By: Aaron McGinley, Director

In light of the current economic situation, property investments may experience distress and there are certain considerations that should be taken into account.  First, is to stay calm!  Owners, lenders and investors have weathered uncertain times before and this too shall pass – this may even present an opportunity for some to grow. In coordination with experienced advisors, owners and lenders here are 3-steps to identifying the right path forward:

Step 1: Review the existing deal and investment plan 

Before making any changes, it’s important to understand the structure of the deal in place.  Lever Capital Partners is constantly reviewing and negotiating deals on behalf of clients and can help make sense of restructuring a deal.  Who are the parties involved and what are their interests and motivations?  Review the partnership and loan docs to clearly define rights, consents and obligations.  Who has decision making authority and what requirements need to be met in order to be in good standing?  Focus on major covenants such as recourse obligations, cash controls and consents required for changes to the capital structure or operations. 

Step 2: Identify changes, immediate needs and reset goals

What changes are temporary vs permanent?  Lever Capital Partners spends a significant amount of time in the bankruptcy and workout world, and can quickly identify problems that need to be addressed.  Define the immediate cash needs to fund carrying costs and service debt.  Identify what short-term and long-term targets need to change. Run sensitivity analyses to understand the impacts these revised assumptions have on investment returns for each party.  Based on this information, begin to reset expectations for the asset and redefine short- and long-term goals. 

Step 3: Develop a plan and come to a resolution with the right parties involved 

At this point, a realistic plan can be made.  Bring all parties to the table, along with expert advisors such as Lever Capital Partners, who can help facilitate a dialogue and implement changes. The goal is to optimize alignment of interest among all parties and come to consensus about how to move forward collectively.  From an operations standpoint, investigate creative solutions for the property and alternative uses that could support the asset in the short term. Financially, there may be a simple solution such as short-term capital, raising equity or bridge financing or a possibly a longer-term workout solution that satisfies the lender and existing investors.

This is not the first period of distress that the commercial real estate industry has seen, and there are tried and true ways to evaluate whether to restructure an asset.  With the right team in place and the right advisors such as Lever Capital Partners, problems caused by current distress in the market can be solved and, in fact, may present an opportunity to grow. 

We’re Here to Help

Lever Capital Partners is a boutique capital intermediary with deep relationships in the debt and equity capital markets for commercial real estate. To learn more about our services or if you have questions about recapitalizing a property, reach out to us and we will evaluate your project.

By: Adam Horowitz, Principal, Lever Capital Partners

Private equity sounds awesome and sometimes it actually is. When sponsors are building out their capital stack they often have a need for outside equity to compliment their own capital. They then have to decide if they want private partners or an institutional one. There are pros and cons of raising equity from private sources vs institutional ones and we’ll try to provide some of the biggest factors you should think about.

Equity from private sources certainly can have some upsides. Private sources will typically allow for the general partner to have greater control of the project, more favorable deal splits and less complicated partnership terms. With all of those positives, why would anyone take on an institutional partner you might ask. Well, if you need more capital than your private sources have lying around, don’t want to spend half your day raising capital, or want a partner that’s an expert in commercial real estate, then maybe finding an institutional partner is for you.

As we all know, time is money, and if you want to grow your business, work on bigger deals, and not spend your days capital raising, then you’re better off with an institutional partner. Making the transition isn’t always an easy one. The required reporting is much greater and you’ll be asked a lot of questions regarding your project or business model that you hadn’t thought of previously. Having answers to those difficult questions when the credit markets tighten will benefit you as you’ll have a professional partner that understands how to navigate the difficult waters.

Is having “control” important? Of course it is. Loss of control is always a big contender for those contemplating going the institutional route. Control rights typically come in to play only if you run into a problem with the project and your partner has a different vision than you. The operating agreement clearly spells out all the control rights and there will be a buy/sell agreement giving everyone a fair shake when it comes to staying in or exiting the investment. 

What about the complicated IRR hurdles? OK, so you’ll have to break out your Excel modeling skills here or ask the analyst on your deal to step you through the model. These IRR hurdles usually are only going to come into play once a capital event, like a sale or recapitalization takes place so it’s not like you’re going to have to run the formulas daily.

