Fl 2d Distressed Resi Real Estate Symp 17nov08
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Fl 2d Distressed Resi Real Estate Symp 17nov08

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This was an incredible event -- the Florida Second Distressed Real Estate Symposium. I moderated one panel discussion on which Stephen Rosenberg, member of the North Carolina Banking Commission and I ...

This was an incredible event -- the Florida Second Distressed Real Estate Symposium. I moderated one panel discussion on which Stephen Rosenberg, member of the North Carolina Banking Commission and I debated the impact of the shadow inventory on absorption, sales prices and rental rates.

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Fl 2d Distressed Resi Real Estate Symp 17nov08 Fl 2d Distressed Resi Real Estate Symp 17nov08 Presentation Transcript

  • By: Scott L. Podvin, Managing Director The Crest at Waterford Lakes, LLC spodvin@post.harvard.edu www.TheCrestLife.com Tel: (305) 793-5762 Fax: (305) 665-3971 Scott L. Podvin: 2nd Florida Distressed Residential Real Estate Symposium
  • Capital Market Conditions Drive Outlook • EU, as whole—27 countries in all, 12 of them using local Severe dislocations across currencies-- faces 1st most parts of the credit recession & are lending less system – not limited to real estate • UK appears most vulnerable with the twin problems of • Limited availability of debt • Borrowing becomes having the most highly capital increasingly difficult indebted consumers and and more costly • Abnormally wide spreads business services sector • Japan’s Aozora Bank, • Securitization trusts hold $1.5T • Germany plunges into 1st major Japanese of subprime and alt-A loans, recession after a steeper- bank to forecast a net $400B of which are delinquent than-expected 0.5% fall in loss for the full fiscal economic activity in 3rd Qtr • Heightened risk of maturity year, as Japan slides • Italy sees 2d qtr of economic defaults into a recession contraction, while Spain • Global financial • Dramatic reduction in experiences its 1st qtrly tsunami batters Hong transaction volume contraction 2 Kong, as it falls in to Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate recession
  • Buy a toaster and get a free Bank Scott L. Podvin IMN’s 2d FL Distressed Residential Real Estate Symposium, Dec 8-9, 2008 spodvin@post.harvard.edu
  • Lender’s Brace for Global Cooling Spreads are widening as PRE-CREDIT CRISIS TODAY 2008 lenders seek to ration MAX LOAN TO VALUE/ 70%-75% 60% LOAN TO COST capital for the year MIN DEBT SERVICE 1.05x 1.20x COVERAGE RATIO Loan NOI UNDERWRITING Borrowers Pro forma NOI Current in-Place NOI proceeds reduced by SPREADS 85-125 bps 250-350 bps as much as Sized using LOAN PROCEEDS 30% by Sized using Amortizing DSCR I/O DSCR tightened standards 3 Years I/O on AMORTIZATION 10 Years I/O 10 Year Loan Much greater Requires Structuring (holdbacks, LOAN REQUIREMENTS likelihood of Minimal earn outs, TI escrows) maturity SYNDICATION RISK defaults Underwritten, Lead Bank Lender Best Efforts, Borrower (Large Loans) MAC and recourse are back Scott L. Podvin: Florida’s 2d Distressed Residential Real Estate Symposium – December 8-9, 2008 spodvin@post.harvard.edu 4
  • Recapitalizing the Banking System Total losses now as big as the impact of RTC  There is a difference between a lender and an  originator Desperately Seeking SWF  Scott L. Podvin spodvin@post.harv
  • • Growth slows and region may fall into recession • Is it different this time or is Asia in denial? Obamanomics Sparks Hope? • Warnings signs from Hong Kong & Vietnam, slower growth showing in Australia and Japan, although China and India forge ahead Recession is here. How • Economic risks spike for Germany, Spain, UK, Irelan deep and how long? d & certain ―emerging‖ • Housing markets plunge – no states clarity yet as to whether we’ve hit • ECB starts to ease, but the ―bottom‖ more is needed • Volcker puts on superman outfit • BOE cuts rates by 1.5% to at ULI 3% earlier this month • Consumer confidence • Europe to hit bottom? UK plunges, as unemployment rises to go V-shaped recovery? to 6.5% -- highest level since Spain in for a U-shaped 1994-- in October and may go to recession? 8% by year end Scott L. Podvin: Florida’s 2d Distressed Real Estate Symposium December • Future growth: Is it a V, a U, a 8-9, 2008 double-dip or a frying pan? spodvin@post.harvard.edu 6
