Recourse Only’: Investor’s Worst Fear

The phrase “recourse only” is causing fear among investors, developers, buyers, and owners seeking loans or refinancing options, signaling a risk of losing all assets beyond the property value.

Recourse Only': Investor's Worst Fear

The phrase "recourse only" is causing fear among investors, developers, buyers, and owners seeking loans or refinancing options, signaling a risk of losing all assets beyond the property value.

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Good morning. In the midst of the banking crisis, could recourse loans only be the preferred choice for lenders in the near future? Landlords in New York face increased vulnerability due to the broadening definition of fraud as a result of two recently passed bills. Meanwhile, The Related Group, Florida's largest developer, discusses the keys to success for their family business.

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Market Snapshot

S&P 500
GSPC
4,365.69
Pct Chg:
-0.5%
FTSE NAREIT
FNER
707.00
Pct Chg:
-1.3%
10Y Treasury
TNX
3.727%
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0.0%
SOFR
1-month
5.05%
Pct Chg:
0.0%

*Data as of 6/21/2023 market close.

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ONLY RECOURSE

Lenders May Have No Choice But to Rely on Recourse Loans

The phrase "recourse only" is causing fear among investors, developers, buyers, and owners seeking loans or refinancing options, signaling a risk of losing all assets beyond the property value. Although not yet widespread, industry experts warn that recourse is reentering loan discussions.

The rising tide of recourse loans: Even though recourse-only loans aren't yet the norm, Aaron Jodka, Research Director at Colliers, points out that "recourse is reentering the dialogue." Reasons for this include the banking industry's instability since March, decreased elective refinancing, and increased capital requirements.

Growing concerns amplifying lender's caution: There's a surfeit of conditions driving lenders to recourse. Trepp reported that CMBS issuance declined 75% from May '22 to '23, with the number of deals dropping 66%. Lending standards are tightening across the board, too. According to the Fed's latest lender survey, the net percentage of lenders tightening their standards rose to 73.8% for construction and land development, 66.7% for commercial, and 64.5% for multifamily, the highest levels seen since 3Q20.

➥ THE TAKEAWAY

Big picture: The reality that even significant property owners might surrender their keys to lenders if refinancing doesn't appear profitable is now conceivable. This shift poses serious problems for lenders, as they are not equipped to manage and maintain properties and may need to sell them off, potentially devaluing other properties. With values falling, lenders are wary of taking hits on their balance sheets, and recourse could increasingly become a palatable demand to avoid being left with depreciated assets. Hence, if the CRE space wasn't intimidating before, it certainly is now.

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FLAGRANT FRAUD

NY Landlords Will Have More to Answer For Than Ever Before

From left: Linda Rosenthal, Brian Kavanagh and Jeffrey Dinowitz (Getty)

NY landlords are under attack as the State Assembly approved legislation that will make it easier for tenants to prove fraud in rent overcharge cases and allow them to consult rent histories to maximize landlords' liability.

Punishing property owners: The Community Housing Improvement Program claims the two bills aim to punish NYC property owners as they look to unravel a court decision that found a 2019 rent law couldn't be applied retroactively to overcharge cases. If the new legislation becomes law, it may have a devastating effect on NYC housing.

The old definition of fraud: The definition of fraud is critical when calculating rent owed to tenants in overcharge cases. The first bill significantly broadens that definition as "a material breach of any duty… to disclose truthfully…the rent, regulatory status, or lease information." For allegations that predate the 2019 law, rent must be calculated based on a 4-year lookback.

The new, proposed definition: With the new legislation, if tenants can prove fraud, they can look back at rent history further than 4 years. Since overcharges are calculated based on the lowest stabilized rent recorded for comparable apartments, there's a potential for substantial awards from landlords to tenants.

➥ THE TAKEAWAY

Tenants win this one: While the bill's lead sponsors, Assembly Member Linda Rosenthal and Sen. Brian Kavanagh, claim that the legislation doesn't focus on retroactive claims, landlords and attorneys disagree. If the legislation becomes law, NY landlords may face increased court cases and higher costs.

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AROUND THE WEB

📖 Read: In Principles, Ray Dalio, one of the world's most successful investors and entrepreneurs, shares the unconventional principles that he's developed, refined, and used over the past 40 years to create unique results in both life and business.

🖥️ Watch: On this episode of Squawk on the Street, Henry McVey, KKR’s CIO, discusses how the global economy is seeing an asynchronous recovery while the US is looking up.

🎧 Listen: In this episode of The Real Deal’s Deconstruct, the team talks about weakening demand for summer rentals in the Hamptons just a couple of years after all-time highs during the pandemic.

ALL IN THE FAMILY

After 40+ Years, The Related Group is Still a Family Affair

Nick and J.P. Perez, the leaders of Florida's biggest condo developer, The Related Group, discusses the keys to success for their family business.

