TEXAS DOMINATES BEST-PERFORMING CITIES INDEX

SAN ANTONIO (San Antonio Express-News, Milken Institute) – Milken Institute just released its ”Best-Performing Cities” index for 2011, and Texas is everywhere you look.

Nine Texas MSAs landed in the top 25 on the institute’s list of 200 largest metros, and four of those ranked in the top five, including number one San Antonio.

Others on the list were El Paso (2), Austin–Round Rock (4), Killeen-Temple-Fort Hood (5), Houston-Sugar Land-Baytown (16), McAllen-Edinburg-Mission (18), Dallas-Plano-Irving (20), Fort Worth-Arlington (24) and Lubbock (25).

The state’s smaller metros didn’t do too shabby either, with five among the top 25: College Station-Bryan (4), Longview (9), Waco (12), Tyler (20) and Midland (22).

While it’s good news for Texas to do so well on in index that is based largely on employment growth, Real Estate Center Research Economist Dr. Jim Gaines said the state looked good mainly because other states didn’t.

“Our growth rate and advancement isn’t all that wonderful,” Gaines told the San Antonio Express-News. “We’ve managed to stay flat or have very small positives. But because everybody has so many negatives, we look so much better.”

Texas accounted for one in every five jobs created in the country between June 2010 and June 2011, reported the Express-News. Houston and Dallas alone were responsible for one in every ten new jobs in the country.

http://www.scotsmanguide.com/default.asp?ID=4793

There’s More than Meets the Eye with Hard Money

Advise clients to look closely at the numbers when comparing joint-venture equity to hard money

Adam Lotterman, vice president, Forman Capital

As published in Scotsman Guide’s Commercial Edition, October 2011.

Finding financing in today’s market  is a difficult task. Many borrowers are turning to alternative sources of financing, from hard money to joint-venture equity.

When choosing between these options, however, potential borrowers must carefully analyze the numbers. Many borrowers do not want to pay the interest rates associated with hard money and think joint-venture equity may be the better option. Commercial mortgage brokers should advise their clients on the best choice for their particular deal — and their clients may be surprised at what hard-money financing can offer.

There is a strong case to be made for the use of a hard-money lender instead of joint-venture equity. Three main advantages of a hard-money loan are:

Short-term deals: A joint-venture equity partner retains ownership in the property for the life of the deal, whereas a hard-money loan  generally is paid off in one to three years.
Quick funding: Joint-venture equity deals are complicated and difficult to get completed and documented quickly, but many hard-money lenders can close in as few as two weeks.
High return on investment: The return on investment to the borrower can be considerably higher with a hard-money loan.
For example, in a recent transaction, a borrower wanted to acquire a newly constructed retail strip center in a secondary market. The property was completed but not stabilized because the developer could not fund the necessary tenant improvements or leasing commissions. The borrower was in contract to acquire the property at a large discount to the construction cost through a tri-party sale agreement with the developer and lender. The lender did not give the borrower much time for due diligence, forcing the borrower to close quickly.

The borrower first considered using equity partners instead of debt. The borrower in this case was sophisticated, well-educated and experienced.  As such, their access to equity capital was abundant and at favorable terms. As the borrower entered discussions with potential equity partners, however, it became clear that a hard-money loan was far less expensive. Even with high-quality, blue-chip borrowers, the potential equity partners wanted about 75 percent of the profits after a preferred return of 10 percent and required the borrowers to contribute 15 percent of the initial capital stack.

In the comparison shown below, the cost of joint-venture equity is compared to the cost of a hard-money loan. In this scenario, the purchase price is $5 million, and after a two-year holding period, the property is sold for $7.2 million with no periodic cash flows from operations. The internal rate of return for this investment scenario is 20 percent.

The all-in cost of the joint-venture equity in this scenario is about 21 percent. The borrower received a sweat-equity component (the difference between the 15 percent capital contribution and the 25 percent ownership) but would own only a portion of the deal and still was required to pay the preferred return to the equity investors.

In the joint-venture equity scenario, the borrower had a cash equity contribution of $750,000, or 15 percent. In the hard-money scenario, the borrower had a cash equity contribution of $1.25 million, which was an additional $500,000 (10 percent).

To break this down further, by contributing an additional 10 percent of the total capital, the borrower could buy back 75 percent of the profits. This increased the borrower’s rate of return from 20 percent in the joint-venture equity scenario to 36 percent in the hard-money scenario.

The typical all-in costs (including points and interest) for hard-money loans generally range from 13 percent to 15 percent with interest rates generally from 11 percent to 14 percent plus 2 points to 4 points. This is a positive leverage scenario to the cost of joint-venture equity. In this particular case, 15 percent was used as the all-in cost of the debt to illustrate that even at the upper end, there is still positive leverage compared to joint-venture equity.

Although not all borrowers can contribute additional capital, there are other potential options. In some cases, lenders may be willing to increase leverage in exchange for an equity kicker (a small participation in the profit realized from the deal). For example, if the borrower could not contribute the additional 10 percent at closing and looked to the lender for those funds, the requested equity kicker may have been between 10 percent and 30 percent, compared to the 75 percent of the deal desired by the joint-venture equity partner.

In addition, although it may be hard to price, many investors would agree that it is valuable to keep ownership of the entire deal and maintain control of the property without having to contend with partnership issues.

When clients are considering joint-venture equity as a means to finance a deal, commercial mortgage brokers should ensure all options are explored. A hard-money loan may be more advantageous financing than your clients realize.

Adam Lotterman is vice president with Forman Capital. Forman Capital is a direct commercial real estate lender specializing in bridge and transitional loans from $2 million to $20 million. Lotterman also teaches real estate market analysis at Nova Southeastern University. Previously, he was the senior analyst for Goodkin Consulting, where for six years he developed extensive experience in real estate consulting, research and analysis on a national level. Reach him at (561) 588-0132 or alotterman@formancap.com.

· Single Family Lot Development in Charlotte, NC

· Single Family Lot Golf Course Development in Fort Meyers, Florida

· Ritz Carlton Condominium Unit in Dallas, Texas

· Two apartment communities in Killeen, Texas

· Single Tenant Office Warehouse in Nashville, Tennessee.

· Retail property in Dallas, Texas

· Two Single Family Lot Developments in Alpharetta, Georgia

· Motel property in Dallas, Texas

Article can be found here

The article can be found here

The quote was short, but you can find more information on why I think Fannie/Freddie should be selling homes in 20 unit blocks by reading my other blog post – How to Create 500,000 Jobs and Save Taxpayers Billions (http://newprovidencecapital.com/real-estate-blog/how-to-create500000-jobs-and-save-the-taxpayers-billions)

A big thanks to Clea Benson for giving a voice to the small players who are ultimately going to fix the housing mess.

The government as landlord - that reminds me of a joke:  A man walks into the Post Office to file a complaint about someone stealing his mail…

http://online.wsj.com/article/SB10001424053111904480904576498713414380604.html

Rental Options Sought On Foreclosed Homes
The Wall Street Journal

By NICK TIMIRAOS

The Obama administration will announce plans Wednesday to seek investors’ ideas for turning thousands of foreclosed properties owned by government-backed entities into rental homes, according to administration officials.

The move is intended to put a floor under declining home prices by creating a way to deal with hundreds of thousands of potential foreclosures in coming years.

Mortgage giants Fannie Mae and Freddie Mac sold a record 100,000 homes during the second quarter. Together with the Federal Housing Administration, the entities owned about 250,000 homes at the end of June, or around half of all unsold, repossessed properties. Another 830,000 homes backed by the entities are in some stage of foreclosure, according to Barclays Capital.

The Federal Housing Finance Agency, which regulates Fannie and Freddie, will issue the formal “request for information” with the administration to solicit proposals that shrink the glut of foreclosed properties weighing on the residential market.

Banks are usually faster than mom-and-pop sellers to cut prices in order to unload properties quickly. In many hard-hit markets, more than half the sales have been made to non-owner-occupant investors—at discounts. The upshot is that home prices will continue to fall if many properties continue to be sold out of foreclosure. That has made it harder for traditional sellers to sell their homes at prices potential buyers have agreed to because foreclosures are driving down appraised values, killing some agreed-upon deals at the closing table.

“The process by which you sell foreclosures is largely determining what happens to home prices,” said Oliver Chang, head of U.S. housing strategy at Morgan Stanley.

One proposal would sell packages of hundreds or thousands of foreclosed properties in bulk to investors that agree to rent them out. That approach is preferred by the Department of Housing and Urban Development, which is taking back properties as defaults mount on loans backed by the FHA.

Another approach would let investors enter joint ventures with Fannie or Freddie to invest in a pool of converted rental homes. A national property-management business would handle day-to-day landlord responsibilities. Investors would pay for rehabbing and maintaining properties and would share revenue from monthly rental income and the ultimate sale of the property. Such a joint venture would be modeled on the Resolution Trust Corp., which sold failed banks’ assets in the early 1990s.

