A wave of scandals did little to slow former President Donald Trump’s momentum on Tuesday night, making the Republican the presumptive president-elect once more.

While analysts and social commentators try to reverse-engineer how the Democrats and Kamala Harris’s efforts for the White House fell so far short of their goals — handing Trump both the electoral college and the popular vote in preliminary estimates — leaders in commercial real estate are seeing potential.

This boded well for the real estate market, especially with the Federal Reserve expected to cut interest rates another 25 basis points on Thursday.

“With the election results settled, the real estate market will benefit from the reduction in uncertainty,” Adelaide Polsinelli, vice chair of Compass, said in an email. “Lower capital gains taxes, which Trump has previously supported, could encourage more frequent buying and selling, potentially increasing transaction volume across residential and commercial real estate.”

If successful, Trump’s proposal to raise import tariffs by 10 to 20 percent is seen as a sign that industrial real estate could have another wave of success in the industrial market as companies seek to reduce the increased cost of overseas manufacturing.

“Trump’s long-standing advocacy for bringing manufacturing back to the U.S. suggests a likely boost in demand for industrial spaces like logistics hubs, warehouses and manufacturing facilities, as companies may need more space to accommodate domestic production and distribution needs,” Polsinelli added.

The stock market already reacted with enthusiasm to Trump with share prices spiking and the Dow Jones Industrial Average gaining 1,508 points, amounting to a 3.57 percent one-day increase.

Briggs Elwell, CEO and co-founder of RLTYco, which provides financial and tax services to real estate clients, sees the stock and bond markets’ spike as a temporary bump, and the real cash is expected to flow later on in more sustainable ways.

“At the end of the day, when you take out all the emotion and you exclusively look at the financial components of the election, the markets are saying that this is a positive for real estate,” Elwell told CO. “Knee-jerk reactions happen, but the reality is that the frontrunner that’s driving the market surge are the banks, and they’re banking on the fact that under a Trump administration you have a trend towards lower rates, and you’re going to have less regulation at
the end of the day.”

Wednesday morning saw Trump with a 5 million vote lead in the national tally, which would be the first time since 2004 a Republican won the popular vote. And Democrats lost control of the U.S. Senate and may have lost their chance at the majority in the House of Representatives, creating a scenario reminiscent of Trump’s victory in 2016.

Leland Collins of FTI Consulting sees the first year of Trump’s new administration dealing with tax matters, mostly related to the Tax Cuts and Jobs Act (TCJA), also known as the “Trump tax cuts,” which were enacted in 2018 but are set to expire in 2025.

“Real estate’s in a really precarious spot here,” Collins said in an interview. “I will caveat everything by saying that we don’t know the House right now, and the House really will propel how much of his policy that we’ve been hearing from Trump actually gets enacted. What I’ve been hearing from my D.C. colleagues is that 2025 will be all about tax.”

Collins’s colleagues and clients were concerned about tax increases, such as carried interest from capital gains rather than a simpler and lower income tax, if Harris won the election.

“There was a lot of discussion from Democrats about increasing, or rather limiting, how much carried interest could be classified as long-term capital gains,” Collins said. “And, in fact, there was discussion about changing that to always being ordinary income, without any kind of reference to a holding period like it currently is. Now that obviously would impact private equity
and asset managers quite a bit.”

Now, those changes may no longer be on the table. Trump has not made any tax proposals, and Collins is still waiting for the 100-day plan that usually is released by a president-elect closer to inauguration.

“I will say that the corporate tax rate increases that were being discussed are really probably off the table at this point,” Collins said. “So, for tax rate increases, those are things that I don’t expect clients to have to worry about going forward. … It should spur investment into U.S. real estate and other types of private equity funds, because tax rates are lower.

“I do see this as being positive, and not to mention it takes a lot of restructuring off the table that clients would have had to consider,” Collins added.

Tali Berzak, a broker also with Compass, foresees investors eventually taking money out of the stock market and deploying it into something more stable, like real estate.

“I can tell you that almost all the people that I work for were hopeful for [a Trump] administration, and I think some of that has to do with their perspective on how that will help the buyer and investor pool,” Berzak said. “There’s something about a Trump administration where you’re not
exactly sure what his policies are, and they’re not always overarching concepts. Sometimes they’re more haphazard. Because of that, the stock market can yo-yo a bit, and so investors might make a decision to park their money in an asset versus keeping everything in the market.”

By midmorning, however, real estate stocks were not flourishing with the rest of the market. For instance, CBRE was down 2.6 percent, Cushman & Wakefield dipped slightly by 0.1 percent, Newmark fell 2.4 percent and JLL dropped 5.4 percent, SeekingAlpha reported.

Residential brokerages saw the steepest drop with Redfin dropping by 3.5 percent, Zillow by 5.5 percent, Compass by 7.1 percent and Opendoor Technologies by 4.4 percent.

However, the stock drop might not be hurting some in the industry who are expected to benefit from a Trump presidency.

Alexander Goldfarb of investment bank Piper Sandler argued to Crain’s New York Business that real estate could get a “lighter regulatory touch” under a Trump administration, and it could be especially helpful for Newmark CEO Barry Gosin.

Howard Lutnick, the executive chairman of Newmark, is the co-chair of Trump’s transition team. Lutnick taking a more full-time job with the future administration could give Gosin a freer hand in running Newmark.

“Barry and Howard have a wonderful relationship and built a great firm,” Goldfarb said to Crain’s. “But the time might be right for a change.”

Shaun Pappas, an attorney from Starr Associates who represents developers like Harry Macklowe, Michael Stern of JDS Development Group and Taconic, believes that many investors have been holding back on making big decisions until the election was over. Regardless of how the chips fell, commercial real estate investors will be acting with a sense of stability.

