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“Size does matter—the larger cities tend to ‘punch out’ smaller cities, which supports the concept that smaller cities need to collaborate as a regional approach. People in Europe are voting with their feet, and moving out of less successful cities and moving into more successful cities.” Michael Parkinson, director of the European Institute for Urban Affairs in London.

MBA Welcomes TRIA Reauthorization Bill
MBA, Coalition Urge House to Pass REMIC Bill
Conference Explores Commercial Securitization for Lawyers

Condo Conversions Gain Prominence in CMBS Market

Doing Business in 'New Europe' Requires Many Hats

Green Park Financial Finances $13.5M for Chelsea on the Square

MBA's Asset Admin/Tech Conference Coming in May

OCC Appoints Bland as NE Deputy Comptroller

Europe Looks to U.S. Cities as Models

CREF 2005 Presentations Now Online

Rewriting Law Can Give Lenders More Control on Property Rents

Rep. Mike Capuano, D-Mass., joined Reps. Steve Israel, D-N.Y., Barney Frank, D-Mass., Paul Kanjorski, D-Pa., and Joe Crowley , D-N.Y., brought in the bill to extend TRIA and the "make available" provision by two years, through 2007.

“TRIA has helped make terrorism insurance available and affordable to businesses, particularly those in our major urban areas,” Capuano said. “We need to act now to extend the program while we work on long-term solutions to protect American workers and our cities and towns against possible terrorist attacks.”

MBA said it welcomes H.R. 1153, as well as other legislation to extend TRIA. “There is a growing Hill recognition for the vital role TRIA plays in maintaining the stability of the commercial real estate finance industry," said Kurt Pfotenhauer, MBA's senior vice president of government affairs. "Just last month, S. 467 was introduced that also proposes to extend the Terrorism Risk Insurance Act of 2002. MBA appreciates the hard work of the sponsors of H.R. 1153 and is hopeful that the House Financial Services Committee can forge a bipartisan solution and act now to extend the program."

As time moves on without the extension of TRIA, the number of transactions occurring within the commercial real estate finance industry will decrease due to the lack of availability of terrorism insurance, MBA said. MBA noted that servicers with a fiduciary responsibility to ensure that terrorism coverage is in place will begin to force place insurance which could possibly result in litigation.

"It seems clear that if we are going to insure buildings we should insure the lives of the people within those buildings," Israel said. "The insurance community lost $40 billion as a result of the 9/11 attacks over three years ago and the limited federal guarantee of such insurance is about to expire. That means insurance companies will simply stop writing policies that cover future attacks, banks will not finance real estate ventures and companies will be unable to insure their property or their employees. It is vital to our national and economic security that a federally guaranteed terrorism insurance program continues without an arbitrary deadline."

MBA also said Federal Reserve Chairman Alan Greenspan, acknowledged that the private market alone cannot adequately insure against the continuing threat of terrorism. In 2002, Congress overwhelmingly passed TRIA to provide a limited federal backstop in the event of another catastrophic terrorist event. The House Financial Services Committee unanimously passed similar legislation to extend TRIA for two years in 2004 but it did not move through the banking committee.
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MBA, Coalition Urge House to Pass REMIC Bill
MBA (3/10/2005) Hilliar, Paul

A coalition of trade groups, led by the Mortgage Bankers Association, sent a letter to the House urging representatives to pass H.R. 1010, the Real Estate Mortgage Investment Conduit (REMIC) Modernization Act introduced last week by Reps. Mark Foley, R-Fla., and Earl Pomery, D-N.D. The bill would modernize REMIC rules in the tax code to allow modifications of collateral securing commercial mortgages held in REMICs.

Last night, Sens. Gordon Smith, R-Ore., and Kent Conrad, D-N.D., introduced S.580, the Real Estate Mortgage Investment Conduit (REMIC) Modernization Act of 2004. Senate cosponsors include Sens. Chuck Hagel, R-Neb., Lincoln Chafee, R-R.I., and Ted Stevens, R-Ak. Smith's office said the bipartisan legislation would improve the flexibility of real estate property owners to upgrade property by streamlining the bureaucratic and costly process.

