January 12, 2016
Jeanne Calderon and Gary Friedland at the NYU Stern School of Business have posted What TEA Projects Might Look Like Under EB-5 2.0: Alternatives Illustrated with Maps and Data. For those of you who are unfamiliar with the EB-5 program, the authors provide some background:
Under the EB-5 Program, enacted in 1990, an immigrant who invests at least $500,000 or $1,000,000 in a specific U.S. business project is eligible for permanent residency, if the investment creates at least 10 American jobs.
These invested funds became an inexpensive source of patient, flexible capital for real estate development projects after the Great Recession in 2008. More recently, EB-5 capital has blossomed into a mainstream source of capital for real estate development projects. The immigrants’ pooled equity capital is contributed to an entity (known under the EB-5 law as a “New Commercial Enterprise” or “NCE”) typically created by an affiliated government-approved regional center. The proceeds are most commonly deployed as a mezzanine loan to a real estate project development entity (known under the EB-5 law as a “Job Creating Entity” or “JCE”). The immigrant’s motivation to make the investment is to qualify for the visa, and thus, he accepts interest rates well below market.
The original purpose of the EB-5 law was to create investments and jobs in rural areas, as well as high unemployment areas, referred to as “Targeted Employment Areas” (“TEA”). To encourage investments in these areas, the minimum investment in a project located in a TEA was set at a discounted level of $500,000, compared to $1,000,000 for a project not located in a TEA. Developers strive to have the location of their projects qualify as a TEA because immigrants seeking the EB-5 visa strongly prefer to invest in areas where the lesser minimum investment level applies, especially if they believe the investment will result in their receipt of a visa and a return of their capital investment.
Some members of Congress and other critics had become outraged by the growing trend of projects qualifying as TEAs that are located in thriving urban areas and commanding the lion’s share of EB-5 investment dollars. With the approval delegated to individual states, each of which was authorized to set its own rules and motivated to retain economic development within its own borders, projects in even the most affluent parts of the country were able to routinely qualify for the discounted investment level by combining contiguous census tracts (starting with the project site and often extending in unnatural configurations to remote sites miles away) until the weighted average met or exceeded the high unemployment threshold required by the law. This census tract aggregation is referred to pejoratively as “gerrymandering.” Thus, gerrymandering rendered the two level investment threshold meaningless and immigrants flocked to invest in luxury projects by major developers in urban areas. (4-5)
The authors conclude,
Congress should focus more attention on visa reserves and the types of projects that merit any special visa priority. As explained in the visa reserves section of this paper, immigrant investors are likely to place increasing importance on this issue in the near future as visa waiting periods rise. A project’s qualification for visa reserves might become as important a factor in the immigrant’s investment decision as the TEA status of a particular project. (48)
This type of program rubs many people the wrong way — Green Cards for Sale! — so it is important that is designed and implemented properly. As such, the authors make some valuable suggestions as to what EB-5 2.0 should look like.
January 11, 2016
Fox News quoted me in Playboy Mansion for Sale — With One Tenant for Life. It reads, in part,
We called it: In October, we revealed that the Playboy mansion — home to Hugh Hefner and the site of epic parties back in the day — is in need of major renovations. Now, if a new report from TMZ is to be believed, it looks like Hef is finally ready to throw in the towel: Within a month, the crumbling 6-acre estate will be up for sale.
In spite of the 29-room (six-bedroom) Beverly Hills mansion’s decrepit condition, its owner, Playboy Enterprises, hopes to sell it for north of $200 million. Plus, the buyer will have to grapple with another huge catch: According to TMZ, the buyer will have to grant 89-year-old Hef a “life estate,” which means he can continue living there until death parts him from his beloved bachelor pad.
Ummm … who the heck wants to buy a home with someone living in it? Strange as it may seem, “life estate” arrangements are as old as the hills.
“Life estates go way back to the earliest roots of the common law, and they are great for providing for someone to live in his or her own home until death,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “Effectively, a life estate grants the [original owner] many of the indicia [characteristics] of full ownership for the rest of his life. Upon death, complete ownership of the property can pass to another. A common example would be where a husband bequeaths a life estate in the home to his wife, with the remainder to his children upon her death.”
But Hefner’s deal differs in one key way: He’s not bequeathing his home to family members or even a deserving Playboy bunny, but to an as-yet unknown third party who’ll be forking over millions to move in once Hef passes on.
But this privilege will likely drag down the asking price, a lot. While the listing price may be $200 million, most experts say that $80 million to $90 million is more realistic.
