- Lottery Allocations and Games for Public Rental Apartments, by Zhan Wang, Jinpeng Ma, & Hongwei Zhang, March 1, 2015.
- Wages, Housing Prices and Commutes, by Tom Mayock, Real Estate Economics, Forthcoming.
- Financial Literacy, Broker-Borrower Interaction, and Mortgage Default, by James Neil Conklin, Real Estate Economics, Forthcoming.
- Is Timing Everything? Race, Homeownership, and Net Worth in the Tumultuous 2000s, by Sandra J. Newman, Real Estate Economics, Forthcoming.
- Option Market-Based Predictors of REIT Leverage Changes, by Paul Borochin, John L. Glascock, Ran Lu-Andrews, & Jie Yang, Georgetown McDonough School of Business Research Paper No. 2577414.
- Rent-to-Own Housing Contracts Under Financial Constraints, by Sanjiv Jaggia & Pratish Patel, March 10, 2015.
Tag Archives: REIT
Friday’s Tax Roundup
- United States Tax Court holds that properties acquired in tax lien sale by an LLC are not subject to capital gains rates, but rather income tax rates, because the properties are held primarily for sale.
- Real Taxes on Virtual Currencies: What Does the IRS Say?, by Nika Antonikova, Virginia Tax Review, Vol. 34, No. 3, 2014.
- Counterintuitive Tax Revenue Effect of REIT Spinoffs, by Bradley T. Borden, Tax Notes, Vol. 146, p. 381, No. 381, January 2015; Brooklyn Law School, Legal Studies Paper, No. 402.
- United States Tax Court allows partial charitable contributions deduction.
- The House Committee on Ways and Means to markup “America’s Small Business Tax Relief Act of 2015” (H.R. 636) on February 4, 2015.
Wednesday’s Academic Roundup
- Regional House Price Segmentation and Convergence in the US: A New Approach by William Miles, Journal of Real Estate Finance and Economics, Vol. 50, No. 1, 2015.
- Impacts of Planning Rules, Regulations, Uncertainty and Delay on Residential Property Development by Arthur Grimes & Ian Mitchell, Motu Working Paper No. 15-20.
- Credit Supply and the Housing Boom by Alejandro Justiniano, Giorgio E. Primiceri, & Andrea Tamalotti, NBER Working Paper No. w20874.
- Rethinking the Tax-Revenue Effect of REIT Taxation by Bradley T. Borden, Florida Tax Review, Vol. 17, Issue 6, 2015, Forthcoming; Brooklyn Law Review, Legal Studies Paper No. 400.
- The Politics and Economics of Metropolitan Sprawl by William A. Fischel, Zoning Rules! The Economics of Land Use Regulation. Cambridge, Mass.: Lincoln Institute of Land Policy, 2015, Forthcoming.
- Property Law Conflicts by Joseph William Singer, 54 Washburn Law Journal 139 (2014) (discussing what law applies to real property case conflicts).
Reiss on Investing In Real Estate Versus REITs
Investopedia quoted me in Investing In Real Estate Versus REITs. It reads in part,
The U.S. real estate market is finally starting to fire on most, if not all, cylinders, with investors’ enthusiasm gathering steam seemingly each passing month.
According to a study from the Urban Land Institute and PwC,expectations on profitability from the U.S. real estate sector are on the upside going forward. “In 2010, only 18% of respondents felt the prospects for profitability were at a good or better level,” the ULI reports. “This has improved steadily each year, with 68% of respondents now feeling that profitability will be at least good in 2014.”
The study reports that myriad investment demographics are pouring into the market, including foreign investors, institutional investors and private equity funds, as well as leveraged debt from insurance companies, mezzanine lenders, and issuers of commercial mortgage-backed securities.
“The anticipated interest in secondary markets is indicative of how the U.S. real estate recovery is expanding beyond the traditional investment hubs,” says Patrick L. Phillips, chief executive officer at the ULI. “Access to greater amounts of both debt and equity financing, combined with a sustained improvement in the underlying economic fundamentals, means that the opportunities and returns offered in smaller markets are potentially very appealing.”
