California Real Estate Journal March 22, 2010 : Page 1

INSIDE �� PAGE 4 �� PAGE 5 �� PAGE 6 CA L I FORNI A www.CARealEstateJournal.com Commercial Real Estate In The Cross Hairs BY GREG KANE CREJ Staff Writer most sacred tax protections as they struggle to overcome an esti- mated $20 billion budget shortfall by June. The efforts S T ince the new year began, state lawmakers have proposed a variety of mea- sures challenging some of commercial real estate’s S P E C I A L REAL ESTATE JOURNAL Keeping Up with FINANCE Numerous proposals target the industry as a source of new state revenues to close California’s $20 billion budget deficit dependent contractors to withhold portions of their pay as accelerated income tax payments. Others have revolved around Proposition 13’s inclusion of commercial properties, with legislators, unions and even a county assessor taking turns advocat- ing instead for the so-called split-roll tax system. It should come RE POR T LAW have included bills aimed at el imi n a t i n g Internal Rev- enue Code 1031’s capital gains exemption for “like-kind” property exchanges and another requiring businesses that hire in- GUEST COLUMN A National First: The Green Construction Standard BY KATHLEEN J. MCKEE AND GREG RODRIGUEZ he mandatory provisions of California’s 2010 Green Building Standards Code (CALGreen Code), the nation’s fi rst mandatory statewide standards for green construction, are set to take effect on Jan. 1, 2011. Adoption of the CALGreen Code implements AB32, which seeks to reduce greenhouse gas emissions in California, and Executive Order S-20-04 issued by Gov. Arnold Schwarzenegger, which seeks to reduce grid- based energy purchases for state-owned buildings. The CALGreen Code is a comprehensive, uniform regulatory code for all residential, commercial and school buildings, ensuring that every new building in California is built using environmentally advanced construction practices. The CALGreen Code will apply to all new construction of public The purpose of the CALGreen Code is to improve public health, safety THENE X TLE V E L and general welfare by enhancing the design and construction of new buildings, specifi cally addressing the areas of planning and design, en- ergy effi ciency, water effi ciency and conservation, material conservation and resource effi ciency, and environmental quality. The CALGreen Code consists of both mandatory DEVELOPMENT AB811 GAINS TRACTION WITH NEXT-GENERATION PROGRAMMING PAGE 26 and voluntary standards. Some of the mandatory standards applicable to K-12 and community college districts constructing new buildings include the follow- ing: reduce indoor potable water use by 20 percent; install water-conserving fi xtures that reduce wastewater by 20 percent; and install irrigation system controllers that reduce outdoor water use by sensing moisture and � Water effi ciency: Install plumbing fi xtures that elementary schools, secondary schools and community colleges. Enforcement will be handled through the Division of State Architect. Due to the fact that the CALGreen Code will only apply to new construction, modernization of existing structures is not subject to the CALGreen Code at this time. sistant materials for walls and foundation; recycle or salvage 50 percent of non-hazardous construction or demolition debris; and recycle 100 percent of all trees, stumps, rocks and associated vegetation and soils rainfall to adjust watering appropriately. � Material conservation and resource effi ciency: Provide weather-re- CALIFORNIA’S 2010 MAJOR REAL ESTATE LAW FIRMS PAGE 16 as no surprise that real estate is a target for tax increases considering that the significant decline in prop- erty values from the collapse in commercial real estate invest- ment has translated to a signifi cant See BACKLASH, page 23 BY MANDY JACKSON CREJ Staff Writer continue to fulfi ll their mission of funding hous- ing for Americans, including those who live in multifamily properties. The government slowly is withdrawing its F fi nancial support for the GSEs as they continue to suffer billions of dollars in single-family mortgage losses, but it looks like a complete plan for restructuring the companies to with- stand future credit crises will not be made public until 2011 at the earliest. In the meantime, Fannie Mae and Freddie Mac appear to be conducting business as usual when it comes to multifamily lending. Fannie Mae and Freddie Mac held $5.4 University of California, Berkeley students Griffin Cassara, left, and Katherine Cole walk past the state Capitol after participating in a rally in Sacramento against funding cuts to higher education. Teachers’ unions have proposed ballot initiatives to remove commercial real estate from Prop. 13 to increase state tax revenues. trillion in mortgages and mortgage-backed securities as of year-end 2009 and funded $36.4 billion in multifamily loans and securities last year. Those multifamily assets continue to perform far better than the GSEs’ single-family holdings. In November, the delinquency rate in Fannie Mae’s single-family portfolio was 5.29 percent for mortgages with three or more months of missed payments and the multifamily delin- quency rate on loans 60 days or more past due was 0.66 percent. Freddie Mac’s delinquency rates as of Janu- ary were 4.03 percent for single-family mort- gages that were behind by 90 days or more and 0.15 percent for multifamily assets that were at least 90 days past due. In comparison, the delinquency rate for mul- tifamily loans held in commercial mortgage- backed securities was 6.98 percent in January, according to Realpoint. While the multifamily market has been dependent on Fannie Mae and Freddie Mac for fi nancing since the onset of the credit crisis in 2007, David Cardwell, vice president of capital markets and technology for the National Multi Housing Council, said Presi- dent Barack Obama’s administration and the U.S. Department of the Treasury have delayed their proposal for restructuring the GSEs, but it remains to be seen if Congress will push for reforms for the entities this year. As a previously announced February See MCKEE, page 28 ��InSites �� \UF �� TM Visitwww.CARealEstateJournal.com and sign up online today! �� \UF INSITES See HOUSING, page 8 ederal regulators have yet to reform Fan- nie Mae and Freddie Mac, but the trou- bled government-sponsored enterprises PUBLISHED WEEKLY � $3 � MARCH 22, 2010 Fannie and Freddie Government-sponsored enterprises dominate the multifamily financing marketplace while their futures remain in question AP PHOTO/RICH PEDRONCELLI