 “Communities lose out on jobs when property owners can’t make improvements,” Smith said.  “By making simple and necessary adjustments to the tax code, we can free the hands of owners to make lasting investments that will improve the economy and create well-paid construction jobs.”  

Current law is nearly two decades old and restricts the ability to modify collateral on commercial securitizations without “the need for costly and burdensome tax opinions.” As a result, the current law limits opportunities to maximize economic value of the property, hindering commercial real estate growth, the letter said.

Last year, at a meeting of the Conference Committee on the international tax bill, House Ways and Means Committee Chairman Bill Thomas, R-Ca., called the REMIC Modernization Act, "good public policy" and vowed to help enact it in the 109th Congress. "We were encouraged by Chairman Thomas' public comments last year and look forward to working with the new Congress to achieve this important update to the REMIC tax laws," said Kurt Pfotenhauer, MBA’s senior vice president of government affairs.

REMICs provide securities that pay their investors with cash flows generated by the payments of principal and interest to an underlying pool of mortgages.

The enhancements to the 1986 Tax Act will protect the REMIC bondholders’ investment with a “modest impact on tax revenue, reducing revenue by only $11 million over the next ten years,” based on results from the Joint Committee on Taxation, the letter said.

The coalition includes MBA, America’s Community Bankers, Building Owners and Managers Association International, Commercial Mortgage Securities Association, International Council of Shopping Centers, National Apartment Association, National Association of Real Estate Investment Trusts, National Association of Realtors, National Multi Housing Council and The Real Estate Roundtable.
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Conference Explores Commercial Securitization for Lawyers
MBA (3/10/2005) Rawak, Melissa

The American Law Institute and the American Bar Association, with support of The Capital Consortium, of which the Mortgage Bankers Association is a member, will hold the Seventh Annual Advanced ALI-ABA Course of Study: Commercial Securitization for Real Estate Lawyers, May 19 and 20 in Chicago.

Securitization is now a significant part of the real estate debt and equity markets. Conduit lenders are competing aggressively with traditional portfolio lenders for loans, and new rules apply to the negotiation and documentation of real estate commercial loans. Real estate finance, once a local or regional business, is now an integral part of global capital markets. Borrowers now have many choices available for public or private, securitized or non-securitized debt. Although securitization has provided access to new sources of capital, periodic turmoil in the capital markets demonstrates that securitization is not without risk. As a result, borrowers and their counsel must carefully consider the advantages and disadvantages of each financing choice.

This annual advanced course of study, comprising 12 full hours of instruction, is designed for real estate lawyers who need a better understanding of the basic elements of the securitization revolution. It answers many of the questions commonly asked: What is negotiable? What is not? What will it cost my client? What do the rating agencies really require? How do I protect my client against volatility in the capital markets? What happens if the lender or servicer encounters financial difficulty? What if the market changes or my client defaults? Whom do I talk to if there is a problem, a default, or a change in circumstances requiring an amendment to the documents?
 
Coursework includes:
• An overview of the economics of the marketplace, presented by representatives of investment banks and other industry leaders
• How to build a bond
• The basic types of securitization structures (including the creation of special purpose, bankruptcy remote entities), along with their legal and practical consequences
• The role of the rating agencies and their requirements, explained by representatives of the leading agencies
• Securitized vs. portfolio loans: a comparison of the risks and rewards
• A brief, user-friendly discussion of tax issues and concerns in various types of transactions, offered by a tax expert
• An exposition of the mortgage loan and related documents developed for securitized lenders by the real estate industry's Capital Consortium
• Advice for dealing with servicers of loans after securitization
• Key opinion issues: How does borrower's counsel respond to a request for an overreaching opinion or a claim that the required form of opinion cannot be changed?

Tuition for this course is $995. Tuition entitles registrants to admission to all sessions, a set of study materials, continental breakfasts and refreshment breaks daily. To register, call 1-800-CLE-NEWS (800-253-6397) or visit the conference Web site, www.ali-aba.org. The conference will take place at the Omni Hotel in Chicago.

The conference is sponsored with the cooperation of the Capital Consortium, whose members include MBA; the Bond Market Association; the Commercial Mortgage Securities Association; the National Association of Realtors; and the Real Estate Roundtable.
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"In 2004, condo converters purchased an estimated $9.9 billion of rental property, far surpassing the calendar year 2003 total of approximately $2.1 billion," said Rickard Olander, an analyst at Moody’s and author of the ratings agency's new report.

