The housing boom resulted in the creation of thousands of new for-sale homes and condominium projects. The subsequent crash left many of these properties unsold or partially completed. In many cases, homebuilders and multifamily developers involved in these projects have either cut their losses and walked, lost the assets through foreclosure or are trying to secure [...]

The housing boom resulted in the creation of thousands of new for-sale homes and condominium projects. The subsequent crash left many of these properties unsold or partially completed.

In many cases, homebuilders and multifamily developers involved in these projects have either cut their losses and walked, lost the assets through foreclosure or are trying to secure additional financing to keep their heads above water. Add to that all the lenders with vacant houses and buildings thrown onto their laps.

All the while, there are numerous homes and apartment projects sitting empty or abandoned across the country. Sure, investor appetite is high for most assets out there, particularly multifamily. But even if these projects get snapped up, the demand has yet to materialize.

But what if there were something that could be done to both fill those units and address a major social issue at the same time?

That’s along the lines of what Habitat for Humanity is doing in Florida’s Sarasota County, according to a report in a local paper. The organization, which usually builds homes for families in need of one, has decided to shift gears for the next few years and instead rehabilitate homes that have been foreclosed on or abandoned. According to the report, Habitat can, in some cases, buy and remodel the residences cheaper than it would cost to build them. The effort would also help to ease the blight on neighborhoods by minimizing the number of homes sitting empty. Sarasota County and the City of Sarasota are partnering with the nonprofit through a $17-million infusion of federal stimulus money, which will help acquire and revamp about 100 abandoned and foreclosed homes by Feb. 11, 2013.

Similarly, advocate groups in New York City have been campaigning to have vacant condo and apartment units in some neighborhoods turned into affordable housing. The areas in question are primarily gentrified communities across the city, where developers—swayed by demographic trends—kicked off dozens of high-end projects on spec. Now that demand has decelerated dramatically, many of those luxury condos and rental apartments remain unoccupied. Why not take those vacant units to provide housing for those in need, the groups maintain?

I must admit, I’ve had the same thoughts myself, when I happen to venture into those neighborhoods. Take Long Island City, for instance, which houses one of my favorite restaurants, Waterfront Crab House (if you like seafood and find yourself in that area, you must check it out). When my husband first took me there nearly 10 years ago, the area was comprised of mostly industrial warehouses and shut-down factories.

A couple of years ago, there seemed to be more people living there and more coffee houses, funky lounges and restaurants opened up, and much of Long Island City was rife with development—mainly, of luxury condo projects. Go there, today, however, and it’s clear that the developers overshot their target. There are no fewer than a dozen high-rise condo towers out there, some unfinished and some only partially occupied—or both.

In a city is already suffering from a dearth of housing for low-income households, those vacant units could serve a much better purpose than they are now. Now, given what it cost to develop these projects and the financial weeds the developers and lenders may be in, I don’t know if this is even feasible. But it’s a thought…

Traditional lenders tightened their underwriting criteria almost immediately after the credit collapse, and construction loans were among the hardest hit. Now, the government has decided that may not be a bad idea. HUD recently unveiled its proposed changes to FHA’s underwriting of multifamily mortgages. The agency had previously released its planned tweaks to single-family FHA, so [...]

Traditional lenders tightened their underwriting criteria almost immediately after the credit collapse, and construction loans were among the hardest hit. Now, the government has decided that may not be a bad idea.

HUD recently unveiled its proposed changes to FHA’s underwriting of multifamily mortgages. The agency had previously released its planned tweaks to single-family FHA, so the new approach to apartment loans was not unexpected. Carol Galante, Deputy Assistant Secretary for Multifamily Housing, maintained that the move was part of an effort to strengthen the FHA multifamily programs.

The changes—namely, to Section 221(d)(4) and 223(f) loans—were necessary due to the rising rate of default for market-rate 221(d)(4) loans, among other factors, Galante stressed. FHA also has a high concentration of properties in the markets with the highest vacancies, she stated, adding that the claims rate has doubled in the past two years to 1.2% in fiscal year 2009, and that figure is expected to double this year.