Commercial Real Estate In The Cross Hairs

Greg Kane

Numerous proposals target the industry as a source of new state revenues to close California’s $20 billion budget deficit

Since the new year began, state lawmakers have proposed a variety of measures challenging some of commercial real estate’s most sacred tax protections as they struggle to overcome an estimated $20 billion budget shortfall by June.

The efforts have included bills aimed at e l i m i n a t i n g Internal Revenue Code 1031’s capital gains exemption for “like-kind” property exchanges and another requiring businesses that hire independent contractors to withhold portions of their pay as accelerated income tax payments. Others have revolved around Proposition 13’s inclusion of commercial properties, with legislators, unions and even a county assessor taking turns advocating instead for the so-called split-roll tax system.

It should come as no surprise that real estate is a target for tax increases considering that the significant decline in property values from the collapse in commercial real estate investment has translated to a signifi cant Decline in state tax revenues. These legislative attempts to recoup dollars from the commercial real estate industry are part of a larger trend observers say threatens business interests across the state.

State lawmakers are looking anywhere and everywhere for revenues to stop the budgetary bleeding that’s become an annual tradition in Sacramento.

“They’re desperate for revenues. They’re looking at anything they can look at,” said Alex Creel, senior vice president of governmental affairs for the California Association of Realtors. “If you were to ask them if they are leaving any rocks unturned, they would say no.” But Creel and others say that at this point, the real estate industry is being targeted no more than any other business interests across the state for new revenues.

Joel Fox, president of the Sacramento-based Small Business Action Committee, said unions, offi cials and lawmakers often look to the private sector when faced with shortfalls, thinking there are large dollar amounts to be obtained.

“In general, there is a feeling that corporations could be set up as the bad guy and have to pay,” Fox said. “But any kind of understanding of how the economic system works shows that this is not a black-and-white case.” In fact, the momentum for ongoing assaults on Prop. 13 appear to be on the decline as budget talks and the election season begin to heat up.

The California Teachers Association in late 2009 fi led two initiatives with the California Secretary of State’s Offi ce meant to create split-roll property taxes, but in early March chose to donate $500,000 to a separate effort to repeal corporate tax breaks approved by legislators last year.

A CTA spokeswoman said the union had yet to make a decision on whether to proceed with the split-roll initiatives and was unlikely to do so until at least late March. But Fox and other insiders believe that action effectively signals that the union will not move forward for the November 2010 election.

And while the split-roll remains on the table this year — State Assemblyman Tom Ammiano, D-San Francisco, has introduced spot legislation with which he intends to spark a debate on the issue — polling among state voters suggests that changes to Prop. 13 remain unpopular, experts said.