“The life estate would likely significantly reduce the fair market of the property, because the purchaser must defer taking possession as well as other aspects of ownership — renovating it, for example — until the death of the life tenant,” Reiss says. “Moreover, the purchaser must deal with the uncertainty of the life estate: Will it end in a year or in 10 years?”
And aside from these uncertainties, there’s the question of liability. Without adequate legal protection, the owner could be responsible for any damage to the property or its inhabitants. Granted, Hef is 89 and probably passes his days playing chess, but if Playboy bunnies continue to hop in and out, anything could happen.
“What if there’s a fire and the place burns down? What if Hefner falls down and breaks his hip?” asks Wendy Flynn, a Realtor in College Station, TX. “After all, it is known as a party house.”
All in all, if you’re salivating for a piece of Playboy history, make sure to man up your legal team to protect you from all that could go wrong before you’re able to take possession. And even though the mansion is a decent candidate for a tear-down, “don’t start spending money on plans for the property,” Reiss adds.
Even though Hef is already past the average U.S. male’s life expectancy of 84.3, “a lot can happen before possession of the property is actually conveyed.”
- New York state appeals court affirmed denying dismissal of claims against Morgan Stanley for fraud. Plaintiff bought $17 million in high-risk notes tied to residential mortgage-backed securities in a $500 million collateralized debt obligation that eventually were wiped out.
- Quicken Loans’ suit was dismissed against the U.S. government for its use of the False Claims Act for failure to state a claim. This suit was brought to prevent a costly enforcement action.
- JP Morgan has settled to pay $48 million fine for shoddy mortgage servicing practices in response to allegations from the Office of the Comptroller of the Currency (OCC). (Consent Order; Termination).
- Credit Suisse AG has settled for $110 million in class action alleging the use of misleading financial disclosure documents that caused the plaintiffs to purchase $1.6 billion in bad mortgage-backed securities.
January 8, 2016
The Christian Science Monitor quoted me in Los Angeles to Serve as Crucible for Reform in Ending Chronic Homelessness. It reads, in part:
As the heavy winter rains sweep across southern California, Los Angeles’s homeless residents hunker down. Many – like former farmworker Andreas, who huddled in the doorway of a parking structure – are unable or unwilling to find shelter off the street.
These are the chronically homeless, a large portion of the 44,000 people in L.A. that make this city the West Coast’s homelessness capital.
Nationwide, the chronically homeless represent roughly 20 percent of the nation’s homeless population at any given moment. And, both in California and across the country, they form the core target of an intensified effort by activists and politicians determined to get at the roots of intransigent homelessness.
* * *
The US is not going to conquer chronic homelessness until it addresses the structural issues that hand homelessness down from one generation to another, says Brooklyn law professor David Reiss, who specializes in housing issues.
The absence of a safety net for those who fall out of employment is the beginning of the cycle, particularly for at-risk populations such as foster-care children who age out of the system and single mothers with young children. Job scarcity is also a factor. Big cities with the highest cost of living, like Los Angeles and New York, usually present the most possibilities for those in search of work.
“Very low-income people often prefer to stay in such cities, even if they are at risk of homelessness, because it is the best of a set of bad options,” he points out.
The basic costs of maintaining a home are driving more people onto the street, says Professor Reiss – a growing problem tied to the issue of income inequality.
A recent study by the Harvard Joint Center for Housing Studies finds that this trend is increasing and, says Reiss, “we should expect more and more households to have trouble paying rent in the coming years.”
January 7, 2016
Realtor.com quoted me in Could Fonzie Solve America’s Housing Shortage? It opens,
Call me old-fashioned, but in my heart of hearts, Fonzie from the 1970s TV show “Happy Days” is still the epitome of cool. That leather jacket. The shades. Those thumbs!
He may also be the solution to America’s housing shortage.
As you may recall, Fonzie lived above the Cunninghams’ garage—offbeat living quarters that are making a big comeback today thanks to BIMBY, short for “builder in my back yard.” BIMBYs carve out small, bootleg homes on their property by renovating work sheds, upgrading floors over garages, or raising new structures from scratch.
BIMBYs typically create these dwellings for aging parents (thus their not-so-sexy nickname “granny flats”), or to rent out to college students who can’t afford traditional apartments. Their renaissance is due to plain old necessity: Housing is just too damn expensive. A BIMBY home, though modest, is a deal for both tenants and cash-strapped homeowners. It’s a win-win scenario for Cunninghams and Fonzies alike!