The main changes involve increased oversight of Multifamily Accelerated Processing lenders and borrowers and improvements in credit risk management and processing.

Debt service coverage ratios would also be increased for market-rate 221(d)(4) loans and developers would have to come up with twice the working capital escrow (from 2% of the loan amount to 4%). Further, cash-out proceeds would be withheld until the project is completed and stabilized, and most borrowers must be able to prove they can stabilize the property within 18 months of delivery. For MAP lenders looking to fund new construction or LIHTC deals, there will be a new specialty certification that would require them to demonstrate that they are experienced in those areas. (For a full breakdown of all the changes, go here or here.)

The details to HUD’s plan are still being worked out, and the proposal should be published on the Federal Register soon. But what information has been released has certainly sparked debate among members of the multifamily community about what tighter underwriting conditions could mean for the availability of FHA financing, which has basically become the only source of construction funds in the industry since the credit crash.

Since early last year, commercial real estate investors have been eagerly awaiting the deluge of distressed properties to hit the market. They’re still waiting. And chances are, they will be for some time, since property holders are still wary of selling assets into a bad market. So what’s an investor to do? Consider funneling your capital into [...]

Since early last year, commercial real estate investors have been eagerly awaiting the deluge of distressed properties to hit the market.

They’re still waiting. And chances are, they will be for some time, since property holders are still wary of selling assets into a bad market.

So what’s an investor to do? Consider funneling your capital into distressed debt. There’s no question the opportunities are out there, as the pool of non-performing loans grows ever larger. Though other property sectors may be in more trouble than apartments, it doesn’t mean investors looking to make multifamily plays won’t have plenty to choose from.

In its January report, Trepp reported that the multifamily CMBS delinquency rate rose nearly half a percent to 9.71% (and that’s not even counting Tishman Speyer’s Stuyvesant Town/Peter Cooper Village deal). And Real Capital Analytics reported that by year-end 2009, there was $22.7 billion in troubled apartment assets in the market. Even exempting those deals that will be worked out or restructured, there will be plenty left over for anyone interested in loan-to-own transactions.

Though not a new development by any means, investing in distressed debt deals as a way to obtain property is a tactic that’s increasingly gaining favor among private equity players.

As illustrated in the latest issue of Distressed Assets Investor, there are several ways to execute this strategy, often known as loan-to-own. The purest form is to come into a distressed scenario and either buy the defaulted loan at a discount from the lender or provide the capital to pay it off, effectively becoming the new lender. If the borrower somehow continues to pay on time, the investor gets paid interest fees. If the borrower defaults, the investor gains control of the asset—at a cheaper cost than if it purchased the property outright.

The investor can also come in and provide the borrower—which is effectively backed into a corner thanks to the lack of financing in the market—with capital to pay down the debt on the asset, thereby purchasing a stake in the property.

Often the new capital comes with caveats. If it’s in the form of a loan, it generally has high interest rates, often in the mid-teens. (If the borrower couldn’t pay its original loan, what would make anyone think it could pay a more aggressive one? But I guess that’s the point, huh?) The borrower defaults and the investor gets the asset.

If the investor provides an equity infusion that gives it a partner role in the asset, it can structure the operating agreement in its favor and have a say in how the property is run. If the borrower is able to bring the property to a good level of performance, the investor can either sell its stake to the borrower or a third party for a profit. If the property fails or the borrower cannot hold up its end of the bargain, the investor gets control of the asset. The deed-in-lieu-of-foreclosure option also allows the investor to avoid the legal costs of a foreclosure process.

Of course, there are other variations to the strategy and certain nuances—such as the complications investors in securitized loans may face—that investors should consider, but for brevity’s sake, I’m not going to get into them here.

The term “loan-to-own” is generally considered a dirty word in commercial real estate circles, since it insinuates ulterior motives on the part of the investor. Some of these investors are considered vulture funds, and there have been accusations that loan-to-own players execute these deals with the sole intention of the borrowers going into default, or that the equity partner may coerce the borrower into exiting the deal by making it difficult or unprofitable.