“There’s a perception of Trump being good for real estate — obviously, it’s where he came from — and I think that people have been hesitant to jump back into the market over the last six months based on the election,” Pappas said. “I think now we’re at a point where we know what we’re in for, and, whether you like it or not, or whatever your political leanings are, at least you
have a foundation of stability and knowing who’s going to be in charge.”

And it’s kind of like the “devil you know,” since Trump already served in the White House.

Adam Henick of Current Real Estate Advisors believes, like Pappas, that the market would have seen a post-election rebound no matter which “devil” the Electoral College selected.

“I think that with everyone’s political views aside, having the election in the background and behind us is a very healthy step for all markets here — not only commercial real estate leasing markets, but financial markets as well,” Henick said. “Markets like certainty, and I think that’s the news we got on election night as the results rolled in.”

Commercial Real Estate Has High Hopes for President Trump, Part II

After years of saving for a down payment, Hamza Sheikh was ready in 2022 to buy his first home—a one-bedroom apartment in Manhattan.

Sheikh, who is in his early 30s and works in technology, was “dead set” on paying less than $1 million, according to his real-estate agent, Phillip Salem of Compass. That’s because New York charges a so-called mansion tax for properties of $1 million or more, meaning he would have to pay an additional 1%, or at least $10,000, in cash at closing.

“It wouldn’t have been a total deal breaker,” says Sheikh, who likely would have borrowed the extra cash from his family. But avoiding the tax “made the whole process a lot more feasible.”

They focused on apartments priced around $1.1 million, seeking sellers who might be willing to go below $1 million, Salem said. Eventually, they found a Chelsea condo asking $1 million; Salem negotiated the price down to $995,000, and they made a deal.

Mansion taxes—shorthand for taxes on high-end real-estate sales, usually in the form of a one-time payment at closing—are becoming more common as cash-strapped local governments look for new funding sources. In New York, buyers typically pay the mansion tax; in other markets, like Los Angeles and San Francisco, sellers are usually on the hook to pay such fees. Often popular with voters, these taxes face vehement opposition from the real-estate industry and business groups, who say such measures will cripple the residential real-estate market.

The impact is often much more nuanced.

The data show that new mansion taxes tend to have a significant but short-term impact on the number of home sales, creating a rush of deals before the tax goes into effect and suppressing transactions for several months afterward. Then, the market begins to normalize.

Take Los Angeles, for instance. Since its new mansion tax, called Measure ULA, went into effect in April 2023 to raise money for affordable housing and homelessness prevention, the controversial law has been widely blamed for tanking the city’s high-end housing market. ULA required the sellers of residential and commercial properties above $5 million to pay a 4% tax,
while the sellers of properties of $10 million and up paid 5.5%. (The thresholds are adjusted for inflation each year.)

“In L.A., the luxury home market hit a wall,” said California spec-home developer Simon James. “A lot of it had to do with ULA.”

The first month the law was in effect, the number of L.A. property sales over $5 million plummeted to four from 90 the previous month, according to data compiled by real-estate appraiser Jonathan Miller. What happened, he said, is that sellers rushed to close deals before ULA took effect. “There was a heightened frenzy in the buildup to that tax being implemented,” he said.

The number of high-end sales stayed low for several months as many owners delayed putting their homes on the market in hopes that ULA would be repealed or altered, local agents said.

That was the case for entrepreneur David Alexanderian, who completed a six-bedroom spec house in L.A.’s Bird Streets in 2023. “I waited for six or seven months” to put it on the market, he said. Eventually he gave up on the law being repealed and listed the home for $24.5 million.

When the roughly 11,000-square-foot house, which has a massage room and putting green, sold in August for $21 million, Alexanderian had to pay a total of about $1.25 million for the mansion tax and transfer tax, significantly cutting into his profit, he said. “This is a very unfair tax,” he said, vowing not to do any future projects in L.A.

Gradually, the number of high-end sales in L.A. has crept back up. In July 2024, the city saw 25 home sales over $5 million, more than double the number in July 2023 and down slightly from July 2022.

“Initially, people didn’t know what to do—it was so jarring,” L.A. Compass real-estate agent Tomer Fridman said of ULA. These days, the tax is more likely to play a role in negotiations, with buyers and sellers sometimes splitting the tax. “Now, it’s a conversation to be had.”

L.A.’s high-end market is still contending with high interest rates, spiraling fire-insurance costs and a general slowdown in housing sales across the country.

The lasting impact of mansion taxes tends to be with deals right around the price thresholds for when the taxes kick in. Some buyers, like Sheikh in New York, take pains to minimize or avoid paying such fees. In New York, that means plenty of $995,000 or $998,000 price tags, said real-estate agent Leslie Hirsch of Christie’s International Real Estate Group.

Mansion taxes—some of which also apply to commercial transactions—have been present in some areas for years: New York state in 1989 started requiring buyers to pay a flat 1% tax on any home purchase of $1 million or more. That has remained the starting point for the mansion tax since then, leading New Yorkers to complain that the name is deceptive, given that $1 million buys only a small apartment in Manhattan. “Someone from another country, when you
tell them about mansion taxes, they fall off their chair and say, ‘Have you seen a mansion?’ ” said longtime New York real-estate agent Leonard Steinberg.

Recently, more mansion taxes have been proposed or expanded as cities seek new sources of funding amid falling commercial property values and a significant decline in state funding since the 1970s, often coupled with state laws restricting other types of taxes.

“Local leaders are going to be put under immense pressure with few options,” said Richard Auxier, a state and local tax-policy expert at the Urban-Brookings Tax Policy Center. “You’re out of money—what else are you going to do?”

In 2019, New York City added a supplemental mansion tax for buyers of homes of $2 million or more, with increases at different price levels, up to 3.9% for homes of $25 million and up. In San Francisco, voters have approved four increases in transfer-tax rates since 2008; in 2020, they approved Proposition I, which doubled the tax rate for sales of at least $10 million, with the sellers of homes at $25 million or more now paying 6%. Not all have succeeded: Chicago’s Bring Chicago Home referendum, which sought in part to raise the city’s real-estate transfer tax on property purchases of $1 million and up, was defeated in March.