  • Year-Over-Year Employment Growth METRO EMPLOYMENT MOMENTUM Pockets of strength in Pacific Northwest, T exas and South Central Weakness in Industrial Midwest, So uthwest and Florida Illegals leaving Arizona in response to collapsing housing markets and Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Source: AEW Research, economy.com anti-illegal 7 Symposium, December 8-9, 2008 spodvin@post.harvard.edu legislation
  • Housing Is The Lynchpin To Recovery Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium December 8-9, 2008 8 spodvin@post.harvard.edu
  • Affordability Is Barely Visible: Long Way to Go TARP not 70% Percent Change From Minimum Affordability going as DET planned? 60% No Jobs, No See next CLE Appreciation 50% (Trough-to-Current) slide Prices Adjusting, Affordability Improving CIN 40% IND SAC COU WES RIV 30% Owners have LOS FTW SAN benefited from Endless Land DEN TAM KAN elevated 20% LAS FOT More Price Decline Coming STL values, although PIT ORL MIN NEO PHO NAS BOS DAL declining MIA SNT ATL WAS CHI HOU US NEY SEA 10% JAC SAY precipitously in HON CHR COS SAF OAK AUS BAL POT PHI most markets NEA SAZ SAJ RAL 0% -50% -45% -40% -35% -30% -25% -20% -15% -10% -5% 0% Recent buyers are in a very bad Percent Change from Maximum Affordability position in many (Peak-to-Current) markets. Improved land being dumped by builders in most of the ―hot‖ Source: AEW Research, NAR markets of the past Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium: December 8-9, 2008 few years spodvin@post.harvard.edu 9
  • Lender’s Brace for Global Cooling PRE-CREDIT CRISIS TODAY 2008 MAX LOAN TO VALUE/ 70%-75% 60% LOAN TO COST MIN DEBT SERVICE 1.05x 1.20x COVERAGE RATIO NOI UNDERWRITING Borrowers Pro forma NOI Current in-Place NOI SPREADS 85-125 bps 250-350 bps Sized using LOAN PROCEEDS Sized using Amortizing DSCR I/O DSCR 3 Years I/O on AMORTIZATION 10 Years I/O 10 Year Loan Requires Structuring (holdbacks, LOAN REQUIREMENTS Minimal earn outs, TI escrows) SYNDICATION RISK Underwritten, Lead Bank Lender Best Efforts, Borrower (Large Loans) Scott L. Podvin IMN’s 2d Florida Distressed Residential Real Estate Symposium, Dec. 8-9, 2008 spodvin@post.harvard.edu
  • U.S. Sneezes, World Catches Pneumonia? Spreads are widening as lenders seek to  ration capital for the year  Loan proceeds reduced by as much as 30% by tightened standards  Much greater likelihood of maturity defaults  MAC and recourse are back Scott L. Podvin spodvin@post.harv
  • What Should An Investor Do? Don’t panic. • No one moves into and out of stocks and • bonds in response to valuation cycles; don’t try to do it in real estate either. Opportunistic investing has been very • difficult in recent years as the ―wall of capital‖ overwhelmed risk pricing. There will be more ways to earn opportunistic returns going forward. Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium, Dec. 8-9, 2008 spodvin@post.harvard.edu 13
  • What Should An Investor Do? Core funds, particularly newer vintage funds, will • begin to see more attractive pricing for acquisitions. Existing core assets will begin to see the benefit of • slowing development as we move into 2009-10. REITs in US, Europe and Asia take a beating during • 2007-08. So, we are approaching the time for pension funds, endowments, REITS, and other qualified investors to rebalance/add to positions. Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium  December 8-9, 2008  spodvin@post.harvard.edu 
  • 2009 is Going to be Painful for Many Source: Cartoonbank.com Scott L. Podvin: IMN’s 2d Distressed Residential Real Estate Symposium, Dec. 8-9, 2008 spodvin@post.harvard.edu
  • Development models “Our vision is to become the premier innovative property developer in Florida‖ While we focus on large-scale mixed-use LEED certified communities, primarily of the following types: Strategically located developments, located in the centre of a city, being large-scale City-Core and multi-phase developments typically consisting of residential, office, retail, Development entertainment and cultural properties with a blend of historic restoration and modern Projects architecture Integrated Large-scale, multi-phase urban residential developments targeted at China’s growing Residential middle and upper-middle classes, and which offer high-quality living conditions in convenient urban locations with easy access to transport facilities Development Projects Broken Condos There will be tremendous opportunities in busted condos and conversions. Likewise, & Conversions there will be many projects that where construction is almost complete that we will be able to pick up and complete the construction and reposition the asset to create a or Partially vibrant working and living community for working class people Constructed Communities We are now focusing on distressed real Scott L. Podvin: IMN’s 2d FL Distressed estate, opportunistic and value add Real Estate Symposium, Dec. 8-9, 2008 opportunities spodvin@post.harvard.edu