“I really don’t see the political impetus for something moving forward this year,” said David Wolfe, legislative director for the Howard Jarvis Taxpayers Association. About 70 percent of voters who responded in recent polling were against the idea of a split-roll, he added.

Reversing Prop. 13 Protection That hasn’t prevented other legislation from nibbling around Prop. 13’s protections for both residential and commercial property owners, Wolfe said. Two bills working their way through the Legislature focus on lowering the threshold for passing various bonds and special taxes to 55 percent, which would make it easier for lawmakers to squeeze payments out of property owners that go beyond the 1 percent cap instituted through Prop. 13.

Assembly Constitutional Amendment 9, by Assemblyman Jared Huffman, D-San Rafael, would lower the required vote to pass bonds and special taxes from two-thirds to 55 percent to fund public safety improvements. Senate Constitutional Amendment 6, by state Sen. Joe Simitian, D-Palo Alto, does the same for school facility parcel taxes.

In both instances, the bonds and taxes would be considered “below the line” reductions that do not count against Prop. 13’s 1 percent cap, Wolfe said.

The “tax-and-spend lobby” will likely continue its attempts to chip away at Prop. 13, as it does in stronger budget years, Wolfe said. But “The answer is not to increase revenues or to go after Prop. 13,” he said. “The answer is to fi gure out how to live within the means of an $82 billion budget, which is still the biggest in the nation.” Matthew Hargrove, senior vice president of governmental affairs for the California Business Properties Association, also said that the polling numbers regarding Prop. 13 bode poorly for proponents of a split-roll property tax. While such measures surface year after year in the state Legislature, poor budget times often give lawmakers cause to take a closer look at anything that could help to close the gap.

“The state is so desperate for revenues, I think they’re looking at all these measures,” Hargrove said.

State Democratic leaders are also looking for an easier road toward adopting budgets in future years. A package of bills allowing the Legislature to adopt spending plans through a simple majority — rather than the current two-thirds requirement — was introduced in mid-March. This would allow the Democrat-heavy Legislature to pass budgets without a single Republican vote.

The majority tax votes are one of the ways lawmakers are pushing for new revenues, Hargrove said. Another are tax measures such as Assembly Bill 2640, which includes an elimination of the state capital gains tax exemption for transactions in which similar properties are essentially swapped — dubbed “like-kind” exchanges.

That bill, introduced by Assemblyman Juan Arambula, D-Fresno, is in its early stages, and Arambula acknowledges its scope could be narrowed.

But the proposal does not come from left fi eld — the state’s nonpartisan Legislative Analyst’s Offi ce has in recent years recommended such a measure as a way to add revenues to the budget, estimating an extra $350 million a year in its 2009- 10 analysis of the spending plan.

The LAO has proposed other measures affecting real estate development that were adopted by state government in recent years, experts said. The offi ce’s analyses also suggested cuts to enterprise zone and redevelopment programs in the state to offset shortfalls and state lawmakers agreed on the latter, taking more than $2 billion intended for redevelopment agencies and using it to supplant school reductions the most recent budget deal.

Fighting for Redevelopment Funds The California Redevelopment Association fi led a lawsuit soon after, arguing the state did not have the authority to use that funding for anything other than redevelopment. But John Shirey, executive director of the CRA, said redevelopment agencies across the state have been forced to cancel or postpone hundreds of projects because while they await a court decision that could be as many as three months away.

That inaction in the state’s redevelopment area leads to a reduction in the very thing state offi cials have been trying to create — jobs.

“They’re canceling or putting on hold literally hundreds of projects,” Shirey said. “Many are construction projects that would put people to work.” The recent string of budget shortages has even led Gov. Arnold Schwarzenegger to propose getting the state out of the real estate business entirely. The budget included plans to sell 17 state-owned offi ce buildings across the state for an expected $2 billion to private buyers in a series of sale-leaseback deals for which bids are being accepted now.

Schwarzenegger also pitched selling highprofi le landmark properties such as San Quentin State Prison, the Los Angeles Coliseum and the Cow Palace to generate revenues last year before largely backing off. Only the Orange County Fairgrounds were approved for sale in the actual budget.

