Daily Archives: November 6, 2013

Multifamily Players Dare to Hope GSEs Won’t Be Dismantled

By Erika Morphy – GlobeSt.com

WASHINGTON, DC-There is a growing sense in the multifamily industry that, despite the strong push to privatize housing finance, Fannie Mae and Freddie Mac may not be unwound. It doesn’t hurt that both GSEs have posted strong profits in recent years. Also, as politicians get closer to the reality of what it would entail to sell off parts or all of the GSEs, the more practical-minded they become about the mission. The intense lobbying campaign by the industry has likely had some sway as well, says one player. “I think Congress didn’t realize how important the GSEs are to housing finance—they liquidity they provide in the capital markets, especially the multifamily side,” this person tells GlobeSt.com. “They certainly didn’t realize how profitable the multifamily side is.”

To be sure, the official party line in Washington is that the GSEs are headed for an exit at some point. Certainly the Federal Housing Finance Agency continues to push the GSEs to conserve, to scale back lending and otherwise shrink. Also the GSEs themselves are positioning their operations for the day when the private markets will be the main source of finance in this space. Earlier this month Fannie Mae priced its inaugural credit risk sharing transaction under its Connecticut Avenue Securities (C-deals) series—transactions is which The GSE transfers some of the retained credit risk to investors in exchange for sharing a portion of the guaranty fee payments.

Then there are the comments Fannie Mae’s CEO Timothy J. Mayopoulos, made at the recent Mortgage Bankers Association meeting.

He spoke of building a sustainable housing finance system and on his list of what would comprise such an ecosystem was private capital that stands “in front of the government to withstand market downturns. The amount of this private capital needs to be substantially higher than the capital the GSEs historically held.”

Reporting the Results of a Due Diligence Investigation

By Azad Khalighi – GlobeSt.com

Must the results of a Phase II Environmental Site Assessment be reported to regulatory agencies?

Frequently in the area of real estate due diligence, persons who engage consultants for a Phase II Environmental Site Assessment (Phase II ESA) face the question of whether or not they need to report data to regulatory agencies, and if so, who is ultimately responsible to do so.  The answer to this question varies on a case by case basis, depending on three primary aspects: the regulatory jurisdiction of the project; the scope and results of the investigation; and the purpose of the investigation.

Generally, if environmental impacts detected during a Phase II ESA exceed regulatory risk-based standards, action is required.  Who these findings should be reported to, and what kind of cleanup action is required at the property, is determined by the relevant agency that provides oversight for that site.

There are many different regulatory agencies which often have overlapping jurisdiction and each Phase II investigation is different in scope and purpose.  To be certain whether environmental concerns found during the Phase II ESA must be reported, property owners should discuss these aspects with their environmental consultant.  Sometimes, such information is best relayed from the agency regulators themselves, while in particularly complex cases an attorney in the field of environmental law can provide the best advice.

Regulatory Jurisdiction

A property owner may be required to report analytical data from a Phase II ESA if oversight is required in that jurisdiction.  In some instances, a jobsite is under regulatory oversight, and the scope of a subsurface investigation is in accordance with that agency.  Under these circumstances, the agency’s caseworker will most likely require the data to be reported.  Reporting the data to the regulator with pre-existing oversight is generally the duty of the responsible party, and consultants can submit the data on their behalf.

Importantly, risk-based standards are regulated on both a State and a Federal level.  The Federal Environmental Protection Agency (EPA) has jurisdiction across the nation, and publishes standards and foundational requirements per region for local regulatory agencies and departments to use as a template.  In addition to Federal regulators, States have multiple agencies with overlapping jurisdictions such as water quality boards, environmental protection boards, toxic substances control and more, each enforcing various regulatory action levels.  Within these state agency jurisdictions are county and city departments, which also overlap in jurisdiction, such as fire departments, public health departments, water agencies and more.