With Congress unlikely to approve new spending to help the economy, the federally backed loan giants are one of the administration’s few levers for addressing the housing market. Rental initiatives would mark an aggressive step to clear the backlog of foreclosed homes, which many economists call the most significant hurdle to a housing recovery.

While the homeownership rate in the U.S. has fallen to around 66%, from a peak of 70%, it stands at less than 60% after excluding delinquent borrowers, according to Morgan Stanley analysts.

With fewer traditional buyers today able to qualify for loans, “you have to get investors to pick up the differential,” said Laurie Goodman, senior managing director at Amherst Securities Group LP.

One question is whether investors will offer prices high enough to justify participation by Fannie and Freddie. While significant amounts of capital have formed on the sidelines to buy pools of foreclosed properties from hedge funds such as New York-based Och-Ziff Capital Management Group LLC, Fannie and Freddie have resisted bulk sales because they would trigger big upfront losses for the government. That reluctance has kept out institutional investors large enough to execute a rent-and-hold strategy.

Instead, the main outlets for foreclosed properties are retail listings or public foreclosure auctions, also known as trustee or sheriff sales. Two years ago, investors began scooping up cheap properties at auction in hopes of quickly reselling them for a profit. But falling prices have made flipping harder to pull off, and more distressed-property investors have turned to buying and renting out homes.

Write to Nick Timiraos at nick.timiraos@wsj.com

I have made this comment before but it bears repeating, the homes are worth what someone is willing to pay for them today. If you don’t sell it today you are a speculator on future prices. Fannie and Freddie as well as the banks on government sponsored life support are speculating on housing futures by holding inventory in hopes that values will rebound. Will they rebound? Odds are that the price rebound will happen after the speculating institutions cease to be solvent (or should I say cease to be carry the veneer of solvency).

If you believe the reports that the Fs are going to be holding in excess of 600,000 homes by the end of 2011, then you start to get the idea that their outputs may not be able to keep pace with their inputs. I have an idea to solve the problem at the Fs while at the same time creating hundreds of thousands of jobs. It’s called “Sell the Homes to Investors”. Package the homes in bundles of 20 units and make the bundles geographically consistent (it’s impossible to manage homes scattered across the entire country). The 20 unit size is too small for the big banks like JPMorgan and Bank of America to buy back the foreclosures they created yet they are big enough for the Fs to offload huge volume in short order.

Small investors/entrepreneurs will be able to buy the homes, rehab, and rent them out. My calculations show that with the 600,000 homes that the Fs will not otherwise sell this year we could create 570,000 new jobs. Assume that the homes have an average after repair value of 100,000 (this is the number used by the Fs in their reports). Also assume that the homes need on average $25,000 of repairs.

Entrepreneur needs to raise $2m to buy each bundle, $1.5 m to purchase and $500,000 to rehab. This bundle of homes generates $40,000 per year in management fees which equates to one new entrepreneur’s job. Additionally, each bundle of homes creates $500,000 in construction costs – which typically split 50/50 between labor and materials. Therefore $250,000 in direct labor costs would create roughly 10 new construction jobs at $25,000 each. Let’s also assume that each materials supply chain job requires $31,250 in new spending, thus creating 8 new jobs. That means that for every 20 homes sold by the Fs, 19 new jobs would be created, that equates to 570,000 new jobs created by selling the entire excess inventory of the GSEs.

Link to article:  http://www.financialpost.com/housing+still+vicious+downward+spiral/4595904/story.html

Full text of the article below:

John Shmuel, Financial Post · Apr. 11, 2011 | Last Updated: Apr. 13, 2011 1:06 PM ET

The article can be found here

And here

Fannie, Freddie’s $24 Billion Glut Imperils Recovery
January 21, 2011, 6:03 PM EST
BUSINESSWEEK

By Clea Benson
(Company corrects number of owner-occupied properties in 10th paragraph.)

Jan. 21 (Bloomberg) — Fannie Mae and Freddie Mac’s combined inventory of foreclosed residential property has quadrupled in just three years and now stands at a record $24 billion. The number of properties on their rolls — now at nearly 242,000 — has increased fivefold.

That’s roughly a third of the total U.S. portfolio of repossessed homes. And it’s growing because the two mortgage companies operating under U.S. conservatorship aren’t finding buyers faster than new foreclosures come in.

