Money pouring into distressed real estate funds

Florida-based Kayne Anderson is having to turn investors away after raising $1.3B in two weeks for a fund targeting distressed property sales. The company says it would typically take 12-18 months to raise such an amount. According to Preqin, in early April there were 939 commercial funds globally looking to raise just shy of $300B.

Severe stress for commercial property is likely going nowhere even after the economy begins to reopen. It’s hard to imagine hotels and shopping centers operating at anything close to full capacity for months, if not years. And if this work-from-home trend gets a foothold, demand for office space isn’t looking good.

Among those who have made fortunes from a distressed property in the past and who will likely do so again are Sam Zell, Blackstone (NYSE:BX), and KKR (NYSE:KKR).

For those interested in investing alongside Zell, there’s Equity Commonwealth (NYSE:EQC), where he’s board chairman. It’s market cap mostly in cash, the company is more or less a vehicle for Zell and team to buy distressed assets on the cheap.

https://seekingalpha.com/news/3562617-money-literally-pouring-distressed-real-estate-funds

Rent payments dive for strip mall owners

Owners of the more than 30,000 strip malls in the U.S. have been paid only between 30% and 50% of April rent, according to commercial property researchers at Green Street Advisors.

That puts the outdoor plazas on course for far larger declines in annual income than they endured during the global financial crisis, highlighting the scale of the disruption caused by the coronavirus shutdown.

Despite the pressure, Green Street said listed operators should have balance sheet strength to emerge from the crisis intact, compared to landlords of indoor shopping malls, some of which are heading for financial restructuring.

Related: RPT, CDR, SKT, SPG, PEI, MAC, CBL, WPG, EPR, FRT, WSR, KIM, TCO

https://seekingalpha.com/news/3561878-rent-payments-dive-for-strip-mall-owners

Home-Based Businesses Are Coming

With the rapid spread of Covid-19, working from home is having a moment. With most major cities now under stay-at-home orders and nonessential businesses closing down across the country, millions of Americans are working remotely for the first time. Will it stick?
Indeed, even before the coronavirus and self-quarantining, more and more Americans have been running businesses from home. According to recent research, the number of home-based businesses nearly doubled between 1992 and 2012, constituting one in six businesses by 2014. Evidence from this period indicates that such businesses are more likely to be run by people otherwise excluded from conventional work: single parents, the disabled, the unemployed, and caregivers, among others.
The steady rise of home-based businesses has clearly escalated in recent years. Pull up Google Maps for any suburban neighborhood and see for yourself. In one neighborhood in Lexington, Kentucky, for example, notification bubbles rise above a half-dozen single-family homes for businesses such as African hair-braiding, artisanal candle-making, and software development. Though growing, such home-based businesses remain largely invisible, in part because they are often illegal under current zoning laws. In addition to the risk of fines and penalties, this leaves many home-based entrepreneurs unable to secure financing to expand their businesses.
In a study for Utah State University’s Center for Growth and Opportunity, we explored these regulatory barriers to entrepreneurship and possible avenues for reform. The challenge for home-based businesses, it turns out, is that many zoning ordinances were written before World War II. As a result, the provisions regulating when and how people can work from home are often antiquated. Few current lists of permitted businesses even mention the Internet.
Where certain home-based businesses are allowed, a host of detailed regulations makes legally operating them nearly impossible. In most cities, for example, it’s illegal to have any clients, customers, or employees visit as part of operations, making popular home-based businesses like daycares and tutoring prohibited in residential areas. Equally common are bans on businesses involving sales, keeping inventories, or using technology not normally found in a home.
If these rules were too strict from the start, the issues have only intensified during the digital age. Services like eBay and Amazon have allowed more Americans to run retail businesses from home—and made bans on residential-based retail increasingly out of step with reality. The same applies to many other popular small businesses, from tax preparation to computer repair—both now online services. Outdated restrictions are now having a detrimental effect. In a recent case in northern Virginia, for example, regulators spent two years fighting with a home-based direct-sales operator. Her offense: storing dresses in her home. Meantime, in Nashville, regulators find themselves in a multiyear battle with a music producer over recording musicians in his home studio.
Ironically, while northern Virginia and Nashville spent 2017 trying to stifle home-based entrepreneurs, they were simultaneously offering billions in subsidies trying to lure a second headquarters for Amazon—itself a former home-based business. Obsolete codes could undermine the Amazons of tomorrow. Iconic brands like Disney and Harley Davidson, which both began as home-based businesses, might not exist today were they subject to these laws.
The good news is that reform is in the air. In cities like San Diego, regulators have largely scrapped old rules and costly permits. In Arizona, state policymakers came close to adopting a law that would allow “no impact” home-based businesses to operate statewide. Other states, such as Colorado and California, have developed workable rules for common home-based businesses such as “cottage foods” and daycares. But these encouraging trends remain the exception. For every San Diego, there are a half-dozen cities like Charlotte, which conditions home-based entrepreneurship on a tight set of regulations and a $145 permit.
If yesterday’s futurists overstated the extent to which the Internet would usher in an era of remote working, perhaps we underappreciate its virtues today. As many Americans experiment with working from home in the weeks and months to come, an untold number may join the ranks of home-based business operators—and never return to a conventional office. Are cities ready for that?
https://www.city-journal.org/covid-19-rise-of-home-based-businesses