That’s why those that so use this strategy are generally known as hard-money, asset-based or mezzanine/bridge lenders. A quick Google search brings up hundreds of firms that bill themselves as such—Kennedy Funding, Arbor Commercial Mortgage, Metro Funding Corp., Aries Capital, Greystone Commercial Finance, AREA Property Partners (formerly Apollo Real Estate Advisors) and Cohen Financial, among others.

Yet there are some companies that are unabashedly embracing the loan-to-own strategy. Last month, Fifield Realty Partners LLC announced a new $200-million apartment acquisition fund focused on buying core-plus and value-add properties, short-sale deals and loan-to-own acquisitions. The firm and its institutional partners hope to buy as much as $600 million in properties nationally, amounting to more than 5,000 units.

Private equity firm AION Partners last year bought the loans on an eight-property portfolio of primarily multifamily assets in six states, valued at more than $110 million. So far, it has foreclosed or taken a deed-in-lieu on five properties, and expects to take over the rest of the assets this year.

In an interview with DAI, AION principal Michael Betancourt says the firm looked for loans with shorter maturities. “As a lender, you have control, so we take proactive steps to put pressure on the borrower,” he admitted. The properties gained in the deal are the first in what the firm hopes to grow into a larger portfolio; it is eyeing other distressed deals it could take advantage of.

And there will be even more opportunities for investors to take advantage of distressed debt as the FDIC sells off the assets of banks it has seized.

So, do you think loan-to-own is an effective strategy for multifamily investors looking for a good deal? Or, would the presence of the GSEs, along with the positive view many traditional lenders have of apartments, throw a wrench into these opportunistic players’ plans?

It seems like every few weeks, a new ordinance is enacted somewhere that limits what we can or cannot do in public places. No smoking in restaurants? Cool, I like to actually savor my food anyway. Bars? No problem, your bedroom won’t smell like an ashtray the next morning from the pile of clothes on [...]

It seems like every few weeks, a new ordinance is enacted somewhere that limits what we can or cannot do in public places. No smoking in restaurants? Cool, I like to actually savor my food anyway. Bars? No problem, your bedroom won’t smell like an ashtray the next morning from the pile of clothes on the floor or in the hamper. Public recreational areas? Of course not, there are children there!

But in recent years, a new movement has emerged to ban smoking in apartment units and condo/co-ops, as examined in a recent New York Times article. In most cases, the decision to prohibit smoking in multifamily residences isn’t being mandated. Rather, individual apartment owners are banning it in some of their properties primarily due to concerns over the effect of second-hand smoke.

(Full disclosure: I used to smoke. I still do enjoy a cigarette on an occasional basis. But I despise smoking indoors, so I share the same anti-smoking sentiments that many non-smokers do.)

In major markets across the country, a handful of firms have made the move to ban smoking in on or more of their apartment properties, not only inside units and common areas but also on terraces and patios: Pan Am Cos., Related Cos., Archstone, AMLI Residential, McCaffery Interests and Trammell Crow Residential, among others.

Kenbar Management in New York has taken it one step further; at one of its newest buildings, 1510 Lexington Ave., smokers can’t even use the sidewalks that wrap the property, which takes up almost an entire city block. (Now, what the management is going to do about passersby lighting up is another question.)

Even the Department of Housing and Urban Development has recommended that public housing agencies bar smoking in housing projects; to date, about 50 agencies have forbidden smoking in their buildings.

Some municipalities have even mandated that smoking be banned in shared housing. In Richmond, CA, for instance, an ordinance was passed in July 2009 outlawing cigarette smoking, and in Belmont, CA, a smoking ban was passed two years ago and went into effect this month for units with shared floors or ceilings—effectively, all multifamily properties.

The City of Calabasas, CA near Los Angeles has a proposal on the table to ideally ban smoking in 80% of multifamily properties by 2012 (which conjures up images of Warsaw ghetto-like communities for the other 20% of otherwise ostracized properties). Officials in Menlo Park in Northern California are debating a similar proposal.