New York City’s mansion tax helps fund public transit, with the Metropolitan Transportation Authority collecting $345.1 million from the tax in 2023 for capital projects, according to an MTA spokesperson. In August, the MTA announced it would start selling debt backed by mansion-tax revenues to help raise $2 billion for infrastructure upgrades.

But most of the new measures around the country aim to address the housing crisis. The sharp jump in the homeless population, a shortage of affordable housing and increasing income inequality have helped sway public opinion in favor of mansion taxes in many places, said Peter Dreier, a professor of Urban & Environmental Policy at Occidental College who was involved in drafting Measure ULA.

Seven states, plus Washington, D.C., have a form of mansion tax, according to Kamolika Das, local tax policy director at the Institute on Taxation and Economic Policy.

“Taxing the people who have benefited the most from the real-estate boom—that’s a pretty attractive way of addressing the housing crisis,” Dreier said. After ULA passed, “we got a lot of calls asking, ‘How did you do it? Can we do it here?’ ”

In San Francisco, funds from Prop. I go into the city’s general fund but are intended for rent relief and affordable housing. Between January 2021 and March 2024, Prop. I raised $324 million, according to a June report by the city’s Housing Stability Fund Oversight Board. Of that, more than $203 million had been spent to advance new affordable housing initiatives and provide emergency rent relief to San Franciscans, the report said, including acquiring five sites to build more than 550 units of new affordable housing.

In Los Angeles, ULA revenues go into the House LA Fund, with roughly 70% going to affordable housing programs and 30% to homelessness prevention. As of April, $54.7 million in ULA funds had been proposed to expedite the building of 795 affordable housing units, and an estimated 11,000 people had been approved for ULA-funded emergency rent assistance, according to a
report by Dreier and others. Between June and August, more than 1,500 people received legal services in eviction cases, Dreier said.

Governments often fail to anticipate the initial ups and downs when forecasting how much money mansion taxes will bring in, Miller said. For example, Measure ULA was projected to raise nearly $1 billion a year. Instead, from the time it went into effect to early October, it had generated only about $403 million from 623 transactions.

Dreier acknowledged that after ULA was introduced “for the first couple of months, the tax numbers were nowhere close to what we had anticipated.” He attributed this largely to the real-estate industry going “on strike, basically, against the measure. It worked for a while, but eventually people had to sell their properties.”

When New York City increased its mansion tax in 2019, it saw a similar pattern. In June 2019, the month before the increase took effect, the number of Manhattan sales of $2 million or more jumped to 661 from 355 the previous month, then plummeted to 164 in July 2019, Miller’s data shows.

“There was a sharp drop-off in transaction volume after a bit of a frenzy just before the enactment,” recalled Steinberg. By December, the number of sales had returned to normal and even surpassed the number in December 2018.

Now, New York buyers are accustomed to the tax. “It’s become the norm,” said real-estate attorney Shaun Pappas with Starr Associates.

When North Carolina oncologist Dr. Sean Wang started looking for a Manhattan pied-à-terre, he didn’t realize that New York has a mansion tax.

In August, he paid $985,050 for a one-bedroom in Midtown. While he said he feels “lucky” to have avoided the tax, his choice had little to do with that—mostly, he liked that the south-facing condo has an extra half bathroom, unlike many of the apartments he looked at. For the right apartment, “I was prepared to pay more than $1 million,” said Wang, 55. The mansion tax was “a minor contributing factor.”

Like Wang, most buyers are more focused on finding the right home than avoiding mansion taxes, agents said.

“I don’t think a buyer is going to lose out on their dream property because of a 1% payment,” said Salem of Compass, who works in both New York and Los Angeles.

In San Francisco, real-estate agent Nina Hatvany of Compass said the tax only factors in a bit. “No one has said to me, ‘I’m not buying an expensive house because when I sell I’ll have this big tax,” she said. There are some situations when it comes into play, she said; for example, if a homeowner is renovating their home and considering buying a house to live in temporarily, the high cost of selling may be a deterrent.

In Washington state, which expanded its excise tax in 2020, sellers also pay little attention to it in part because home values have steadily increased for years. “It has been a nonissue, other than that people do not enjoy paying it,” said real-estate agent Jen Cameron of the Agency Seattle.

Buyers and sellers try various tactics to avoid paying mansion taxes, especially for homes on the cusp of a price threshold where the tax kicks in or increases. Hirsch and her colleague Howard Morrel, who listed the New York home that Wang eventually purchased, purposefully priced it just below $1 million to help lure buyers. “If they can avoid the tax, it sets our listing apart,” Hirsch said.

For communities considering measures like a mansion tax, Shane Phillips of the UCLA Lewis Center for Regional Policy Studies advises governments to implement marginal taxes, where the effective rate increases gradually with every dollar spent, rather than all-or-nothing thresholds. That would avoid “these weird threshold effects that occur,” he said, calling them “inefficient and wasteful.”

Another challenge with the politics of mansion taxes is how the funds are allocated, according to Auxier, the tax policy expert. The money collected fluctuates with the real-estate market, making it difficult to predictably fund specific programs.

https://www.wsj.com/real-estate/luxury-homes/what-is-mansion-tax-new-york-california-7a9a6bfe?mod=real-estate_lead_story

New York City’s Commercial Property Assessed Clean Energy (C-PACE) program got off to a sluggish start since the first loan was made three years ago. But the commercial real estate industry is hoping new guidelines can provide a spark for the financing vehicle.

The guidelines released last month by NYC Accelerator, which is managed by the Mayor’s Office of Climate and Environmental Justice, aim to spur more C-PACE deals by opening the program to new construction projects and expanding to include buildings with ground leases.

