Foreclosing on Rental Property

Questions have been asked on the rights of a tenant when their landlord loses their property through foreclosure.  Below is an informative Legal Q & A from the California Association of Realtors Legal Department.

-Burt

I. Introduction
When a lender begins a foreclosure, parties involved with the property in foreclosure may be uncertain as to how the process affects them. Not only are lenders often unaware of their rights and obligations, but borrowers (sometimes also referred to as "owner" or “mortgagor”) who are faced with losing ownership of property also are frequently lacking knowledge about the limit and extent of some of their basic responsibilities and rights.
When the foreclosed upon property is a rental, tenants are unwittingly forced into a position of uncertainty concerning their contractual and legal rights and duties. If the rental is managed by a real estate broker, yet another party may feel strained by the tension and possibly competing demands of the property owner, foreclosing lender, and tenant.
This legal article addresses some of the major issues faced by property owners, lenders, tenants and property managers involved with a foreclosure on rental property. Certain topics will not be addressed, such as the steps in a foreclosure, the circumstances under which a deficiency judgment may be obtained (see legal articles, Deficiency Judgments and California Law and Deficiency Judgment Chart), and discharge of indebtedness and other issues involved in a short payoff (see legal article,Short Sales), as these issues are germane to all foreclosure properties. Instead, the primary focus will be to highlight those areas of concern unique to rental properties.

II. Lender Issues

A. Lender Issues with the Owner

1. Rent Skimming

Q 1.  What is rent skimming?

A  Foreclosures typically take place because a borrower does not make required payments pursuant to the loan documents. Foreclosing lenders are bound to be frustrated by an owner who is collecting rents yet not paying a loan. These lenders may want to try and stop the borrower from taking what they perceive as money which is owed to them. After all, isn't this rent skimming? And, isn't rent skimming a crime?

Rent skimming is defined as using revenue received from residential real property any time during the first year after acquiring the property without first applying the revenue to payments due on deeds of trust encumbering the property (Cal. Civ. Code § 890). Criminal penalties of up to one year in jail or up to a ten thousand dollar fine or both exist for rent skimming (Cal. Civ. Code § 892).  Thus, if it isn’t the first year of ownership, this remedy doesn’t apply.

Note:  There is also an “equity skimming” federal law; however, it is limited to residential one-to-four unit properties in default at time of transfer or in default within one year of transfer and those which are HUD properties, have HUD insured loans, or have VA loans. This federal law also requires a “pattern or practice” of purchasing such properties with an intent to defraud. (12 U.S.C. § 1709-2.)

Q 2.  What can a lender do, if anything, to respond to an owner engaging in rent skimming?

A  The decision of whether to pursue criminal action is in the hands of a government prosecutor (and outside the scope of this article). If rent skimming is involved, a lender can bring a civil action against the borrower for damages, costs, and attorney's fees. The court has the authority to also award exemplary (punitive) damages. (Cal. Civ. Code § 891(c).)

If the lender was a seller who carried back a loan (i.e., seller financing) and the borrower has engaged in multiple acts of rent skimming, a court must award exemplary damages of at least three times the actual damages (Cal. Civ. Code § 891(a)). The right to bring a claim based on rent skimming is not limited by either the one-action rule or anti-deficiency laws (Cal. Civ. Code § 891(g)).

2. Before the Foreclosure

Q 3.  Prior to foreclosure, what are the owner’s obligations to the lender?

A  Prior to title transferring at a foreclosure sale, the borrower has a contractual obligation to make the payments specified in the note. Aside from the potential criminal and civil issue of rent skimming, the borrower has no obligation to use the specific rents received to pay off the loan. If the lender wishes to gain access to the property as a mortgagee-in-possession the borrower can deny the lender permission. (Cal. Civ. Code § 2927.)  Similarly, if the lender attempts to peacefully exercise a rents and profits clause without bringing a judicial action, the borrower can prevent this voluntary exercise by refusing permission and instructing any tenants to continue making payments as called for in the lease and not to the requesting lender.

Q 4.  How can the owner defeat an action brought by the lender to appoint a receiver?

A  If the lender brings a legal action to appoint a receiver to enforce a rents and profits clause, the borrower can oppose the action. The appointment of a receiver is discretionary, not automatic (Cal. Civ. Proc. Code § 564(b)(8).) Where a rents and profits clause does not exist and the lender applies to the court for appointment of a receiver, the borrower may defeat the action if the borrower can show the following:

(1)  The property is in no danger of being lost, removed, or materially injured; or
(2)  That even if a condition has not been performed, the property is sufficient to satisfy the debt (Cal. Civ. Proc. Code § 564(b)(2).)

a. Mortgagee-in-Possession

Q 5.  Prior to the foreclosure sale, what are the lender’s rights?

A  A lender who wishes to enter the property for the purposes of collecting rents may do so with the express consent of the owner/borrower in default even without additional consideration or a formal agreement (Cal. Civ. Code § 2927; Hooper v. Young (1903) 140 Cal. 274). A lender who does so is a mortgagee-in-possession. However, a lender who enters the property without the consent, or over the objection, of the owner/borrower in default becomes liable to the owner for forcible entry and trespass. (California Hotel Co. v. Bank of America Nat'l Trust & Sav. Ass'n (1939) 31 Cal. App. 2d 295; Mcguire v. Lynch (1899) 126 Cal. 576).

Q 6.  How does the lender become responsible to the tenant upon becoming a mortgagee-in-possession?

A  A lender who becomes a mortgagee-in-possession enjoys the advantage of directly collecting rent and applying it toward the unpaid debt.  However, the lender is responsible to the borrower and junior lien holder for losses caused by negligence or failure to act in a business-like manner. (Johns v. Moore (1959) 168 Cal. App. 2d 709. )

For lenders who find the advantages outweigh the disadvantages, although not required, a written agreement is advisable in order to avoid conflicts over whether consent was granted or withheld, as well as to have documentation which will support the lender's claim to rents if questioned by tenants.

b. Rents and Profits Clauses

Q 7.  How is the lender legally able to invoke the status as mortgagee-in-possession (i.e., how does the foreclosing lender pursue the direct collection of rent)?

A  Today, most deeds of trust contain a rents and profits clause. This can be an absolute assignment of rents, an absolute assignment of rents conditioned on default, or an assignment of rents as additional security. This last type of clause is typically found in short form deeds of trust recorded in each county and referred to by a short form trust deed.

An example of such a clause appears below:

As additional security, Trustor hereby gives to and confers upon Beneficiary the right, power, and authority, during the continuance of these Trusts, to collect the rents, issues, and profits of said property, reserving unto Trustor the right, prior to any default by Trustor in payment of any indebtedness secured hereby or in performance of any agreement hereunder, to collect and retain such rents, issues, and profits as they become due and payable. Upon any such default, Beneficiary may at any time without notice, either in person, by agent, or by a receiver to be appointed by a court, and without regard to the adequacy of any security for the indebtedness hereby secured, enter upon and take possession of said property or any part thereof, in his own name sue for or otherwise collect such rents, issues, and profits, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorneys' fees, upon any indebtedness secured hereby, and in such order as Beneficiary may determine. The entering upon and taking possession of said property, the collection of such rents, issues, and profits, and the application thereof as aforesaid, shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice.

Q 8.  Does the existence of a rents and profits clause mean the lender can invoke the mortgagee-in-possession status without doing anything else?

A  It depends.  The collection of rent pursuant to a rents and profits clause does not, in and of itself, impose mortgagee-in-possession status on the lender. (Strutt v. Ontario Sav. & Loan Ass'n (1972) 28 Cal. App. 3d 866.) The lender must take steps before proceeding to collect. However, a demand upon the tenant or borrower to turn over the rents, coupled with their cooperation is all that is needed (Lee. v. Ski Run Apartments Assoc., (1967) 249 Cal. App. 2d 293).

