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March 6 | Read Online​

I got this question from an investor in a syndication after last week's newsletter went out;

"Sponsors are raising capital (fund) and they are structuring the fund under a "pref equity" type raise. They are labeling the fund as "rescue capital" or opportunity fund. Then they go on to explain that the fund is for one of their own properties for improvements and/or capital to fill the gap for a new refinance. So the new investors would fall under the first mortgage bank debt and above the original LP's in the cap. stack...sounds questionable to me...legal..? maybe...ethical..? maybe not..."

We will be answering questions like this in our live event on April 3, 2024 at 9am Pacific. Panelists include Mark Roderick, attorney, Tom Castelli, CPA (real estate specialist), and Irwin Boris and Joe Blackbourn, investor/sponsors.

​Register for the event here (if you have not already done so).

And if you know someone who might be interested in joining us but who doesn't get this newsletter, please feel free to invite them to join.

​Here's more information on the event.​

News and updates follow.
Adam

story of the week

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​Here’s why regional banks have so much commercial real estate exposure (CNN)

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The news: Among U.S. banks with more than $100 billion in assets, commercial real estate represents 12.5% of their aggregate loan portfolios, S&P Global Ratings says. But for banks with less than $10 billion in assets, commercial property makes up fully 38% of their loan portfolios.
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Why it’s worrisome: The imbalance means losses from commercial real estate loans could pile up quickly and lead to bank failures, Fitch Ratings warned recently. Valley National Bank’s CRE exposure amounts to 475% of its Tier 1 capital. At Valley National Bank, the ratio is 470%. At JPMorgan Chase, by contrast, CRE is just 61% of Tier 1 capital.
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What’s the strategy? To compete with megabanks, smaller banks often focus on building relationships with local businesses and investors. In good times, the approach gives regional banks deep understanding of the local economies they operate in. In tough times, though, the heavy weighting of CRE loans can imperil financial institutions’ survival.
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What’s next: Worried that defaults could quickly spiral out of control, the FDIC is asking banks with outsized CRE portfolios to start stockpiling capital.
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Related reading:
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• ​These 10 Lenders Have Bet the Bank on Commercial Real Estate. Here’s How They’re Holding Up. (Barron’s)(3/1/2024)
• ​Commercial real estate faces new financing landscape (RSM)(2/29/2024)
• ​‘Material weaknesses’ in tracking commercial real estate loan risks send NYCB stock plunging, CEO out (Fortune)(3/3/2024)
• ​NYCB's commercial real estate exposures among 'key concerns' (Yahoo Finance)(3/1/2024)
• ​Banks With Heavy Commercial Property Exposure See Bonds Get Hit (Bloomberg)(3/5/2024)
• ​Bonds backed by commercial real estate loans could be the next pain point for markets, economist says (Market Insider)(2/29/2024)

📰the week's highlights

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​The office market is so bleak that Canada's largest pension fund sold its stake in an NYC building for $1 (Business Insider)(2/27/2024)

The rest of the story: Unloading the investment absolved the investors of a $46 million commitment to a redevelopment project.
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​Commercial real estate tycoon says the industry is entering its final stage of grief: Acceptance (Fortune)(3/3/2024)

Bargains are beginning to emerge, RXR’s Scott Rechler says.
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​Meet the asset managers who smell value in the commercial real estate crisis (Fortune)(3/1/2024)

Office is struggling, but industrial and some retail properties are thriving.
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​Post-pandemic Market: Winners and Losers in Commercial Real Estate (WWD)(3/4/2024)

Luxury retail and Class A office are among the winners.
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​2024 apartment market update for multifamily investors (JP Morgan)(2/28/2024)

Supply is a problem, but a strong job market and out-of-reach housing costs are boosting demand.
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​West Loop apartment complex trades for 14% less than 2017 price (Crain’s)(3/1/2024)

The property hit the market as interest rates peaked.
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​Jamie Dimon says the US can avoid a commercial real estate crisis if the economy sticks a soft landing (Yahoo Finance)(2/28/2024)

If the economy avoids a recession, struggling owners will be able to “muddle through,” the JPMorgan Chase CEO says.
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​Trump faces huge losses as he flogs commercial real estate properties in the teeth of a brutal market (Fortune)(3/2/2024)

With a $454 million civil judgment looming, the former president might be forced to sell some of his assets.