Everything seems great until it doesn’t. When problems arise, as they are now, you want an institutional partner that knows how to navigate troubling times. This won’t be their first rodeo when dealing with economic uncertainty. They’ve been there before and can work with you to figure out the best plan of action going forward. Private investors scare more easily and would be more likely to try and pull their money out of a deal rather than backing your plan and coming out the other side in one piece.

Sometimes you’ll find a perfect investor where you get all the benefits with none of the downsides. When that happens, take it and be grateful. For everyone else, it might be time to look at institutional partners to see if they’re a good fit for your next project.

We’re Here to Help

Lever Capital Partners can guide you through the process of determining which partner is best for you. To learn more about this topic, or if you have questions regarding other financial needs, don’t hesitate to reach out to us.

By: Adam Vanlerberghe, Managing Director, Lever Capital Partners

With news of a different large retail chain closing down stores or filing for bankruptcy seemingly every week, there has been little reason for optimism for the retail real estate owner and investor. While the collapse of large retailers is very real and prevalent, there are signals that the sector’s decline has leveled off. There are several contributing factors to this apparent stabilization including creative tenant-mix repositioning, federal interest rate cuts and an overall improvement about the sentiment in the retail sector from the lending/investing community. 

Retail owners and managers now have more of a focus on bringing in a tenant mix which includes entertainment and lifestyle businesses in order to create centers with more of a social experience. Restaurants, bars and other entertainment related businesses are helping drive consumers to the centers thus increasing the overall foot traffic and exposure to all surrounding businesses. Service oriented tenants are also being sought after by retail owners and managers as these businesses cannot be as easily replaced by the ever-growing online shopping phenomenon.  

Notable changes in the federal interest rate have also helped the retail industry rebound. Just as quickly as we watched the Federal Reserve raise rates in 2018, we saw them fall once again with three straight rate cuts to end 2019. Due in part to the federal rate cuts and the repositioning to more entertainment-focused tenant mixes, the lending and investing community within the retail real estate sector has finally started to thaw.

National Real Estate Investor (“NREI”) recently published an article which highlights notable findings from a survey of 231 real estate professionals about the sentiment in the retail sector and found that “the share of respondents saying capital is more available than a year ago rose to 20.8 percent for equity (up from 12.7 percent last year) and 18.9 percent for debt (up from 13.3 percent in 2018)”. With regard to real estate investors buying, selling or holding retail property, the article further noted that “…sentiment began to swing a bit on investors’ plans to buy… The buy figure is the highest in the five years NREI has been conducting this research.”

We’re Here to Help

Lever Capital Partners has helped our clients fulfill their capital needs including ground-up development financing, bridge financing, permanent financing as well as joint venture equity investments. To learn more about these trends and how they might affect your business, or if you have questions regarding a commercial property, reach out to us at Lever Capital Partners and we will evaluate your project.

Sources

https://www.nreionline.com/retail-cre-market-study/exclusive-research-light-end-tunnel

Chapter 645B of NRS Relating to Commercial Mortgage Lending is Amended, Allowing for More Growth and Opportunities in Nevada

LAS VEGAS, NV. Dec. 12, 2019 /PRNewswire/ — In a change positively impacting lending in Nevada, lenders who are unlicensed in the state of Nevada may conduct transactions through a licensed mortgage broker in the state, effective Jan. 1, 2020. Chapter 645B of NRS relates to commercial mortgage lending in the state of Nevada. The bill exempts wholesale lenders who only fund or purchase commercial mortgage loans from obtaining a license. The recent assembly Bill No. 398 amends Chapter 645B by adding the line, “The provisions of this chapter do not apply to a wholesale lender who only funds or purchases commercial mortgage loans.”

Prior to the amendment, the law required persons and entities engaged in mortgage lending in Nevada to be licensed by the Commissioner of Mortgage Lending in Nevada. Lever Capital Partners’ Principal, Adam Horowitz, said, “It was difficult for the state to track the transfer of funds, as the state lacks the staff to properly track the companies lending with or without a proper license. Often the state focused primarily on unlicensed residential loans, therefore groups either lent illegally, filed for an exemption, or forewent lending in the state altogether.”