So far, officials at Fannie Mae and Freddie Mac say, the two companies have been trying to stabilize neighborhoods by selling their massive inventory at prices that are close to market. With home seizures projected to increase this year, some housing analysts predict they may have to drop prices, with potentially far-reaching impacts on the real-estate market.

“The concern we have is less what Fannie and Freddie are showing at the moment as defaulted loans and more what’s in the shadow,” said Michael Feder, chief executive officer of Radar Logic, a real-estate data firm based in San Jose, California.

As the backlog swells and the Obama administration moves toward a complete revamp of the federal role in the housing market, pressure is growing on Fannie and Freddie to rethink their sales strategy for REO or real-estate-owned properties.

If they do eventually drop prices, that might hurt individuals who are selling their homes in a depressed market, but it could also benefit real estate investors who are being shut out by their current sales policies.

‘Prolonging Inevitable’

“I think they’re very purposefully not flooding the market,” said Michael Slaughter, a partner at New Providence Capital, a Dallas-based private lender. “It’s understandable why they’re not, but I think they’re just prolonging the inevitable.”

Officials at the two companies say they are committed to an approach consistent with their mission as backstops for the housing market. In an effort not to depress housing prices still further, the two companies have focused on selling to live-in homeowners instead of investors or “flippers.” And except for properties in need of repair, they say they won’t sell for rock- bottom prices.

“We don’t want a reduced value to initiate a quick sale,” said David Wendling, senior director of REO sales at Freddie Mac. “The focus has always been on supporting neighborhood values, making sure we don’t create low-dollar comps that impact other neighborhood folks.”

Owner Occupants

Of the 5,289 properties Freddie Mac sold in the first nine months of 2010, 67 percent went to buyers who intended to occupy them, according to agency data. At Fannie Mae, about 80 percent of sales are to owner-occupants, said company spokeswoman Amy Bonitatibus.

Fannie Mae and Freddie Mac say their prices reflect the market value for the properties they own. Because there are caps on the size of mortgages they buy from originators, the median price of their inventory is lower than the national median.

The median foreclosure list price for properties owned by the two government-sponsored enterprises is $99,000, according to RealtyStore, a Santa Barbara, California-based foreclosure data provider. That compares with a national median price of $171,000 for the nearly 4 million homes on the market overall.

The agencies say they are moving as quickly as possible while working to find the right buyer at a market price.

‘No Shadow Inventory’

“We don’t hold anything back that is available to be sold,” said Jane Severn, director of REO disposition at Fannie Mae. “We’re doing the opposite, pushing our homes out to the market as soon as we can. We don’t have a shadow inventory.”

The two companies, officially known as “government- sponsored enterprises” or GSEs, do give preferential treatment to certain buyers. For the first 15 days after a property is listed, they will only sell to people who intend to live in them or to nonprofit and government organizations, officials said. Fannie Mae also offers financing with a 3 percent down payment to potential owner-occupants.

They’re also taking the time to invest in some properties, spending millions on maintenance so they are competitive with other homes on the market in their neighborhoods. This has created new opportunities for firms in the real-estate industry to gain government contracts.

At the same time, some real-estate analysts doubt the GSEs can keep pursuing this strategy as foreclosures continue to mount.

Foreclosures Rising

The number of homes subject to a foreclosure filing may rise by 20 percent this year, up from a record 2.87 million properties in 2010, RealtyTrac Inc., an Irvine, California data company predicted this month.

The market currently can absorb about 1 million foreclosures a year, the Mortgage Bankers Association estimates. Fannie and Freddie themselves estimate in regulatory filings that it will take “a number of years” to bring their foreclosure inventory, known as REO for “real-estate owned,” back down to pre-2008 levels.

As foreclosures increase, the GSEs will eventually need to drop prices and turn to investors, analysts predict.

“We haven’t seen a lot of opportunities to buy single- family homes at values that allow you to rent them out,” said Slaughter, the Dallas-based private lender. “That’s because they’re restricting the supply to owner-occupants and giving them 97 percent financing.”

That strategy isn’t working, he said.

“They’re continuing to add properties to their balance sheet way faster than they’re getting rid of them,” he said. “If they don’t start with a systematic distribution of these properties to investors who have cash today and will buy them at the right price, they’re going to end up selling the entire portfolio to Goldman Sachs or BlackRock at a tenth of what they can get for them today.”
–Editors: Maura Reynolds, Gregory Mott

To contact the reporter on this story: Clea Benson in Washington at cbenson@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net