If neither party cooperates or if the borrower objects (even if the tenant agrees) the lender needs to file a judicial action for appointment of a receiver.

The legal action is one for specific performance of the borrower's promise as contained in the trust deed. The request for a receiver is secondary to this specific performance action (Cal. Civ. Proc. Code § 564 (b)(8)). A receiver is an agent of the court, not the lender, and must maintain control of the rents until ordered to pay them out. The order for appointment of the receiver can direct the receiver to apply collected rents:

(1)  First to pay the expenses of the receivership (administrative and management);
(2)  Then to payment of taxes and senior secured debts; and
(3)  Followed by the maintenance of a working capital account before any funds collected are to be made available to the lender. (See, California Mortgage and Deed of Trust Practice, 2nd ed., Roger Bernhardt (hereinafter referred to as "Bernhardt") pp. 259-260.)

Monies collected by a receiver pursuant to an additional security rents and profits clause can be received by a lender following a trustee's sale without violating either the one-action or anti- deficiency rules (Bernhardt, supra Section 5.22).  In the absence of a rents and profits clause it may still be possible to have a receiver appointed, but the burden is much greater on the applying lender than where a rents and profits clause exists (Cal. Civ. Proc. Code § 564(b)(2)).

3. After The Foreclosure Sale

Q 9.  If the borrower is an occupant of the property, and the lender forecloses judicially (not trustee’s sale), can the lender evict the borrower?

A  If the borrower occupies one of the units in the rental property and the lender has foreclosed judicially, then the borrower is entitled to possession throughout the statutory redemption period (either three months or one year depending on the amount received at the judicial foreclosure) (Cal. Civ. Proc. Code §  729.030). The foreclosing lender can charge the borrower rent for this occupancy equal to the value of use and occupation (Cal. Civ. Proc. Code §  729.090(a)).

However, if the occupant/borrower fails to pay rent, the lender probably lacks the ability to evict during the redemption period. After the redemption period, the lender should be able to pursue an action for collection of unpaid rents. (Cal. Civ. Proc. Code §  729.090(a).)

Q 10.  If the borrower is the occupant of the property, and the lender forecloses through a trustee’s sale, can the lender evict the borrower?

A  Yes.  If the lender has foreclosed by way of a trustee's sale, the borrower can be evicted immediately following a three-day Notice to Quit. (Cal. Civ. Proc. Code § 1161a(b).)

B. Lender Issues with the Tenants

1. Before The Foreclosure

Q 11.  Prior to the foreclosure sale, is the tenant required to turn rent directly over to the foreclosing lender?

A  No.  A lender may request that a tenant make payments directly to the lender rather than the borrower in an attempt to create a voluntary exercise of a rents and profits clause or to establish the lender as a mortgagee in possession. The tenant may comply but is not required to do so.

If the lender goes to court and has a receiver appointed with the power to collect rents, a tenant will be obligated to pay the receiver. There is no apparent right in California law permitting a lender, or receiver, to evict a tenant for a breach of a lease. Indeed, there is a danger in doing so if, in fact, the borrower reinstates the loan prior to a foreclosure sale and is damaged by the loss of a tenant.

2. After The Foreclosure

Q 12.  Following a foreclosure sale, what are the tenant’s obligations to the lender?

A  Following a judicial foreclosure sale, the tenant, after receiving notice of the sale, must pay rent to the lender or the appointed receiver from the time of the sale until a redemption by the former owner (Cal. Civ. Proc. Code § 729.090(a), Cal. Civ. Code § 1111).

Following a trustee’s sale foreclosure, the tenant must also pay rent to the lender (or a receiver if one had been appointed) from the time of the sale (Farris v. Pacific States Auxiliary Corp. (1935) 4 Cal. 2d 103, 105).  There is no period of redemption after a trustee’s sale; however, some refer to the right to “cure the default” any time prior to five business days before the date of the trustee’s sale as a “right of redemption” (see Tomczak v. Ortega (1966) 240 Cal. App. 2d 902).

a. When the Lease is Senior to the Lender’s Deed of Trust

Q 13.  If the lease is senior to the deed of trust of the foreclosing lender, what are the tenant’s rights after the foreclosure?

A  When the lease is senior to the deed of trust (i.e., the deed of trust was recorded after the date of the lease) or the lender had knowledge of the tenancy at the time the loan was made, the lender takes the property subject to the rights of the tenant (Cal. Civ. Code §§ 1214, 1215, Dover Mobile Estates v. Fiber Form Products, Inc. (1990) 220 Cal. App. 3d 1494, 1498.) The tenant becomes obligated to the lender as if the lender were the former owner (Cal. Civ. Code §§ 821, 1111).

b. When the Lease is Junior to the Lender’s Deed of Trust or Tenant is on a Periodic Tenancy

Q 14.  If the deed of trust of the foreclosing lender is senior to the lease, (i.e., the deed of trust was recorded prior to the date of the lease) or the tenant doesn’t have a lease, what are the tenant’s rights after a foreclosure?

A  The foreclosing lender or the immediate successor-in-interest at foreclosure (e.g., the purchaser at the trustee’s sale) who wishes to terminate the tenancy must give the tenant the following notice to terminate the tenancy:

3 days:  If the tenant is the mortgagor (borrower), then s/he must receive a 3-day Notice to Quit prior to termination of the tenancy.  Also, if the tenant is a party to the mortgage note, then s/he must receive a 3-day Notice to Quit to terminate the tenancy.  (Cal. Civ. Proc. Code §§ 1161a, 1161b, P.L. 111-22.)

60 days:  If the tenant is the child, parent or spouse of the mortgagor (borrower), then s/he must receive a 60-day Notice to Quit prior to eviction.  If the tenancy is not the result of an arms-length transaction or the rent is substantially lower than fair market rent, then s/he must receive a 60-day Notice to Quit to terminate the tenancy.  (Cal. Civ. Proc. Code § 1161b, P.L. 111-22.)

90 days:  If the tenant is not the mortgagor (borrower) or is not a child/parent/spouse of the borrower or the tenant is on a periodic tenancy and the tenancy is the result of an arms-length transaction and the rent is not substantially lower than fair market rent, then the tenant is entitled to a 90-day notice to terminate the tenancy. (P.L. 111-22.)

Full term of the lease:  If the tenant is not the mortgagor (borrower), or is not a child/parent/spouse of the borrower, and the tenancy is the result of an arms-length transaction and the rent is not substantially lower than fair market rent and the tenant has a lease, then the tenant is allowed to occupy the property until the end of the lease term.  However, if the foreclosed property is sold to a buyer who will occupy the property, then the lease can be terminated with a 90-day notice.  (P.L. 111-22.)

Q 15.  Why is there no 30-day notice option in Question 14?

A  A 30-day Notice to Terminate a Tenancy can be used when the property is not a foreclosure property and the tenant has resided in the property for less than one year (60-day notice if the tenant has resided in the property for one year or longer) (Cal. Civ. Code § 1946.1).

Q 16.  Do the notice periods in Question 14 still apply if the tenant is not paying any rent at all?

A  It depends.  If the lender foreclosed by judicial foreclosure and the tenant is the mortgagor (borrower), the lender probably lacks the ability to evict during the redemption period. After the redemption period, the lender should be able to pursue an action for collection of unpaid rents. (Cal. Civ. Proc. Code § 729.090(a); Bernhardt, Section 5.37.)  For other tenants who aren’t paying any rent, after the judicial foreclosure the lender may give a 3-day Notice to Quit (Cal. Civ. Proc. Code § 1161(2)).

