Real Estate Forum - April 2013

NEWS FRONT
GSE Reform Critic Stands Up for Multifamily

WASHINGTON, DC—The multifamily industry, at least when speaking on the record, has been reluctant to outright criticize the Federal Housing Finance Agency’s plans to streamline and shrink the GSE’s operations. Yet one voice of opposition is CBRE’s Peter Donovan, immediate past chairman of the National Multi Housing Council, who gave a spirited defense of the multifamily industry and the support it receives from the GSEs at the American Enterprise Institute.

The market showed discipline and unprecedented performance during the worst recession since the Great Depression, he said. For critics who see “a current GSE multifamily book that will cause losses to taxpayers during the next bottom of the cycle,” Donovan countered with a default rate that is currently 25 basis points on a combined GSE portfolio of over $300 billion, with a 20- to 25-year history and a business that has generated billions in income.

For those who point to “a synchronized— rather than locally differentiated multifamily market—producing excessive leverage,” he countered that the 2012 GSE average LTV for newly originated loans is 65%, with a 1. 45 debt service coverage and an outstanding balance of 50%-55% at maturity.

For critics who say that “if the federal
guarantee is continued, the risk of down-
ward pressure on multifamily underwriting
standards is very high,” Donovan says there
has been no evidence of this under receiv-
ership. “Your reference to the growth of the
aggregate multifamily debt outstanding is
not shown in the context that the average
loan to value has gone from 53% in 1992 to
36.5% in 2012,” according to the Federal
Reserve Board, and that values have
increased during that time from $545 bil-
lion to $2.3 trillion. “I ask you, where is the
bubble in that? Is this your GSE over-alloca-
tion of capital to the multifamily sector?”
Donovan also knocked down other sug-
gestions that have been floated in lieu of
GSE support. The private capital market
has not shown itself to be ready, willing,
able, disciplined or reliable enough to
take the place of a government guarantee.
And the Federal Reserve Bank providing a
backstop in lieu of a government guaran-
tee is “to my mind the difference between
a disaster recovery plan and a disaster pre-
vention plan that will likely lead to more
frequent and severe multifamily debt mar-
ket crisis.”
Donovan concluded with this: “The GSE
multifamily experience was not the single-
family experience. In times of severe eco-
nomic crisis, it worked even better than any
of us imagined. It was quite simply the
model that needs to be emulated because it
works. I don’t want successor GSE multifam-
ily to crowd out the private debt market, but
rather to lead it.”—Erika Morphy

Keys to Winning the New Bidding Wars

There’s no question that the real estate market’s balance has tipped and bidding wars have returned in a big way in favor of sellers. The days of buyers squeezing sellers for healthy due diligence periods and meticulously negotiating all their demands are gone. Given this particularly frothy environment, how the deal actually gets done has to change.

Here are five important tips for a real estate buyer to survive (and thrive) in a bidding war or competitive situation:

1. Don’t believe everything the broker tells you—ask questions! Brokers are incentivized to help move the parties ahead at lightning speed. This is often a benefit so that a deal does not stall.

However, less scrupulous brokers may tell a buyer there is a bidding war over a property to provide that extra spark of anxiety when there might simply be other interested parties (who have not yet bid). Avoid the unnecessary drama by asking questions (or ask your attorney to check the real story).

2. Don’t ditch common sense requirements due to heightened emotions. Even with 10 competing buyers, you all need basic information to underwrite the deal. For example, if the seller refuses to provide leases that you need to ascertain the property’s income, don’t forego this requirement just because there are other bidders. After all, every single other buyer would want these documents, too.

3. In this environment, the role of the buyer’s attorney is to draw
attention to any serious issues for the client and then step aside.
In a situation where the economic drivers of a deal are highly
compelling, many nuances of the contract that are ordinarily

By Aaron Y. Strauss

negotiated become irrelevant given the deal value. Your attorney should flag every major issue, but will potentially kill the deal if he or she attempts to heavily negotiate a highly theoretical condemnation provision.

4. In a competitive bid setting, a “sit-down contract signing” is preferable. In our technology-driven world, where email and conference calls are considered more efficient, this is a major exception. You simply cannot replace the dynamics of sitting down face-to-face with all parties to quickly hammer out (and win) a deal. Negotiating a few contract points in person can get the deal done more efficiently for everyone.

5. Fight for your right to assign the contract. If there are truly competitive bids on a property, a buyer may have actually made money by simply signing the contract if he or she has retained the right to assign it or “flip it.” Most sellers and their counsel will heavily resist the right to assign but in a rapidly moving and rising market, it is too valuable an option to leave on the table if at all possible. (The request for the right to assign must be marketed carefully so as not to appear as a “flip.”) Win it if you can.

It is definitely a buyer’s market, and as competition heats up for favorable deals and attractive properties, it’s important for real estate buyers and investors to keep the primary goal in mind: to close the deal with the most favorable terms. Today’s deals are moving fast, and buyers and their attorneys are well advised to do their advance research, stick to the time-honored basics and don’t kill a deal unintentionally by “over-lawyering” it.

Aaron Y. Strauss is founder and a partner the law firm A. Y. Strauss, based in Roseland, NJ. He may be contacted at ays@aystrauss.com. The views expressed here are the author’s own.