“There Will Be Large Number of MF Foreclosures by Mid-Year”
- Feb 24, 2010
Stuart M. Saft is the new Chair of the Global Real Estate Practice at Dewey & LeBoeuf. In this capacity, he will oversee on the firm’s national and international efforts to address the changing needs of real estate clients. Saft’s first initiatives include the launch of two new real estate practice specialties: Strategic Utilization of Real Estate (SURE) clients; and the Disaster Assistance and Recovery Team (DART) focusing on problem-solving for real estate owners dealing with disastrous events.
Saft is a lawyer in the development, permanent, mezzanine, leasehold, wraparound and construction financing, ground, master and operating leases, conversion to condominium and cooperative ownership, construction, restructuring and sale of residential and commercial property throughout the US. He has also developed experience in privatizing subsidized housing projects and the development and operation of multi-use property. He talks to MHN about the impending foreclosure crisis in the multifamily sector and how the government can help in avoiding it.
MHN: Can you elaborate on SURE and DART?
Saft: Disasters happen everywhere and anywhere. A person commits suicide by jumping out of his apartment building; somebody shoots innocent people in a mall etc. In my experience, when disasters like these occur, no one knows who to call. I realized that there has to be someone who can pull all the divergent specialties together and deal with these situations. I thought we could be playing this role with DART. Owners and localities don’t have to deal with something like this all the time so they are not always resourceful in dealing with disasters. We send in a group immediately and decide who needs to be there to deal with the situation. Somebody with specific knowledge can deal with these problems.
SURE helps large companies in managing their real estate. They are focused on their core business but might need help utilizing their real estate.
In the multifamily sector, if the market is soft you need somebody to come in and redefine how the property is utilized; whether or not amenities can be added to increase value; whether it makes sense to build additional buildings or turn a part of the building into a day care center to lure working families; put in a health club etc. There are always these kind of decisions that have to be made. It does not matter whether its residential or commercial properties.
MHN: You deal with loan workouts in the multifamily sector?
Saft: I have been doing loan workouts almost exclusively in the multifamily sector, working on both sides with lenders and owners to figure out how to keep the properties from going into foreclosures or needing to do bankruptcy filing. Right now, I am trying to convince Washington D.C. (through articles and whatever other platform afforded to me) that foreclosures are not being handled the right way.
MHN: What do you mean the right way?
Saft: The unemployment rate right now is very high so obviously a lot of real estate is going to be in default because the entire economy is in default. It doesn’t make sense to put pressure on the lenders to change loan terms because in many cases they are servicers of debt. Congress needs to pass legislation so that they can’t be sued for changing the debt around.
MHN: Are there a lot of multi-housing foreclosed properties?
Saft: Not right now because lenders have been holding out on foreclosing because they don’t want to have to write the loans down on their books so they’ve really held back on multifamily properties. Lenders have been extending the loans and modifying them and avoiding foreclosure. However, my expectation is that by the middle of this year, there will be tremendous pressure on the part of the bank regulators to force the banks to write down these loans because loan amounts in many cases are now in excess of what the equity is worth. Unless something is done on a broad scale, there will be a very large number of multifamily properties going into foreclosure.
MHN: How will this impact the sector?
Saft: This is going to be very problematic for the sector. Properties are going to be run down, tenants are going to be immediately and adversely affected by this. People are going to start moving out of their homes and the situation is going to be deteriorating.
MHN: How can this be avoided?
Saft: If the necessary programs are put into place, this can be averted. But there is too much disharmony coming out of Washington, D.C. so I don’t see a solution taking shape.
MHN: What can the Government do?
Saft: While the recession lasts, regulations should change and not require banks to create loan loss reserves because there is a potential for the loan to go into default. Also, Congress could amend the internal revenue code to make real estate more attractive in the next few yrs by changing the passive loss restrictions, depreciation schedules and eliminating double taxation for foreigners investing in the U.S.
MHN: Will this mean financing for multifamily properties will be harder to achieve?
Saft: Yes. There is such a paucity of financing available anyway but the foreclosures will mean we will go into a second phase of the housing softening because suddenly financing is going to disappear again. Many of these loans are under water right now so they have to create loan loss reserves. But as a result, there will be less funds available with which to make loans.