Category Archives: News

High Construction Costs and Delays are the New Normal

By Adam Vanlerberghe, Managing Director, Lever Capital Partners

The topic of high construction costs has been popular over the last year and continues to be relevant into the new year. At Lever Capital Partners (“LCP”), we work closely alongside our Developer clients who must navigate and mitigate increased labor rates, material costs and labor shortages and delays.

The pain has been felt throughout the industry and especially within the Multi-Family sector where there remains a shortage of specialized trades needed to finish jobs. “We’re measuring an average delay of around five months,” says Andrew Rybczynski, senior consultant for CoStar Group Portfolio Strategy.

These delays can also lead to increased financing costs and liabilities to the Developer and/or Loan Guarantor(s). Delays lengthen the construction phase of a project, which typically carries a higher interest rate than the completed, income producing phase/product. Even worse, the delay could result in a loan default and/or costly loan extension fees.

At LCP, we anticipate and understand the challenges associated with developing a commercial project in today’s high-cost, often-delayed construction environment. We have realistic, open conversations with our Clients and help negotiate favorable loan terms, extensions and language to address such contingencies with our vast network of capital providers. Further, we will assist and advise our Clients on the preparation of budgets and proformas that account for these contingencies. When done properly, our Client and their project gain valuable credibility with capital providers, improving the likelihood of effectively closing the transaction.

Reference:

NREI Online

Multifamily Investors Shifting Towards Workforce Housing

By Amnon Cohen, Managing Director, Lever Capital Partners

Over the last 5 years Multifamily Investors have been gravitating towards Workforce Housing. According to HousingWire, 51% of all multifamily investments over that time period are considered to be Workforce Housing. The increase has been steady across most of the large MSA’s, but particularly in Orlando and Las Vegas.

What is Workforce Housing?

“Workforce housing tenants include those who fall outside of the 60 percent area median income (AMI) requirements of the Low-Income Housing Tax Credits (LIHTC) program. These individuals are unable to economically qualify for LIHTC properties, but are also unable to financially afford new class A communities being built in desirable urban centers. As a result, they are forced into older communities that are further away from economic centers and lack amenities, and often end up either paying a high share of their income to be in centrally-located communities or living further away from their jobs” (NREI Online).

About 13.5 million households live in workforce housing, according to a new CBRE report cited by Housingwire. Most residents are “renters by necessity” due to reasons like paying off debt or not having the financial means to own a home. Still, affordability remains a risk — as rents rise faster than wages due to increased rental demand. The report noted that 35 percent of workforce renter households were “rent burdened,” meaning rent payments were 30 percent or more of their incomes. That’s up from 21 percent of households in 2006.

“Urban Pacific Group has a workforce housing construction model that it claims is able to generate 25% internal rates of return over an 18-month to 24-month period. “We started looking for a new workforce-housing model, and we identified a marketplace for rental townhomes with multiple bedrooms to serve multi-generational working families,” Scott Choppin, founder of Urban Pacific, told real estate publication GlobeSt. “We found that if we build five-bedroom units, we could house a larger family and given the way that the rent structures work, we could be around $3,000 per month for a five-bedroom unit. When we finished the underwriting, we found that this model would produce market-superior yields to equity.” The new project model is referred to as an Urban Town Home, and Urban Pacific plans to create properties with 10 to 30 five-bedroom units” (HousingWire)

The challenge in buying or developing workforce housing is capital. Unlike true lower income housing markets that have a slew of LIHTC financing solutions both in terms of senior & junior debt as well as equity partners, workforce housing doesn’t have any government subsidized programs and the equity market might shy away from a product that isn’t really sexy. However, as the Class A space becomes more competitive and developers pulling no punches in term of amenities and innovation, conventional thinking is that margins and returns will shrink to a point where it makes more more sense to look at products like workforce housing, which are cheaper, safer and provide higher returns than the top end product.

Similarly, in the past JV equity shops shied away from older vintage properties as newer properties and new developments were surpassing IRR threshold requirements. As land prices and cost of construction increase and cap rates for newer products decrease, institutional equity players have found it harder to pencil out Class A apartments. As a result, the equity market has begun to rethink workforce housing as an interesting alternative in the multifamily space.

At Lever Capital Partners we have noticed the equity markets warming up to this segment over the last few years and have had recent success in financing older apartments being rehabbed into workforce housing in various parts of the country.

References
The Real Deal
NREI Online
Housing Wire

Opportunity Zones

By Amnon Cohen, Managing Director, Lever Capital Partners

Opportunity zones are areas designated by local governments that offer tax breaks under a new federal program. Investment firms have started to set up funds to distribute money specifically into these opportunity zones. There is a catch, every property within a qualified opportunity zone will not receive the same benefits.

There are multiple factors for investors to consider when it comes to investing money into opportunity zone properties. A few of these factors are, “the likelihood of getting a solid return on investment, the ability to quickly navigate the project approval process and the other programs that can be utilized alongside the opportunity zone benefit” (Banister).

“The industry was awaiting specific regulations from the Treasury Department, but experts believe it will allow investors to see significant increases in returns while also benefiting communities that otherwise might not attract as much investment. Develop founder Steve Glickman, who helped write the Opportunity Zone program while at the Economic Innovation Group, said the vision was to foster investment in low-income communities. But it was also important for local governments to select areas that could support private investment and create returns, and he said they did a good job of that. The census tracts selected cover 10% of the U.S. population, roughly 35 million people, and have an average poverty rate of about 30%” (Banister).

Here are the specifics:

-Gains can be reinvested into opportunity zones. If the project is held for longer than 5 years, 10% of the gains tax will be reduced
-If the project is held for 7 years 15% of the previous gains tax will be reduced
-If the project is held 10 years the any gains tax on the existing phttp://levercp.com/wp-admin/edit.php?post_type=news_2roject will be eliminated
-Among the answers provided, the Treasury Department said that a business can qualify as being in an Opportunity Zone as long as 70% of its property is in the designated area.
-Another important data point: Investors have 180 days from the sale of their stock or business to put the proceeds in an opportunity fund.
-Businesses also get 30 months to hold working capital for an investment in the Opportunity Zone, just so long as there is specific plan for a project.

Interactive Map of Opportunity Zones

References:
https://www.bisnow.com/washington-dc/news/economic-development/which-properties-investors-expect-to-benefit-most-from-opportunity-zone-investments-93980

Hotel Outlook: Economic Growth, Occupancy, and Airbnb

At Lever Capital Partners we are also seeing positive ADR and Occupancy growth for most of our hotel clients. Given the run up in RevPAR, there has been a slew of development and the commercial real estate financing world is now taking a harder look at new development projects. Commercial real estate lending for new hotels is now only provided for the best owners where the STR report shows a true need for the asset in question. There’s been a bunch of CRE News about Airbnb and the effect that it’s having in the hospitality market but I haven’t seen it given the deals we’ve looked at. Maybe it’s having a greater effect in primary markets like NYC and San Francisco but many of the assets we’ve financed recently continue to have positive RevPAR trends. Overall we continue to like the hospitality segment but are cautious along with the lenders about what might happen if there’s a slowdown in the segment given the increase in average interest rate for commercial real estate loans.

– Adam Horowitz, Principal of Lever Capital Partners and President of the Real Estate Capital Alliance

Click here for more information on economic growth, occupancy and Airbnb in the hospitality sector.

Investors Favor Internet-Resistant Net Leased Assets

Although not great for the size of my stomach, QSRs are popping up in markets all over the country and at a fast rate. NNN projects have accounted for about 20% of the commercial real estate lending that we’ve done over the last few years. As Sade mentions, investors will look for credit tenants first and foremost, but we’ve provided commercial real estate mortgages for many non-credit tenants as well. Many of our developer clients are asking us to find them non bank commercial real estate lenders that will finance 100% of the capital stack including pursuit costs, and we’ve been successful in finding them that capital.

– Adam Horowitz, Principal of Lever Capital Partners and President of the Real Estate Capital Alliance

Click here to read more about why investors favor Internet-resistant net-leased assets.

Opportunity in the Apartment Market for Family Offices

I like Antonio’s article and hope that more family offices invest in multifamily assets. We’ve always enjoyed finding commercial real estate financing for family offices, but the challenge has been the locations. Antonio suggests that they should look in secondary and tertiary markets but what we’ve found is that the family offices tend to start off investing in locations near their home base with a GP partner before heading into a smaller market which makes it more difficult. We’d love to see more commercial real estate news saying that family offices are pouring into the space but only time will tell if they want to pick up multifamily assets and commercial building loans in markets they don’t know well.
– Adam Horowitz, Principal of Lever Capital Partners and President of the Real Estate Capital Alliance

Click here to read Antonio’s article on why family offices shouldn’t overlook the apartment market.

Reinvention of the Ground Lease Business

We see a lot of ground leases when looking at deals in larger markets like New York City and San Francisco, but less so when looking at commercial real estate loans in Las Vegas or St Louis. I think Jay has hit upon a smart market strategy as there aren’t a lot of national players going after this business. It makes attaining commercial real estate loans a bit more challenging due to the ground lease, but good lawyers usually solve any issues surrounding it as long as the lease is fairly long-term. We’ve had a few deals where the commercial real estate mortgage interest rates ticked up a bit for these types of assets where we’re only financing the building but the deals have all closed.

– Adam Horowitz, Principal of Lever Capital Partners and President of the Real Estate Capital Alliance

Click here to read more about Sugarman’s thoughts on the reinvention of the ground lease business.

New Approach to Senior Living: Multigenerational Communities

This was an interesting article to read, and I think personally a good idea. The challenge with this idea on senior housing will come from the commercial real estate lending side. The commercial real estate financing business moves pretty slow and they like to see that there are many very similar projects that they can draw from for comps and previous success. We’ve worked on similar projects recently and have seen that attaining a commercial real estate mortgage was more challenging in this sector, although still doable.

– Adam Horowitz, Principal of Lever Capital Partners and President of the Real Estate Capital Alliance

Click here to read more about senior living bridging the generation gap.

Student Housing Trends in 2018

As I speak with some of our Student Housing clients we’re seeing many of the changes that Elliot mentions, particularly in the way they market to perspective tenants. In terms of getting a commercial real estate mortgage from the agencies, that’s still the goal for most borrowers unless there’s a heavy lift on the rehab site in which case different types of capital are needed. As commercial real estate mortgage interest rates rise I think we’ll see some of the weaker borrowers in this space have a harder time making deals pencil out and bigger players like Vesper taking down these assets. The more things change the more they stay the same and Cash is still King isn’t really commercial real estate news to anyone in the know.

– Adam Horowitz, Principal of Lever Capital Partners and President of the Real Estate Capital Alliance

Click here to read more about Student Housing Trends in 2018

The End of Office Space as We Know It

Our team at Lever Capital Partners has been providing commercial real estate financing for a few clients in the co-working space. As the average interest rate for commercial real estate loans keeps creeping up, our office owners are looking for additional ways to boost their NOI. Over the last couple of years we’ve been hired by firms that are trying to emulate WeWork in markets where they already have a strong office presence. The ability to get a commercial building loan is getting easier as WeWork co-working expands into smaller markets.

– Adam Horowitz, Principal of Lever Capital Partners and President of the Real Estate Capital Alliance

Click here to read more about The Rise Of ‘Office As A Service’.