If the lender has foreclosed by trustee’s sale (and, thus, there is no period of redemption), the lender may evict a non-paying tenant or mortgagor (borrower) by giving a 3-day Notice to Quit (Cal. Civ. Proc. Code § 1161(2)).

Q 17.  If the deed of trust of the foreclosing lender is senior to the lease, (i.e., the deed of trust was recorded prior to the date of the lease), can the lender enforce the lease if the tenant wants to terminate it?

A  No.  When the deed of trust of the foreclosing lender is senior to the lease, the lender who finds that the lease is favorable and wishes to continue to enforce it may be disappointed to discover that the tenant has the right to terminate the lease after foreclosure. (Dover Mobile Estates v. Fiber Form Products, Inc. (1990) 220 Cal. App. 3d 1494.)

c.  Security Deposit Issues

Q 18.  After foreclosure, what party is responsible for returning the tenant’s security deposit?

A  Upon termination of the borrower's interest in the property, security deposits which are not returned to a tenant should be transferred to the borrower's successor-in-interest, the lender (Cal. Civ. Code §§ 1950.5 (g), 1950.7(d)).  In the event the owner fails to comply with this requirement, and the rental is residential, the owner remains jointly responsible with the lender for repayment of security to the tenant.(Cal. Civ. Code § 1950.5(i)).

Q 19.  After foreclosure, to whom does the tenant go to get the security deposit back?

A  An owner who is about to lose property through foreclosure is unlikely to either:

(1)  Transfer any security deposits to the foreclosing lender; or
(2)  Return the security deposits to the tenants as is required by law.

(Civil Code Sections 1950.5(g), 1950.7(d).)

In the event the owner who has lost the property through foreclosure has not done either option above, and the rental is residential property, the foreclosing lender is jointly and severally liable, along with the former owner, for repayment of any security to which the residential tenant is entitled (Cal. Civ. Code § 1950.5((i)).

Possibly this express statement of joint and several liability can be used by the lender to bring a legal action against the borrower for recovery of any sums properly paid to residential tenants for security deposit claims by the lender without violating the one action or anti-deficiency rules. (See California Real Estate, Miller & Starr § 19:143 (online).)

Q 20.  Upon foreclosure, must the lender return the tenant’s security deposit?

A  Regardless of the form of foreclosure used, a residential lender becomes obligated to return unused security deposits to any residential tenants unless the borrower returned these sums to the tenants prior to the transfer of title. (Cal. Civ. Code §§ 1950.5, (i) and (j).)

Commercial lenders who acquire the property through foreclosure do not have the same statutory obligation to return deposits to tenants if the lender does not receive the security deposit money from the former owner (Cal. Civ. Code § 1950.7).

III. Owner Issues with the Tenant

A. Before the Foreclosure

Q 21.  After the owner’s default but prior to foreclosure, what are the tenant’s obligations to the owner?

A  The borrower is contractually entitled to receive rent from the tenant even though in default on the note. A default on the note, in and of itself, does not create a breach of the covenant of quiet enjoyment of the leased premises or a denial of possession to the tenant. Thus, the tenant who ceases payment of rent can be evicted by the owner or sued for breach of the lease. (Cal. Civ. Proc. Code § 1161.)

B. After the Foreclosure

Q 22.  Following foreclosure, what are the owner’s/borrower’s obligations regarding the tenant’s security deposit?

A  After the foreclosure sale, the owner must return the security deposit to the tenant or transfer it to the foreclosing lender in order to be relieved of liability for the security deposit to the tenant (Cal. Civ. Code §§ 1950.5 (h), 1950.7 (d)). The owner/borrower who in bad faith fails to return a security deposit to a tenant can be held liable to the residential tenant for up to twice the amount of the security, in addition to actual damages (Cal. Civ. Code § 1950.5 (l)).  For a commercial tenancy, the owner/borrower can be held liable to the tenant for bad faith retention of the deposit in statutory damages not to exceed two hundred dollars, in addition to any actual damages (Cal. Civ. Code § 1950.7 (f)).

V. Property Management Issues

Q 23.  Does the owner’s default entitle the property manager to neglect or deviate from the property management agreement?

A  No, the default of the owner does not entitle the manager to neglect responsibilities identified in the property management agreement. Prior to a foreclosure sale, the property manager has contractual and fiduciary obligations to the owner of the property. If the management agreement provides for the collection of rent, then such activity, consistent with the terms of employment, is done on behalf of the owner. Honoring a request of the lender for disbursements of rents received, without the express permission of the owner would be grounds for breach of the manager's contractual and, possibly, fiduciary duties.

Q 24.  How does a court-appointed receiver affect the property manager’s rights and obligations to the owner?

A  Once a receiver has been appointed by a court, if the power of appointment directs the manager to hand over received rents, then the request of the court-appointed representative should be satisfied. The property manager should request a copy of any court order.  If the receiver collects rents directly, and takes over other management functions from the property manager, this would have the effect of terminating the agency and contractual obligations of the manager and establishes probable grounds for a manager's breach of contract claim against the owner. Monies held by the manager should be disbursed in accordance with the instructions of the owner unless directed otherwise by a receiver who has been granted that authority.

Q 25.  Can the property manager make a breach of contract claim against the owner following the foreclosure sale?

A  After the foreclosure sale, the subject of the agency--the owner's interest in the real property-- becomes “extinct,” thus terminating the agency (Cal. Civ. Code § 2355(b)). As a consequence, the owner may be liable to the property manager for breach of contract damages. However, disbursement of previously-collected sums still requires direction from the former owner or court.

Q 26.  Does the property manager have any obligation to comply with requests from the foreclosing lender?

A  The property manager is the agent of the owner and has no obligation to honor any request for disbursement of rents made by a foreclosing lender. Upon receiving such a request, that agent's duty of full disclosure would impose upon the manager a requirement to inform the owner of the lender's request. If a lender has a receiver appointed, the manager can presumably enter into an agreement with the receiver to continue performing property management functions, for a fee. Such an agreement would affect rents collected and services performed after the date of the agreement.

Q 27.  Following the foreclosure sale, may the property manager enter into a new property management agreement with the lender?

A  Yes.  After the foreclosure sale terminates the owner's interest in the property and the agency relationship between the owner and manager, the manager may enter into a new property management agreement with the lender, just as the manager could with any owner of property.

Q 28.  Does the property manager have the right to release tenants’ security deposits to the lender?

A  No.  Should the lender demand that the manager release previously-held tenants' security deposits, the manager should refuse. These funds are held in a trust account for the benefit of the former owner and are not the property of the manager (Cal. Bus. & Prof. Code §§10145, 10176(e)).

Q 29.  Should the property manager inform tenants that the owner is in default and facing foreclosure?

A  One issue facing a property manager is whether to inform tenants that the property owner is in default and facing foreclosure.  What should the manager do? If during the lease negotiations the manager acted as a dual agent, then the manager's fiduciary responsibilities would require disclosure of the foreclosure. If there is no agency relationship with the tenant, then the manager needs the owner’s permission to disclose the fact of the foreclosure to the tenants.

Q 30.  Following foreclosure, can the tenant establish a claim against the property manager in order to secure the return of their security deposits?

A  Once the foreclosure sale has been completed, tenants whose leases have terminated and who desire a return of their security deposits might try to sue the manager.  Typically, the property manager is not the owner of the property and is acting solely in an agency capacity.  Thus, there shouldn’t be any personal liability.  However, that may not discourage the tenant from suing the property manager.