But the state’s activity on the real estate market is less a concern to industry observers than its fi scal policies behind the scenes. It remains too early in the Legislative session to know exactly what is going come from the many bills still winding their way through the system, but experts acknowledge there is a fi ght ahead for business as a whole and real estate in particular.

“We’re certainly concerned that real estate will be looked at as a way to balance the budget,” Creel said. “Business is attractive because the perception is that business has more to give.” And it’s that perception that business — and even the state’s own economic development programs — fi nd themselves fi ghting as the current budget cycle moves forward. Shirey said the state’s budget process has become so haphazard that virtually any area with dollars that can be grabbed is in danger of losing them and real estate is no exception.

“The state is so desperate, they will take money from anywhere,” Shirey said. “They don’t care about the fallout, who gets victimized or what repercussions it might have.” —

E-mail Greg_Kane@DailyJournal.com

The Green Construction Standard

Kathleen J. Mckee

The mandatory provisions of California’s 2010 Green Building Standards Code (CALGreen Code), the nation’s fi rst mandatory statewide standards for green construction, are set to take effect on Jan. 1, 2011.

Adoption of the CALGreen Code implements AB32, which seeks to reduce greenhouse gas emissions in California, and Executive Order S-20-04 issued by Gov. Arnold Schwarzenegger, which seeks to reduce gridbased energy purchases for state-owned buildings.

The CALGreen Code is a comprehensive, uniform regulatory code for all residential, commercial and school buildings, ensuring that every new building in California is built using environmentally advanced construction practices.

The CALGreen Code will apply to all new construction of public elementary schools, secondary schools and community colleges.

Enforcement will be handled through the Division of State Architect. Due to the fact that the CALGreen Code will only apply to new construction, modernization of existing structures is not subject to the CALGreen Code at this time.

The purpose of the CALGreen Code is to improve public health, safety and general welfare by enhancing the design and construction of new buildings, specifi cally addressing the areas of planning and design, energy effi ciency, water effi ciency and conservation, material conservation and resource effi ciency, and environmental quality.

The CALGreen Code consists of both mandatory and voluntary standards. Some of the mandatory standards applicable to K-12 and community college districts constructing new buildings include the following: .. Water effi ciency: Install plumbing fi xtures that reduce indoor potable water use by 20 percent; install water-conserving fi xtures that reduce wastewater by 20 percent; and install irrigation system controllers that reduce outdoor water use by sensing moisture and rainfall to adjust watering appropriately.

.. Material conservation and resource effi ciency: Provide weather-resistant materials for walls and foundation; recycle or salvage 50 percent of non-hazardous construction or demolition debris; and recycle 100 percent of all trees, stumps, rocks and associated vegetation and soils Resulting primarily from land clearing.

.. Commissioning: Develop project goals and post-construction performance expectations in the form of commissioning plans and reports to ensure the “green” operation of the building once built and put into operation.

.. Building operation and environmental quality: Provide areas readily accessible for recycling by occupants and have systems in place to regulate outdoor air delivery and acoustics.

In addition, the CALGreen Code also includes voluntary measures that may be incorporated into a project by a K-12 or community college district, or that can be adopted by local jurisdictions into a city or county’s local building code.

Implementation of the mandatory provisions of the CALGreen Code confi rms California’s movement toward sustainable, green construction in publicly owned buildings. Thus, it is important for K-12 and community college districts to become familiar with the CALGreen Code and to ensure all bid and contract documents comply with the new mandatory provisions scheduled for 2011. General information on the adoption and implementation of the CALGreen Code may be found at http://www.bsc.ca.gov/CALGreen/default.htm.

Keeping Up With Fannie And Freddie

Mandy Jackson

Government-sponsored enterprises dominate the multifamily financing marketplace while their futures remain in question

Federal regulators have yet to reform Fannie Mae and Freddie Mac, but the troubled government-sponsored enterprises continue to fulfi ll their mission of funding housing for Americans, including those who live in multifamily properties.

The government slowly is withdrawing its fi nancial support for the GSEs as they continue to suffer billions of dollars in single-family mortgage losses, but it looks like a complete plan for restructuring the companies to withstand future credit crises will not be made public until 2011 at the earliest.

In the meantime, Fannie Mae and Freddie Mac appear to be conducting business as usual when it comes to multifamily lending.