Adam Horowitz, was aware of the complications this was causing within the industry and wanted to enact change. Horowitz spearheaded the amendment to the bill as he knew this would be beneficial to the state and open doors to out-of-state capital providers wanting to lend in Nevada. The bill will allow projects to be completed more easily, promote competition and increase dollars flowing into the state. The state will also be able to monitor deal traffic more easily as the transactions will be better regulated.

Lever Capital Partners maintains a commercial lending license within the state of Nevada and is on the board of the Nevada Advisory Council on Mortgage Investments and Mortgage Lending. The firm is an experienced commercial real estate finance brokerage company, providing capital on transactions over $5MM across the United States. It offers its clients the resources of a national platform with the personal commitment of a boutique company. The team’s track record demonstrates a commitment to serving financing requirements in nearly all types of real estate income-producing and developmental projects. LCP is a proud member of RECA, the Real Estate Capital Alliance, a consortium of 20 companies covering every major metropolitan market across the United States financing over $5.2 billion in 2018.

For more information about lending in Nevada, please contact Adam Horowitz at (212) 493-5400 or [email protected].

SOURCE Lever Capital Partners

By: Adam Horowitz, Principal, Lever Capital Partners

Do you want to live and work near public transit? I certainly do, and so do many others, including a majority of millennials. As George Bluth said, “there’s always real estate money in the banana stand.” OK, he didn’t say the real estate part, but you get the idea. Populations worldwide are moving closer to urban centers – the United States is no exception. It’s happening everywhere, but nowhere is it more prominent than in the so-called 18 hour cities where public transit used to be an afterthought. The impact is large, as we see more investment dollars being used to build multifamily and office properties near transportation alternatives.

One of the main reasons we are beginning to see this transition is that Millennials and Gen Zs are ditching cars at a fast clip and have to get around somehow. So, it’s either stay landlocked in the suburbs or move to more urban neighborhoods with good transportation options. Who wants to sit in traffic in Atlanta, Boston, or Los Angeles when you can walk to work then meet friends or family easily at the end of the day before heading back home lickety-split.

This is taking place across the United States. True 18-hour cities like Denver, Nashville and Dallas are offering the amenities of the Big 6 Cities, at a fraction of the cost, with a growing set of public transportation options. Secondary cities such as Denver and Minneapolis-St. Paul has extensive light-rail systems, which have a very high usage rate. These cities are less expensive to live in than New York City, Chicago, and Los Angeles, which are all seeing residents leaving at an alarming rate.  

Developers are smartly capitalizing on the desire of people wanting to live, work, and play within short distances of each other. Being in these locations also allows them to achieve cap rates similar to their central business district counterparts. Research shows, “public transit’s benefits go beyond moving people from point A to point B. Transit creates value and, as a result, influences development and business location decisions (NREI).” Consequently, equity investors are focusing on mass transit and “walk scores” much more than in previous years. As usual, the smarter real estate groups will “follow the money” so, if that’s where the equity dollars desire to go, then that’s where they’ll build.

All in all, this is a positive move for our changing population. People are moving closer to cities and want access to live, work, play environments. Secondary and tertiary markets are in higher demand due to their available transit options. The more demand for these projects results in lower cap rates and more equity investor interest. 

We’re Here to Help

At Lever Capital Partners, we have seen a large amount of projects needing debt and equity capital for projects in close proximity to transit. Whether your project is missing guarantors, GCs, or local sponsors, we can help fill in the gaps. To learn more about these trends and how they might affect your business, or if you have questions regarding a commercial property, reach out and we’ll evaluate your project.

