Andy shared that–overall–multifamily property is an investment category of choice up and down the entire east coast, although they do have their share of financial distress. Categorically, multifamily properties have see a 30%-40% decline in value and not, as one might think, because rents have gone down but rather because currently, there are only two kinds of properties that are being sold: The first type is Class A properties (new construction/excellent location in an excellent market.) These properties are attractive because they trade with much less risk. The second type of property actively selling consists of a hodgepodge of distressed assets including bank foreclosures selling on the open market. It is this second category of distressed assets where today’s painfully slow creep of properties making their way to the market can be accelerated, and I asked Andy what are some available options to borrowers that could jump-start this market.

Andy mentioned that bridge loans are a useful tool when financing and holding multifamily purchases. He explained that, currently, a good bit of transaction volume is of the bank REO sale type. Banks are mainly selling distressed assets which cannot qualify for permanent financing. Fannie Mae does not loan on properties that are in transition or have less than 85% occupancy. Bridge loans can be used to reposition, re-tenant and redevelop distressed properties, literally bridging the gap between the purchase of a property in distress and the exit strategy for loan repayment. Bridge financing is key to carrying the property until operations are stabilized.

As you may be aware, the features and issues surrounding multifamily investments vary greatly from one region of the country to another. For example, Texas and Florida have very different rental markets than New York. In Texas and Florida, there is no rent control, lots of inventory, renting is cheaper than owning and both markets are improving. At the same time, there is not a lot of new construction in either state. In Texas and Florida bridge loans could be used for making improvements to landscapes, parking lots and general building upgrades. Conversely, in New York, there is very high occupancy rate with less available inventory and rent control protections. In this region bridge loans can be utilized for directing management costs towards keeping properties secure and clean, rental collections and careful tenant screenings.

After speaking with Andy, it is my impression that utilizing bridge loans can work well, and be useful, anywhere and everywhere, all you need to do is buy at the proper level in the first place.

Both the type of receivable, and the method of originating the asset, vary greatly from state to state, but Tom used the following description of the process in the state of Florida as an example.  In Florida, when a property holder becomes delinquent on their taxes, the country reaches out to the property holder requesting payment.  After the period of time set by state statute (about a year) if the taxes aren’t paid the county puts a lien on the property, tying the hands of the property owner so that s/he cannot sell, take out a second mortgage or improve the property in any way.   If the property owner still does not pay the amount owed, the tax liens are sold in a Dutch auction at the state maximum interest rate of 18% with the bidding amount being reduced in quarter point increments and sold to the lowest bidder.  The bidder pays the money and, in return, they get a piece of paper (tax lien certificate) worth the amount purchased plus an agreed-upon rate of interest that accrues at the rate set by the aforementioned auction process.  However, because sale of tax liens involve properties that are distressed, it is possible that the property owner will never pay off the monies due.  In such a case, the home(s) are used as collateral and after 22 months the investor can initiate a tax deed application process (TDA). This TDA process is the first step taken to initiate the foreclosure process. 

Because it is my understanding that all of the states that allow for sale of tax liens attack the process slightly differently, I asked Tom to explain some of the differences in tax lien investments in New York, New Jersey and Connecticut.  He explained that in New York State there is tremendous variation on how property taxes are handled.  Each county sets their own rules and some, but not all, counties sell tax in bulk.   In New York City, they securitize their taxes adding yet another variation to the theme. 

In Connecticut, the governments are empowered to sell liens, however in many instances do not.  The counties that do choose to issue tax liens don’t do so with any regularity. They raise money when they need it, and when they sell tax liens the procedure is typically handled through bulk sales. 

New Jersey is one of the most popular states for tax liens, partially because sales occur year round all year round.  The procedure in New Jersey allows for the possibility of very attractive yields and is handled on a municipal level.   The location of the state also adds to its popularity

As investors search for creative ways to do new things with their investment dollars, the humble tax lien may be one of the most attractive options available.