Condominiums accounted for roughly 12.8 percent of the housing market from the second quarter 2004, a one third increase over the past ten years, according to the report. "Demand is largely driven by first-time buyers priced out of the single-family home market as well as wealthier individuals that are downsizing their living arrangements in favor of more centralized locations," Olander said.

The two main differences between condo conversion loans and conventional CMBS loans are in the element of construction or renovation risk in condo conversions, the ratings agency said. They are structured in a way that, as units are released, the loan amount and the collateralization of the remaining loan balance diminishes. "Condo conversion loans are therefore typically structured with various credit enhancement features to reduce these elements of additional risks," Olander said.

The Moody’s analyst said condo conversion developers do not focus primarily on capitalization (cap) rates, as they are not looking to operate the projects to generate a steady income stream. Developers would rather sell units at the highest possible price to maximize returns. "In some markets, speculative buying of condo units has soared to record levels,” Olander said. “Speculative buyers in some cases take advantage of low pre-construction prices and sell the units at a profit prior to construction completion. Speculative buying accounts for nearly 50 percent of condo unit sales in conversion projects in some South Florida locations.”

Lenders responded to speculative buying by tightening their lending criteria, often requiring down payments of 20 percent to help assure that speculative purchasers close the sale, or mitigate damages if the sale does not close, the report said.

Moody's said it differentiates between projects with minimal construction risk and those with significant construction risk. "The differentiation between projects based on the degree of construction risk allows Moody's to appropriately consider the relevant risks in combination with required credit enhancement features," Olander said.

Moody's said it considers pre-selling activity, gross sell-out pricing, and absorption pace within various market sectors and loan features under consideration include fast pay features, interest reserve, operating expense reserve, renovation holdback, completion guarantee, borrower, management and loan servicing.
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The 40-ish de Obaldia was born in Poland and lives in Paris. Her husband is from Spain. She speaks five languages fluently—English, French, Spanish, Polish and Russian. In a typical year she travels to a dozen countries or more on business.

And her job, as managing director of VOCEM, Paris, is to help companies bridge barriers to doing business within the European Union, which now consists of 25 countries.

It’s a daunting task. The EU has expanded twice, from the original six to 15 and last year with the addition of 10 more countries, many from the old Soviet bloc of Warsaw Pact nations. With 25 nationalities, even more languages and enough cultural nuances to send Miss Manners into a hissyfit, the EU presents business challenges that go beyond logistics.

“Companies and countries realize that to do business in the EU, they have to understand each other better, work better together and respect diverse cultures,” de Obaldia told MBA NewsLink at Reed MIDEM’s GlobalCity conference here. “Each culture is different because of its past history, traditions and mentalities. My goal is to overcome them in a positive way.”

Much is at stake—the 10 new countries of the EU represent more than 100 million people. Some, such as Poland, are rapidly emerging economic powerhouses. Others, such as the former Soviet satellites Estonia, Lithuania and Latvia, are eager to get up to speed after languishing for decades under non-capitalist economic structures.

Which is where de Obaldia comes in. Her company works with clients in understanding a country’s nuances. She says it is not necessary for a client to take a crash course in a particular language so much as demonstrating a willingness and flexibility to understand and appreciate a country’s culture and even its peculiarities.

“Companies today face different situations—cultural habits, traditions, day-to-day life,” de Obaldia said. “They want to know what to expect when they go there. They want to know how businesses there are organized, what they need to do locally to get set up and integrate, and how to negotiate.”

Most of de Obaldia’s clients are European, although she has worked with one U.S.-based real estate finance company, Cendant of New York. American companies, she said, do have an advantage in that many Europeans can and do speak English.

“English is used a lot in commerce in Europe. Most Europeans speak English as their second language,” de Obaldia said. “And many members of the ‘new’ EU are eager to do business in English.”

The entry of new countries to the EU last year—and the expected entries of Turkey, Bulgaria and Romania in the near future—added a new dynamic to business, de Obaldia said.