Sources

https://www.nreionline.com/finance-investment/what-s-impact-nearby-transit-office-and-multifamily-property-values?NL=NREI-11&Issue=NREI-11_20191123_NREI-11_546&sfvc4enews=42&cl=article_3&utm_rid=CPG09000020162406&utm_campaign=24110&utm_medium=email&elq2=6405b71382914521b62c75e7b1660e2c

By: Amnon Cohen, Director, Lever Capital Partners

The two biggest drivers causing shock waves in the commercial real estate retail sector are the proliferation of online shopping and the consumption habits of millennials. As a result, there has been a steep decline of traditional retail malls across the United States. Recent reports indicate that upwards of 20% of stores are at risk of losing an anchor tenant resulting in possibly 25% of them closing by 2024. Developers and investors are now scrambling to find the right tenant mix that will attract more people to shop at their centers, thereby providing a more stable income base.

eCommerce

The ease of purchasing goods online is clearly the main factor why so many name brand retailers are filing for bankruptcy ,or liquidating entirely. In 2019 alone, big name brands like Gymboree, Payless, Forever 21 and Barneys New York have all either filed Chapter 11 to restructure their debt, or close all their stores as part of a Chapter 7 bankruptcy. It is easy to buy baby clothes online, but how about a gallon of Milk? Grocery stores have been a mainstay of in-line shopping centers for years, and are holding their ground, but there has been an uptick of grocery operators shipping locally to consumers thereby chipping away at that sector as well. 

Millennials

Millennials represent 30% of all retail sales, shop 50% online and are the major drivers for the changes discussed above. As they continue to move into urban areas, convenience is an important factor as it becomes more difficult to shop in denser areas. Therefore, millennials are looking to shop with brands that can provide a seamless experience online and off. As a retailer you’ll need to be able to create an experience where consumers can easily find the same products and deals from mobile phones to computers to in-store purchases.

Options 

There have been countless articles about the need for retailers to provide more of an experiential store, thereby drawing in people to get an experience they can’t get online. Retailers are adapting by bringing technology to their stores such as automated checkout lines, robots for customer service, interactive price comparison and other services that enhance the consumers shopping experience and provide an alternative to shopping from home.  But what do we do with all the retail that’s already been built? We’ve seen malls being converted to office buildings, shared office space, trade schools, colleges, fulfillment centers and other industrial uses which are in high demand.

Capital Availability  

Finding capital requires a concrete plan by the owners. How are you going to replace the tenants that have liquidated? Are you going to replace them with a stronger tenant who has a better lease guarantee? If you’re going to convert your building to a different use, how do we know you have the expertise to accomplish that? Whatever plan you have, make sure you can back it up with a lot of data and bring in any partners that have an expertise that you’re lacking. The best way to gain access to attractive capital is to have the entire plan well thought out without any holes. Reach out to us if you would like an evaluation of your retail project.

We’re Here to Help

To learn more about these trends and how they might affect your business, or if you have questions regarding a commercial property, reach out to us and we will evaluate your project.

By: Adam Vanlerberghe, Lever Capital Partners

The chatter about the next recession continues to get louder, but the commercial real estate (CRE) investment appetite remains strong and highly liquid. CRE lenders continue to be well capitalized, but their lending parameters have become narrower and they have become more cognisant of ‘downside protection’ in the event of a recession. To do so, lenders may begin to adjust their portfolio’s exposure to market risk in hopes to reduce capital losses that result from significant asset declines. 

Lenders are now especially attracted to cash flowing, or near-cash flowing value-add projects. Multifamily and other workforce housing fits this profile and continue to be a popular asset classes for many lenders. Alternatively, lenders have become more conservative with their approach to ground-up development projects, which typically require longer time horizons before generating revenue and realizing value creation. If a recession were to take effect in the next 12 months, as some economists have predicted, they don’t want to be left holding the bag by committing their funds to a development project that might take 18 months or longer to build and lease-up. At Lever Capital Partners, we work to anticipate these lender concerns and can help our clients position their projects to navigate such challenges.  

Lenders are also now looking outside of the major markets and gateway cities in search of stronger and more stable economic fundamentals. This notion was further explained by Peter Muoio, Chief Economist at Ten-X Commercial, “In order to gauge the resilience or vulnerability of markets to a potential downturn, it really depends on how high vacancies are and how much development is occurring. That said, we are long into this cycle and property prices have been generally bid up in gateway and major markets, which are typically the first to attract investment earlier in a cycle. This leads investors to search for yield in secondary and tertiary markets.”

At Lever Capital Partners, we are constantly interacting with the commercial real estate lending and investing community which allows us to think like a lender or investor. By doing so we are able to anticipate and mitigate their concerns in order to best capitalize our client’s projects. 