How to Get Your Lender to Say Yes to Forbearance

Like many property owners these days, New York-based JEMB Realty requested a six-month forbearance for its CMBS loan on 75 Broad Street, a 34-story, 671,366-square foot building in Manhattan. The request was denied, according to Trepp.
The company’s request for forbearance was referred to the special servicer, which reviewed the request and determined the borrower still had the cash flow to continue to make debt service payments, according to the watchlist notes. “If the borrower receives further tenant rent relief request and shows a decrease in cash flow then the special servicer will review the request,” Trepp reported.
Certainly there are more hoops to jump through when requesting forbearance with a CMBS loan, but the special servicer’s reasoning is instructive for such requests across all lender types: namely, the borrower has to demonstrate a legitimate need for relief.
As the coronavirus continues to wreak havoc on the US economy and the commercial real estate industry, more and more property owners are approaching their lenders. Many of these lenders are willing to work with borrowers but there are also plenty of examples of lenders denying the requests because they feel it is not necessary.
There are some tactics borrowers can try, however, that may nudge a lender into looking more favorably on its request, according to a recent webinar hosted by ULI.

Have a Detailed Plan

Generally lenders are responding positively to these requests although some are saying no to borrowers that can’t prove a legitimate need, Zachary Streit, SVP at George Smith Partners, said.
“But while banks are being receptive to helping out, I can’t encourage sponsors enough on using best practices in their approach. They must have a coherent plan and presentation in place, including a log of conversations with tenants and when they applied for a loan under the Payment Protection Program,” he said.
Borrowers should proactively call their lender and tell it the situation and what is being done to address it, he says. Go over the components of the plan over the phone and then send them the details as a follow up, Streit advises.

Be Attuned to What Your Lender Wants

This approach can be refined depending on what type of lender it is, said Allan Glass, a partner at HATCHspaces LLC and president and CEO of ASG Real Estate.
“We have a mix of equity partners as lenders ranging from friends and family in smaller deals and institutional investors in larger deals,” he said.
The friends and family lenders just want to know we are on top of it, he continued. “A lack of communication is the worst that can happen.”
The institutional partners, on the other hand, want to be more involved in the discussions and decisions, he said.
Some lenders can be very flexible, Glass said. He told of a private money lender that has provided a construction loan on an empty building. “He has been very adaptable to whatever changes we have had to address during the process.” There is another construction loan on an open and active building that is partially under development.
That lender “wants to know that we are talking to tenants and managing the expectations in our loan documents. It is making sure we are aware of what the debt service ratio requirements are and funding the construction components of our loan.”
Christopher VanArsdale, managing partner with Heleos has found that CDFIs are extremely flexible and “willing to shift on a dime. If we need to postpone or delay they are willing to renegotiate.”
The GSEs on the other hand have “gone berserk” with new requirements, VanArsdale continued. “We are renegotiating everything we thought we had term sheets for. We are attempting to over communicate to make sure everyone is up to date on collections. Right now we are not sure how things will shake out and what forbearance will look for us with agency debt.”

