Opportunities for Preservation of Overleveraged MultiFamily Housing

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Opportunities for Preservation of Overleveraged
Multi-Family Housing
Presented by Harold Shultz, CHPC David Walsh,
NYSHFA Dina Levy, UHAB
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What is an Overleveraged Building?
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An Example

• Annual
  Per Apt/Month
• Total Debt Service 23,957,325 1,108
• Loans of 367 M
• OM (Est) 14,704,320 680
• Total Debt OM 38,661,645 1,788
• Gross Income (2007) 17,310,476 801
• Net (21,351,169) (987)
• DSCR .36 !

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Banks and CMBS

• Two types of lenders
• Banks
• Commercial Mortgage Backed Securitized Trust

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CMBS
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What Will Happen?

• Extend Mortgage
• Recast Mortgage
• Sell Mortgage
• Foreclose Mortgage

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What Will Happen?

• Capital Starvation
• M O cut to the bone
• Results in
• Long term building deterioration
• Neighborhood deterioration

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Extent of the Problem

• 2009 Potentially more than 70,000 units of
  over-leveraged housing in NYC
• Rent Regulated
• Mitchell Lama
• PB S8

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One Example 4,000 unit portfolio(Non
Securitized)

• Original Owner

Sale in March of 2005 295 million, or 74,000
per unit.
1st Private Equity/LL_at_ 20 59 M 1st Lender _at_
80 236 M
Sale in May of 2007 918 million, or 232,000
per unit.
2nd Private Equity/LL _at_ 20 184 M 2nd Lender _at_
80 734 M
DEBT SERVICE TRIPLES IN 2 YRS
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Barriers to Acquisition

• Transparency
• Pricing
• Market Watchers

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Preservation Goals

• - Long-term responsible owners
• - Supportable debt based on existing income
  stream
• - Adequate operating and capital reserves
• - Use-restrictions (in some cases)

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Opportunities for Acquisition

• Administrative and Legislative Proposals
• Voluntary Sales
• Phantom Tax Relief
• Debt Acquisition
• Restrictions on PIPP/LLP
• Restricted Foreclosure Sales?
• HUD/Treasury MF Preservation Program

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Types Of Loans

• Portfolio Loan Originated by Lender and sitting
  on balance sheet. Lender may or may not want to
  remove loan through sale or securitization
  process.
• CMBS Loan may be pooled with other loans,
  transferred into a Trust, which then issues bonds
  that may vary in yield, duration and payment
  priority.

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CMBS Loan Participants
CMBS Participants

• Trustee Holds all loan documents and
  distributes cash flow received from Servicer to
  Investors
• Servicer Manages the flow of payments and
  information and is responsible for communicating
  with the Borrower
• Rating Agency Establish ratings for each bond
  class and continually monitor performance
• Investors Rated versus Unrated Pieces

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Challenges with Securitized Loans

• Ownership Who owns the various loan pieces?
• Valuation How much is the property worth?
• First Loss Position Who is controlling holder?
• Servicer Will the servicer share information
  with you?
• Trustee Trust not looking to sell if loan not
  in default

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Strategies

• Mezzanine Financing - Acquisition of various
  Mezzanine Loan pieces. Foreclose where collateral
  is equity ownership entity in the deal. Take
  subject to first mortgage. (ie John Hancock
  Tower Boston, MA)
• Alternative Property Usages Property being
  reviewed as possible Supportive Housing project
  where traditional all-affordable deal in major
  trouble and lender may be willing to make deal.
  Supportive Housing financing structure may be
  applicable and may work

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Opportunities Where To Look

• Brokerage Firms Cushman Wakefield, Eastdil,
  Massey Knakal,
• Banks Deutsche Bank, JP Morgan, NY Community
  Bank
• Law Firms Dechert, Paul Hastings, Skadden Arps
• Mortgage Brokers Ackman-Ziff, Holliday
  Fenoglio, Meridian Capital, Palisades Financial