VI. Conclusion

Unfortunately, many areas of the state are experiencing record levels of foreclosures. REALTORS® in these areas, as well as anywhere else where a foreclosure is occurring, are often asked questions by the principals involved with the property. Owners, lenders and tenants of rental property in foreclosure who are, have been or anticipate having a working relationship with a REALTOR® may seek advice from the real estate licensee. While a licensee should avoid giving legal advice, it is helpful for a REALTOR® to have an understanding of some basic issues facing these principals. Such an understanding can help guide the REALTOR® away from problems and toward solutions.

When a rental property is being foreclosed upon, the duties and relationships between and among the principals and agents change depending on the strategies employed by the foreclosing lender, the needs and desires of the property owner, and the type and priority of the tenants' leases. Another critical factor affecting the relationships is whether or not the default has resulted in an actual sale of the property. This article has identified many of the issues most likely to be faced by a real estate licensee. The purpose is to enable a REALTOR® to identify issues and problems so that appropriate steps can be taken, or appropriate referrals made, to enable the principals and REALTORS® alike to make their way through a difficult situation with as much information and ease as possible.

Housing Prices Down 42.4% Since Peak of January 2006 in Northern CA – Wine Country

Report just released by the California Association of Realtors shows the Northern Wine Country in California had a peak price of $645,080 in January 2006.  As of December 2009 the median price of a home in the wine country was $371,430 for a change of –42.4%!
-Burt

Complete CAR article can be read here.

News Hub: Has Commercial Real Estate Bottomed?

-The Wall Street Journal

Renter’s Market

by Katie Kuehner-Hebert 

The weak economy has hammered many of the mom-and-pop stores that rent commercial space from Robert Phillips, whose company owns and manages property in San Diego. In some cases he has helped them through tough times by offering them as much as four free months of rent.

“The retail sector especially is really struggling, so everybody’s looking for help,” says Phillips, president and chief executive officer of Pacific Coast Commercial Asset Management.

The worst recession in decades has caused apartment landlords and other commercial property owners across the country to contend with falling rental rates and rising vacancies. They are under pressure as jobless renters buddy up and commercial tenants struggle to keep afloat. Business bankruptcies soared in the United States in 2009, and they were on track to double compared to 2008.

Owners are watching the values of their properties tank, in some cases to far below the amount they still owe. Smaller and medium-size property owners are especially vulnerable, but the big and powerful aren't immune either. In New York, developer Tishman Speyer defaulted on debt from its $5.4 billion buyout of Peter Cooper Village and Stuyvesant Town, which was the largest single-property transaction in history. The developer has lost an estimated $3 billion on the deal.

The pressure on property owners is taking a heavy toll. About 2.8 million properties were foreclosed in 2009, up 21 percent from 2008 and 120 percent from 2009, according to RealtyTrac, on online marketplace for foreclosed properties.

“This is not a good time to be an owner of a commercial property—not only has the price of the building likely gone down causing the possibility of an underwater mortgage, but tenants have been able to extract some pretty serious concessions, including free rent in some cases,” says Christopher Cornell, an economist at Moody’s Economy.com, a division of Moody's.

Moody's says its REAL Commercial Property Price Index declined by 44 percent from its peak in October 2007 to the latest reading, which was in October. That means that many owners of commercial properties of all types—office, retail, industrial, warehouse, and apartments—likely now have negative equity in their properties, Cornell said.

The problem is compounded by higher vacancies caused by business tenants going under or apartment renters sharing units to make ends meet, which has resulted in lower rental rates, said Andres Carbacho-Burgos, another economist at Moody’s Economy.com.

Apartments rates fell 4.1 percent on a national basis, and rates dropped much more in some markets, according to George Ratiu, an economist with the National Association of Realtors. For example, rates in and around New York fell as much as 15 percent in some neighborhoods, after the region was hard-hit by massive job losses on Wall Street, which reverberated through the local economy. (For a graphic showing recent vacancy rates in key U.S. cities for office, industrial, retail, and multifamily units, click here).

In San Diego, for example, rents fell by an average of 3 percent, but some parts of the region were hit much harder, says Chris Garland, an account manager with ENG Properties, which owns about a dozen apartment complexes in the area. In neighborhoods that are saturated with apartments, such as the North Park neighborhood, higher vacancies have caused rental rates to fall by as much as 10 percent over the past year.

To attract tenants for its properties, ENG Properties has had to make a number of concessions beyond lower rents. It has reduced security deposits, upgraded appliances, and replaced carpets earlier than the company had planned, Garland says. The company says its efforts have helped minimize vacancy rates at its properties. “We’re not thriving, but we’re doing better than just surviving."

Those owners of just one or two properties with few units are likely suffering the most, says Linda Morris, president of Cambridge Management Group, Inc. in Escondido near San Diego. Morris owns a duplex in San Diego and manages apartments for other landlords.

“Owners of smaller properties have very low margins, and some are having to contribute their own money to pay the mortgages because rents are reduced while operating costs for things like insurance, water, utilities, and trash keep going up,” Morris says.

Owners of larger apartment complexes likely have the cushion of better margins, she says, but then again, many of those properties were bought right before home values plummeted and now their owners are saddled with underwater mortgages.

Garland says ENG Properties has been able to escape that dilemma because it purchased its properties years before the housing crisis. In fact, its properties are now valued higher than before because of all the upgrades the company made last year. ENG Properties says it will likely reap an even better return when it eventually sells those properties.

Phillips, of Pacific Coast Commercial, owns several units within a commercial strip mall in San Diego and manages commercial properties for other property owners. Some of his business tenants asked for discounted rents over the past year, but after reviewing their financial statements, Phillips declined. “I think they were just probing to see what they could get, but they are all doing okay,” he says.

Phillips has heavily discounted rents for tenants of properties he manages for other owners and, in some cases, has given four months of free rent. In each case, the landlords approved the discounts.

In some areas of San Diego, such as El Cajon, rent on industrial space fell from $1.10 to 65 cents per square foot in the span of one year, and many tenants have been looking for a way out of their leases. In cases where tenants are nearing the end of their multiyear agreements, Phillips has been offering lower rental rates as an inducement to renew.

A veteran of several downturns over the past 30-odd years, Phillips says that he believes that property owners have really “matured,” and that most have quickly responded to the current crisis.

“It’s really a partnership between the owners and tenants,” he says. “If the owners are honest with themselves and the tenants are honest with themselves, then they can work together and they can both make it through the cycle.”

California Apartment Association News

 

Rent  Control Legislation Stopped by CAA in State Assembly

The California Apartment Association (CAA) and the California Association of Realtors (CAR) successfully stopped legislation last week that would have, in effect, forced landlords to remain landlords for one full year even if they wanted to simply get out of the rental housing business and use their own private property for other uses.

Existing law specifies that in rent controlled cities if a rental property owner wants to get out of the rental housing business, he or she is required to give all tenants a 120 day notice of the intent to withdraw the building/units from the market. If there are any residents who are over 62 years of age or disabled, those residents are offered a one year notice.

Assembly Bill 1171, authored by San Francisco Assemblyman Tom Ammiano, would have required that if a landlord wanted to get out of the rental housing business, and even just one resident was 62 years of age or disabled, every other tenant in the building would have to be offered the one year notice.

"The elderly and disabled should merit special considerations when it comes to housing," said Debra Carlton, CAA's Senior Vice President of Public Affairs. "But imagine the economic impact on the property owner who must maintain the building for one full year.  The owner would be severely hampered in the sale of the property as few if any buyers will want to take on that provision."

