Hope for Housing?

Spring is in the air and the sun has begun to shine on the housing industry.
Last week, the Commerce Department reported that construction of new homes and apartments in February (2009) were up twenty-two percent (22%) from January (2009). A large increase in apartment construction is said to have led the charge. January’s 470,000 new units were expected to decline to 450,000 in February; instead, they rose to 583,000 units.

Yesterday, the Ohio Association of Realtors reported a 12% increase in Ohio home sales from January to February, 2009.

For those who like to look beyond the silver lining and focus on the clouds, simply compare February 2008 to February, 2009. Construction (on a national basis) is down 47%, and Ohio home sales are off 22% from a year ago.

Personally, I think it is time we focus on the half-full part of the glass. Throw in good “Dow gains” and the Obama Administration’s new plan to help banks dispose of so called “toxic assets” unveiled on March 23, 2009, and at least we have something to smile about. More importantly, according to the Cleveland Plain Dealer’s March 24, 2009 headline article (Dow surges 497 on bank plan details), “(w)hile its still early, local bankers were optimistic about the program”.

Cuyahoga County For Sale

(Actually, just 340 parcels of it)

On March 25, 26 & 27th (2009), at 10:00AM, at the Justice Center Auditorium [1300 Ontario Street, Cleveland, Ohio), 340 parcels of Cuyahoga County real estate are scheduled to be sold.

The parcels have been forfeited to the State of Ohio due to long term tax delinquency. Bidders who own property in Cuyahoga County, who are delinquent on their real estate taxes are not eligible to buy.

Properties are sold “AS IS”, and subject to all liens and encumbrances, except the lien that triggered the foreclosure.

For more information, log on to the Cuyahoga County Auditor’s website (www.auditor.cuyahogacounty.us), or call them at 216-443-7072 or 216-443-7087.

Attention Home Buyers: Mortgage Lenders Have A New Credit Scoring Tool

FICO, the leading provider of analytics and decision management technology, and Equifax, a global leader in information solutions, today introduced BEACON® Mortgage Score, a new FICO® industry score specifically designed to help mortgage lenders make the best possible risk decisions when addressing both current homeowners and those aspiring to own. Equifax plans to make the new score available in April to mortgage lenders and servicers for use in their loan servicing decisions including mortgage loan modifications. (Click here to read a copy of FICO's news release)

Andres Navaro, a writer for MortgageRatesinCanada.ca, discusses in his article titled "Buyers Beware: New Beacon Scores Tool Launched for Mortgage Lenders" what this new scoring tool could mean from the borrower's perspective. Navaro states,

"The new BEACON® Mortgage Score tool will have some features of previous BEACON score products, including maintaining the current scoring table, which goes from 300 – 850. It will also maintain the current policy on how inquiries affect your credit score. What’s new is that now, in addition to the already existing reason codes used to explain information of your report, there will be an additional 15 more codes. However, the biggest potential challenge for those of you trying to qualify for, refinance, or modify a mortgage loan is the fact that even more data will be used to scrutinize your mortgage loan credit worthiness; unfortunately, what type of "additional data" is used has not
been released but it has been said that the information is based on information that
Equifax collects on credit holders. (This is a prime reason to make you’re your credit information on file at Equifax is correct!)"

Foreclosure Numbers and Housing Price Declines Overblown?

A study recently conducted by University of Virginia professor William Lucy and graduate student Jeff Herlitz analyzed foreclosures in all 50 states, 35 metropolitan areas and 236 counties.Their analysis shows that most foreclosures are concentrated in just 4 states, California, Florida, Nevada and Arizona, along with a modest number of metropolitan counties in other states. They also determined that 87% of national declines in housing value occurred in those same 4 states, with California accounting for the lion's share of the losses.

There's something to be said for living in the Midwest where the real estate bubble never got much traction; we had less to lose.

Californians were particularly susceptible to foreclosure problems because they were more in hock on their homes. The median value of owner-occupied housing in 2007 was 8.3 times the median family income, while the 2007 national average was on 3.2 times higher than median family income. In fact, in the Los Angeles metropolitan area, more than 20% of mortgage holders were paying 50%+ of their income in housing-related costs. Ohio keeps looking better and better.

According to Lucy and Herlitz, assuming housing values decline to 2000 levels, potential losses from 2008 foreclosures in the U.S. would be less than 1/3 of the $350 billion provided by the federal government to banks and insurance companies to cope with losses in mortgage-backed securities.

