Given today’s economy, foreclosure transactions are becoming the transaction type of 2009. How is pre-foreclosure environmental due diligence different from new loan due diligence? First, we must consider the difference to our client’s exposure to environmental risk.
In lending on real estate, the lender is generally more concerned with the quality of the collateral rather than with the management of any environmental liabilities associated with the property. As the bank has no direct ties to the tenants/occupants of the property, tenant health issues are a distant concern.
In a foreclosure transaction, the lender will generally take title of the property, and despite the potential protections for the Secured Creditor Exemption, potentially expose the bank to environmental liabilities associated with the property. The once distant concerns are now the direct responsibility of the bank. As such, it would be in the lender’s best interest to be more cautious with any environmental concerns, especially when grey areas arise. In a new loan, when the Phase I Environmental Site Assessment identifies a marginal issue, the lender can occasionally write off potential environmental risks knowing tha that the problem is not theirs. But once the lender assumes title of the property, these risks and expenses often fall on the lender and/or the eventual buyer of the asset.
In addition to the ASTM E1527 standards, pre-foreclosure Phase I ESAs may include non-ASTM scope issues such as asbestos, lead, radon, mold, and vapor intrusion as a lender taking title is very concerned with the property being used safely by occupancy.
In the world of SBA, the consultant and lenders should follow scope requirements dictated by SBA SOP 50-51. Note these rules are set to change with an updated version of SOP 50-51 scheduled for 2009, and the new version will be much more prescriptive.
Finally, site access is always a potential problem on foreclosure transactions. Oftentimes, site contacts for a property are the borrowers who defaulted on the loan. Therefore, it doesn’t come as much of a surprise when the site contacts are uncooperative.
Though, at times, a difficult and challenging task, the Phase I ESA assessor must ensure that the appropriate measures are taken to protect the interest of the client as the potential for liability for the lender is much greater.
Friday, January 30, 2009
Saturday, January 10, 2009
The Third Economy and Commercial Real Estate
I think all of us involved in commcercial real estate industry are very concerned about the CMBS market and how it is going to effect our clients. The recent news of Vornado and other signifcant landlords looking to the government for relief through TARP certainly raised the level of concern and the recent news of Hines taking control of Cabi's 33 properties in Southern California just proves that we are in the beginning stages.
In reading this insightful article by Irving Fisher, "The Debt-Deflation of Great Depressions," our current economic environment may be a reprint from the combination of excess debt and the utilization of risk.
http://www.newmarkkf.com/research/whitepapers/library/third_economy.pdf
In reading this insightful article by Irving Fisher, "The Debt-Deflation of Great Depressions," our current economic environment may be a reprint from the combination of excess debt and the utilization of risk.
http://www.newmarkkf.com/research/whitepapers/library/third_economy.pdf
Thursday, December 18, 2008
Update on TARP: Kashkari's speech
Neel Kashkari's recent testimony explaining why he and Secretary Paulson believe the TARP Capital Purchase Program is working, and how it should lead to more lending soon is discussed at http://www.seyfarth.com/sertalert/, which is my firm's Strategic Economic Response Team website. This website provides an overview of the TARP legislation as well as periodic updates about recent developments in the area.
Monday, December 8, 2008
Foreclosing Lender: Understand the Condition of the Property
In a foreclosure, a workout, or a short sale a clear understanding of the condition of the building in question is typically more central to the transaction than in a normal real estate sale.
For the past fifteen years I have done Property Condition Assessments (PCA) on commercial real estate for lenders and buyers. In these transactions my mission was to find all of the property’s physical deficiencies and to project the capital improvement budget for the next 12 years. However, these transactions were typically a done deal by the time the principals hired me. Of course, every so often I would find a structural problem or a major water intrusion problem that might derail the deal, but in most instances my PCA report was used to justify the decision that was already made.
Foreclosures are different. First, foreclosure assets are far more likely to have significant deferred maintenance issues or even just out right waste. My clients have to deal with a lot of issues on the way into a transaction that my PCA illuminates. Lenders must mark to market and most agree that the cost of immediate repairs and necessary capital improvements must be accounted for. Also, lenders must immediately try to sell the asset, often for a loss. For a special assets officer to sell an asset for a loss he or she must justify the transaction internally and the condition of the asset is primary to that decision.
Finally, the pre-foreclosure PCA typically doubles as a pre-sale PCA once the lender takes the asset to market. Buyers of foreclosure will negotiate hard and try to get the asset for rock bottom prices. An accurate PCA protects a lender against an overly aggressive buyer, exaggerating the physical deficiencies.
Overall the foreclosure and eventual sale of an asset is a far more complicated set of transactions than a new loan and a clear understanding of the asset will pay.
For the past fifteen years I have done Property Condition Assessments (PCA) on commercial real estate for lenders and buyers. In these transactions my mission was to find all of the property’s physical deficiencies and to project the capital improvement budget for the next 12 years. However, these transactions were typically a done deal by the time the principals hired me. Of course, every so often I would find a structural problem or a major water intrusion problem that might derail the deal, but in most instances my PCA report was used to justify the decision that was already made.
Foreclosures are different. First, foreclosure assets are far more likely to have significant deferred maintenance issues or even just out right waste. My clients have to deal with a lot of issues on the way into a transaction that my PCA illuminates. Lenders must mark to market and most agree that the cost of immediate repairs and necessary capital improvements must be accounted for. Also, lenders must immediately try to sell the asset, often for a loss. For a special assets officer to sell an asset for a loss he or she must justify the transaction internally and the condition of the asset is primary to that decision.
Finally, the pre-foreclosure PCA typically doubles as a pre-sale PCA once the lender takes the asset to market. Buyers of foreclosure will negotiate hard and try to get the asset for rock bottom prices. An accurate PCA protects a lender against an overly aggressive buyer, exaggerating the physical deficiencies.
Overall the foreclosure and eventual sale of an asset is a far more complicated set of transactions than a new loan and a clear understanding of the asset will pay.
Thursday, December 4, 2008
"Poverty Effect": what do latest grim home foreclosure figures do to retail sales?
According to the Wall Street Journal’s December 2 article, Trans Union predictions, TransUnion LLC analyzed about 27,000,000 consumer records in its database and predicted that 7.17% of consumers will have mortgages that are 60 days or more past due in the fourth quarter of 2009 – the highest level since TransUnion started tracking these statistics in 1992. (By contrast, TransUnion expects a delinquency rate of 4.67% at the end of 2008.) More adjustable rate loans are due to reset from 2009 through 2011.
Locally, Reuters reported that the volume of Los Angeles County home foreclosure auctions rose again in November (to 3,685, up 51% year over year and up 54% from October). This happened despite the implementation of a new California state law passed last summer which requires lenders to contact homeowners to explore foreclosure avoidance options during a 30 day waiting period, according to RE research firm PropertyShark.com. Click here to read the Reuters article.
Even Bernanke is worried. He’s been quoted (in Forbes, among others) as saying that the U.S. foreclosure rate remains “too high,” creating “substantial social costs” as the subprime mortgage mess and ensuing financial crisis wreaks havoc on the economy. The Fed chief said "more needs to be done" to avoid further “unnecessary” bank repossessions – a departure from his earlier position opposing a bill that would allow bankruptcy judges to modify mortgages to save homes.
It’s hard to tell yet what the “poverty effect” will actually do to retail sales this year. Bloomberg focuses on the report that November retail sales reflect the worst monthly drop in four decades in its December 4 update; but CNN Money says the drop was not as bad as expected here. Most reports indicate the deep promotional cuts made by retailers are generating some traffic and sales; the question seems open as to how profitable these tactics will be.
Then the next question for commercial real estate will be: what’s the effect on retail stores, their leases and their landlords? And, in turn, their lenders? Your thoughts?
Locally, Reuters reported that the volume of Los Angeles County home foreclosure auctions rose again in November (to 3,685, up 51% year over year and up 54% from October). This happened despite the implementation of a new California state law passed last summer which requires lenders to contact homeowners to explore foreclosure avoidance options during a 30 day waiting period, according to RE research firm PropertyShark.com. Click here to read the Reuters article.
Even Bernanke is worried. He’s been quoted (in Forbes, among others) as saying that the U.S. foreclosure rate remains “too high,” creating “substantial social costs” as the subprime mortgage mess and ensuing financial crisis wreaks havoc on the economy. The Fed chief said "more needs to be done" to avoid further “unnecessary” bank repossessions – a departure from his earlier position opposing a bill that would allow bankruptcy judges to modify mortgages to save homes.
It’s hard to tell yet what the “poverty effect” will actually do to retail sales this year. Bloomberg focuses on the report that November retail sales reflect the worst monthly drop in four decades in its December 4 update; but CNN Money says the drop was not as bad as expected here. Most reports indicate the deep promotional cuts made by retailers are generating some traffic and sales; the question seems open as to how profitable these tactics will be.
Then the next question for commercial real estate will be: what’s the effect on retail stores, their leases and their landlords? And, in turn, their lenders? Your thoughts?
Current Trends in Real Estate
Bob Gardner, Managing Director of Robert Charles Lesser & Co., recently gave a very interesting presentation about the current trends in commercial real estate to the ULI Los Angeles District Council.
Among other trends including what areas/types of real estate are being hit hardest in the current recession and confirming the perception that credit is very tight, his presentation includes some charts showing the number of building permits applied for before, during and after several recent recessions. The trend lines don't seem to have a typical pattern from recession to recession, so are not much of a guide in themselves to how deep/long a recession will be.
Other charts show the likely effect of demographic trends (particularly the huge drop in numbers from the Baby Boom generation -- aged 43 - 62 -- which is 27% of the population, to Generation X -- aged 27 - 43 -- which is only 18% of the population, which will be succeeded by Generation Y -- now 8 - 27 -- which is 27% of the population).
Bob suggests that these demographics favor smaller (and greener) units and urban development close to transit or walkable neighborhoods, both for newly formed households seeking their first apartment/condo, and for empty nesters seeking to move down from larger houses to lifestyle product.
If you are interested, you can view Bob's presentation on his website by clicking here to see a copy. Feel free to add your comments and opinions.
Among other trends including what areas/types of real estate are being hit hardest in the current recession and confirming the perception that credit is very tight, his presentation includes some charts showing the number of building permits applied for before, during and after several recent recessions. The trend lines don't seem to have a typical pattern from recession to recession, so are not much of a guide in themselves to how deep/long a recession will be.
Other charts show the likely effect of demographic trends (particularly the huge drop in numbers from the Baby Boom generation -- aged 43 - 62 -- which is 27% of the population, to Generation X -- aged 27 - 43 -- which is only 18% of the population, which will be succeeded by Generation Y -- now 8 - 27 -- which is 27% of the population).
Bob suggests that these demographics favor smaller (and greener) units and urban development close to transit or walkable neighborhoods, both for newly formed households seeking their first apartment/condo, and for empty nesters seeking to move down from larger houses to lifestyle product.
If you are interested, you can view Bob's presentation on his website by clicking here to see a copy. Feel free to add your comments and opinions.
Tuesday, December 2, 2008
Welcome to the LA CRE Alliance blog!
Our goal is to provide an electronic "watering hole" to discuss Southern California commercial real estate and related topics. We don't plan to talk about specific deals here, though.
We hope you will give us the benefit of what you know and your opinions about relevant issues affecting commercial real estate right now. We hope that you will find this blog useful and opinionated -- and we look forward to your comments.
We hope you will give us the benefit of what you know and your opinions about relevant issues affecting commercial real estate right now. We hope that you will find this blog useful and opinionated -- and we look forward to your comments.
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