A burgeoning profit avenue for investors is the real estate investment trust market, a market that is truly growing by leaps and bounds. Ernst & Young reports the REIT (Real Estate Investment Trust) market has grown from $300 billion in 2003 to $1 trillion by 2013, with growth expected to accelerate going forward.
By definition, an REIT is a corporation, trust or association that owns and, in most cases, operates income-producing real estate and/or real estate-related assets. Modeled after mutual funds, REITs pool the capital of numerous investors. This allows individual investors to earn a share of the income produced through commercial real estate ownership, without having to go out and buy or finance property or assets.
REITs differ from traditional real estate investing, primarily due to the fund-heavy strategic asset flow from REITs, versus the traditional free, more direct access flow from real estate investing (like becoming a landlord or buying stocks from homebuilding companies.) But both investments offer distinct advantages
* * *
some industry experts say the advantages of both investment classes cut much deeper than the descriptions above.
One big difference is that the market for REIT shares is much closer to the efficient market described by Nobel Prize winner Eugene Fama than the market for individual real estate parcels is, says David Reiss, a professor of law at Brooklyn Law School, and an expert on REITs.
“That means that the price of a REIT’s shares is more likely to contain all available information about the REIT,” he says.
“Because individual real estate parcels are sold in much smaller markets and because the cost of due diligence on a single property is not as cost-effective as it is on REIT shares, an investor has a better opportunity, at least in theory, to get a better return on his or her investment if he or she does the diligence him or herself.”
Mortgage REITs and Other Frights
The Office of Financial Research in the Department of the Treasury has released its 2013 Annual Report. It describes a number of things that should scare you as you put your head on your pillow at night and dream of the financial markets. It also describes some important steps that OFR is taking to get a handle on these potential nightmares.
One of the nightmares, relevant to readers of this blog, are Mortgage REITs. Mortgage Real Estate Investment Trusts (REITs) are “leveraged investment vehicles that borrow shorter-term funds in the repo market and invest in longer-term agency mortgage-backed securities (MBS).” (16) OFR identifies serious problems in this subsector:
Mortgage REITs have grown nearly fourfold since 2008 and now own about $350 billion of MBS, or 5 percent of the agency MBS market. Two firms dominate the sector, collectively holding two-thirds of assets. By leveraging investor funds about eight times, mortgage REITs returned annual dividend yields of about 15 percent to their investors over the past four years, when most fixed-income investments earned far less.Mortgage REITs obtain nearly all of their leverage in the repo market, secured by MBS collateral.
Lenders typically require that borrowers pledge 5 percent more collateral than the value of the loan,which implies that a mortgage REIT that is leveraged eight times must pledge more than 90 percent of its MBS portfolio to secure repo financing, leaving few unencumbered assets on its balance sheet. If repo lenders demand significantly more collateral or refuse to extend credit in adverse circumstances, mortgage REITs may be forced to sell MBS holdings. Timely asset liquidation and settlement may not be feasible in some cases, since a large portion of agency MBS trades occurs in a market that settles only once a month . . ..
Although their MBS holdings account for a relatively small share of the market, distress among mortgage REITs could have impacts on the broader repo market because agency MBS accounts for roughly one-third of the collateral in the triparty repo market. Mortgage REITs also embody interest rate and convexity risks, concentration risk, and leverage. For these reasons, forced-asset sales by mortgage REITs could amplify price declines and volatility in the MBS market and broader funding markets, particularly in an already stressed market. (17)
Sounds like systemic risk to me.
Happily, the report also contains policy proposals to address some of these systemic risk concerns. First and foremost, it proposes the adoption of a Financial Stability Monitor tool to track financial threats. The OFR also proposes mortgage-specific tools. Reiterating the findings in a recent OFR white paper, the report calls for the creation of a universal mortgage identifier so that regulators and researchers can more quickly identify patterns in the mortgage market. Predicting financial crises is still more of an art than a science but it is a good development that OFR is trying to improve the quality of the data that regulators and researchers have about the financial market.