New York City’s C-PACE program previously enabled only property owners to obtain low-cost and long-term financing in exchange for certain energy-efficient building improvements on projects involving renovations, but not gut rehabilitation. The lone New York City C-PACE transaction in June 2021 originated by Petros PACE Finance involved renovating the former 25-story Citibank building at 111 Wall Street with retrofitting for energy efficiency upgrades.

Jessica Bailey, president and CEO of Nuveen Green Capital (NGC), said she worked closely with the New York State Research and Development Authority and city officials to open the door to bigger C-PACE projects in the Big Apple. NGC, a clean energy lending arm of Nuveen, has been active with C-PACE deals nationally originating more than $800 million of volume in 2023.

“One of the restrictions that we had in Phase One of the program was that it just didn’t lend itself to interpretation that would allow for proceeds being meaningful enough for large developers to take advantage of it,” Bailey said. “It was a little bit overbuilt in terms of some of the energy savings requirements and the cost-benefit analysis that had to go into the engineering review of what was eligible.”

Bailey said NGC is actively working on “several” C-PACE deals for New York with plenty of demand from property owners in Manhattan and the outer boroughs across all asset types seeking out the financing vehicle. She said there are a lot of C-PACE inquiries in particular for hotel construction and office owners seeking conversions to residential use.

The timing of New York City’s expanded C-PACE program arrives as property owners begin to contend with how to respond to the city’s new Local Law 97 initiative aimed at reducing carbon emission.

Spencer Levine, president at RAL Companies & Affiliates, said C-PACE could be an attractive financing option for some building owners who seek necessary upgrades to comply with New York’s sustainability requirement under Local Law 97.

“It’s another tool for landlords and property owners to utilize here in New York.” said Levine, who is part of an advisory board at the Urban Land Institute holding discussions about the rollout of Local Law 97. “I think it could be an interesting opportunity for New York and another motivating factor to upgrading buildings here.”

Levine said C-PACE could be especially beneficial in New York for older office properties where owners are looking to either upgrade or convert into multifamily assets. Ral Companies’ Zero Irving office property in Union Square was completed in early 2023 with many sustainability features paid for through traditional financing, and Levine said C-PACE would have been a consideration had the program been greenlighted for new construction then.

Shaun Pappas, a partner at Starr Associates who practices in the law firm’s general real estate group, said he has seen interest from developer clients he works with about utilizing C-PACE and sees great potential for the program in New York City given how many properties need overhauls. He said a key to C-PACE taking off in the city will be educating landlords, developers and building boards about the financial benefits of these transactions for certain projects.

“The ones that are building now that are in prebuilt stages are already contemplating compliance with new standards and trying to become just more energy efficient across the board,” Pappas said. “There’s also existing buildings that just need to be upgraded, and finding the money for that is important.”

While New York City’s C-PACE program has been slowed, New York State has seen multiple deals for new construction projects in recent years. These include a $36 million financing package from X-Caliber Rural Capital and CastleGreen Finance in May 2022 to build a Marriott-branded hotel property in Hyde Park, N.Y.

New York is among 38 states along with the District of Columbia that have active C-PACE programs, according to data tracked by the nonprofit association PACENation.

Officials for NYC Accelerator did not immediately return a request for comment on the city’s expectations and goals for C-PACE in New York City.

Bailey said that, after some starts and stops with C-PACE in the Big Apple, the new guidance should spur plenty of momentum for the overall C-PACE program nationally with the nation’s largest city now on board.

“Not having an active program in New York City has been frustrating for those of who are based out here and we see the opportunity here, so we’re cautiously optimistic that this new launch of the guidelines has made a program that will be robust,” Bailey said. “New York City has been the star on top of the Christmas tree for a long time.”

https://commercialobserver.com/2024/09/new-guidelines-nyc-c-pace-program/

Homeowner’s association (HOA) contracts are famously detailed — from outlining how high your grass should be to what color to paint your home. Most everyone knows that big problems can arise when HOA rules aren’t followed, but if you’ve already signed the contract, it can be tough (or impossible) to have much autonomy.

I spoke to several real estate experts in various regions of the United States to find out what advice they have for first-time homebuyers when it comes to reading HOA contracts and the stipulations they should really pay attention to. HOA Transfer Fees at Time of Sale

So you’ve just bought your first home — congratulations! Bret Weinstein, chief executive and cofounder of Guide Real Estate in Denver, says to check your paperwork for a status letter of HOA transfer fees to confirm how much will be owed and by which party in the transaction — the buyer or seller.

“It’s always advisable to have an expert, CPA, or lawyer review all of the documents,” he says. “At the very least, a call to the HOA to discuss the documents is never a poor choice.”

The HOA’s Budget

Weinstein also recommends that homebuyers check the HOA’s budget and budget projections, something real estate agent and market trends committee member for the Denver Metro Association of Realtors Susan Thayer says is especially important when purchasing in a condo building. Perhaps you’re entering one with an elevator that may be old and need replacing soon — or a townhome with a large pool that may need extensive work done in the future.

“If there seems to be very little money in the account and there are a lot of units, if something large breaks, more often than not, a special assessment or an increase in your HOA dues is coming,” Weinstein says.

He also recommends reviewing the minutes of the most recent HOA board meetings to get a sense of the kind of issues they’re discussing — things like homeowner requests, assessments, and the timeline for completion of large projects.

The Association’s Rules

Even with an expert’s help, homebuyers should still carefully read through the HOA rules for themselves to understand what they’re committing to when making their purchase, says Doug Cabral, a real estate broker with Century 21 Excelsior Realty in Mattituck, New York. First, depending on the state you live in, Cabral recommends becoming familiar with the kind of rules HOAs can make in the first place.