That’s why Logan Jenkins, a journalist for the San Diego Tribune, recently suggested the BIMBY resurgence could fill a desperate need for affordable housing in areas where the cost of living on new homes and rentals has spiraled way out of control.
“If 10% of the homeowners in San Diego County added 450 square feet of separate living space to their properties, the affordable housing crisis would be largely over,” Jenkins argued.
And far from dragging down the neighborhood with riffraff, such housing “enables a neighborhood to maintain diversity that otherwise would be lost in a hot housing market,” according to Larry Ford, a geographer and author of “The Spaces Between Buildings.” After all, wasn’t Fonzie the life of the party?
This may explain why certain cities are embracing BIMBYs with open arms. Portland has changed its local laws to forgive their developer fees. Santa Cruz offers pre-approved architectural plans, loans, and fee waivers to what it calls “accessory dwelling units,” or ADUs, spurring a fourfold increase in applications. And other local governments are following suit.
“ADUs could make a big impact in curing housing issues in many locations,” says John Lavey with Community Builders, a nonprofit that has studied the trend, “especially in desirable locations such as Bozeman, Montana, where I’m located, where housing and rent costs exceed national averages. And for millennials seeking walkability and neighborhood authenticity, these ADUs are in high demand.”
But not all communities are automatically lining up to accept these BIMBY newcomers.
“Zoning limitations on accessory units were adopted by lots of local planning boards that were consciously rejecting them for their communities,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. To change the regulations, BIMBY advocates would need to go head to head against the NIMBY (“not in my back yard”) crowd, who argue that an influx of Fonzies could drive down property values.
January 6, 2016
Pamela Blumenthal and John McGinty of the Urban Institute have written an interesting research report, Housing Policy Levers to Promote Economic Mobility. I generally believe that housing policy should be designed to assist low- and moderate-income households live in safe, decent and affordable housing, but I rarely consider how housing policy can actually help low- and moderate-income households become upwardly mobile. This report does just that and concludes,
At a time of growing income and wealth inequality, economic mobility provides a frame through which to consider the potential of housing policy to change the trajectories of individuals and communities. Economic mobility is about the opportunities individuals have to improve their economic well-being and requires education and other skill acquisition, available jobs, transportation networks, and other resources. Stable housing with access to those components gives low-income and minority individuals and families a chance to climb out of poverty. The current structures too often constrain individual choice because families cannot find affordable housing near a good school or in a safe neighborhood.
National policies that enforce fair housing, more fairly distribute tax benefits, and invest in people and places that have long suffered from disinvestment can begin to change the trajectory. State policies that fund affordable housing production and preservation in location-efficient areas and create requirements or incentives for local jurisdictions to integrate affordable housing throughout the community can also help.
To truly move the needle in promoting upward mobility, however, housing policy may need to adopt a lens through which programs are adopted, implemented, and evaluated based on their ability to promote upward mobility. Just as initial concerns about housing quality in the 1930s gave way to a focus on affordability in federal housing policy, another transition may be occurring. This goes beyond recognizing that a stable, safe, affordable home is critical to healthy development and well-being, to addressing the important role that neighborhood context plays—particularly for children. The importance of enabling all families to live in neighborhoods where they have access to jobs, good schools, parks, and other community resources and are free from violence, toxins, noise, and other harmful environments may become future federal housing policy. (41)
I don’t think that there is anything earth-shattering in this report, but it does focus attention on housing policy in a fruitful way.
- House Prices and Job Losses, Gabor Pinter, Bank of England Working Paper No. 569.
- The Dynamics of Adjustable-Rate Subprime Mortgage Default: A Structural Estimation, Hanming Fang, You Suk Kim & Wenli Li, PIER Working Paper No. 041.
- High and Low Activity Spells in Housing Markets, Eric Smith, CESifo Working Paper Series No. 5601.
- House Prices, Local Demand, and Retail Prices, Johannes Stroebel & Joseph Vavra, CESifo Working Paper Series No. 5607.
- Anticipation, Distance, Elevation: Multi-Dimensional Gradients in Urban Spatial Modeling, Victor Yifan Ye & Charles Becker, Economic Research Initiatives at Duke (ERID) Working Paper No. 202.
- Capital Requirements, Risk Shifting and the Mortgage Market, Arzu Uluc & Tomasz Wieladek, Bank of England Working Paper No. 572.
- The Fair Market Value of Public Resources, Bruce R. Huber, California Law Review, Vol. 103, No. 6, 2015.