“It was a good [infusion] of new blood,” de Obaldia said. “What it did was regenerate business in Europe; a year ago I could not have said that. The ‘old’ countries of the EU were not really convinced that adding new countries would benefit. But it has.”
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Chelsea on the Square is a 374-unit, garden-style complex featuring 26 efficiency units, 66 one-bedroom units, 209 two-bedroom units, and 73 three-bedroom units.  With the exception of the efficiency units that have their own entry doors, all units are accessed through interior walkways. Units feature balconies or patios. Interior amenities include frost-free refrigerators, dishwashers, electric ranges, garbage disposals, mini and vertical blinds, and storage closets (off of balcony or patio). Select units have upgraded stainless steel appliances with slightly higher rents than the standard units.

Chelsea on the Square also offers three corporate units, which are fully furnished and rented by the month to major employers who have temporarily relocated an employee to the Newark area.

Joe Topley of Green Park Financial correspondent, Carey, Kramer, Pettit, Panichelli, originated the loan.
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Bland has served as senior advisor since 2003. He previously was an assistant deputy comptroller for midsize banks and a field manager in the central district. Bland joined the OCC in 1981 as an assistant national bank examiner in Milwaukee, Wis.
*****
Jay Shaw joined Collateral Mortgage Capital, LLC, as a vice president in the Columbus, Ohio office. He is responsible for real estate debt and equity originations. Prior to joining Collateral, Shaw was COO of Inland Products, Inc .

Shaw brings more than 25 years of commercial real estate lending experience to Collateral Mortgage, including senior management and loan production skills from Bank Ohio (National City), Provident Bank and Fifth Third Bank, said Ted Schmidt, executive managing director at Collateral.
*****

CWCapital, Needham, Mass., announced the appointment of Jeffrey Zickefoose as vice president and loan officer. He will be based out of CWCapital’s Southwest Regional Office in Dallas and will be responsible for the origination of commercial and multifamily loans in the Southwest, with a focus on fixed, floating and mezzanine lending programs.

Zickefoose has eight years of real estate finance experience. Prior to joining CWCapital, Zickefoose was a director with GE Commercial Finance Real Estate based in Dallas. He began his career with GE Real Estate in 1999 as an associate director.
*****

Gershman Mortgage announced Mark Seigel joined the company as a commercial loan officer in Gershman’s St. Louis (Clayton) office. Seigel will focus on financing multifamily housing, nursing homes, senior living facilities, and hospitals.

Seigel has more than 20 years of customer care, operations, marketing and technology experience. He started a promotions marketing company in the U.K. and managed advertising sales staff across England, Scotland, and Wales. Seigel also has experience in telecommunications, website development, and national sales.
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While U.S. urban areas are not immune to the same mistakes that have plagued world cities—inadequate infrastructure, poor or non-existent zoning, etc.—they have also enjoyed “luxuries” unavailable to Old World cities, such as room to grow, “smart growth” initiatives and flexibility in planning.

European cities are looking to U.S. models of city growth and governance as they face increased competition in attracting businesses and promoting commercial growth. According to Susan Fainstein , professor of urban planning at Columbia University, New York, U.S. cities serve as good case studies.

“The U.S. governance system is unique, compared to Europe, as it stresses a decentralized approach, deferring to regional, state and local governments,” Fainstein said here at Reed MIDEM’s Global City conference. “The result is a wide variety of policies and resources. Some are doing quite well; others are not.”

Nationally, the U.S. has experienced a sustained economy over the past 20 years with just two recessions. Recent U.S. gross domestic product growth has held in the 3-4 percent range, which Michael Parkinson, director of the European Institute for Urban Affairs in London, notes is essential for any city in attracting business.

“High GDP equals high innovation,” Parkinson said. “European cities such as Stockholm and Helsinki that have high GDPs have been able to innovate and revive themselves. Ten years ago, Helsinki was a ‘basket case.’ Today, it is economically strong.”

Competition among cities is much emphasized in the U.S., but it’s not cohesive, Fainstein said. “From a city perspective, the outcome of U.S. policy toward cities is highly problematic; nonetheless, it is not without benefits.

