Real Estate Leadership Guides 9 DEBT & EQUITY CAPITAL EDITION 2018
agencies made regarding HVCRE. Comments for that are
due on Dec. 26, 2017. A bipartisan bill in the House
addressing some of HVCRE’s problems recently passed;
it’s awaiting take-up in the Senate as of this writing.
The notice of proposed rulemaking offers up a new
framework for HVCRE loans, Pendergast explains. The
goal is to create some clarity around the rule. For
instance, the regulation seems to require ongoing
monitoring of all acquisition, development and construction loans throughout their lives because they
might become subject to HVCRE treatment at any
time. That is, needless to say, a huge
burden for banks, she relates.
Also not surprisingly, there’s been a
pullback in lending in part due to the confusion about how to categorize these
loans. Between the bill and the proposed
rulemaking, Pendergast says, there’s
hope the banks will get some relief.
Meanwhile debt funds have stepped
into the breach, at least partially. In
October, Scottsdale-based Five Star
Development secured $282 million in
senior and mezzanine construction financing for the next stage of development of
its Ritz-Carlton hotel and residences, currently under way in Paradise Valley.
HFF placed a $72-million mezzanine piece with
Starwood Property Trust. Interestingly, the $210-million
senior land and construction loan was placed with Bank
of the Ozarks, illustrating that while HVCRE may be
onerous, it is not impossible to overcome.
In other cases, deregulation is behaving as promised, adding more liquidity to the market.
Two years ago, President Barack Obama signed the
Protecting Americans from Tax Hikes Act, which included
provisions exempting certain foreign investors from the
Foreign Investment in Real Property Tax Act of 1980.
They were largely minor reforms, and by no means perfect; since their passage the industry has been asking
for greater clarification as to which plans can qualify for
the FIRPTA exemption.
Despite that, they went on to generate tens of billions of dollars of new investment in the US, including in
the secondary markets, according to a commentary in
The Hill that was written by Peter Lowy, chief executive
officer of Westfield Corp.
Serving as a testament is TH Real Estate’s CASA
Partners VII LP, which recently closed after raising $245
million from investors that included a German pension
fund. The recent FIRPTA reforms have had an impact,
says Jay Martha, TH Real Estate’s head of US multifam-
ily investments. “We manage the CASA funds as club
funds, so we typically have four or five, perhaps six
investors in each of the funds. They tend to be repeat
investors but we do have one new foreign pension plan”
that was qualified under the reforms.
“A number of potential investors we have spoken to
are evaluating FIRPTA,” he adds.
With leverage, CASA VII will target a portfolio of
approximately $400 million.
THE PROBLEM OF DRY POWDER
As it was in 2017 and the preceding years, the problem
of dry powder will likely continue to be a factor in the
capital markets next year. A Preqin survey of alternative
assets investors found that they have generally been
satisfied with the performance of their portfolios in
recent years, and most are seeking to maintain or
increase their allocations over the next 12 months.
However, deal flow is a prominent concern. Dry powder has reached record highs across the private capital
industry, and the number of funds seeking investment
has risen; it is becoming more challenging for investors
to find attractive opportunities to which they can allocate capital, according to Preqin.
In response, investors are opting for bigger, more
established funds, says Oliver Senchal, head of real
estate products. “This places pressure on less-estab-
lished fund managers, which are facing greater compe-
tition for the remainder of investor commitments and
will have to find ways to stand out from one another in
order to attract capital.”
Of course, the commercial real estate market is more
than happy to help. ◆
John R. Williams
Avanath Capital Mgmt.
The Europeans look at
what we offer as having a very
good risk-adjusted return and
being in a good defensive
position in US real estate.