CAA believes that current statutes adequately protect special needs residents of rental housing and that any laws dealing with rent controls should be left to local jurisdictions. The bill was pulled by the author from committee consideration after opposition from CAA lobbyists and CAA members from throughout California.

Oral Arguments in Case to Keep Section 8 Voucher Program Voluntary to Take Place this Month

The Second District Court of Appeal will hear the case of Sabi v. Donald Sterling and Donald T. Sterling Corp. this month in Los Angeles.   The issue in this case is whether landlords may refuse to accept Section 8 vouchers for federal housing assistance payments from disabled, low-income tenants and, specifically, whether such a practice can constitute illegal discrimination.  The trial court had ruled in favor of the landlord, holding that the owner is not required to accept the tenant's section 8 voucher. The issues on appeal are (1) whether an owner is required to participate in the Section 8 program because of the state's prohibition against "source of income" discrimination, and (2) whether an owner may be required to take Section 8 as a reasonable accommodation for a resident/applicant's disability?  CAA filed an Amicus Brief in this case on behalf of the property owner in mid-June 2009.  An overview of the oral argument will appear in the next CAA News.

For more information on participation in the Section 8 Voucher program, see CAA Policy Statement 17: Federal Section 8 Housing Choice Voucher Program.

New California Law Mandates Water Efficient Plumbing Fixtures

As California enters another year of drought, the Legislature has proactively initiated water conservation measures for residential housing. Click below to read a new CAA Issues Insights on a new California law.

Learn More...

Legal Q & A

Q: I rent out a house to a group of students.  They are all on one lease.  Recently they have been complaining to me about how noisy one of their fellow tenants is.  Somebody told me I could bring an action for quiet enjoyment to force that tenant to be quieter. Is that the best approach?

A: The "covenant of quiet enjoyment" is implied in every residential lease.  This covenant provides that the landlord will not interfere with the resident's quiet enjoyment of the premises and means the landlord will not disturb the tenant's enjoyment of the tenant's home.  Many rental agreements, such as CAA's forms 2.0 and 2.1, also require the tenant to not violate the quiet enjoyment of other residents, which would include that tenant's roommates and residents of other units. If you have such a provision, the recourse would be a three-day notice to comply with that provision of your rental agreement (followed by an unlawful detainer action, if the tenant does not comply).

Note however that you can only file an eviction action against ALL the tenants, not just the annoying one.  The unlawful detainer action is designed to get possession of the property back.  As a result, if one tenant is annoying his roommates, and they can't work it out, your recourse is to serve a three-day notice and evict ALL of them.  Explaining that to them may encourage them to seek their own resolution. 

One way to try to head off this type of problem would be to use an addendum that sets your house rules - CAA's form 17.0 (Resident Policies and House Rules Addendum) allows you to set things such as quiet hours.  Making these rules clear to all applicants will discourage those who want to watch loud action movies in the middle of the night from living on your property.  You may also want to encourage the roommates to enter into their own agreement which could cover other behavioral issues such as housekeeping and legal issues such as disposition of the security deposit should some roommates move out while others move in.

See also  CAA's Issue Insight "Co-Tenants and Roommates: Practical Considerations for Rental Property Owners".

Pending Home Sales Down from Surge but Higher than a Year Ago

Contract activity for pending home sales fell after a surge of activity in preceding months to beat the original deadline for the first-time home buyer tax credit but remains comfortably above a year ago, according to the latest survey. The Pending Home Sales Index, fell 16.0 percent to 96.0 from an upwardly revised 114.3 in October, but is 15.5 percent higher than November 2008 when it was 83.1. Lawrence Yun, NAR chief economist, said a drop was expected. “It will be at least early spring before we see notable gains in sales activity as home buyers respond to the recently extended and expanded tax credit,” he said. “The fact that pending home sales are comfortably above year-ago levels shows the market has gained sufficient momentum on its own. We expect another surge in the spring as more home buyers take advantage of affordable housing conditions before the tax credit expires.

Watch video:

What is a memorandum of lease?

A memorandum of lease—also known as a short-form lease—is a brief summary of the lease’s basic terms. During lease negotiations, a tenant may demand that the property owner agree to sign and record a memorandum of lease with local property records. Once recorded, the memorandum of lease becomes a public record that announces to third parties the existence of the tenant’s lease and its rights under the lease. Then, for example, if a bank files a lien against a center where the tenant’s space is located, in most jurisdictions, the tenant’s lease will have priority over that lien.

 

-Burt

The 2010 Handbook

Below are 40 ways to live your life in 2010 (and after) I received from Bob Fioretti of Infinite Possibilities, LLC.  I thought is was worth sharing with you.

Peace and joy,

-Burt

 

Health:

1. Drink plenty of water.
2. Eat breakfast like a prince, lunch like a king and dinner like a beggar.
3. Eat more foods that grow on trees and plants and eat less food that is manufactured in plants.
4. Live with the 3 E's -- Energy, Enthusiasm and Empathy.
5. Make time to pray.
6. Play more games.
7. Read more books than you did in 2009.
8. Sit in silence for at least 10 minutes each day.
9. Sleep for 7 hours.
10. Take a 10-30 minutes walk daily. And while you walk, smile.

Personality:

11. Avoid comparing your life to others. You have no idea what their journey is all about.
12. Avoid having negative thoughts or things you cannot control. Instead invest your energy in the positive present moment.
13. Avoid over doing. Stretch your boundaries but keep healthy limits.
14. Avoid taking yourself so seriously. Life is meant to be joyous and fun.
15. Avoid wasting your precious energy on gossip. Speak the truth with people directly.
16. Dream more while you are awake.
17. Envy is a waste of time. You already have all you need.
18. Forget issues of the past. Avoid reminding your partner with His/her mistakes of the past. Deal with the present and focus on what you can do to create exactly what you want in your relationships.
19. Life is too short to waste time hating anyone. Love is the greater force and energy.
20. Make peace with your past so it won't spoil the present.
21. No one is in charge of your happiness except you. Be 100% accountable for the life you desire.
22. Realize that life is a school and you are here to learn. Problems are simply part of the curriculum that appear and fade away like algebra class but the lessons you learn will last a lifetime.
23. Smile and laugh more.
24. You don't have to win every argument. Agree to disagree...

Society:

25. Call your family often.
26. Each day give something good to others.
27. Forgive everyone for everything.
28. Spend time w/ people over the age of 70 & under the age of 6.
29. Make at least three people smile each day.
30. What other people think of you is none of your business.
31. Your job won't take care of you when you are sick. Your friends will. Stay in touch.

Life:

32. Do the right thing!
33. Get rid of anything that isn't useful, beautiful or joyful.
34. GOD heals everything.
35. However good or bad a situation is, it will change.
36. No matter how you feel, get up, dress up and show up.
37. The best is yet to come..
38. When you awake alive in the morning, thank GOD for it.
39. Your Inner most is always happy. So, be happy.

Last but not the least:

40. Have a happy, healthy, bless and prosperous New Year in 2010. How you begin the year will set the tone and pace the days to come. Wishing you a New Year filled with magic, miracles and an abundance of everything your heart desires.

Foreclosures Can Offer Deals, but Buyer Beware

 

 

By TARA SIEGEL BERNARD

Published: December 4, 2009

So you’re looking to buy a new home, and you think a foreclosed house may be the best deal. You’ve probably noticed, then, that many of the big banks’ Web sites are beginning to look a bit like real estate brokerages, showcasing the many properties that they’ve repossessed.

These houses often sell for about 15 to 20 percent less than comparable homes in the same neighborhood, according to the National Association of Realtors. And while the banks have been careful not to flood the market with all their properties at once, there are hundreds of thousands of listings now, and half a million more expected in the coming year.