Disclose Lease Amendments ASAP

As landlords talk with their tenants about rent relief, they have to be careful that any lease amendments they make don’t trigger a loan liability.
Streit said that he has heard of lenders triggering bad boy carve outs for not getting permissions for lease amendments.
“We do encourage borrowers to disclose those as quickly as possible and to get consent,” he said. However, sometimes that isn’t possible. His advice is to do what you have to do so long as you are acting in good faith.
The borrower should have as much dialogue with its lender as possible, preferably using a consultant or attorney to facilitate the flow of information, he said. “If all this is done in good faith and the lease amendment preserves the asset’s value it should be net favorable.”
https://www.globest.com/2020/04/17/how-to-get-your-lender-to-say-yes-to-forbearance/

April’s Apartment Rent Defaults Weren’t That Bad After All

When the National Multifamily Housing Council reported a drop in April rent payments last week, executives acknowledged the numbers could improve as they expected many tenants would be paying late.
Turns out, they were right.
In its weekly update to its rent tracker report, the association found that 84% of apartment households made a full or partial rent payment by April 12, up 15 percentage points from April 5.
All told, 90% of renters made full or partial payments from April 1-12, 2019, compared with 91% of renters in March 1-12, 2020, according to theNMHC. That is a payment rate of 93% compared to the same time last month.

NMHC surveyed 11.5 million units of professionally managed apartments in the US, across a wide variety of market-rate rental properties.
Separately, LeaseLock found that payments in April were only down 5% compared to January through March for renters that pay in the first 6 days of the month.
“My initial reaction to these numbers is that I am relieved given the size of job cuts,” says Greg Willett, chief economist of RealPage. “What I see right now are manageable challenges.”
Even the Class C apartment buildings, which were widely assumed to have problems given its typical tenant base, are doing relatively well, Willett continues. “Class C is lagging a little bit behind but even these are not in a big hole. The difference [between Class C and Class A and B] is 5 percentage points.”
Individual landlords report similar payment rates. For example, Camden CEO Ric Campo reports that the REIT is at a 93% payment rate compared to the pace seen in January and February. “We feel pretty good with the pace. Some tenants that have job dislocations are having more trouble but on other hand people understand they really need to pay their rent because of services the industry provides.”
Avanath Capital, which provides affordable housing, is seeing the same trends, says CEO Daryl Carter. About 85% of its tenants are tax-credited or Section 8 and it is seeing a 93% payment rate as well. The government support has been a help, Carter says. That said, the company is concerned about May rents especially for markets such as Orlando, which is close to the Walt Disney World Resort. Disney has furloughed or laid off most of its employees there, he notes.

Moral Hazard

Indeed, despite the April numbers, the industry is concerned about May payments as unemployment numbers are expected to continue to rise. NMHC president Doug Bibby notes that delays have been reported in getting assistance to residents. “It is our hope that, as residents begin receiving the direct payments and the enhanced unemployment benefits the federal government passed, we will continue to see improvements in rent payments,” he says.
Other stats suggest that apartment renters’ relative timeliness with their April rents may be short-lived. A rise in credit-card payments is also contributing to a higher rate of rent payments, according to the Wall Street Journal. Entrata showed a 13% increase in credit-card usage in April compared with the first three months of the year an Zego found that the number of tenants paying rent with a credit card during the first week of April rose 30% compared with the same period in March.
Campo, for his part, is concerned about a moral hazard issue taking hold among renters. Rent strikes have popped up in a number of cities, he notes. “The longer this goes on, more people will come to think they don’t have to pay rent. We still need to advocate with Washington to deal with structural issues as evictions.”
https://www.globest.com/2020/04/16/aprils-apartment-rent-defaults-werent-that-bad-after-all

Fannie Mae sees sharp drop in 2020 homes sales

Fannie Mae (OTCQB:FNMA -0.6%) sees 2020 homes sales declining ~15% due to COVID-19, jibing with today’s dip in homebuilder confidence.

Projects purchase originations of $1.11T this year vs. $1.28T in 2019.

Sees refinances rising ~$400B this year to $1.41T.

Forecasts Q2 real GDP falling 25% annualized.