Fannie Mae and Freddie Mac held $5.4 trillion in mortgages and mortgage-backed securities as of year-end 2009 and funded $36.4 billion in multifamily loans and securities last year. Those multifamily assets continue to perform far better than the GSEs’ single-family holdings.

In November, the delinquency rate in Fannie Mae’s single-family portfolio was 5.29 percent for mortgages with three or more months of missed payments and the multifamily delinquency rate on loans 60 days or more past due was 0.66 percent.

Freddie Mac’s delinquency rates as of January were 4.03 percent for single-family mortgages that were behind by 90 days or more and

0. 15 percent for multifamily assets that were at least 90 days past due.

In comparison, the delinquency rate for multifamily loans held in commercial mortgagebacked securities was 6.98 percent in January, according to Realpoint.

While the multifamily market has been dependent on Fannie Mae and Freddie Mac for fi nancing since the onset of the credit crisis in 2007, David Cardwell, vice president of capital markets and technology for the National Multi Housing Council, said President Barack Obama’s administration and the

U. S. Department of the Treasury have delayed their proposal for restructuring the GSEs, but it remains to be seen if Congress will push for reforms for the entities this year.

As a previously announced February Deadline approached for some outline of what should be done with Fannie Mae and Freddie Mac, concurrent with the Obama Administration’s release of its budget proposal for fi scal year 2011, the Treasury Department sought data from all points, including NMHC.

“They came to the conclusion that the markets are still fragile, even though they’re more liquid today and there’s confi dence that buyers and sellers are engaging in investment activity,” Cardwell said.

Because the GSEs hold so much of the country’s mortgage debt, through whole loans and MBS, the Treasury was aware that any announcements regarding the future structure of Fannie Mae and Freddie Mac would cause some reaction in the investment markets.

Without a detailed plan, the Treasury decided not to release its proposal for the GSEs until next year. It is not expected to implement any major changes before the end of 2012, when government support for the companies is set to expire.

However, the Obama Administration and members of Congress are not in lock step on what should be done with Fannie Mae and Freddie Mac.

“That leaves Congress having to take the lead and they’re not willing to stick out their chin,” Cardwell said. “It leaves a lot of questions as to what’s going to happen, but it also leaves some room. The multifamily industry benefi ts from any delay and any extensive delay in what to do with the GSEs.” It is unlikely that legislation related to Fannie Mae and Freddie Mac will come out of the House or the Senate this year.

“That doesn’t mean there won’t be hearings,” Cardwell said. “We’re hopeful they will conduct hearings sometime in the future and we will be part of that.” Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said in January that Fannie Mae and Freddie Mac should be replaced with a new housing fi nance system. A hearing on the GSEs that Frank scheduled for March 2 was postponed.

NMHC has been meeting with members of Congress and their staff to talk about the importance of Fannie Mae and Freddie Mac to the multifamily sector and the association has been happy with the response so far.

“We’re hopeful they will respect the rental side of the housing equation,” Cardwell said.

Conservatorship Extended The Federal Housing Finance Agency put Fannie Mae and Freddie Mac into conservatorship on Sept. 6, 2008. The agency is charged with keeping the GSEs solvent while they continue to fi nance the housing market.

Conservatorship was scheduled to end Dec. 31 but remains in place while the housing market and economy continue to recover.

The Treasury had the authority to buy up to $100 billion of preferred stock from each of the companies has purchased $220 billion of their mortgage-backed securities and extended a credit facility to the keep the agencies afl oat.

The Federal Reserve plans to wind down its purchases of up to $1.25 trillion of Fannie Mae and Freddie Mac MBS and about $175 billion of GSE debt by the end of March.

Fannie Mae and Freddie Mac plan to buy back $200 million in loans in 2010 that are at least four months delinquent and held in MBS pools that they guarantee.

The Treasury’s MBS purchase program and credit facility expired at the end of 2009. The stock purchase program remains in place and can increase above the $200 billion limit as necessary, but the Treasury will stop providing liquidity in that way by the end of 2012.

Freddie Mac reported a loss of $21.6 billion in its full-year 2009 fi nancial results, down from a $50.6 billion loss for 2008. The company received $36.9 billion in cash in 2009 through the Treasury Department’s GSE stock purchase program.