Despite the seemingly high inventory, though, anyone considering buying a distressed property should heed the classic warning: Caveat emptor, or let the buyer beware.

Closing a deal in a desirable neighborhood can be hard to do. Many aspiring homeowners have lost out to all-cash bidders. Buyers also need to search more aggressively than usual, which means figuring out which brokers have the best foreclosure listings, religiously checking for new ones and visiting the properties shortly thereafter. Buyers also need to ensure that the home is truly a good deal and not a money pit — most of these homes are sold as is.

Still, as Rick Sharga, senior vice president of RealtyTrac, a foreclosure listing service, put it, “The best discounts have been on bank-owned property.”

If you are still interested in buying a distressed property, you have several options. You can buy it through a preforeclosure sale, at a public auction or through a bank or other entity that has taken ownership of the home — these properties are known as real estate owned, or R.E.O.’s.

Below is a more detailed description of the potential risks and benefits of buying R.E.O.’s and preforeclosure transactions known as short sales, where the bank agrees to sell a home for less than is owed on the mortgage. Through October, foreclosures and short sales accounted for nearly 37 percent of all home sales, on average, according to the Realtors’ association.

R.E.O.’s

Traditional homebuyers are generally discouraged from buying homes at auction because there are too many risks — you can’t tour the inside of the home, which increases your chances of buying a house that will drain your bank account. Equally important, the home won’t necessarily have a clear title, which means there may be tax liens or other debts against the property. And when you buy the home, you buy those issues, too.

One of the benefits of R.E.O.’s is that the bank typically clears any title issues before it puts the house on the market. “It’s easiest because there is a price already, there is access, you can do your estimate for repairs, and you can write your offer and go,” said Alexis McGee, president of Foreclosures.com, which lists foreclosures and offers classes for foreclosure investors.

But you need to do your share of preparatory work. Start by getting acquainted with the listings in your target area. All R.E.O.’s are sold through an agent. You can find their listings directly on the big banks’ Web sites, like Bank of America and Wells Fargo, as well as regional banks like SunTrust. Fannie Mae offers its listings through the HomePath Web site and Freddie Mac through HomeSteps.

You can also find free listings through independent brokerages like Redfin.com, which has a forum where you can compare notes with other buyers. If you pay a monthly fee, you can access sites that track distressed homes from the moment of default through foreclosure. These sites include RealtyTrac ($49.95 a month), Foreclosures.com ($49.95), and Foreclosure.com ($39.80), all of which provide a free weeklong trial.

One of your first steps would be getting preapproved by a mortgage lender so that once you find a property you are interested in, you can move quickly. Call the listing agent, or hire a buyer’s agent to do it for you. (You should hire a buyer’s agent with experience in these types of sales anyway. In some states, the listing agents may refer you to someone else in their office to represent your interests, said Frank Verna, an R.E.O. broker in Jupiter, Fla.). Arrange to see the home as soon as possible. The bank selling the property may want you to be preapproved with their own lending arm, though you can always use another lender in the end, experts said.

Most R.E.O.’s are sold as is, so buyers should make their offers contingent on a home inspection. It’s best to find inspectors who are also licensed contractors (with references), so they can estimate repair costs. Putting too many contingencies in your offer, however, is likely to derail your bid.

Buyers also need to be prepared to lose to buyers with all cash. That’s what happened to Jason and Elise Hope, who have been searching for a small starter home in San Diego County for six months. The couple has made more than two dozen offers on bank-owned properties, and a couple of short sales, priced from $300,000 to $400,000.

“For the most part, we never heard back from the listing agent,” said Mr. Hope, 28, who works as an equity research associate for a forensic accounting firm. “When we did hear back, we often heard the same story — that the listing had 10 to 20 offers on it, along with ours, within the first weekend of it being available for showing.”

As Mr. Verna, the broker, explained: “In the R.E.O. world, cash is still king because there is no appraisal, last-minute quality checks or potential problems to kill the deal.”

You may be able to increase your chances by making your best offer from the start. But to ensure you don’t overpay, research comparable sales on sites like Zillow.com or have your agent prepare a “comparative market analysis” for you. “You are negotiating with a calculator, and if the numbers don’t work for the seller, they just say no and move on,” Mr. Verna said.

Fannie Mae does give prospective homebuyers a leg up. Last month, it introduced a program that shuts out investor buyers for the first 15 days a home is on the market. Moreover, Fannie also has a financing program, which allows buyers to put down as little as 3 percent and doesn’t require them to carry mortgage insurance. It also provides loans that allow borrowers to wrap in costs for home renovations.

Freddie is testing a program that also initially shuts out investor buyers, and it is currently offering consumers who buy one of its properties up to 3.5 percent of a home’s purchase price, which can be used for closing costs, moving or even furnishings. The program was recently extended to buyers who submit a purchase offer by Jan. 31 and close by March 26. Primary homebuyers are also eligible for a two-year warranty on certain home repairs.

Short Sales

Short sales tend to be more problematic than R.E.O.’s. If you make an offer on an R.E.O., you can expect to get a response within a few days. With a short sale, experts say, it can take months. You also can’t necessarily trust the listing price.

“It may easily be a teaser price just to get offers in,” said Carolyn Warren, author of a new book “Homebuyers Beware: Who’s Ripping You Off Now?” (FT Press). “It’s kind of like posting something on eBay. They are going to list it at a dollar, but they might only sell it for $1,000.”

There are other potential problems as well. While the seller may be motivated, the bank has to be convinced of two things: “One is that the homeowner in question deserves a hardship exception,” Mr. Sharga of RealtyTrac said. “The second thing is that you have to convince it that it is market value, even though it is below the mortgage amount.”

Complicating matters further, the homeowner may have more than one loan on the property, adding to the number of parties involved in the negotiations.

All this lengthens the time to close a deal.

You can get lucky, too. Michelle and Mark Gordon are happily living in a three-bedroom ranch that they bought through a short sale in San Juan Capistrano, Calif., in February. It took only three months to close — record time in the world of short sales. But Mrs. Gordon, a librarian who now stays home with her young daughter, did her homework and was aggressive in her search. She checked the listings religiously on Redfin.com, and saw the property the day after she found it.

The Gordons paid $500,000 for the home, and the bank paid the $12,000 in closing costs. The property was recently valued at $537,500 on Zillow.com. “We painted two rooms,” Mrs. Gordon said. “That was it.”

Your Money - Foreclosures Can Offer Deals, but Buyer Beware - NYTimes.com

Is the Recession Really Over? What Lies Ahead in 2010

Author: Jim Young

‘Can a bubble that took 15 years to create really right itself in just 24 months—especially when considering the shadow inventories in both the residential and commercial real estate markets?’

Ask the ‘recession question’ of 10 people and you’ll get 10 very different answers. While there’s no doubt that the Internet, 24 hour-a-day news services, text messaging and social networking have all contributed to the deluge of information available to us, the fact that your neighbor has begun blogging and is now an ‘expert’ on the topic de jour, requires some intense ‘sifting’ of information. A strong argument could be made that there is too much information and an incredible amount of noise that actually slows down our ability to forecast and make appropriate decisions.

Residential Real Estate

Despite, or perhaps because of, our access to an extraordinary amount of information, it is ironic that there is a lot of important information that is not making its way into the mainstream media. Recent sound bites suggest that home prices are stabilizing and, in some markets, going up. Yet, based on a recent Deutsche Bank report on residential negative equity, a congressional study on the status of the foreclosure market (old fashioned reading that takes more than 15 seconds), and several articles in the Wall Street Journal and other financial publications, we learn that there is a giant wave of ‘shadow foreclosures’—up to 7 million, one report states—being ‘held’ by lenders. This, understandably, is significantly affecting inventories and prices. There is speculation that the banks are not processing these foreclosures at the normal (3-5 months) pace and are in some cases actually extending the process up to 2 years because they don’t want to recognize/report the losses. The bottom line, based on the analysis of these ‘shadow foreclosures’, is that the residential real estate problem is far from over.