They further state that damage to the balance sheets of large banks and AIG was primarily caused by borrowing funds on a short-term basis to by long-range derivatives and from selling credit default swaps insuring derivatives backed by mortgage payments, not from losses on foreclosed residential mortgages which played a much smaller role in this melodrama. Simply put, in a gross lack of foresight, the financial instruments created by AIG and the large banks did not have any mechanism in place for dealing with the potential bursting of the housing bubble; i.e., there was no method to separate foreclosed properties from some forms of mortgage-backed securities.

The bottom line is that the findings of Lucy and Herlitz, while showing specific geographic locations experienced substantial declines, do not support the claim that nationwide housing values have tanked. While the pain many are suffering in the real estate field is real, the likelihood that some regions, such as Ohio, may be able to bounce back more easily than other regions, provides some hope for the future.

For more information on the study conducted by William Lucy and Jeff Herlitz, click here.

Watch Your Language with Percentage Rent Clauses in Commercial Leases

(“Say what you mean, precisely, or a judge will decide what you meant #5”)
“Typically, courts will uphold commercial lease provisions unless they are contrary to public policy or statutory law. Consequently, commercial landlords and tenants have a lot of leeway in allocating the risk and responsibility of issues inherent in commercial leases. For example, a commercial landlord in Ohio could draft provisions calling for non-judicial, self-help evictions (provided there is no breach of the peace); a one-year security deposit versus a one-month security deposit; and a default interest rate of 15%. Courts traditionally presume that commercial landlords and tenants are on more of an equal playing field and are more sophisticated concerning these transactions, since both will usually have attorneys to review their leases. This is not the case in residential leases in Ohio which are subject to the Ohio Landlord Tenant Act (See Ohio Revised Code Section 5321.01 et seq.).

Because courts often defer to the specific language of a commercial lease, (and refuse to consider extrinsic evidence of a party’s intent if the language is clear and unambiguous), unintended results are often norm for landlords and tenants who do not review the language in their leases carefully prior to signing the same. This is especially true regarding interpretations of “gross sales” under "Percentage Rent Leases".

In today’s economic climate, many retail landlords and tenants are agreeing to lower base rental rates, and adding rent in terms of a percentage of "gross sales", above a minimum amount (also known as the “break point”). With Percentage Rent Leases, both landlord and tenant share the proceeds if the tenant is fortunate enough to incur sale volume above the breakpoint. The problem occurs when the lease does not adequately define the formula for percentage rent, in particular, the meaning of “gross sales.”

From the landlord’s standpoint, the Percentage Rent Lease should include the following items in the definition of gross sales or gross receipts:

1) The entire amount of the gross sales price for cash, check and/or credit received from the sale or lease or otherwise of all goods, merchandise, and services provided or performed at, in, on or from the leased premises;

2) All sales by any subtenant, assignee, licensee, concessionaire, or other occupant of the premises;

3) Revenues from internet sales;

4) All telephone, mail-order, facsimile, catalog and email orders originating from or filled at the premises, or filled at other stores or locations;

5) Un-refunded and forfeited deposits and other amounts received from customers;

6) Related services such as delivery, installation and servicing paid for by customers who ordered merchandise at or from the premises;

7) The fair market value of trade-ins;

8) The sales price of gift and merchandise certificates;

9) Lottery ticket revenue;

10) Interest and finance charges in connection with sales;

11) Vending machine, video and amusement game, pay telephone, postal service and newspaper revenue.

It is certainly arguable that lottery sales, or liquor sales whose revenue goes to the state of Ohio should not be included in the definition of gross sales, and the tenant or tenant’s attorney would be wise to have same excluded from the definition. Certainly, commissions are earned from those sales, and those commission amounts should be included. However, the landlord in the case of Midtown Foods, Inc. v. Mid-America Management Corp. 2007 OHIO App. Lexis 2556 (8th District) disagreed with this reasoning. The Midtown-Mid-America lease called for percentage rent on gross sales of all merchandise, services and other items of value, and the landlord argued that liquor was certainly merchandise as well as an item of value. The Court in Mapletown Foods disagreed with the landlord. It held that the gross sales definition and language was ambiguous because it did not include the phrase “liquor sales”. The Court further pointed out that the revenue from the sales actually went to the state of Ohio, and only commissions on sales stayed with the owner. Courts across the country have generally treated lottery tickets sales in the same manner. Courts have also, effectively prevented landlords from securing percentage rent from concessionaires, program advertising, and service-related labor when these items were not specifically included in the definition of gross sales. The moral of the story for landlords is, “say what you mean precisely, or a judge will decide what you meant.”

Tenants who fail to specifically call for exclusions from their gross sales definitions are equally disappointed. Among the items that tenants seek to be excluded from gross sales are:

1) Cash or credit refunds;

2) Transfers or exchanges of merchandise between a tenant’s stores that do not involve a sale;

3) Sales and use taxes;

4) Interest, finance and carrying charges;

5) Returns of merchandise to manufacturers;

6) Licensee, sub-tenant or concessionaire fees;

7) Employee discounts;

8) Vending machine sales to employees;

9) Unredeemed gift certificates;

10) Insurance proceeds;

11) Employee and/or senior discounts; and

12) “Lost leader” sales that generate no profit.