  • Why Concern Ourselves with Non- Core Assets? Consider the explosive growth of RE-oriented private equity firms:   Apollo  Blackstone  Colony Capital  Ramius  Bain Capital  SAC Capital Source: Kingsley Associates and Institutional Real Estate, Inc.  Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium  Dec. 8-9, 2008  spodvin@post.harvard.edu 
  • BLUE HORESHOE LOVES VALUE-ADD/OPP PLAYS Consider the dramatic tilt in institutional investors’ (2007)  allocations:  $44.5 billion targeted to domestic real estate  $36.3 billion to private real estate  $24.7 billion to non-core (i.e., value-added and opportunistic),  $11.6 billion to core (i.e., stabilized apartment, industrial, office & retail) Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium  Dec. 8-9, 2008  spodvin@post.harvard.edu 
  • The Ultimate Hand: Busted Condos and Conversions- Purchase Checklist  Kick the dirt  Talk to the maintenance crew  Understand the reserve capacity  Review and Revise Budget Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium  December 8-9, 2008  spodvin@post.harvard.edu 
  • $$$SHOW ME THE MONEY$$$ Maximize Rental Income   Run axiometrics  www.rentometer.com  How „Bout Them Comps Create detailed Pro Forma based on foregoing variables and  reserve for contingencies Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium  December 8-9, 2008  spodvin@post.harvard.edu 
  • : Hidden Landmines  Pre-foreclosure and Foreclosure in various stages of foreclosure process in community and surrounding community  Foreclosed Units  Short Sales
  • Pitfalls: What To Look Out For? ARE YOU A DEVELOPER? The definition of “developer” in the FL Condominium Act is  quite broad and appears to include any person or entity who offers condominium parcels for sale or lease in the ordinary course of business. Rule 61B-15.007 of the FL Admin. Code provides that for  purposes of filing, there are three types of developers: 1) a creating developer,  2) a successor or subsequent developer; and  3) a concurrent developer.  Scott L. Podvin: Art of the Deal:  Distressed Real Estate Summit 2008  spodvin@post.harvard.edu 
  • Did you unwittingly agree to pick up the tab? Whether a person or entity is a “successor developer” for filing purposes  has created much discussion over the past year or so within the condominium development community. Under the Regs, a person or entity is a developer for filing purposes if the  person or entity is offering condominium parcels for sale or lease in the ordinary course of business (meaning most commonly, offering more than 7 parcels within a period of 1 year), unless the person or entity falls within the exception set forth in Rule 61B-15.007(3) of the Regs (commonly referred to as the bulk purchaser exemption). Therefore, a lender or any other entity who simply offers and  conveys all units which it owns to a single purchaser in a single transaction is not a developer for filing purposes. Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium  December 8-9. 2008  spodvin@post.harvard.edu 
  • Walk Softly & Carry a Big Stick The answer may become a bit more convoluted if the lender or  other entity, while offering all units to a single purchaser, implements or continues a leasing program while in the process of attempting to sell the asset. It would be a reasonable position to take that the lender or other  entity is not a successor developer for filing purposes if all that is being offered are short term leases which are not subject to the actual filing requirements of Section 718.502 of the FL Condo Act (entitled “Filing Prior to Sale or Lease”, which filing requirements apply to offers of condominium units for sale or for leases for more than 5 years). This conclusion is not clearly addressed in the FL Admin Code and  as such may be challenged by the Division or members of a condominium association. Scott L. Podvin: IMN’s 2d FL Distressed Real Estate Summit, December 8-9, 2008  spodvin@post.harvard.edu 
  • HOA issues – Due Diligence Review recorded Condo Docs and understand all CC&Rs   Foreclosure Sale Trigger Turnover Requirements  Lender Liability  Lender/Bulk Purchaser Required to Register with DBPR, if only intent is to lease up and operate units  Pension Fund/Endowment/Bulk Purchaser Responsible for Budget Shortfalls  Hedge Fund and Private Equity Liability for Warranty Claims  Rental restrictions  Special assessments Scott L. Podvin: Art of the Deal: Distressed Real Estate Summit 2008  spodvin@post.harvard.edu 
  • HOA issues – Due Diligence Perform detailed review of Association financial records  and minutes from all Board and member meetings  Adequacy of reserve funds?  Delinquent HOA payments? Any legal claims or threatened legal causes of action  against Association? Scott L. Podvin: IMN’s 2d FL Distressed Real Estate Summit  December 8-9, 2008  spodvin@post.harvard.edu 
  • Legal Issues Negligent Conversion – Liability for not making proper repairs prior  to resale of Condo units  i.e., known / should have known of construction defects, etc. Fiduciary duty to Association  WARRANTY OBLIGATIONS UNDER THE ACT  TURNOVER OF THE CONDOMINIUM ASSOCIATION  OBLIGATION TO PAY ASSESSMENTS  Assignment of contractual rights from original converter   i.e., claims against builder or architect Indemnities provided to original converters still in place?  Scott L. Podvin: IMN’s 2d FL Distressed Real Estate Symposium  December 8-9, 2008  spodvin@post.harvard.edu 
  • Real Estate Tax Issues - Concessions Available? Given the anticipated discount on purchase of individual units, how will  local Property Appraiser value the unit? Local assessors under pressure to reduce assessments as little as possible and  as slowly as possible. To do otherwise would spell bankruptcy to the communities in question regardless of the legality of their position.
  • Set Your Expectations Reasonably For example, in year 1, Buyer purchases busted condos for  $75,000, but prior developer sales averaged $300K. What value will tax assessor use in calculating real estate taxes? 20-33% It may be possible to obtain a reduction of in YEAR  2, although greater reductions often can be achieved by appeals litigation. On the flip side of course, there are issues of cost, timing, and  unpredictability when litigation ensues not to mention attorneys fees.
  • So, How Should I Price Non-Core Real Estate: identify the components of asset-level  returns,  understand the impact of financial leverage,  examine the effects of transaction costs, and  examine the effects of JV structures. Scott L. Podvin: IMN’s 2d FL Distressed Real Estate Symposium  December 8-9, 2008  spodvin@post.harvard.edu 
  • Pricing Non-Core Real Estate Ventures: Conclusions Understand how the property’s return is to be  generated (e.g., initial cash flow yield, growth in cash flow and/or cap rate compression). Understand how financial leverage alters the  risk/return profile. compare the non-core property’s unlevered  risk/return profile to your alternatives (core and non-core real estate). Be mindful of the “drag” of transaction costs.  Scott L. Podvin: IMN’S 2d FL Distressed Real Estate Symposium  Dec 8-9, 2008  spodvin@post.harvard.edu 
  • Post-Closing Issues for Purchaseing Fractured Busted Deals Organize maintenance providers  Schedule necessary repairs  Identify preventative maintenance opportunities  Change locks on all units not currently occupied by owners /  tenants Arrange Leasing / Property Management duties, whether in-  house or third-party company  If in-house Leasing, make sure all protections in place regarding tenants (i.e., application form, background check, security deposit, lease agreement) Scott L. Podvin: IMN’s 2d FL Distressed Real Estate Symposium  December 8-9, 2008  spodvin@post.harvard.edu 
  • How Do I Structure The Deal – The Art and Science Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium, Dec 8-9, 2008--spodvin@post.harvard.edu
  • Basic Characteristics of Equity Investment Shares in profit with NO Guaranteed return  Finances the riskiest portion of the capital  structure More control over decision making  Equity Investor has less protection in event of  bankruptcy Expected Equity Investor Return is Higher Than  Mezzanine Debt Scott L. Podvin IMN’s 2d FL Distressed Residential Real Estate Symposium spodvin@post.harvard.edu
