Author Archives: levercp

Lever’s Angle on 2020 Real Estate Investment Strategies

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.


Changes Looming at Fannie Mae and Freddie Mac

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.


When Big Banks Pull Back On CRE Lending

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.   


Lever’s Angle from ICSC 2019

By Adam Horowitz, Principal, Lever Capital Partners

What we learned:

This year’s ICSC continued to accelerate trends that have been propagating for a few years now; new technologies, mixed use projects, and value-add acquisitions over ground up development. As usual we met with various people at the convention ranging from owners and developers to management companies and leasing agents. What we heard in these conversations last week mirrored the trends that we have been seeing at Lever Capital Partners.

Technology was everywhere at the conference as vendors, new and old, were fighting for a seat at the proverbial retail table. Their goal is to convince the masses that these innovative concepts could drive retail tenants back to their brick and mortar locations.

Mixed-use projects were also at the forefront as evidenced by many multifamily, office and hospitality attendees. Everyone is trying to figure out the perfect combination of uses that will drive traffic and keep their consumers engaged and on-site.

Lastly we had many conversations about rehabbing existing assets rather than providing capital for ground up products. This is due to the ability to modify these types of properties much below replacement costs given rising construction costs.

What are the possible solutions:

Did you know that Augmented Reality in retail is a thing? According to JLL President and CEO Retail Americas Gregg Maloney, “AR is going to impact retail in a way we all really don’t understand right now, but we’ll have to embrace it because when retailers start bringing it into their store, owners and developers will have to bring it into their property.” Maybe this will happen soon or maybe not so fast, but it’s clear that current stores must do something to enhance the in-store experience, especially to appeal towards millenials and Gen-Z patrons.

Many of our meetings this year included some form of the live, work, play lifestyle. The challenge many of our clients have is that they really only know the retail space and need to be able to put together a team of experienced multifamily, office, and hospitality sponsors to compete in the mixed-use arena. Mixed-use projects have always been harder to finance as both lenders and investors have a harder time underwriting all of their uses, typically feeling  more comfortable financing a single use. But the times, they are a changin’ as we’ve started to see more capital providers underwrite to various uses as long as there is a strong sponsorship team in place. ICSC conducted a survey in late March of more than 1,000 adults, finding that 78% would reside in a “live, work, shop and play”community due to the convenience/efficiency and easier access to amenities. (Sleter, 2019).

Given the concerns that lenders and investors have over the amount of time it’ll take to build a brand new asset vs rehabbing an existing one, many owners are pouring money into the ones they already own. Current owners are under pressure to modify their store lineup and are adding “water features, art, and interactive experiential displays”, according to Bisnow’s Joseph Pimentel. The good news coming out of ICSC is that Gen-Z are patronizing malls because they see it as a destination. “Gen-Z cites the abilities to socialize, physically see items and get them immediately as their top reasons for going to stores,” said the ICSC study. “Nearly two-thirds of Gen-Z say it is important when buying online for that retailer to have a store nearby.”

What we can do for you:

We understand how the rapidly changing climate of brick and mortar commerce is continuing to challenge retail owners and developers. Our mission, as always, is to find the best capital providers to help our clients fund their projects. Knowing which capital providers are interested in working with retail sponsors who are using new technology, working on mixed use projects, or rehabbing older assets will allow us to help retail sponsors secure the best available capital for these projects.  If you’re wanting to get creative with your retail project, we’d love to help. Schedule a call today and our team will happily evaluate your project!


2019: The Market Ahead

By Max Bleiler, Lever Capital Partners

Investor appetite is lessening in 2019, according to firms surveyed for the 2019 Annual Investor Intentions Survey by CBRE. Of those surveyed, 98% intend to continue making acquisitions in 2019, but anticipate that they will do so at a slower pace. Furthermore, they are increasingly looking to secondary markets as well as alternative asset classes for yield. Amongst investors, the majority of investments are being made in pursuit of a stable income stream, followed by expectations of capital appreciation. This makes sense as prices across asset classes and markets are at or near all time highs.

Amongst investors, there is continued fear that 2019 may be the year of a global economic downturn. As we are all aware, this fear has been a growing concern over the past few years, but there has yet to be any strong indication that the apocalypse is now. Secondary to this concern is fear over what rising interest rates will do to the economy. At this time, the Fed seems to have indicated that they are taking a break from raising rates, so this fear, at least for 2019, can be put to bed.

Atlanta, Denver and Central Texas markets have emerged as leading metropolitan areas for real estate investment in 2019. Amongst Tier I cities, Boston and Chicago remain in favor while New York, Seattle and D.C. fall behind other Tier II and Tier III locations, including Las Vegas. These trends are continuations of what Lever Capital Partners has seen over the past few years and expects to continue to see moving forward.

Across asset types, industrial reigns top amongst investors. This continues a duel between industrial and multifamily spanning several years now. As tech giants continue to develop distribution plans for our increasingly e-economy, large investors have indicated they believe this sector is ripe with opportunity. Across asset types, value-add strategies remain most popular amongst investors, a trend that has now been increasing for nearly half a decade which Lever Capital Partners expects to continue in the short term. To the surprise of many, retail continues to hold its ground as an investment class, despite much buzz about the so-called “death of retail”.

Looking to the year ahead, the study indicates that 2019 is forecasted to be a slower version of 2018. Many of the concerns of the market have been sustained for several years now and trends in favorable real estate classes, investment strategies, and geographies are continuations from what Lever Capital Partners has seen in the past. In our experience over 2018, we saw increased activity in the senior housing, student housing, and industrial sectors. We anticipate these trends to continue as we move further into 2019.

At Lever Capital Partners we work closely with developers and owners to connect their projects with capital appropriate to their needs. We appreciate and anticipate the challenges the market cycle can bring to real estate transactions. We pride ourselves on our ability to have open conversations with clients and provide quick feedback, as to the market appetite, for their bespoke products. When partnering with developer clients in early stages, we are able to provide our market forecasts and help guide clients toward more financially feasible transactions.

CBRE Americas Investor Intentions Survey 2019

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.


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.

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 p 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


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.