Commercial Real Estate

The commercial market is also experiencing uncertain ‘signals.’ Although the transaction market has come to a near halt, the wave of distressed assets has yet to materialize. One investor stated, “The party has begun; the buyers are here, and we are just waiting for the sellers to arrive.” Various reports on the commercial real estate market show approximately $15 billion in debt becoming due in 2009 with that number doubling in 2010. With asset prices down, the CMBS market gone, and banks not lending to 2006-07 levels, one would expect to see a large increase in the amount of distressed assets.

While there are few notable deals (one Southern California mixed-use project located near the 15 freeway once valued at $115,000,000 was recently valued at $3,000,000 in a bankruptcy proceeding), we still have not seen the wave of distressed assets many speculate to be out there. The consensus is that the speed of processing distressed assets is slow because 1) the institutions do not have resources in place to handle these assets; 2) there has been no push to process toxic assets that will negatively impact the organization; and 3) the Federal Reserve may have requested delays so as not to negatively impact the struggling economy. If you combine the stress of both the residential and commercial markets with the fact that the FDIC is (for the most part) out of money, the slow pace of this toxic asset delivery is more understandable.

According to most ‘experts’, the US recession is over. While not a noted economist, I have to ask the question, ‘Can a bubble that took 15 years to create really right itself in just 24 months—especially when considering the shadow inventories in both the residential and commercial real estate markets?’

Unemployment

In this area also, getting clear and accurate information continues to be challenging. With the national unemployment rate in the 9.5 to 9.8% range, there is a wide range of positive and negative perspectives. The most difficult things to measure when it comes to unemployment trends are the many contributing factors which are not necessarily included—those who have stopped looking for jobs, those who have stopped receiving unemployment, ‘consultants’ with little or no work, those with reduced hours. All of these contribute to the total employment picture.

Unemployment is a critical component for the recovery of the residential and commercial markets. People don’t buy new homes when they’re unemployed and the office, retail and industrial market segments need employment growth in order to absorb the existing inventory before it can expand.

Stay Focused

At some point we need to look beyond the varying and confusing prognostications and keep a careful eye on our own ships. Owning and operating commercial and corporate real estate is very complex. Whether it’s keeping track of space, collecting rents, marketing space, forecasting financials, managing energy consumption or providing secure buildings for our tenants, our business consists of a large number of people, processes and both manual and electronic systems.

In these days of economic uncertainty (either the recession is over or we will experience up to 5 more bad years, depending on who you listen to), it is critical to stay focused. Common sense tells us that streamlining businesses, doing more with less and becoming more efficient will be fundamental parts to recovery. We encourage our industry to examine every business process—from answering the phones (no receptionists) to collecting rents (electronic funds transfer) to how you pay the bills (automated accounts payable). Strive for higher efficiency. One of our favorite sayings is, “Don’t waste a good recession.”

Whether or not the recession has ended is certainly important for long term planning; however, running our businesses daily is still the #1 priority. Technology, automating business processes, streamlining our companies, managing energy better, keeping buildings safer and more secure, communicating with tenants better and managing our complex information systems with more transparency should be even a higher priority than ever before.

While we understand the significance of the debt scenario our industry is faced with, making operations more efficient and therefore profitable is the other side of the equation. Throughout history, technology has played a major role in economic recoveries and operational paradigm shifts. We believe that what we are currently experiencing is a cyclical economic occurrence and the opportunity for a transformational change in the way we do business. If we merely emerge from this cycle and return to ‘business as usual,’ we will have missed the opportunity to significantly enhance the way we operate our multi trillion-dollar industry. Technology and innovation are continuing to have significant impacts around the world in places like Abu Dhabi, South Korea, Singapore, Finland and others. Whatever happens in 2010 with the US economy, don’t lose site of the significant impact we can have by using technology and innovation to better design, develop, lease, operate, transact and use commercial space.

Unlawful Detainer Bill, Resident Screening, Rent Control Law and more

Unlawful Detainer, Meth Lab Clean Up and Other  Bills Signed Into Law From swimming pool safety to meth lab clean-up requirements, read more on the bills signed by the governor that could directly affect rental property owners - and some of the bills the governor vetoed.

During the Resident Screen Process, Simple Rules to Comply with New Federal Reporting Requirements Click here to read some simple questions and answers that will allow rental property owners, managers and other employees to more easily comply with the rules that are now being enforced.

Proposed Changes to Carried Interest Legislation Could Wreak Havoc on Apartment Industry If enacted, this proposal has the potential to be the most disruptive new tax on real estate since the 1986 Tax Reform Act that devastated many apartment owners. Read more.

California Supreme Court and the State’s Rent Control Law After the California Supreme Court denied Review of a lower court case, cites and housing advocates have vowed to challenge the Costa Hawkins Rental Housing Act, the state rent control law passed in 1995. Read more.

Commercial Real Estate Forecast Uncertain

The recent deep economic downturn has had a pronounced impact on commercial real estate sectors, but credit availability is the big unknown that will determine how soon commercial markets recover, according to the NATIONAL ASSOCIATION OF REALTORS®.

Lawrence Yun, NAR chief economist, said some initial movements earlier this week in commercial mortgage-backed securities are encouraging. “The first commercial mortgage bond deal in over a year shows the Federal Reserve’s efforts to sell securities through the TALF program can be fruitful, but the level of activity is well below what is required to resuscitate the commercial market. Credit availability needs to significantly rebound for any hope of a meaningful commercial recovery in 2010.”

The Commercial Leading Indicator for Brokerage Activity rose 0.9 percent to an index of 102.4 in the third quarter from 101.5 in the second quarter, but is 11.1 percent below a reading of 115.3 in the third quarter of 2008. The index in the second quarter was at the lowest level since the first quarter of 1994; NAR’s track of the commercial leading indicator dates back to 1990.

Yun said the modest index recovery follows steep declines in the past several quarters. “Gains i n industrial production, durable goods shipments and retail sales; a rebound in the NAREIT price index; and improving figures on first-time unemployment claims were stabilizing factors,” he said. “Negative impacts include falling private sector income and fewer jobs involving commercial real estate. The office and industrial markets are the sectors most negatively impacted by the economic downturn.”

The Society of Industrial and Office Realtors, in its SIOR Commercial Real Estate Index, a separate attitudinal survey of more than 710 local market experts,² suggests a lower level of business activity in upcoming quarters with recessionary impacts on the industrial and office markets, although 47 percent of members are more hopeful about the near-term outlook.

The SIOR index has declined for 11 consecutive quarters and stood at 35.3 in the third quarter, compared with a level of 100 that represents a balanced marketplace. Even though it is a buyer’s market with lower prices, investment activity continues to decline from the lack of credit, and 85 percent of respondents report development is virtually nonexistent in their markets.

Looking at the overall market, commercial vacancy rates are rising and rents are declining, according to NAR’s latest COMMERCIAL REAL ESTATE OUTLOOK. The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by CBRE Econometric Advisors.

Office Market

Vacancy rates in the office sector are expected to rise from 16.1 percent in the third quarter to 18.5 percent in the third quarter of 2010, with job losses continuing to dampen the market.

Annual office rent should fall by 12.1 percent this year and decline another 8.5 percent in 2010. In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is seen at a negative 56.1 million square feet in 2009 and a negative 43.3 million next year.