Fainstein cited U.S. model successes, including:

-A sustained period of high employment and an expanding economy;

-A high influx of immigrants—the largest since the 19th century;

-Management of a large population of heterogeneous peoples with “minimal” social unrest;

-Amelioration of wide economic disparities—“The economy has benefited all geographic regions of the country. The South is no longer lagging behind other regions,” Fainstein said;

-Development of a large, active third sector consisting of philanthropies, community development corporations and voluntary organizations that takes up the slack from government in development. “These have been particularly effective in developing public-private partnerships,” Fainstein said; and

-“Considerable” success in developing new models and modifying older models.

But downsides exist as well, Fainstein said. She noted that the U.S. model has also accompanied “increasing inequalities, which is especially acute in leading cities such as New York, where you have neighborhoods of the very rich and the very poor;” and different structural contexts. For example, she said, public-private partnerships tend to be “private-sector driven, not government-driven.”

“Urban policies that promote both competition and cohesion depend on reliable national government funding of infrastructure and social welfare and a responsible delivery of public policy,” Fainstein said.

Parkinson said that the same factors that drive innovation and competition in U.S. cities can do the same for European cities, citing population, unemployment rates, “connectivity” and the private sector.

“Size does matter—the larger cities tend to ‘punch out’ smaller cities, which supports the concept that smaller cities need to collaborate as a regional approach,” Parkinson said. “People in Europe are voting with their feet, and moving out of less successful cities and moving into more successful cities.”

Sergio Arzeni , a director with OECD CFE, Paris, disagreed. “In [my home country of] Italy, people are moving away from large cities. As a result, small-to-medium cities are flourishing and increasing their economic clout.”

One Italian city, Turin, is preparing for the 2006 Winter Olympics , a project that has involved comprehensive economic development. New York and London are among the cities competing for the 2012 Summer Olympics, but Fainstein cautioned that such comprehensive development plans that turn on a city’s Olympic bids might not be the best solution.

“One has to wonder if The Bronx really needs a velodrome,” Fainstein said.

But smaller projects work, she said. Recently, the artist Christo installed his “Gates” project in Central Park. “It cost the city $20 million to put on; it brought in more than $200 million in revenue in February, which is traditionally the slowest month for tourism dollars in New York,” Fainstein said. “It proves that if you can find unique events, it can work better than a huge undertaking.”
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MBA’s CREF 2005 Convention had more than 4600 attendees with a wider range of programming options than ever before. The sessions were specifically chosen to span the range of issues confronting MBA’s commercial/multifamily membership, including current issues from detecting and avoiding fraud in loan underwriting and environmental due diligence to anti-terrorism regulations, globalization of the industry, and economic outlooks.

Please view the Presentation Webpage with presentations and background material that accompanied this year's presenters.
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Joshua Stein

CMF: Why do commercial mortgage lenders care about property income?

Stein: When a loan goes into default, the borrower will try to use property income to pay to fight the lender. If the lender can control the property income, it’s that much harder for the borrower to fight, and the lender can use the income to pay down the loan. The rules on all this vary from state to state, from court to court, and in bankruptcy. The whole area cries out for simple and consistent rules.

CMF: How would the new legislation meet that need?

Stein : First, it would eliminate any need for separate 'assignment of rents' documents.  A mortgage lender would almost automatically have certain very practical and well-defined rights to control income after default – sweeping aside some strange rules that courts have sometimes used to frustrate lenders.  The new law would apply not only to pure rental income, but also to hotel rooms revenue, marina docking fees, and the like.

CMF: Who’s writing this legislation, and how far along are they?

Stein: A group of law professors and lawyers, working for the National Conference of Commissioners of Uniform State Laws. I’ve reviewed a handful of drafts as MBA’s observer, and made dozens of comments that will help the legislation work better and more simply. The drafters hope to sign off in April. Then the commissioners will consider the legislation this summer. If the commissioners endorse the proposal, they will send it off to the state legislatures and encourage enactment. That’s when the commercial mortgage industry will want to get involved.

CMF: Is there anything the industry should do now?

Stein: You can take a look at the draft legislation at: http://www.law.upenn.edu/bll/ulc/maripp/Jan05Draft.pdf. If there are suggestions for the draft, please send them to me ASAP at joshua.stein@lw.com, and I will incorporate them into my own comments as appropriate, and make sure they find their way to the drafting committee. Other than that, you should expect to hear more about this process – and why and how you should get involved in seeing this proposal become law – later this year.
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