Scott’s thoughts were that, if we segregate the market into CMBS and balance sheet loans there are two different yet overlapping issues that the investors are dealing with. When it comes to CMBS there is slow transaction time. This slow transaction time is not because investors don’t want to invest, but rather because there are restrictions on the way special servicers operate. They are confined as to what they can and can’t do. However, he felt that because receivers are being appointed by the courts the special servicers will be allowed to make modifications to loans which will allow for those loans to be transferred, we might start to see more transaction activity in the months ahead.

Conversely, on the balance sheet side he felt that there are a lot more dynamics within the market that are in play. On the one hand the banks and insurance companies don’t want to take any losses and, on the other hand, the investors are clambering because they believe that they should be able to ‘steal’ the properties. What is interesting, however, is that Commercial Mortgage Alert recently reported that they believe that the losses have already been written down. If this is the case, why would the bankers and insurance companies have any motivation to sell? Additionally, with so few transactions it must be difficult to pinpoint true value. With these types of dynamics, I’m not surprised that I’m hearing both sides remain intractable.

All in all, after speaking with Scott, my feeling is that the more transparent CMBS market seems to be loosening up a bit and we’ll probably see increasing activity; however, the balance sheet side still has more questions than answers.

I asked Jonathan why we are seeing so many properties going into receivership. He stated that in the northeast (NY, NJ, CT and PA,) this is primarily a maturity default issue. Interest rates are still low and a lot of properties are still ‘cash flowing’ enough. However, when the loan comes due, there may be a 20%-50% reduction in the property’s value since the time of purchase. This fact also makes it difficult, if not impossible to refinance property. The receiver is a neutral party and is responsible for keeping the property is “tip top” condition until a determination is made by the courts as to whether there will be a restructuring of the debt or alternatively, a foreclosure.

Jonathan mentioned that until properties start trading again, the number of properties going into receivership will continue to group. Unlike in the past when the Resolution Trust Corporation (RTC) was able to act as the ONE clearing vehicle to liquidate assets, today there are multiple “parties involved in the process of working through crisis including servicers, banks and ancillaries, all working through delinquencies in their own way and at their own pace. I’ve read that (CMBS) delinquency rates have risen to record highs this month (TREPP: Sept 7, 2010.) How high will they go before the tide turns?

As he explained it to me: special servicers have a process in place to deal with loans that require unusual attention, because they are in–or are about to go into–default. Don elaborated that special servicers do more than just shepherd properties through foreclosure; they are also highly involved in operating and performance issues surrounding non-performing loans including management, resolution and disposition of those loans.

I asked about special servicing and CMBS; are special servicers involved with other types of properties? He explained that special servicers work within a variety of areas in all of the four food groups: multifamily, office, industrial and retail but it is the CMBS that is the strong tie that binds those worlds in many ways, because of the high complexity of dealing with a pool of loans, especially when a large portion are in delinquency or default.

At one time the special servicer’s role was basically to collect principal and interest (P & I) on the loan pool, pay the P & I on the note and provide reports to the investors. However, with so many loans defaulting, and the issues involved with working through and disposing of these loans, the special servicer’s role has expanded exponentially. Today, their role is critically important, far reaching (distress has no geographic boundaries) and they could potentially provide an abundant source of acquisition opportunities. 

No wonder so many people want to hear what they have to say.

I find his hypothesis intriguing, but the jury is still out.  Yes, everything you hear or read suggests the general consensus is that the days of guaranteed home price appreciation are gone; no one can view flipping property as a low-risk-high-return investment strategy these days.  Also, securing returns through rental cash flow can sometimes seem like more trouble than it’s worth.  However, in the wake of Wall Street’s meltdown, with MBS, ABS and CDOs all sharing the blame, are investors ready to give MBS another ‘go-round?’ 

Thoughts, comments?

More at DSNews.com

Unemployment was the main culprit driving foreclosure actions on more than 1.6 million properties, the company said.

“We’re not going to see meaningful, sustainable home price appreciation while we’re seeing 75 percent of the markets have increases in foreclosures,” RealtyTrac senior vice president Rick Sharga said in an interview.

More from Reuters

We welcome Cheryl to the team. If you would like to speak or have questions about an upcoming DRES conference, you may contact Cheryl at:

Cheryl@GreenPearlEvents.com
(646) 862-9391