Each regulatory agency enforces different action/screening levels, which vary across the country.  In Montana, for example, levels are regulated by standards known as Risk-Based Screening Levels (RBSL), New Mexico follows the SSL (soil screening levels) program, Hawaii uses Environmental Action Levels, while standards are set by the Risk Evaluation/Corrective Action Program (RECAP) in Louisiana and the Significant Environmental Hazard Condition Notification Thresholds (SEHCNT) in Connecticut.

Additionally, the majority of city and county environmental departments will require a boring permit for drilling projects encountering groundwater, and a minority of them will require a permit for drilling, even if groundwater is not encountered.  Often times these permits have a closure process that requires all data to be reported.  Property owners should refer to their environmental consultants about whether or not their Phase II ESA project falls within one of these jurisdictions, and if so, prepare to release all analytical data to that department.  A city or county environmental department may report significant data from their permit package to a regional or state agency for regulatory oversight.

Scope and Results

A Phase II ESA scope of work generally includes, but is not limited to, drilling for the analysis of soil, soil gas, and/or groundwater.

Many State EPAs have published various regulatory standards for reporting and clean-up of these elements, such as the Generic Numeric Cleanup Standards for Groundwater and Soil in Maryland, the Soil Cleanup Target Levels in Florida, the Statewide Standards for Soil and Groundwater in Iowa and the Soil Evaluation Values (SEVs) in Colorado.

The Federal EPA has also developed Maximum Contaminant Levels (MCLs) as a health-based protective drinking water standard.  Generally, investigations which include the scope of groundwater sampling use MCLs as a guideline for the risk assessment, however often times other regulatory agencies enforce stricter groundwater and drinking water standards as well.  When a Phase II ESA concludes that groundwater concentrations exceed regulatory standards, the property owner may be required to report that data, if that jurisdiction’s agency requires it, if there are possible sensitive receptors which could potentially be affected, and if any required permitting process requires the data for closure.

The Federal EPA has published Regional Screening Levels (RSLs), and similarly, the California EPA has published Human Health Screening Levels (CHHSLs) for soil and soil gas. Screening levels are generally applied for the science of toxicology and risk assessment, and are not typically used as reporting limits, however some circumstances may still require that data be reported with respect to screening levels.

The advisory and terms of such published screening levels should be reviewed on a case by case basis to confirm any reporting obligations.  Additionally, it is important to consider many state and local agencies have established jurisdictional clean-up numbers which can overrule the requirements for reporting data exceeding these screening levels.

Since each project is different, responsible parties must not rely on generalized information, and should always discuss the conclusions of a Phase II ESA report with their environmental consultant.

Purpose of the Investigation:

Health and safety codes in most jurisdictions across the country indicate that responsible parties and consultants have the absolute duty to immediately report any contamination to soil, soil gas, or groundwater which has been discovered as a risk to public health and safety, or the environment.  Responsible parties should refer to their consultants about whether or not there have been such discoveries that pose a risk to the environment or public health at their site.

A Phase II ESA report may also recommend further investigation, or conclude that remediation is required, and it can be in the property owner’s financial interest to voluntarily report the findings, and remediate the site under regulatory oversight.

Ultimately, it is important for all responsible parties and consultants of a Phase II ESA to understand that each project is different, and similar scopes may still result in different reporting obligations depending on jurisdiction, results, and purpose.  To be certain, the responsible party of a Phase II ESA should never blindly rely on generalized information, but rather discuss their reporting obligations with their environmental engineering consultant, attorney, or local regulatory agency.


California Requirements Study

According to the California Health and Safety Code, any release of a reportable quantity of hazardous substance shall be reported to the department in writing within 30 days of discovery (See California Health and Safety Code, Section 25359.4):

       – A “reportable quantity” means either (1) the quantity of substances as listed in Part 302 (commencing with Section 302.1) of Title 40 of the Code of Federal Regulations, or (2) any quantity of hazardous substance that may pose a significant threat to public health and safety, or to the environment [See 25359.4(c)].