Expects full-year 2020 output contracting 3.1% and full-year 2021 growth of 4.8%.

https://seekingalpha.com/news/3560938-fannie-mae-sees-sharp-drop-in-2020-homes-sales

IRS Extends Deadlines For 1031, Opportunity Zone Investors

Investors who have like-kind exchange or opportunity zone deadlines between April 1 and July 15 now have a little more time to close their deals. The IRS issued new guidance Thursday night that granted all taxpayers, including “trusts, estates, corporations and other non-corporate tax filers” a filing extension until July 15.

The National Association of Realtors told its members the decision benefits investors who are involved in 1031 exchanges or opportunity zone investments. With 1031 exchanges, investors who have to either identify or close on a property between April 1 and July 15 now have until July 15.

Although many experts called for the IRS to extend these deadlines, what the agency released Thursday night was met with more confusion than applause. It doesn’t address like-kind exchanges or opportunity zone investments specifically, but tax experts agreed they are covered under the broadening of the extension.

“Lots of really smart and really knowledgable people are just scratching their heads on this,” said Suzanne Goldstein Baker, the general counsel of Investment Property Exchange Services Inc.

“It’s different because it’s broader, because it covers a lot of ground,” but the guidance does not address 1031 exchange provisions specifically, said Baker, who is the co-chair of the government relations committee of the Federation of Exchange Accommodators. “It’s mind-numbing.”

1031 like-kind exchanges allow real estate investors to sell one asset — from condominiums to warehouses to office buildings — identify a similarly valued property to buy with the proceeds within 45 days and close on it within 180 days. In doing so, those investors can avoid paying any capital gains taxes on the sale.

Under the new IRS guidance, the 45-day deadline and the 180-day deadline could be extended out to July 15, assuming either of those dates falls between April 1 and July 15.

But if an investor now has until July 15 to identify the property, the original 180-day closing date would likely remain since it falls outside the affected date ranges, Baker said.

Numerous prominent commercial real estate organizations — including the Associated General Contractors of America, The Real Estate Roundtable, the Building Owners and Managers Association, the National Multifamily Housing Council, the International Council of Shopping Centers, NAIOP and NAREIT — recently petitioned U.S. Treasury Secretary Steven Mnuchin to extend the deadlines by which investors can purchase replacement properties for recent sales by adding 120 days to both deadlines.

The IRS has allowed similar delays in the past through disaster declarations in certain geographic locations that have experienced natural disasters or emergencies. Calls to the IRS were not returned as of press time.

It was unclear if the IRS was considering other specific coronavirus relief for like-kind exchanges or if the new guidance would be the extent of it. NAR spokesperson Wesley Shaw said the organization doesn’t expect any further immediate IRS guidance on like-kind exchanges.

“If we are approaching July 15 and it appears that exchanges can’t be completed because of then-current conditions, work might begin again on extension,” Shaw said in an email.

Greenberg Glusker Fields Claman & Machtinger partner Warren “Skip” Kessler said he was disappointed by the IRS actions. Kessler represents real estate firms and owners, including those in 1031 exchange investments.

“In the past, the Section 1031 extensions were 120 days and even longer in certain circumstances. Acquiring commercial real estate is a complex process and often results in a decision not to proceed after several months of effort. Further, financing in the best of times is challenging and time-consuming,” Kessler wrote in an email. “Add to the usual concerns, that pricing is uncertain when even Fortune 50 companies are not paying their rent and many existing tenants will close their doors, I would not be surprised if the real estate lobbied for longer time periods for 1031 extensions and believe it is appropriate to do so.”

Nonetheless, NAR officials hailed the IRS move.

“During recent weeks, NAR strongly advocated for tax payment deadline extensions — including for 1031-like-kind exchanges and Opportunity Zone investments — as this pandemic left small businesses and independent contractors particularly vulnerable,” NAR President Vince Malta said in a release. “NAR’s federal advocacy team in Washington has kept in constant contact with the IRS and Treasury Department since this crisis began, and the deadlines extended Thursday will provide immediate relief from some of the disruptions caused by COVID-19.”

Despite the confusion, Baker said, the move does provide some relief to those under the gun to make property purchases.

“Frankly, the IRS doesn’t have to do anything,” Baker said. “[Investors] may not have the three-tiered wedding cake with a cherry on top, but they have something more than they had yesterday.”

https://www.bisnow.com/index.php/national/news/economy/nar-recent-irs-tax-deadline-extensions-benefit-1031-exchanges-103865