Further, paying attention to those rules — often referred to as the covenants, conditions and restrictions (or “CC&Rs”) — will help clarify everything from what kind of vehicles you can park in your driveway, to any pet restrictions or limits on how many pets you can own. It’ll also note if the HOA has any rules regarding rentals (short-term or long-term) in case you want to use your home as a future investment property, says Christina Ray, a real estate agent based in Denver.

“Look to see if the CC&Rs impose any restrictions on leasing,” adds Arash Sadat, a Los Angeles-based real estate attorney at Mills, Sadat and Dowlat LLP. “The CC&Rs may require permission from HOA to rent the home, and depending on how many homes in the community are already rented, this may require you to join a waitlist.”

Policies on Pets and Parking

What are the HOA’s policies on pets? Thayer says checking on this is important for homebuyers who not only want to make sure that their beloved pet’s breed and size isn’t restricted, but also for those who may want to have backyard chickens or raise bees, for example.

As for parking, she advises homebuyers to look for details such as rules for parking overnight on the street, any restrictions for commercial trucks or vans, and leaving your garage door open for an extended amount of time. “These questions are great for people who may have their own businesses, lots of cars, or family members with more cars than garage spaces,” she says.

Property Modification Stipulations

Last but certainly not least, Sadat says you should carefully read the sections of the CC&Rs relating to modifications if you plan on making any changes to the property, such as adding a deck or installing solar panels. “Some changes you want to make might not be allowed at all, while others may require approval from the HOA and/or your neighbors,” he advises.

And while the home you’re purchasing is subject to any rules that are already in place, rule changes (and amendments to the by-laws) are not always at the sole discretion of the HOA board, providing homebuyers with some comfort in knowing that additional changes to the rules might not be made unless a certain HOA homeowner approval threshold is met, says Shaun Pappas, a Manhattan-based real estate attorney.

Still, you may be able to go to the HOA board and request a waiver for something that’s important to you, but be cautious. Pappas says he would “not advise anyone going into such a purchase to buy with the reliance on the belief that the rules can be modified for them and them alone.”

https://www.apartmenttherapy.com/hoa-contract-details-37287552

It’s traditional in lease negotiations for the owner of an office building to ask a prospective tenant to show proof that they are in good financial standing and can be expected to pay rent every month.

But the public prognostications comparing office real estate to an “apocalypse” and a “Category 5 hurricane” haven’t escaped the companies in the market for office space, leading to an increasingly common role reversal: tenants asking landlords to open up their books and provide protection in case they go under.

“It’s not enough to just say, ‘You know, we have bulletproof institutional dollars behind us,'” CBRE New York Tri-State Region CEO Mary Ann Tighe said. “The landlords still want to know about the credit of their tenants, but the tenants now say, ‘OK, I’ll show you mine. You show me yours.'”

From New York to Atlanta, Miami to Los Angeles, across all types of building classes and lease lengths, more companies are forcing their potential landlords to reveal details about their financial backers and assure them of their ability to meet lease terms and hold onto buildings, industry players told Bisnow.

Tenants are taking a close look at the capital stack of buildings and considering the exact implications were a landlord to default on their obligations. The steady stream of office market pain is affecting big-name landlords, which would have been fairly inconceivable just a few years ago.

Distress in U.S. office real estate jumped to $24.8B at the end of the second quarter, up $6.7B from the previous three-month period, according to the latest MSCI U.S. Distress Tracker. Office is now the most distressed commercial real estate asset type for the first time since 2018, surpassing retail and hotels, which have recovered more quickly from the pandemic.

Brookfield, Blackstone and Related Cos. have all handed back properties to lenders, and defaults have been shooting up across the country. Last week, Starwood Capital Group defaulted on a $212.5M mortgage on Tower Place 100, a 614K SF, 29-story building in Atlanta — which sent a shockwave through the local market, said Jodi Selvey, a principal with Colliers in Georgia.

“If they can go belly up, anyone can go belly up,” Selvey said. “It scares you if you are trying to put a tenant in a space. … After the Starwood thing in Atlanta, you will see more questions.”

Among the questions tenants and their representatives are asking are which lender owns the debt on the building and specific terms embedded in the loans, sources said. These conversations are happening on the first space tour, they said, rather than during the final stretch of lease negotiations, as they have in the past.

“It’s like asking someone how much money you make on the first date,” Selvey said. “During the implosion in ‘08, ‘09 and 2010, I don’t remember asking these questions.”

Nationally, office leasing rose by 11.6% in the second quarter, the biggest quarterly increase since Q2 2021, according to JLL. The jump likely reflects an increasing return to the office and a solidifying of hybrid arrangements and workplace mandates.

Still, tenants are calling the shots in most markets. In Manhattan, availability hit a record high in the second quarter, per Colliers, reaching roughly 96.4M SF, a 78.9% increase since March 2020. SL Green, New York City’s biggest office landlord, last week reported an office occupancy “low point” of 89.8% across the company’s portfolio.

Tenants are now being extra careful about their tenant improvement allowances, which have been one of landlords’ top incentives to land deals in this market. Those allowances are going into escrow accounts in some instances, brokers said, to make sure the promised amount is paid up. In
some cases, commissions are being escrowed as well.

“I think the landlords recognize that is part of getting deals done today. … Being transparent and showing where the building stands in relation to financial health,” OPEN Impact Real Estate co-founder Lindsay Ornstein said.

She added that tenants are asking, “Is this landlord going to lose this building, and is someone else sitting in that seat next year?”

Real estate players have long discussed the flight to quality in the office market, as brand-new, well-located properties with significant amenities have dominated the leasing market.

In recent weeks, tenant representation firm Savills has begun using the term “flight to capital” to describe the new phenomenon of tenants factoring in the financial health of properties alongside their amenities.

“You’re seeing it right now, especially in Downtown LA, where those landlords that are in a better financial position than others are going to benefit,” Savills Head of Office Research Michael Soto told Bisnow. “Some landlords are stronger than others, and we all know which ones are in trouble right now.”

