The Problem
In the past five years the New York City multifamily market has experienced tremendous fluctuations. The passing of HSTPA in June of 2019 was the starting point of a transformative marketplace. COVID ushered in new regulations and record low interest rates. This was quickly replaced with rapid rates hikes causing valuations to drop precipitously. Minimal rental increases for rent stabilized properties combined with upwards pressure on costs have created a distressed situation for both borrowers and lenders.
Cash flow constraints, depressed valuations, and rates doubling when loans roll over have put properties underwater or loans into default. Often, assets are worth equal to or less than the current outstanding loan balance and the borrower has given up on the business plan and refused to throw good money after bad.
What Was Tried That Isn’t Working
Borrowers who are unable to refinance without putting additional cash into the deal have tried to hire a broker to sell the building, but the bids come in lower than what is required to pay off the loan and closing costs. The lender is not part of the sales process and therefore unwilling to take a discounted sale for a loan that isn’t due and isn’t in technical default. Neither borrower nor lender is willing to pay what’s required to get out of the deal and the collateral depreciates in value.
Lenders have alternatively tried to sell the notes but find themselves with bids so far below par they opt not to sell, or file for foreclosure as a matter of procedure or delay tactic.
Rent stabilized notes are discounted more than the lenders expected for five main reasons.
1. Timing
It takes a minimum of two years to foreclosure in New York and the borrower has the option to file for bankruptcy right before the auction, delaying the transfer even longer.
2. Incentives
With economic incentive structures and valuations upside down, borrowers are not motivated to maintain or improve the collateral during an elongated foreclosure process, depressing valuations even further.
3. Paperwork
A significant portion of the value of real estate is in the paperwork proving the legality of the rents which only the borrower has access to, meaning without transparency, the note buyer doesn’t truly know what they’re buying.
4. Mismatched Buyer Pool
Lenders are aiming for fee-simple retail pricing in a marketplace that caters to a different type of buyer. Note buyers have distinct expectations, preferences, and requirements compared to fee simple purchasers, leading to a mismatch that results in significantly discounted valuations.
5. Financing
When purchasing a property, a buyer can offer a lender the fee as collateral. When purchasing a note, the buyer must look a layer deeper in the financial market to get financing on the note purchase or more than likely buy it with cash. Since the financing market is already extremely challenging for fee simple purchases or refinances, the debt market for financing a note is exponentially more challenging. Historically, financing a note was 200 basis points more expensive than financing the fee. Compounding the problem further is the fact that the lender pool to finance a note is quite small. Since financing the note is nearly impossible the valuations are once again discounted.
Key Takeaway
The lender cannot maximize proceeds without participation from the borrower, and the borrower cannot escape the asset without participation from the lender. Cooperation is required!
Our Solution
Mission Capital Advisors in partnership with the New York Multifamily Group have created an auction platform to help borrowers and buyers transact at a point in the market where lender participation is required.
Our service is designed to create transparency between borrower, lender, and buyer in order to maximize proceeds.
What Are The Benefits To Our Platform?
BENEFITS TO THE LENDER
- Cooperative Environment – Transparent due diligence process which maximizes proceeds.
- Time Saving Advantage – Faster and less costly than foreclosures and bankruptcies.
- Improved Collateral Condition – Reduces borrower neglect resulting in happier tenancy.
- Avoid Excessive Legal Fees – Reduces fees associated with foreclosures and bankruptcies.
- No Double Tax – Pay the transfer tax once, rather than twice if a foreclosure takes place.
- Transparent Valuation Process – NYM provides reputable opinion of values.
- No bankruptcy or foreclosure disputes – Simplicity plus mortgage recording tax savings.
- No obligations – Reserve price is agreed on by the lender borrower and broker in advance.
BENEFITS TO THE BORROWER
- Release of personal guarantees
- Possible equity recovery
- Clean exit – we facilitate a mutually beneficial outcome.
- Transparent Process – reduce the risk of unexpected negotiations.
- No Obligation – Borrowers are not obliged to sell unless their reserve price is hit.
- Privacy and Discretion – Completely confidential and secure
- Seller and borrower can earn a fee – in exchange for their cooperation in due diligence.
- Minimize tax liability – short sales can be more tax advantageous than a foreclosure.
BENEFITS TO THE BUYER
- More likely to participate in an auction that promises finality.
- Ability to acquire an asset not previously attainable.
- Fee simple versus note purchases are more desirable.
- Clean business plan with ability to raise money therefore able to pay more.
- Better financing equals premium pricing.
The auction platform is designed for lenders and borrowers to maximize proceeds via a short sale or deed in lieu.
Call to Action
If our auction platform is interesting to you, please reach out to a team member from New York Multifamily or Mission Capital Advisors to learn how to participate!