  • What to Look for in an Equity Partner Experience   Skills  Contacts  Practical problem solving  Reputation  Team  Capacity  $$ Balance Sheet $$ Scott L. Podvin IMN’s 2d FL Distressed Residential Real Estate Symposium spodvin@post.harvard.edu
  • Alignment of Interests: Equity Source & Developer Fund Objectives   Fund Life  Leverage and Financing  Guarantees  Management Style and Control  Tax Considerations  Dealing with Unexpected Issues Scott L. Podvin IMN’s 2d FL Distressed Residential Real Estate Symposium spodvin@post.harvard.edu
  • Key Issues in Negotiating an Equity Agreement Controls   Define Major Decisions  Key persons Performance Standards   Economic  Non-Economic Economics   Promote structure  Management & Other Fees Buy-Sell – Many variations of ―shot-gun‖ and ―ROFR‖  Scott L. Podvin IMN’s 2d FL Distressed Residential Real Estate Sypmosium spodvin@post.harvard.edu
  • Joint Ventures: Some Observations & Thoughts: Like leverage, JVs are neither good nor bad.   Like leverage, JVs reshape the investor’s return distribution  Unlike leverage, the JV concern is how to:  Protect the investor’s downside  Motivate the operating partner to act optimally Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium December 8-9, 2008 spodvin@post.harvard.edu
  • JVs impose additional costs: Monitoring and supervision,   Additional legal complexities,  Issues of control,  Risk of a “bad” partner, and  Operator’s “promoted” interest. Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium  December 8-9, 2008  spodvin@post.harvard.edu 
  • Benefits of JVs include Access to “off-market” deals,   Access to asset- and/or market- specific expertise, and  Potential for excess risk-adjusted returns. Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium  December 8-9, 2008  spodvin@post.harvard.edu 
  • Joint Ventures: Motivational Issues If the operating partner has earned (but not realized) its promoted  interest, they tend to make “safe” bets in the future (i.e., they become risk-averse), because of the fragile/volatile nature of the promoted interest: • For example, execute a lower-rate lease with a strong credit  tenant. If the operating partner has not earned its promoted interest, they  tend to make risky bets (i.e., they become risk-seeking), because the downside is completely underwritten by the investor: • For example, execute a higher-rate lease with a weak credit  tenant. Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium  Dec. 8-9, 2008  spodvin@post.harvard.edu 
  • Sharing Profits: IRR Waterfalls Objective   Reduce downside risk to equity investor  Increase upside potential to developer Example   First Tier—Developer Fee  Second Tier—Return of Equity and 8% Pref  Third Tier—50% to Equity, 50% to Developer Until Equity has received a 15% IRR  Thereafter, 40% to Equity, 60% to Developer Summary—Higher Pref hurdles increase risk for developer/mitigate risk for  Equity Scott L. Podvin IMN’s 2d FL Distressed Residential Real Estate Symposium spodvin@post.harvard.edu
  • Practical implication: How To Strategically Structure Preferences and waterfalls If preference is too low, the incentive is too generous. • If preference is too high, the operator either: • Takes on very risky behavior, or • Places its efforts on other projects (with better likely outcomes). Scott L. Podvin: IMN’s 2d FL Distressed Residential Real Estate Symposium  Dec. 8-9, 2008  spodvin@post.harvard.edu 
  • The Market for Private Equity Funds: Certain real estate funds use the  private equity model: “2 & 20”  Promote is based on a (modified) “catch-up” provision – see next slide  Such funds look to generate 15-20% returns to their investors Scott L. Podvin: Art of the Deal:  Distressed Real Estate Summit 2008  spodvin@post.harvard.edu 
  • Conclusions When a JV structure is used, make sure that all the  costs (including the expected value of the operating partner’s promoted interest) are identified; use the investor’s expected return net of these costs to identify favorably and unfavorably priced opportunities. Realize that JV deals create certain motivations in  the operating partner (an old economic axiom: agents respond to financial incentives). Scott L. Podvin: Art of the Deal:  Distressed Real Estate Summit 2008  spodvin@post.harvard.edu 
  • Take Care of Your Family Contact Information Scott L. Podvin, Managing  Director of The Crest at Waterford Lakes, LLC www.TheCrestLife.com  spodvin@post.harvard.edu  Cell: (305) 793-5762  Fax: (305) 665-3971 