Aside from the health benefits, the smoking ban is helpful in other ways. Some firms are using it as a marketing tool for their residences; there’s even a website where such properties can be listed on the Smokefree Apartment House Registry. It limits the risk of fire from smokers who may fall asleep with a butt in their hands, or who haphazardly dispose of their cigarettes. There’s also the cost issue—it’s easier and cheaper to clean a non-smoking unit when it comes down to turning it over to a new tenant.

And for some firms, limiting residents’ smoking improves indoor air quality, which is one of the factors taken into consideration when aiming to achieve LEED status on their projects. Trammell Crow Residential this week unveiled the second phase of its Alexan CityView on the Peninsula at Bayonne Harbor, touting the New Jersey project as an example of healthy living and green building practices.

While this movement is a breath of fresh air for non-smokers, for those who oppose, it has become a civil liberties issue worthy of calling in the ACLU. After all, smoker or not, apartment tenants do pay rent to live in their homes, and condo or co-op residents own their residences outright.

Regulating whether one can or cannot partake in a legal activity in one’s home is a sticky situation, and there are concerns that limiting what people may do in their own residences is a slippery slope to navigate. What’s next? A ban on cooking cabbage, fish or curry indoors? Taking it a step further, can a landlord ban loud music because it disturbs others? How about a colicky, crying baby in the middle of the night? Or an obese tenant whose heavy footsteps make his downstairs neighbors feel like they’re in an earthquake?

No residents over 300 lbs permitted on upper floors!!    Crying prohibited after 10 pm!!     Malodorous foods banned!!

(Okay, now I’m getting silly, but you get my point.)

Some observers agree with the health benefits of smoke-free environments, but question how wise of a business decision it is. Apartments are suffering as weak demand is cutting into occupancies. According to the Centers for Disease Control and Prevention, 20.6% of all adults over the age of 18, or some 46 million people in the US, smoke. Do landlords really want to snub a significant portion of would-be renters just to appease others?

Then there’s the enforcement issue. Sure, tenants who violate anti-smoking policies can get hit with fines and even face eviction. But who is responsible for the violators? Can a non-smoking tenant sue the management over a neighbor who flouts the rules? What about chain smokers that may smoke outdoors, but bring the residual smells into their units? (Anyone who is familiar with a smoker knows that the smell lingers, permeating one’s clothes and body.)

Concerns over safety arise, too. What happens when a tenant gets a nicotine fit at 3 am, goes downstairs to satisfy the craving and gets mugged on the isolated, dark street? Does that tenant have a right to sue the landlord because it was forced into an unsafe situation?

Measures to limit tenant activities in a multifamily property are tricky, especially when it becomes policy and not just a matter of general courtesy to one’s neighbors. If you’re an apartment landlord or manager, what do you think about these latest developments? Have you considered enacting similar measures? Do you think it should be mandated, or left to the building ownership? And if you have banned smoking or other activities, what do your tenants think about it?

PS: While doing research on this topic, I came across some other questionable activities apartment tenants partake in.

Do you know what your tenants are doing?

In some metropolitan cities, apartment tenants are commandeering building rooftops, and sometimes their own terraces, to breed bees for honey. These aspiring beekeepers aren’t exactly professionals, and generally have to keep their activities on the hush-hush; most municipalities outlaw urban beekeeping.

As someone who is afraid of bees and has many sting-allergic friends who have to carry around epi-pens, I’m not too fond of the prospect of thousands of bees living on my neighbor’s patio.

And in some cities, the “organic living” movement has some households raising their own chickens. While the majority house their fowl in small backyard coops, there are some New York families with coops in the co-ops. Most municipalities do allow people to have chickens as pets, but ban roosters (could you imagine those wake-up calls?).

For most of these folks, the hens provide eggs, but others have no qualms about using them for meat. Let alone the concerns about any diseases the chickens may carry and the incessant pecking and clucking that may bother some neighbors, there is the problem of the proper and hygienic slaughtering and disposal of said poultry.

I think I’d rather live next to a smoker…