation for services rendered and it is not guaranteed income. Most real estate partnerships must exceed numerous hurdles, which result in the limited partner realizing a return on investment before the general partner sees the first dollar of gain. Moreover, the general partner often experiences a significant “hold” time before seeing that gain.

By treating the general partner’s interest in a partnership as compensation for services, the risk that the general partner undertakes on behalf of the partnership is not recognized. The direct risks include all partnership liabilities for environmental concerns, lawsuits, loan guaranties and carve-outs. Furthermore, the general partner is currently required to pay ordinary income taxes on the fees received from the partnership for standard services such as leasing or construction management.

With the commercial real estate industry under serious strain due to the current credit crisis, raising this anti-investment tax on real estate will not only threaten economic development projects and related jobs, but is will also hit small and medium sized developers the hardest.

A carried interest tax increase comes with serious economic consequences and disproportionately affects the shopping center/real estate sector.

Betsy Laird
ICSC Senior Vice President of Global Public Policy

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