Empire State Bidding War?
I was quoted in a Law360 Story on the ongoing Empire State Building saga, Empire State Bids Soar Over Approaching REIT Deal (behind a paywall). It reads in part:
the bidders that have come out of the woodwork since Schron’s left-field offer may be banking on the assumption that Malkin and its shareholders could be willing to part with the iconic skyscraper in an all-cash deal that would avoid some of the drama associated with the REIT proposal.
“The owners … may lose the prestige by losing control of the Empire State Building, but they may end up making more money,” said David Reiss, a professor of real estate law at Brooklyn Law School, on Friday. “They may be more than happy to sell to the highest bidder if they’re going to get more than what the REIT would get them for it.”
The bidders appeared to think the unhappy shareholders would find value in their offers as well.
In connection with his bid, Schron agreed to enter into a contract with Malkin with a $50 million nonrefundable deposit immediately and to close the all-cash deal in 90 days. As part of the deal, investors would be able to choose to remain invested in the building and receive a membership interest in Schron’s Cammeby’s International Group in lieu of cash, according to an offer letter revealed last week.
The offers that followed — one from Thor Equities that was “north of $2.1 billion,” one from a group of investors including Phil Pilevsky and Joseph Tabak, and another from an unnamed bidder — reportedly offered similar assurances.
In addition to the chance to own one of the most famous buildings in the world, experts say those who have thrown their hats into the sudden bidding war for the skyscraper are also keen to take advantage of its retail potential.
“I think there’s a belief that this is a valuable property, and that particularly the retail portion of it — and to some extent the office portion too — is undervalued,” Israel said. “I think they feel they could do a major upgrade.”
Those who may have been previously interested in the building also now have the assurance, after a May court ruling in one of the lawsuits over the proposed deal, that verified the legality of a controversial $100-per-share buyout provision, according to Reiss.
Potential buyers now know “that the buyout provision is valid and … that a good bid can get the requisite votes,” he said.
An appeal of the ruling on the buyout provision remains pending.
Reiss on the State of the Empire REIT
I was quoted by Bloomberg News in Empire State Building IPO Has Almost All Votes Needed. The story opens,
A plan to form a real estate investment trust holding New York’s Empire State Building has almost all of the votes needed to proceed, Malkin Holdings LLC said today.
Holders of 79.6 percent of the units of Empire State Building Associates LLC, which owns the Manhattan landmark, have voted in favor of the transaction, Malkin Holdings said in a regulatory filing. That’s up from 75 percent as of April 3, the most recent update. Eighty percent approval is needed.
The votes indicate that Malkin Holdings Chairman Peter Malkin and President Anthony Malkin, who control the tower, are edging closer to victory in their plan for an initial public offering of the building and 20 other properties. The Malkins, who have been fighting opposition from some of the investors, recently won two court rulings that eliminated potential obstacles to the plan.
The filing, a letter being mailed to all investors, “creates a sense that the vote is a fait accompli,” said David Reiss, a professor of real estate finance at Brooklyn Law School who isn’t involved in the transaction. “It is an effective document for creating a sense that this is a done deal.”
Court Rulings
On May 2, New York Supreme Court Justice O. Peter Sherwood said he intended to approve a $55 million settlement of a class-action lawsuit by a set of unit-holders. He has yet to make his approval official. Two days earlier, he denied a request by objectors to the settlement to declare a provision illegal which could result in opponents getting a token $100 a share if they didn’t switch their votes to “yes” within 10 days of official approval by 80 percent of the building’s units.
Malkin Holdings had said it would leave the voting on the IPO open until Sherwood ruled on the $100 provision, or until May 2. The voting has been open since late January, and the Malkins have the option to extend the ballot period until the end of 2014.
Each Empire State Building unit may be worth more than $300,000, according to the offering statement.
In today’s filing, investors are reminded that the buyout provision is “legally binding and enforceable.”
While the Malkins may invoke the provision to get the needed unanimity, they “may not enforce the $100 price,” Reiss said.