The morale of the story is the same for tenants, as it is for landlords: "say what you mean precisely, or a judge will decide what you meant".

One particular vexing issue in gross sales definitions is whether or not to include internet sales. Because sales are technically made in “cyberspace” rather than at a leased premises, general provisions such as “gross sales of all merchandise at the premises” will not suffice. The ultimate resolution of whether or not internet sales will be included in a lease definition of "gross sales" will depend primarily on the relative bargaining strength of the parties. However, if it is agreed that internet sales are in fact to be included, careful drafting is in order so that the following questions are answered within the language of the lease itself: 1) How are you defining the location of the applicable internet sales? (e.g., all sales made within the zip code in which the store is located, or within a certain radius of the store, or just sales that are fulfilled from the particular shopping center location); 2) In the case of a national tenant, should a portion of national sales be allocated to each region or store; 3) How will you treat internet returns in order to determine what to exclude from the new definition?; (4) Is a separate breakpoint for calculating internet sales in order?

However you define gross sales, say what you mean precisely, or a judge will decide what you meant.

Capital Markets Commentary

(This article was reprinted with permission from Mr. Tom Cohen, Director of Johnson Capital’s Kansas City office).

Anyone who generally follows what is happening in our economy today knows that the current status of the capital markets is dismal. It is a challenging year for mortgage bankers/brokers and anyone else connected to the real estate industry. Deflation and a reduction in real estate values coupled with tightening in the credit markets has created real challenges that few in the industry will be able to avoid.

I recently attended the Mortgage Bankers Association’s CREF Conference in San Diego, which helped to shed some light on the current state of the lending market. This conference is usually attended by 4,000 to 5,000 participants and distinguished by conspicuous consumption associated with lavish parties put on by lenders. The only conspicuous aspect of this past conference was the relatively small number of attendees (approximately 1500) and the lack of parties to attend.

At the conference, I met with life insurance companies, banks, and private capital sources, who all offered a consistent theme: reduce leverage, tighten amortization, increase rates, price for risk and take as little risk as possible. Even more surprising was that many of the life insurance companies, once consistent sources of debt capital, were actually out of the market for the first time. They were simply attending the CREF conference to maintain connections with brokers and correspondents, preparing for the time when they would be able to re-enter the market. Life companies still in the market indicated that they had made significant adjustments to their lending criteria. No longer are they offering debt at 75% LTV, 25-year amortization or rates hovering in the low 6% range for a 10-year term. For the most part, life companies have reduced leverage to no more than 65 percent LTV, increased rates to 7% or greater and reduced amortization to 20 years.

I also noticed the absence of the contingent associated with Commercial Mortgage Backed Securities (CMBS) markets, which made it all too clear that this particular market is dead with no chance of return in sight. What will become of the billions of dollars in CMBS loans that will mature over the next eight or nine years as real estate values decline and there are fewer and more conservative lenders in the market place? Clearly, without the ability to refinance, many of these loans will default, leading us into a deeper capital markets crisis in the years ahead.

Hopefully, the government will be able to step in and purchase these loans and restructure them into performing loans through its TARP program. I am not optimistic that any other viable sources of debt capital will become available to handle the tsunami of maturing CMBS debt. As a result, the government may become the largest lender in the nation, much like it was during the days of the Resolution Trust Corporation.

Clearly, capital is severely constrained today. Despite the lack of available lending sources in the market, Johnson Capital does have sources of capital through its agency lenders (Fannie, Freddie and FHA), active life insurance correspondents, banks and credit union sources. We are eager to assist our clients in identifying the best options available in the marketplace to secure debt for their projects, whether it is to pay off construction loans or to refinance these maturing loans.

Founded in 1987, Johnson Capital is one of the country’s top real estate capital advisory firms with eighteen locations nationwide. Their services include debt placement and acquisition financing for permanent, construction and repositioning in addition to joint venture equity placement for individual assets, portfolios, entities and discretionary funds. Johnson Capital transactions have ranged in total funding from $1 million to over $300 million and have financed all property types, including: multifamily, office, retail, industrial, hotels, mixed use, manufactured housing, credit-tenant leases, single-family housing and land developments. For more information about Johnson Capital, log on to their website at: http://www.johnsoncapital.com/

4th Quarter Market Reports by Collliers

Below are links to the 4th quarter 2008 market reports issued by Colliers Ostendorf-Morris: