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The Real Estate Philosopher


Possible Government Plan to Rescue Troubled Real Estate With Preferred Equity

Jul 5, 2020

No, we at Duval & Stachenfeld haven’t lost our minds.  Apparently a proposal of this nature is being discussed in Congress right now and a bill could be introduced by Congressman Van Taylor (R. Texas), as soon as this coming week.  The bill he would introduce would be called the “Helping Open Properties Endeavor Act of 2020,” and it would establish a “HOPE Preferred Equity Facility.”  It is not finalized yet, but this is what we think “might” happen.  In brief: 

The government might offer inexpensive preferred equity to troubled commercial real estate transactions nationwide in an attempt to stabilize the real estate markets.
 
The goal of the bill is to preserve jobs by assisting the real estate industry in avoiding a wave of foreclosures on real estate projects that are teetering on the edge of foreclosure. 
 
How would this work?  The specifics are not determined yet, but from our discussions with persons in Congressman Van Taylor’s office, we suspect the following would be encompassed:

  • It would be preferred equity that is inferior to existing financing and comes into the transaction at the highest equity level in a transaction (i.e. probably invested into the Single Purpose Entity that typically directly owns the real estate);
  • It would be originated by financial institutions, administered by Treasury and backed by the federal government;
  • It would have a very low-interest rate – possibly as low as 2.5% – with repayment in self-liquidating payments over a fairly lengthy time period, guessed at about seven years.  It is likely that these payments would start in 2022;
  • It would provide for an investment of up to 10% of the outstanding debt;
  • It would be freely prepayable, but cash distributions would go to pay down the preferred equity investment before payments to other equity holders;
  • There would likely be requirements requiring full or partial repayment if more than 50% of the direct or indirect equity in the property is transferred;
  • It would likely mirror the PPP structure for origination and servicing fees; and
  • Eligibility would be restricted to borrowers in good standing before the pandemic, with no loan defaults prior to March 1, 2020, and DSCR, together with other requirements under consideration.

Although this is a good outline about where I think the bill is likely to go, there are many details still being analyzed, including: 

  • What restrictions the preferred equity holder will have on actions taken by the property owner (expected to be minimal and in the nature of preventing un-market affiliate transactions)
  • What remedies the preferred equity holder will have if the property owner defaults;
  • The standards for eligibility;
  • Whether lender or other third-party consents will be required or overruled as unnecessary by the statute; and
  • The documentation process

If this moves forward, there will be much more to say about it.  Overall this is a work in progress.
 
This is very exciting.  Obviously, if this type of rescue capital is provided by the government in a significant amount, it would be a game-changer for much of the real estate world, including, such troubled areas as retail and hospitality.  It would be enormous – inexpensive – rescue capital.
 
The genesis of our discussion with Van Taylor’s office was our proposal of Micro Equity Funding from a prior Real Estate Philosopher article.  By ironic coincidence, our proposal was for private capital to do almost exactly what the government is proposing to do; however, the BIG difference is the cost of capital, in that our Micro Equity Funding plan was private capital with implied interest rates in the low to mid-teens, whereas the governments will be more like 2.5%.  Plus the government has the ability to legislate away transactional difficulties by, for example, dictating that third party consents are unnecessary. 
 
If you would like to discuss this potential program, please feel free to contact me (bstachenfeld@dsllp.com), or any of my colleagues Andrew Atallah (aatallah@dsllp.com), Caitlin Velez (cvelez@dsllp.com) or Kristen McMaster (kmcmaster@dsllp.com), and we will be most pleased to keep you up to date.
 
Finally, I emphasize that this is by no means something that will definitely happen.  It is a “maybe.” but a big maybe.  Happily, my understanding is that the bill has bipartisan support, which makes the end result more likely. 
 
For this article, I give credit to my excellent colleague Andrew Atallah, who has researched all of this and is responsible for the content.
 
Let’s all of us in real estate hope that this legislation occurs.  Notably, Congressman Van Taylor’s office suggests that writing letters/emails to your respective Representative would be helpful to the cause.
 
I give my best to all in the real estate world.
 
Bruce Stachenfeld aka The Real Estate Philosopher™

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As the Chairman of Duval & Stachenfeld – a law firm in mid-town NYC known as The Pure Play in Real Estate Law – I am inviting you to join The Real Estate Philosopher™. This will consist of my thoughts and also thoughts of friends and colleagues.

It will not be published in any traditional media – it will go only to friends of our firm. The purpose here is very simple – to put forth thoughts in the real estate world that are different, provocative, and challenging of accepted wisdom. Hopefully, nothing said here will be mainstream thinking.

You may be wondering how I am qualified to write on these topics since I am “just” a lawyer. However, I have an unusual place in the real estate world. As the Chairman of The Pure Play in Real Estate Law (one of the largest real estate law practices in NYC), I interact with an incredible number of real estate players. This ranges from small real estate shops with nothing but a gleam in their eyes, to some of the largest real estate institutions in the world, and everything in between. This gives me a unique and global perspective and allows me to act as an amateur philosopher in the real estate world. This has always been my hobby and it is what I love doing.

Regards,

Bruce Stachenfeld
a.k.a The Real Estate Philosopher™

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