Sidley Austin’s move to 350 South Grand Ave., where the law firm will take 57K SF in the Related Cos. and CIM Group-owned property, was cited as an example of this trend. Sidley Austin is leaving Brookfield’s Gas Company Tower, which is now in receivership.

Marisha Clinton, Savills’ senior director of Northeast regional research in New York, said private equity firm Clayton Dubilier & Rice leased 144K SF at 550 Madison Ave. in the second quarter. It is moving from the Seagram Building on Park Avenue, where owner RFR landed a two-year extension on a $783M CMBS loan that was maturing this year.

“The firm will be going from an older trophy asset that has a significant amount of debt coming due,” Clinton said in an interview earlier this month. “They’re pretty much relocating to a recently redeveloped trophy asset that is also in better financial health.”

Despite tenants’ demands for information in a market that is highly competitive among landlords, opening up their books is not something landlords always want to do, said Shaun Pappas, a real estate attorney with Starr Associates.

“Many landlords are not keen on this type of due diligence and are not turning over such information without push back and questions,” he wrote in an email. “Usually there is a happy medium where the tenant and landlord can get comfortable with both of their financial positions and to make sure that the deal makes sense for both sides.”

That was the case for Suresh Sani, the CEO at First Pioneer Properties, a New York landlord whose office properties include 33-02 Skillman Ave. in Long Island City, which the firm converted from industrial to office.

A prospective tenant at one of the firm’s properties asked for financial information, but First Pioneer pushed back and showed due diligence on its loan-to-value ratio instead, Sani said.

However, across the board, tenants want subordination, nondisturbance and attornment baked into leases. An SNDA, as they are known, is an agreement from the landlord that in the event it defaults, the lender won’t foreclose on leases and will allow the tenant to continue renting in peace.

Sani said it has been common to have these kinds of arrangements in place for major tenants, but it is increasingly being requested across all tenant types — and not offering it is a deal-breaker.

“Thankfully, we have lenders that understand. … My guess is they are getting so many of these,” he said. “They want the building rented.”

The state of the office market is splashed across headlines around the world. Last month, Bloomberg referred to a “creeping rot inside commercial real estate,” and last week, New York Magazine ran a cover story calling Manhattan “New Glut City,” with office buildings “dangerously empty and crushed with debt.” Starwood Chairman Barry Sternlicht said the market is in a “Category 5 hurricane.”

The coverage is driving the extra focus from tenants because the topic is completely inescapable, said Tighe, CBRE’s top leasing broker in New York.

“I’m talking to my folks in capital markets, [asking] what’s the situation, then really getting the backstory from the parts of our firm that deal with that, talking to our investment sales operation about what’s the dynamic,” she said. “I think any thoughtful business person would probably be committing malpractice not to ask the questions.”

https://www.bisnow.com/national/news/office/landlord-finances-owners-open-books-119930

As legislation awaits Gov. Kathy Hochul’s signature, New York City residential brokers are pushing back against measures that would expose the ownership of limited liability companies.

State lawmakers advanced the proposed law, dubbed the LLC Transparency Act, to the governor’s desk on Tuesday. If approved, the bill would require the names of LLC owners and the addresses of their businesses to be published in a publicly searchable database maintained by the Department of State.

The legislation is intended to prevent the perpetrators of illegal activity such as money laundering and tax evasion from hiding behind anonymous shell companies, the bill’s sponsors have said.

But some brokers are criticizing the move for unnecessarily revealing information to the public they say could be limited to law enforcement agencies monitoring these bad actors.

“This is a law enforcement policy that I feel has been hijacked to create some kind of narrative,” Compass’ Leonard Steinberg said. “That is not serving the public well. That’s not serving the taxpayer well.”

Most buyers using LLCs to purchase real estate do so to maintain their privacy, Coldwell Banker Warburg president Frederick Peters said. He added that owners of LLCs are already required to register, the information is just not open to the public.

“The vast majority of corporate purchases are people who simply want to maintain their privacy and not see their names emblazoned across the media if they purchase an expensive property,” Peters said. “It is a terrible idea to further penalize the wealthy for spending money in our state, where such expenditure benefits us all.”

The public nature of the database could saddle some, especially those in the public eye, with security risks — and those concerns aren’t just limited to celebrities, Steinberg said.

“There are a lot of people who have absolutely valid security concerns that should not be overlooked,” Steinberg said, citing judges or psychiatrists with volatile patients as examples.

With these safety concerns top of mind for buyers, Steinberg said he anticipates an increase in demand for high-security, doorman buildings.

The bill would allow some LLC owners to submit a waiver for certain privacy concerns, though real estate attorney Samantha Sheeber expressed concerns that the legislation doesn’t define what concerns would qualify for the waiver.

“It is just extraordinarily overreaching,” Sheeber, who is the managing partner at Starr Associates and is working with REBNY to block some of the legislation’s current provisions ahead of the governor’s review, said.

However, real estate attorneys will likely work with buyers to find alternative ways to conceal owners’ identities, “which is going to probably, you know, fly in the face of what’s trying to be accomplished here,” Sheeber said.

“Any attorney is going to now try and come up with creative ways to protect their clients as they should be protected,” Sheeber said.

Despite the privacy concerns, several brokers say they don’t expect the law to have an inordinate impact on the market. The one exception could be foreign buyers, who may hesitate to buy property in New York due to concerns about the new guidelines and how to circumvent them.

“It will potentially turn off some foreign investment,” Nest Seekers’ Michael Fabbri
said. “People who want to buy in New York will buy in New York. They’ll figure out a way.”

The Array Apartments in Austin, Texas, has announced a ‘mandatory’ curfew between 10 p.m. and 5 a.m. each night. But legal experts are skeptical such a rule can be enforced.