Fannie Mae reported a full-year 2009 loss of $72 billion, compared with a loss of $58.7 billion for 2008. The Treasury Department’s investment in the company’s stock to help Fannie Mae manage losses through fourthquarter 2009 totaled $76.2 billion.

The tapering off of government support and rising delinquencies in the single-family and multifamily portfolios of Fannie Mae and Freddie Mac should not impact the amount of money the GSEs have available for apartment lending and purchases of securities tied to multifamily loans, Cardwell said, because the agencies still have a mission to fund low- and moderate-income housing, including apartments.

He noted that their lending volumes were down signifi cantly last year, but only because there were few new apartment transactions, so most of their activity was tied to owners whose property values would support a refi nance or who had equity to contribute to the refi nance of their maturing debt.

“Having liquidity in that market is critical,” Cardwell said. “There is no concern that the agencies are going away in 2010.” Freddie Mac announced in February that its share of the U.S. multifamily lending market was 37 percent last year, up from 29 percent in 2008. However, because of the contracting market, the GSE’s multifamily whole loan and bond guarantee business totaled only $16.6 billion last year, down from $24 billion in the previous year. The total for 2009 was still Freddie Mac’s third largest year ever in the multifamily business.

“During the worst economic recession in a decade, we remained focused on providing liquidity to the market when most other sources were still nowhere to be found in 2009,” said Mike May, senior vice president of multifamily for Freddie Mac.

Fannie Mae did $19.8 billion in multifamily lending in 2009, including $18.6 billion funded through its delegated underwriting and servicing program.

Dominating the Multifamily Market Attorney Gordon Gerson of Gerson Law Firm APC in San Diego noted that Fannie Mae and Freddie Mac did 81 percent of all apartment lending in the United States last year. His fi rm also closed more loans for Fannie Mae and Freddie Mac in January and February than it has in any other January and February.

“Every indication is that they will be strong in terms of lending activity in 2010,” Gerson said.

Credit may be loosening up among other lenders, but while the lending parameters for Fannie Mae and Freddie Mac are more constrictive than two or three years ago, he said capital still is more available and at lower costs from the GSEs than from any other lender today.

In fact, Fannie Mae and Freddie Mac are looking to expand their products in the multifamily sector. Freddie Mac reportedly is putting together a mezzanine lending program designed to allow leverage of up to 85 percent of a property’s value as borrowers refi nance.

“We’ve seen Fannie Mae and Freddie Mac as being a very important source of liquidity to the market. Their originations through the worst of the credit crunch remain very strong,” said Jamie Woodwell, vice president of commercial research for the Mortgage Bankers Association.

Multifamily mortgage originations from Fannie Mae and Freddie Mac slipped from fourth-quarter 2008 to fourth-quarter 2009 due to decreased demand, but lending declines during the credit crunch have been steeper for under lenders.

From fourth-quarter 2007 to fourth-quarter 2009, commercial mortgage originations among all lenders plunged by 78 percent but Fannie Mae and Freddie Mac originations dropped by only 37 percent, Woodwell said.

Commercial and multifamily mortgage originations were 15 percent higher in fourthquarter 2009 than in the previous quarter and 12 percent higher than the last quarter of 2008, according to MBA.

Multifamily originations declined by 8 percent on a year-over-year basis in the fourth quarter, but lending in the last three months of the year was up 4 percent from the third quarter. Fannie Mae and Freddie Mac originations were off 26 percent year-over-year and 15 percent from third to fourth quarter.

“Their business has slowed down because there haven’t been as many properties to fi t their programs, but they still are the biggest players,” said Bill Hughes, senior vice president and managing director of Marcus & Millichap Capital Corp. in Newport Beach.

Still, Hughes said it is hard for anyone to compete with Fannie Mae and Freddie Mac.

Even life insurance companies, which have raised their loan-to-value ratio limits from 50 percent to 55 percent last year to 60 percent to 65 percent this year, have a hard time competing with the GSEs, which can offer up to 75 percent leverage.

“There’s a little bit of calming in the marketplace and confi dence is being restored, because we’re not seeing conditions erode in the market as quickly as last year,” Hughes said. “But until we see the return of values, we won’t see aggressive lending from anyone in the marketplace, especially life insurance companies.” — E-mail Mjackson@DailyJournal.com

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