– According to the Department of Toxic Substance Controls, Fact Sheet Update for Reporting Nonemergency Hazardous Substances Releases, the term “discovery” as used in 25359.4 means when a person finds, learns, or otherwise acquires knowledge that a hazardous substance has been released.

– A release must be reported unless (1) it is permitted, (2) it is authorized, (3) it requires reporting to the Emergency Management Agency, (4) it has already been reported to the Emergency Management Agency, and (5) the release occurred prior to January 1st, 1994 [See 25359.4(b)].

According to the California Fire Code, the Fire Chief shall be notified immediately when a  release or an unauthorized discharge escapes containment, is contained but presents a threat to health or property, or becomes reportable under state, federal or local regulations (See California Fire Code, Section 8001.5.2.2).

Any person who causes or permits any hazardous substance or sewage to be discharged in or on any waters of the state, shall, as soon as that person has knowledge of the discharge, immediately notify the California Emergency Management Agency of the discharge in accordance with the spill (See California Water Code, Section 13271).

DFW Apartment Market Good for Landlords, Investors–For Now

By Dees Stribling, Contributing Editor – MultiHousingNews.com

Dallas—Even though the Dallas-Fort Worth area never quite suffered the housing slump that many other U.S. markets did, the area’s relatively robust economy is creating new households that are tightening the apartment market. In fact, according to the recently released 2Q report by investment specialist Marcus & Millichap, employment gains in the Metroplex will be nearly 3 percent in 2012, nearly double the national average, and job seekers will be moving into the area, especially from less-than-robust markets in the Midwest and on the West Coast.

“As a result, leverage in lease negotiations will remain firmly on the side of apartment operators through the end of the year, spurring strong revenue gains,” the report predicts. In short, DFW apartment landlords are going to be in clover for the time being.

By the end of 2012, asking rents will have risen 3.4 percent to an average of $823 per month. Effective rents will rise at a faster clip of 4.2 percent as owners pare concessions, pushing the average to $744 per month by year-end, the report says.

But Marcus & Millichap also notes that there will (eventually) be some headwinds for landlords. Year-over-year, home sales in the market are up 20 percent, an indication that more renters are transitioning into single-family homes. Foreclosure activity is up more than 10 percent in 2Q12 from the second quarter of 2011, mitigating attrition from apartments to the housing market. But as foreclosure activity begins to abate and new construction of multifamily rental properties accelerates next year, apartment operators may have to react quickly with concession offerings to maintain the current tight occupancies.

New apartment construction is predicted to be quite vigorous in the coming quarters. Apartment completions will nearly triple in 2012, as about 8,100 units will come online by the end of the year. “Based on the rapidly expanding development pipeline, another dramatic increase in deliveries appears likely next year,” the report says.

In the meantime, investors are getting into the market while the getting is good. Transaction velocity will continue to escalate this year as out-of-state investors target large, better-quality deals in the Metroplex, the report anticipates. Despite cap rate compression through the past several quarters, local apartment properties continue to spin off stronger returns than similar assets in coastal markets.

For example, Class A cap rates for Metroplex multifamily can start as low as 5.5 percent, which still offers a 50- to 75-basis point premium over East Coast and coastal California metros. While investor demand for top-quality DFW assets remains elevated, prices are hovering near new construction costs, which may hamper the pace of appreciation over the next year. At the same time, though, the Class B sector may record further price growth, as many investors priced out of the Class A market shift their appetites to large Class B+ properties. Within this segment, prices for well-located 1980s assets have pushed above $40,000 per unit, changing hands at cap rates in mid-7 percent range.

Residential Price Increase Still Strong; Homeownership Slightly Up in 3Q

By Dees Stribling, Contributing Editor – CommercialPropertyExecutive.com

CoreLogic reported on Tuesday that home prices nationwide, including distressed sales, increased 12 percent on a year-over-year basis in September. This change represents the 19th consecutive monthly year-over-year increase in home prices nationally, according to the company. On a monthly basis, including distressed sales, home prices increased by 0.2 percent in September compared to August.