In a move reminiscent of a dormitory for college freshmen, or perhaps a summer camp for children, an apartment complex in Texas has announced a legally dubious curfew that demands residents stay inside their units all night long.

The curfew at the Array Apartments begins at 10 p.m. and goes until 5 a.m., according to local news station KXAN, which first reported on the situation last week. The apartment’s management first announced the curfew in a notice to residents, KXAN reported. The notice states that “it is mandatory for all residents to remain indoors and restrict their movements outside their homes, except for emergencies or authorized activities.”

Ford Sanders, a reporter with local station KVUE, tweeted a photo of the notice, which states that the curfew is a response to “security concerns and potential public health and safety concerns.”

The notice also encourages residents to hunker down with provisions, saying they should “make necessary arrangements to procure essential items like groceries, medications and other supplies ahead of curfew hours.”

The notice doesn’t include additional details about what might have prompted the curfew, nor does the notice explain how managers plan to enforce the rule or what might happen to those who break it. The notice concludes by saying that “together, we can overcome this challenging situation and emerge stronger as a community.”

According to KXAN, Austin 311 — the city’s information and help line — has received about 950 calls since the beginning of 2022 from the street where the apartment is located. Of those calls, 91 reportedly came from the apartment complex itself, and 62 of those calls were “police-related.”

Array management did not respond to Inman’s request for comment Monday.

Despite the official sounding language in the notice, legal experts were skeptical of the curfew.

“I don’t see how they can do that,” Shaun W. Pappas, a New York-based attorney who focuses on real estate, told Inman. “It’s ripe for a lawsuit.”

Pappas said apartment managers can close certain areas of their properties —
think common spaces, terraces or pools — during certain hours. But ordering
residents to stay inside all night would likely violate their civil rights.

“To actually say you can’t leave your apartment, you can’t get away with that,” he added.

Pappas said some residents may be tempted to obey the curfew because they won’t know it is illegal. But if it were him, Pappas said, “I wouldn’t comply whatsoever.”

Austin-based attorney Bill Gammon had a similar take while speaking with KVUE.

“The apartment complex can’t do this. This is ludicrous,” Gammon said, adding that he’d advise residents to simply ignore the rule.

In all likelihood, residents who do ignore the rule won’t face any penalties; KXAN reportedly got in touch with an unnamed property manager who said he couldn’t enforce the rule and that the security company working at the complex suggested sending out the notice.

The apartment curfew comes after a period during which curfews generally became more widespread thanks to the COVID-19 pandemic. As case counts rose in 2020, for instance, California issued a stay-at-home order for multiple counties that required people to remain inside between 10 p.m. and 5 a.m. Parts of Ohio, New Jersey, Colorado, Massachusetts, Florida and many other states also imposed curfews, as did a number of foreign countries.

However, the COVID curfews were imposed by elected officials, not private property managers, and in any case have long since been lifted.

Despite the questionable legality of property managers attempting to keep residents inside at night, the Array Apartments is not the first complex to announce a curfew. Over the years, managers at apartments in Gainesville, Florida, Dallas, Texas, and Raleigh, North Carolina have all imposed curfews at their properties — often to the consternation of residents.

Now, that appears to be exactly what’s happening in Austin. Speaking to KVUE, Array resident Kristie Broadaway said the curfew notice she received makes it sound “like I’m in some hurricane area where they have martial law.” Broadaway also said she searched her lease but couldn’t find anything giving management the authority to impose a curfew.

“If I can’t go outside or have friends over after 10,” she added, “I may look for somewhere else to live.

https://www.inman.com/2023/06/13/this-apartment-complex-wants-to-lock-residents-inside-all-night-long/

Imagine a New York City co-op or condo building that certain lenders won’t touch: It could be a nightmare situation for a buyer, seller, and the building in general.

That scenario is the new reality for nearly 40 apartment buildings in NYC that appear on a list putting them off limits for Fannie Mae lenders—and there is the potential for that number to grow exponentially in the next couple of years, according to at least one real estate professional. While some real estate lawyers and mortgage brokers that Brick Underground spoke to have not yet encountered a buyer unable to get financing as a result of this banned building list—they concede it could be a significant problem in the near future.

Orest Tomaselli is the president of the project approval division at CondoTek, which provides data on condos for lenders, and the CEO and president of Strategic Inspections, which conducts co-op and condo reserve studies. He sounded the alarm about the Fannie Mae unavailable condo and co-op list in a recent post on his firm’s website.

More than 1,400 U.S. condo and co-op buildings have been added to this list since 2022 and thousands more are likely to be added in 2023, he says, explaining that the unavailable list prevents lenders from closing and selling loans in these designated properties to Fannie Mae. There are 39 condo and co-op NYC buildings on this list, he tells Brick. (CondoTek works with buildings to help get them off the unavailable for lending list.)

What is the Fannie Mae unavailable condo and co-op list?

The list is part of a response to the Surfside, Florida condo tower collapse in June 2021. Following that tragedy, which occurred after building managers were warned about major structural damage, Fannie Mae, one of the government-backed entities that buys loans from banks, issued new guidance to lenders essentially shutting off loans for buyers in buildings with low reserve funds for structural repairs, among other risky scenarios.

Freddie Mac, the other quasi-government agency that buys back conforming loans, also issued similar guidance. Other lenders tend to follow Fannie and Freddie’s lead and are likely to align their rules—and Tomaselli sees this alignment extending to jumbo lenders and underlying mortgage financing as well.

Being on the list means buyers could run into trouble if they’re seeking conforming loans (mortgages that meet Fannie and Freddie guidelines). A higher conforming loan limit for 2023 gives New Yorkers bigger loans that are cheaper and easier to qualify for and depending on how much they are seeking, an alternative to jumbo financing.

“If Fannie Mae is unwilling to purchase loans in ‘unavailable’ condo and co-op properties, few, if any, lenders will extend mortgage financing borrowers in these properties,” Tomaselli writes.

