Real Estate Industry Alerts Tracker - October 9, 2020 Issue

New York State Considering Extending Mortgage Tax to Mezzanine and Preferred Equity Financing

In January, the New York State Legislature introduced draft legislation (recently amended) that would impact mezzanine, preferred equity and other non-traditional methods of financing. The proposed bill (currently in committee) would amend the real property law and the uniform commercial code to require the filing of a UCC-1 financing statement in the real property records to perfect a security interest in mezzanine debt and preferred equity investments. Additionally, it would amend the tax law to require a mortgage recording tax with respect to mezzanine debt. The proposed bills define ​“mezzanine debt” and ​“preferred equity investments” as ​“debt carried by a borrower that may be subordinate to the primary lien and is senior to the common shares of an entity or the borrower’s equity and reported as assets for the purposes of financing such primary lien.” It would not apply to any debt on a cooperative or common shares of a residential dwelling where the unit owner of a cooperative apartment is a shareholder of the ownership entity, has exclusive occupancy of such dwelling unit, and has established and delimited rights under a proprietary lease.

A copy of the Senate version of the draft bill may be found here and a copy the Assembly version may be found here.

The Washington D.C. Council has Passed an Omnibus Tenant Protection and Eviction Reform Measure

Since the pandemic began, at almost every meeting the Washington D.C. Council has taken action to protect tenants from eviction. Such measures included the initial eviction ban, subsequent extensions of the eviction moratorium, and a ban on landlords issuing notices of eviction, but in each case these legislative actions have been directly tied to the COVID-19 emergency declaration. At its most recent meeting, the Council passed an omnibus tenant protection and eviction reform measure that makes permanent changes to the District’s laws. Passed as an emergency measure, the bill will go into effect for 90 days upon approval by Mayor Muriel Bowser. The measure includes provisions that:
  • Require time-stamped photographic evidence of a posted eviction notice at a tenant’s address.
  • Require the Superior Court to seal some eviction records and allow other records to be sealed in certain cases.
  • Require landlords to provide thirty-day written notice prior to commencing the eviction process.
  • Ban landlords from initiating an eviction over an unpaid amount of less than $600.
  • Ban evictions by landlords lacking a current business license.
  • Ban landlords from requesting information from prospective tenants on past evictions which did not result in repossession.
  • Ban landlords from requesting information on evictions from prospective tenants that occurred three or more years earlier.
  • Ban evictions based on a breach of lease that occurred when the tenant was a victim of a crime.
  • Require a landlord to disclose in writing the grounds for any punitive action against the tenant.
  • Provide the tenant with an opportunity to dispute any such grounds.
  • Express the Sense of the Council that the Superior Court should increase the eviction filing fee from $15 (one of the lowest) to $100.
  • Require landlords to disclose to potential tenants how they will be screened prior to their tenancy, and to provide an opportunity to correct any errors in screening data.

The Council also passed another measure at the most recent legislative meeting that would reform the District’s Emergency Rental Assistance Program to reduce certain barriers and help facilitate access to the funds provided under the program for those having difficulty paying their rent.

Heard Around the Industry

More Than Fifty Percent of Retailers Received Rent Relief During Pandemic: According to a survey by PJ Solomon, a global investment services company, and the National Retail Federation (NRF), 73% of U.S. retail chains had closed at least three-quarters of their physical store locations, including stores located in enclosed malls and outlet centers, at height of the pandemic. The survey reported that less than a third of respondents paid at least three quarters of their June rent, but that 65% had paid at least three-quarters of July rent. Of those retailers that missed rent payments, almost three-quarters indicated that they would pay back at least half of all rent owed and more than half said they were able to get some form of rent relief from their landlord. The most common concession from landlords involved deferred back-rent to late 2020 or 2021 in exchange for reduced co-tenancy rights and delayed kick-out clauses.

Additional information may be found here and here.