Taking distressed sales out of the equation, notes CoreLogic, and home prices increased year over year by 10.8 percent in September. Month over month, excluding distressed sales, residential prices increased 0.3 percent in September compared to August. The company counts both short sales and REO transactions as distressed sales, which in recent years have progressively become less and less a factor in most markets.

CoreLogic’s House Price Index, for which the year 2000 = 100, has been hovering below 150 since the end of the recession, though lately it’s been higher than 150. The bubble peak for the index was in 2006, when it briefly touched 200.

Homeownership Up Slightly in 3Q

The Census Bureau reported on Tuesday that the U.S. homeownership rate came in at 65.3 percent of households in the third quarter of 2013, its lowest 3Q level since the mid-1990s, up still up from the previous two quarters. During the first two quarters of this year, the rate remained at 65 percent; in the third quarter of 2012, the rate was 65.5 percent of households.

At the height of the housing bubble in 2006, 69.2 percent of all households owned their homes, but that number proved unsustainable in the face of the contraction of the housing market, the subprime meltdown, and the Great Recession. In the post-recession era of tighter lending standards and fewer middle-class jobs, that peak will probably not be reached again soon, if ever.

The demographics of employment is also a factor in holding down the rate of homeownership. Younger workers have suffered more unemployment than their middle-aged counterparts in recent years, and thus have less money to put into home buying and no equity to turn to for a downpayment. According to the Census Bureau, 63 percent of adults 18 to 31 had jobs in 2012. In 2007, before the recession, 70 percent that age group was employed.

Wall Street had a mild mixed day on Tuesday after starting out a lot lower, with the Dow Jones Industrial Average off 20.9 points, or 0.13 percent, and the S&P 500 down 0.28 percent. The Nasdaq managed to eke out a gain of 0.08 percent.

Economy Watch: Banks Loosen Lending Standards on Business Loans

By Dees Stribling, Contributing Editor – MultiHousingNews.com 

The Federal Reserve reported on Monday in its October 2013 Senior Loan Officer Opinion Survey on Bank Lending Practices that U.S. banks have eased their lending standards in some cases, while experiencing little change in the demand for some kinds of loans over the past three months. The point of the survey is to examine any changes in the standards and terms on, and the demand for, bank loans to both businesses and households.

The October survey found that banks eased their lending policies for commercial and industrial loans, even though there was little change in demand for such loans over the past three months. But since there are more lenders in the field than there used to be, the domestic banks that eased their commercial and industrial lending policies cited increased competition for such loans as an important reason for doing so.

The survey results also indicated that banks, on the whole, didn’t substantially change standards or terms on lending to households, which are still relatively tight compared to pre-recessionary standards. A few respondents, including a few large banks, reported easing standards on prime residential mortgage loans. The survey is based on the responses from 73 domestic banks and 22 U.S. branches and agencies of foreign banks.

Mortgage delinquencies edge up in September

LPS released its September Mortgage Monitor on Monday, reporting that 6.46 percent of U.S. mortgages were delinquent in September (over 30 days late, but not in foreclosure). The company also reported that 2.63 percent of mortgages were in the foreclosure process during the month, making a total of 9.03 percent in nonperforming mortgages for September.

The delinquency rate was up for the month from 6.2 percent in August, though most of the increase is attributable to seasonal factors. Year-over-year, the number of loans in foreclosure is down from 3.86 percent in September 2012. About 1.33 million loans are currently in the foreclosure process.

According to LPS, the states with the highest rates of non-current loans (delinquent and in foreclosure) in September were Florida, Mississippi, New Jersey, New York and Maine. The states with the lowest rates were Wyoming, Montana, Arkansas and both of the Dakotas.

Wall Street had a mild up day on Monday after wobbling around a lot, with the Dow Jones Industrial Average gaining 23.57 points, or 0.15 percent. The S&P 500 was up 0.36 percent and the Nasdaq advanced 0.37 percent.