The original goal was to discourage the practice of deferred maintenance in buildings with aging infrastructure—meaning putting off needed repairs because of budget shortfalls. To put some teeth into it, Fannie Mae said it wouldn’t buy back mortgages from condo or co-op developments that used an assessment to pay for repairs involving structural integrity until the repairs have been made. It created the new status of “unavailable” for buildings that don’t meet eligibility, and a new requirement: Condo buildings need to accumulate reserve funds by setting aside 10 percent of their annual operating budget every year to put toward their reserve fund, a departure from past practices that allowed buildings to obtain a reserve study instead.

Ryan Greer, senior vice president at National Cooperative Bank (a Brick sponsor), points out that while Fannie Mae’s requirement to collect 10 percent of the operating budget for reserves only applies to condos, not co-ops, NCB does “include a reserve ratio in our financial analysis for co-ops as a measure of overall financial stability.”

Buildings are increasingly using assessments to fund capital improvements or shore up their reserve funds for capital improvements, often in excess of $1 million, he says. “Cooperatives typically offer a discount for payment upfront and will allow shareholders to make payments in installments over two to five years,” he says.

But even though a good majority of NYC buildings do rely on assessments to pay for upgrades, the list of banned buildings has only grown slowly—at least until now.

How does a co-op or condo land on the list?

Tomaselli explains that there are several triggers that can land a building on the list, including when a questionnaire is sent to building management as part of the mortgage application process.

If the building is non-compliant with Fannie Mae guidelines, some lenders may just reject the loan. Others may send the documentation to Fannie Mae and request an override—and that review may be what puts the building on the no-lend list.

Why are some buildings considered unavailable for lending?

There are many reasons why a building may end up on the list, Tomaselli says, but these four reasons are the main ones:

– It doesn’t have a 10 percent reserve line item in its operating budget. (Freddie Mac does accept a reserve study in lieu of a reserve fund requirement.)

– It is not compliant with Fannie Mae’s insurance requirements.

-It has violations related to structural or mechanical repairs that need to be completed.

-Investor-owned units exceed Fannie Mae’s maximum thresholds. (More than 20 percent of units are owned by one investor or more than 50 percent of units are owned by investors—which can be a problem in rental-to-co-op or rental-to-condo conversions.)

Local Law 97, which requires buildings over 25,000 square feet to reduce harmful gas emissions by 2024, will also likely land “thousands” of buildings on the list in the future, Tomaselli says.

The city estimates about 20 to 25 percent of buildings will exceed their emissions limits in 2024 if no action is taken. Fines will be issued in 2025 if a building exceeds the limits or fails to report its energy use.

“Local Law 97 is going to have a gigantic impact,” he says. If a building receives a Local Law 97 fine for not repairing or replacing its outdated heating system, for example, or the building does not have enough capital in its reserve account to replace those components, then the building would be ineligible for Fannie Mae mortgage financing and is likely to end up on the unavailable list.

How do you find out if your building is on the list?

If you’re a seller, buyer, or on a building board—wouldn’t you want to know if your building is on the list? Good luck with that. The list is not public; it is only available for view by Fannie Mae lender partners. (Tomaselli has seen the list.)

“Unless a lender notifies the property manager or [a board] then there is no official way you find out if you’re on the list,” Tomaselli says. “The lack of transparency is shocking.”

Since the goal of changing Fannie Mae’s guidelines in the wake of the Surfside tragedy was to “make sure buildings pay attention to finance and structural problems, you would think they would want to make sure boards were aware,” Tomaselli says. But the only way a building finds out if it is on the unavailable list is when a buyer applies for mortgage and is informed the building is on the list. (Brick reached out to Fannie Mae for comment but did not get a response.)

But the sky is not falling yet

Mortgage broker Kevin Leibowitz, founder of Grayton Mortgage, says he hasn’t heard of a NYC deal blowing up because of Fannie Mae’s unavailable list, but sees the potential for problems in buildings where buyers are likely to need a conforming loan.

Still he cautions against overreacting: “Just because a building is on this list doesn’t mean the value of the building is going to become worthless,” he says. That’s especially true in high-end buildings where buyers have lots of options for loans.

These guidelines may create more headaches for jumbo loan borrowers, he predicts. They are already tougher to qualify for—you need a higher credit score and more cash reserves, for example. In other words, lenders are not giving these loans away easily. “It may be worse for the jumbo borrower because there are no more stupid loans anymore,” Leibowitz says.

How to avoid getting your deal derailed by the unavailable list

When you’re buying in NYC, you need an attorney who will dig into the financial health of a building, explains Shaun Pappas, a partner at Starr Associates. That includes reviewing board meeting minutes to see what’s been going on. Be patient and allow your attorney to investigate, he suggests.

A building that has been pre-approved by a lender or where a lender has lent in the past means you’re less likely to run into problems, he adds.

Another strategy in the current market: Requests for financing and funding contingencies to protect the buyer are also making a comeback, he says. These days it’s harder for a seller to push back on those.

Some buildings have not yet put a strategy in place for dealing with Local Law 97, he says, and that has repercussions for lending.

“Everyone in NYC is so busy, and we don’t often look down the road as we should,” he says, adding that “a bank is not going to take a step if a building doesn’t have a plan in place for LL97,” he says. But the outcome may not be that dramatic: The closer we get to these deadlines, two things could happen, he notes: “If buildings aren’t ready, the city will push the dates back. Otherwise banks will have trouble finding buildings they can lend in.”

And that latter scenario will likely prompt banks to come up with workarounds.

As attorney Bettina Miraglia, a partner at DL Partners explains, “We all need residential mortgages. My guess is the banks will figure out solutions,” she says, pointing out how Freddie Mac’s guidelines offered some flexibility to borrowers. That kind of variation is necessary in lending and it’s part of the bigger picture. “We need the regional banks, the First Republics,” she adds.