📈Chart of the week

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​Mueller Real Estate Cycle Monitor,(Glenn R. Mueller, Denver University)

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A tale of two charts: Commercial real estate is endlessly cycling between oversupply and undersupply. By Prof. Glenn Mueller’s reckoning, nearly all of the major office markets throughout the U.S. are in recession. That list includes New York, Los Angeles, Chicago, Dallas, Boston and Washington, D.C. By contrast, the only industrial market in recession is Austin.

What they mean: Not much surprise here, but office continues to underperform among property types. Work-from-home trends remain strong, and office occupancy is still weak. Houston and Atlanta have moved into the recovery phase, but most other major markets are still scraping along the bottom. The outlook is sunnier for industrial space, although many of the largest markets have moved into the “hypersupply” phase, which is characterized by new groundbreakings and rising vacancies.
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The opportunity for investors: The growing distress in the office market could means there will be bargains for savvy investors. But the outlook remains uncertain, mainly because no one knows how much longer work from home will last. If workers finally return to the office en masse in a year or two, and if employers decide they want office space again, then we’ll look back at today’s distress as a buying opportunity. But if white-collar workers continue to work from home, today’s bargains could be tomorrow’s money pits.

▶️ This week's podcast

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Guest: Brandon Hall, Hall CPA

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Background: Continuing our series on how the tax code applies to and benefits real estate investing, today we look at the complexities of Real Estate Professional Status (REPS) with Brandon Hall, a leading CPA specializing in real estate.
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Brandon breaks down the intricate details of REPS, offering a comprehensive explanation of its impact on tax deductions, and how it can significantly enhance cash flow by allowing professional investors to offset passive income and capital gains with tax 'losses'.

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Highlights: For those unfamiliar with REPS, Brandon begins with a 101 explanation, clarifying that this status is not so easy to qualify for because it requires meeting specific IRS criteria, including a 750-hour annual activity requirement and other benchmarks. He then dives deeper into the nuances, revealing strategies for documenting and substantiating one's active participation in real estate to meet IRS scrutiny.

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Why you should watch: Gain insights on how REPS can bolster investment portfolio profitability for real estate professionals.

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This discussion is a must-listen for anyone looking to make informed decisions in their real estate investments, emphasizing the significance of REPS in the broader context of tax planning and investment management.

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​Watch or listen to the full episode here.​

📰Social mediA, Multi-media, and other news

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​Jay Parsons on the Top and Bottom Markets for Renters (LinkedIn)(3/2/2024)
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​Andrew Cushman on Buyer Demand Being Alive and Well (LinkedIn)(3/5/2024)
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​Carl Whitaker on What’s Happening in the Lease-Up Space (LinkedIn)(2/29/2024)​
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​Reid Bennett on More Demand for Multifamily Units (LinkedIn)(3/4/2024)
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​Dave Wald on a Financial Crisis in 2026 or 2027 (LinkedIn)(3/5/2024)
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​Generational Opportunity in Commercial Real Estate (Bloomberg)(3/3/2024)
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​Dave Zook, Tax efficient strategies for the real asset investor (Real Estate Reality Show)(3/2/2024)
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​Crowdfunding tax credits. (Rethink Real Estate. For Good.)(3/5/2024)

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​Maximizing our Real Estate Profits Through Crowdfunding (Agents Building Cashflow)(3/3/2024)
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​‘The Backstory’: Commercial Real Estate’s Turnover (Commercial Observer)(3/1/2024)