Office Rent Concessions Increase: A recent report prepared by Trepp and Compstak found that the spread between starting rents and net effective rents increased 27% in major gateway cities including New York City, Los Angeles, San Francisco/Bay Area, Chicago, Boston and Washington D.C. The increase is following a similar upward trend at that of which occurred during the Great Recession, when rent spreads beginning in 2009 increased by approximately 106% for three quarters and peaked ten quarters following the market bottom. In addition to the increased rent spread, the amount of rent incentives has also increased during the pandemic. This is occurring for both direct leases and subleases. For example, for two New York properties, after re-trade negotiations, one landlord provided six months of free rent in a direct lease transaction while another tenant was provided with five months of free rent when its sublease re-traded. The number of free months on a lease as a percentage of the total lease term has increased to more than 5%, an increase of approximately 30% compared to the same period last year.

Additional information may be found here and here.

Commercial Real Estate Values Plummeted During Pandemic: A recent report by Wells Fargo analyzed the appraised value of 116 properties that had been sent to special servicing since April 1, 2020. The appraised values of those properties have averaged about a 27% drop from the value at origination, according to the report. A majority of the troubled properties are in the hospitality and retail sectors. Based on the revised appraisal figures in the Wells Fargo report, the average loan-to-value ratio in CMBS transactions had been 60%, the average loan-to-value ratio is now near 90%.

Additional information may be found here

Commercial Real Estate Prices Increase Slightly In August: The latest monthly CoStar Commercial Repeat Sales Indices (“CCRSI”) showed that commercial real estate prices increased slightly in August after sustaining losses in the early months after the outbreak of the pandemic, but are still below pre-pandemic levels. CCRSI uses both an equal-weighted and a value weighted U.S. Composite Index. The equal-weighted U.S. Composite Index, which reflects the more numerous but lower-priced property sales typical of smaller markets, increased by 0.2% in August. However, it was still down 2.3% from its pre-pandemic levels. The value weighted U.S. Composite Index, which reflects larger asset sales common in major markets, rose 1.4% in August, which is down 0.4% from its pre-pandemic high mark. Sales volumes for the year totaled $56.2 billion in the first eight months of the year, which is down 40.8% from the same period in 2019. The deceleration in deal volume was across the size and building-quality spectrum, with transactions down 45.9% in the investment-grade segment and 28.4% in the general commercial segment in the first eight months of 2020 compared to the same period in 2019.

Additional information may be found here and here.

CMBS Loan Performance Improves but Special Servicing Rate Climbs: The Commercial Real Estate Finance Council (CREFC) reported that the overall delinquency rate in the CMBS market fell for the third consecutive month to 8.9% in September, down from its high of 10.3% in June. According to analysis provided by Bank of America, of the loans that went from thirty or more days delinquent in August to current in September, 43% were hospitality properties and 39% were retail loans there were formerly granted COVID-19 related relief. However, while the overall delinquency rate declined, the rate of loans being transferred to special servicing increased from 10% in August to 10.3% in September. The increase was driven by hotel and retail loans.  CREFC’s report also noted that one quarter of all CMBS financed hotel loans by outstanding balance are in special servicing and 18.3% of retail loans are in special servicing. This is in stark contrast with 2019 year-end, when 1.9% of hotel loans and 5% of retail loans were in special servicing.

Total Number of Residential Mortgage Loans in Forbearance Declines to 6.87%: The most recent Forbearance and Call Volume Survey prepared by the Mortgage Bankers Association (MBA) revealed that the total number of loans in forbearance decreased from 6.93% of servicers’ portfolio volume in the prior week to 6.87% as of September 20. The MBA estimates that 3.4 million homeowners are in forbearance plans. The percentage of Fannie Mae and Freddie Mac loans in forbearance dropped for the 16th week in a row to 4.46%, which represents a 9-basis-point improvement. The percentage of Ginnie Mae loans in forbearance remained flat at 9.15%, and the forbearance share for portfolio loans and private-label securities also remained flat, at 10.52%. The percentage of loans in forbearance for depository servicers decreased by 7 basis points to 7.11%, while the percentage of loans in forbearance for independent mortgage bank servicers decreased 3 basis points to 7.23%.

Additional information may be found here.