Source:

https://www.nreionline.com/finance-investment/five-cre-economists-offer-advice-todays-real-estate-investors/gallery?slide=1

By: Adam Horowitz, Lever Capital Partners

Where are we in the cycle:
We’re on a 10+ year run of economic expansion since the fourth quarter of 2008 and people have been predicting a recession for a couple of years now. Since news outlets have to sell ads, there are stories littered with the mention of an “inverted yield curve” predicting an upcoming decline. It’s certainly not a foolproof predictor of a pending recession and in any case it’s flip-flopped back and forth a few times already this year.

Regardless of some possible indicators, investors are certainly worried about a global economic slowdown and the threat of an ever-escalating trade war. What do they do when they feel that way; they flee to higher-quality assets both on the real estate side and as well as long-term US government bonds. There have also been interest rate cuts which are having an impact on the industry. “As a result, there may be some incremental cap rate compression in some markets and property types as lower interest rates reduce upward pressure on cap rates” according to a report from real estate services firm CBRE (NREI).

What are the possible solutions:
Not surprisingly, there’s been an immense amount of development during the growth period. Some of it necessary, especially in sectors like industrial and student housing, and some geographically needed in the “smile states” where population continues to increase. In late 2019 we’re seeing development slowing down as it becomes more difficult to arrange debt and equity financing. That’s certainly not for a lack of deal flow, just what’s actually capable of getting done. Many of our clients, who are both developers and value-add buyers, are moving the needle more towards the acquisition business and away from longer term development projects that might catch them in the middle of an economic downturn.

Value-add deals tend to have a timeframe somewhere in the 1-3 year range which gives sponsors the ability to sell a cash flowing asset more easily. Even if you don’t complete your full improvements, a cash flowing asset still has value and maybe the LP investors get their money back but won’t realize the lofty IRRs predicted by their GP partners. Our most successful clients sell once their greatest returns are realized. I have a feeling we’re going to be seeing faster turnaround in the next year.

We’re also seeing a shift to more NNN deals. Sponsors who haven’t been in the space in the past are looking to park some of their money in safer transactions that can weather a storm and come out the other side relatively unscathed so they’ll have a lot of cash when the market bottoms out. There has been a lot of groups getting their toes wet in this space, which is super competitive, making it hard to find a good deal.

What we can do for you:
In short, A LOT. We’ve been arranging Joint Venture equity financing for value-add transactions across multiple sectors as well as financing NNN development and acquisitions. Everyone and their sister wants to buy value-add multis so you either have to find off-market transactions or seek another asset class that’s lets competitive to find an interested LP. For NNN deals there are many financing options on the acquisition side if you’re acquiring the asset at a market cap rate and we’re arranging development projects at 100% LTC plus pursuit costs.

Sources:
https://www.nreionline.com/net-lease/dollar-stores-remain-demand-net-lease-investors?NL=NREI-21&Issue=NREI-21_20190805_NREI-21_378&sfvc4enews=42&cl=article_1&utm_rid=CPG09000020162406&utm_campaign=21968&utm_medium=email&elq2=1608c592fa3244f1b4f4f282c929b76a
https://www.fool.com/investing/2019/08/23/better-buy-realty-income-national-retail-properti.aspx
https://www.globest.com/2019/08/26/newly-developed-net-lease-properties-in-high-demand-in-fl

By: Amnon Cohen, Managing Director, Lever Capital Partners

The Trump Administration led by Mark Calabria, lead Director of the Federal Housing Finance Agency, is making a push to re-privatize Fannie Mae and Freddie Mac by removing the agencies from government conservatorship. 

In August 2008, the U.S. government took over both agencies as they were heading towards insolvency. This was a result of the Great Housing Crisis caused by the subprime market crash and subsequent recession that followed. In September 2008, the U.S. Congress authorized $100 billion in bailout funds for both agencies to keep them afloat. The recovery in the housing market enabled Fannie Mae and Freddie Mac to return to profitability and eventually repay the U.S. Treasury the entire bailout amount plus an additional $20 billion in interest. 