Focusing on family: The Related Group, founded by Jorge Perez in the 1980s, is one of Florida's largest multifamily and affordable housing builders. Since 2020, Jorge's son, J.P., has managed day-to-day operations for his father, who remains CEO and chairman. While Jorge is less active in the day-to-day, the trio makes decisions on new projects and investments together. Although this sounds like a scene from Succession, Jorge isn't a fan of the show and hopes he's not viewed in the same light as Logan Roy.

Lines of business: The brothers are always busy managing four divisions: mixed-use condos above hotels, an affordable housing division, multifamily rentals, and a Florida condo division. They recently broke ground on the Casamar in Pompano Beach, which is already almost sold out. The company is also focusing on branded projects with 5-star hospitability companies. They approached the Manhattan Hospitality Group to partner on the Nomad in Wynwood to appeal to a young professional buyer.

➥ THE TAKEAWAY

Lessons learned: While J.P. was starting his career and Nick was still in college during the last economic downturn, the brothers leaned on their father for lessons on how to handle economic uncertainty. Besides having a diversified business mix, they focus on conservative leverage. They always hold a strong cash balance and are ready to capitalize on opportunities with minimal recourse. In the current environment, they've found that financing a condo is easier than a multifamily deal.

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✍️ Daily Picks
  • Ghost town: Office vacancy rates in Silicon Valley are skyrocketing as tech companies continue reducing office space due to layoffs and hybrid work arrangements.

  • Tenant-induced chaos: Facing tenant protests, the NY rent board has greenlit a 3% hike on rent-stabilized one-year leases. Landlords argue it's inadequate.

  • Lifeline lender: Many wonder if Federal Home Loan Banks, second only to the Fed as a lender of last resort to U.S. banks, has enough oversight and regulation governing their actions.

  • Tumbling transactions: According to Green Street, there were only $37B of real estate transactions in May, down 70% YoY.

  • Billionaire's playground: NYC Comptroller Brad Lander, previously a strong opponent of Hudson Yards, admitted he was wrong about the development’s tax revenue.

  • Less losses: According to Cred iQ, CMBS losses in May were a fraction of the total from April due to a lower volume of workouts and a smaller average outstanding loan balance at disposition.

  • Office in distress: Special servicers are experiencing a surge in activity as distress in the office sector grows, with the Trepp CMBS Special Servicing Rate rising 49 bps in May to 6.11%.

  • Guns n’ Texas: The National Rifle Association (NRA) has identified TX as its top choice in the search for a new HQ. Not surprising.

  • One Plantation purchase: PGIM Real Estate sold the One Plantation multifamily complex to Chicago-based Waterton for $88.4M.

  • Bye, Bye: Buy Buy Baby, a subsidiary of Bed Bath & Beyond, will be auctioned separately from its parent company as the retailer tries to streamline ops and optimize value for shareholders.

  • Rosy outlook: The economic forecast for NY, according to the New York Fed, has significantly improved, with an upward revision indicating a brighter outlook for the region's economy.

  • Deal of the day: Brookfield Infrastructure Partners and the Ontario Teachers’ Pension Plan will buy Compass Datacenters from RedBird Capital Partners and the Azrieli Group for $5B.

  • Longing for life sciences: Lab landlords want to capitalize on higher M&A activity and pharma funding, positioning themselves to benefit from growing demand for life sciences assets.

  • Fresh face: Avison Young appointed Harry Klaff as President after Juan Bueno left for the firm after less than 2 years.

  • Legal frenzy: Construction contracts are landing in court more often—and at higher dollar figures—than ever before, as runaway costs and pressure to build faster have led to a spike in disputes.

  • Special servicing: A $195.8M CMBS loan on A&R Kalimian Realty’s The Aire luxury apartment tower on Manhattan’s Upper West Side has transferred to special servicing.

  • Sale of the day: Related Group and Rockpoint sold a four-building apartment complex in South Florida’s Lantana neighborhood to NY-based Praedium Group for $138M.

  • Broker expansion: Ballast Rock Group is expanding its capabilities by adding a licensed broker-dealer, offering its clients a wider range of investment products and services.

  • Words of wisdom: This CFO has five tips to help small company CFOs manage their CRE, including conducting regular portfolio reviews, leveraging tech, and seeking guidance on efficiencies.

  • Eviction crisis: After stalling during the pandemic, eviction filings have increased, driven by rising rents and a long-running shortage of affordable housing.

  • Fed Chair: We're monitoring commercial real estate closely. Interest rates likely to rise later this year, says Powell to Congress.

📈 Chart of the Day

Seattle’s business districts have seen the largest YoY increase in available office space among the ten largest U.S. metro areas.

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