Fannie Mae and Freddie Mac are now making loans at a record setting pace. The current administration, and some economists, believe it is time to make the agencies private again. The current administration believes the GSE’s (Government Sponsored Enterprises) are a burden on the government and if regulated should be ran by a private enterprise. However, there are many in the real estate industry who feel that a private company who lacks the backing of the U.S. Treasury may unnerve investors and result in agency backed loans to become more expensive and volatile. As news of the impending privatization trickled through the market, Fannie Mae multifamily loan spreads spiked 50 basis points while similar loans in the private sector remained steady or decreased. 

Michael Bright, President of the Structured Finance Industry Group and the former acting President of Ginnie Mae, told Bloomberg that keeping Fannie Mae and Freddie Mac structured exactly as they are and releasing them to privatization is a “dangerous experiment.” There are several reasons for Mr. Bright’s fears. The two main dangers are that a) A private lender is perceived to be more volatile than a government agency and b) A pure for profit lender may exclude some housing products or markets that they may deem as less profitable

The National Association of Realtors also supports an explicit government guarantee. NAR President John Smaby penned a letter to Mr. Calabria stating that any reforms must be well designed and thoroughly vetted before implementation. He also added that any reforms that take place should keep in mind the GSEs public mission which is to  “provide liquidity, stability, and affordability to the U.S. housing market”.

We at Lever Capital Partners share the sentiment of if it ain’t broke, don’t fix it. Currently, Fannie Mae and Freddie Mac are the leading multifamily lenders in the country, and their aggressive lending rates and terms have trickled down to others in the lending industry including: banks, life insurance companies and CMBS lenders. Privatizing the agencies may change the parameters that are currently in place, which may affect, rates, terms, leverage and capitalization rates in the most influential segment of the Commercial Real Estate Industry.

Sources:

https://www.washingtonexaminer.com/opinion/op-eds/privatize-freddie-mac-and-fannie-mae

http://www.mortgagenewsdaily.com/06052019_gse_conservatorship.asp

By Adam Vanlerberghe, Lever Capital Partners

A strong recent economy combined with loosened regulatory constraints have contributed to a healthy commercial real estate (“CRE”) lending environment. 

In such an environment, banks often look to put out more capital and be a bit more aggressive with their underwriting. Back in 2017, large banks with more than $100 billion in assets experienced a 5% growth rate in commercial real estate lending, according to Fitch Ratings. In addition to increased activity, we saw banks offering loans as high as 75-80% loan-to-cost (“LTC”) on construction projects. Higher LTC ratios have certainly been welcomed by our commercial real estate developer/investor clients as it lowers their required equity contribution, thus allowing them to pursue additional investment opportunities and/or limit their need to bring on added partners.

However, that 5% growth rate reported by large banks in 2017 shrunk to 1.2% in 2018, according to Fitch. The reduced growth rate is likely to coincide with more conservative underwriting from these larger banks. As a result, underway construction projects may have difficulty when transitioning from their high LTC construction loan to their take-out/permanent loan facility in a more conservative lending environment. This can especially be the case when a recently completed project needs time to reach stabilization and/or didn’t realize enough value creation during the development period. When this occurs, the permanent loan proceeds being offered may not be enough to fully payoff the high LTC construction loan.
The team at Lever Capital Partners (“LCP”) helps our clients navigate such funding shortfalls and can often bring multiple solutions to the table such as a bridge loan, mezzanine loan, preferred equity or joint venture equity. We always consult with our clients and carefully consider their partnership structure and business strategy to help them determine the absolute best solution.
Fortunately, large banks that are pulling back on CRE lending are not the only options available, as the above funding solutions will likely be provided by a non-bank capital source. At LCP, we have a vast network, experience and long-standing relationships with private/public debt funds, REIT’s, private equity, credit unions and life insurance companies which we utilize to provide our clients with optimized funding options for their commercial real estate transactions.   

Source: 

https://www.nreionline.com/lending/bank-exposure-risk-cre-lending-creeps-higher?NL=NREI-21&Issue=NREI-21_20190605_NREI-21_700&sfvc4enews=42&cl=article_1&utm_rid=CPG09000020162406&utm_campaign=20841&utm_medium=email&elq2=0a930ff8f8e14fcab78dc9c0c04d55ea