Industrial Market

Industrial vacancy rates are forecasted to rise from 13.5 percent in the third quarter of this year to 15.4 percent in the third quarter of 2010.

Annual industrial rent is projected to fall 10.8 percent this year and another 11.5 percent in 2010. Net absorption of industrial space in 58 markets tracked is likely to be a negative 298.7 million square feet this year, and a negative 140.5 million in 2010.

With much of the construction in recent years customized for specific industrial needs, there is an overhang of obsolete structures on the market. “There is an opportunity for non-current owners to look at distressed industrial properties in the current market,” Yun said.

Retail Market

Retail vacancy rates will probably rise from 12.2 percent in the third quarter to 13.0 percent in the third of 2010. “Near term, retail is the most hopeful commercial sector with an expected rise in consumer confidence, resulting from a restoration of housing wealth as home prices stabilize and begin to rise around the spring of next year,” Yun said.

Average retail rent should decline 1.3 percent in 2009 and 3.0 percent next year. Net absorption of retail space in 53 tracked markets is forecast at a negative 21.9 million square feet this year and a negative 4.7 million in 2010.

Multifamily Market

The apartment rental market – multifamily housing – is impacted by higher home sales to first-time home buyers. “However, as the economy turns around and consumer confidence returns, constraints on household growth will be released, which may help to unleash a pent-up rental demand,” Yun said. Multifamily vacancy rates are projected to be fairly steady, edging up from 7.3 percent in the third quarter of 2009 to 7.4 percent in the third quarter of next year.

Average rent is likely to decline 4.1 percent this year, moderating to a 3.3 percent loss in 2010. Multifamily net absorption is forecast at 168,300 units in 59 tracked metro areas in 2009 and 59,700 next year.

Source: NAR

BREAKING NEWS: Congress Passes Homebuyer Tax Credit Expansion

RISMEDIA, November 6, 2009—After the Senate gave final approval last night without a dissenting vote, the House of Representatives voted overwhelmingly this afternoon to pass legislation containing an extension and expansion of the homebuyer tax credit, completing Congressional action and sending the tax credit to President Obama for his signature, possibly as early as tomorrow.

The $8,000 homebuyer tax credit for first-time buyers, due to expire in 25 days, will be extended through April 30 of next year and buyers will have an additional two months, until the end of June, to close. First-time buyers who are in the process of making a purchase will no longer need to worry about qualifying for the $8,000 credit if they close after the November 30 deadline. The new legislation increases the income limit for couples with income up to $225,000, a nearly $55,000 increase above the level in existing law.

For the first time, the new legislation makes buyers who already own a home eligible for a credit. A $6,500 maximum credit will be available to existing homeowners who have lived in their current residence for five of the prior eight years. The legislation limits eligibility for the existing homeowner credit to homes worth $800,000 or less.

The legislation takes effect December 1 and is not retroactive. Both credits are available only for primary residences, not second homes or investment properties.

In the House debate, Speaker Nancy Pelosi (D-Calif.) took the floor to say the homebuyer tax credit was helping a new generation of Americans live out their dream of homeownership and financial independence. Debate on the homebuyer credit was overwhelmingly positive and the legislation passed 403 to 12.

However, several leading economists have voiced concern about the $16.7 billion cost of the credit and the wisdom of spending up to $400,000 per homebuyer to stimulate real estate sales and White House support for extending the credit has been lukewarm at best. However, it is virtually certain that the President will sign the legislative package, which contains an expansion of unemployment benefits as well as the tax changes.

In the Senate, the homebuyer tax credit was amended to a bill expanding unemployment benefits by 20 weeks for those who have exhausted their benefit. The latest unemployment numbers are due out tomorrow and Congressional leaders are rushing the unemployment bill to the White House so that the President can show compassion by signing on the same day more job losses are announced.

The legislation included provisions added to address complaints of fraud. The Internal Revenue Service is given greater authority to oversee the process to root out fraud, and provisions are added in response to past abuses of false sales or underage buyers. An investigation by the Treasury Department’s Inspector General for Tax Administration found that more than 580 children, some as young as four years old, had received $627,000 in first-time homebuyer credits. The IRS has identified 167 suspected criminal schemes and opened nearly 107,000 examinations of potential civil violations of the first-time homebuyer tax credit.

The legislation also contains a provision supported by the National Association of Home Builders which will help larger companies strapped for cash with net operating losses (NOL). Ordinarily these companies can carry back these losses for only two years to qualify for a tax refund. The provision would make this process extend the carry-back to five years for either 2008 or 2009. The tax break will now apply to losses in either 2008 or 2009, and the income cap will come off.

For more information, visit www.realestateeconomywatch.com.

First rail car to be delivered to Alstom-Mare Island

FOR IMMEDIATE RELEASE – November 3, 2009

Tomorrow, Wednesday, November 4th, 2009 San Francisco Bay Railroad will move the first Amtrak California cars to Alstom-Mare Island to perform a Caltrans-funded overhaul marking an exciting and important first step in the re-use of the railroad tracks which connect Mare Island to existing California Northern and Union Pacific tracks to the central Vallejo and onto the national railroad grid.

The City of Vallejo is currently in negotiations with San Francisco Bay Railroad to design an agreement which would provide for the long-term operation on the City’s railroad spur.

Successful negotiations would allow Mare Island businesses to have access to freight service and help support Mare Island’s industrial businesses “The City of Vallejo, Lennar Mare Island, Alstom Mare-Island and the San Francisco Bay Railroad are very excited to move  ahead with this phase of Mare Island’s development,” said Jason Keadjian, spokesman for Lennar Mare Island, the island’s master developer.

Alstom Transportation, Inc. is an international transit company that recently signed a lease for more than 112,000 sq. ft. of office and manufacturing space in Building 599, one of Mare Island’s largest structures. The company will be working with Amtrak to refurbish rail cars used for Amtrak’s Capitol Corridor service.  A welcoming ceremony for the first train is planned for 11am on Wednesday, November 4th, 2009 at Alstom-Mare Island upon arrival of the first cars.

The Address of Alstom-Mare Island is: 450 Pintado St, Vallejo, CA. Traffic along the Wichels causeway may be impacted between 10:30am and 11:30 am, so that persons planning to attend the welcome ceremony should plan to take the Highway 37 exit onto Mare Island.

For more information, contact Annette Taylor (707) 649-3510 or Gil Hollingsworth (707) 649-5454 in the City of Vallejo’s Economic Development Division.

Fox Business – Full Story on Real Estate

Commercial Real Estate Debt Won't Be the Next Shoe to Drop, Economists Say

Oct 20, 2009 12:55 PM, Elaine Misonzhnik, Retail Traffic

For months, the buzz has been that commercial real estate—with $3.4 trillion in outstanding debt, $1.4 trillion of which is coming due by the end of 2012—would precipitate the next leg in the credit crisis and possibly derail the broader economic recovery. To some, that mountain of debt coming due represents a clear parallel to the trillions of dollars in residential loans that helped destroy more than 100 banks and made the current recession the deepest and longest since the Great Depression.

The situation seems especially ominous given that commercial real estate values are off 40 percent from market peaks and credit markets are barely out of hibernation mode. That means indebted owners can't sell a property and repay their mortgage with deal proceeds. It also makes refinancing difficult. Today, borrowers have to put more of their own equity into a deal and lenders have tighter standards. Loan-to-value (LTV) ratios are not only lower than they were at market peaks, but have to be based on the current value of the property, which is lower than it was a few years back. That means a bank might want to replace an 80 percent LTV mortgage on a property once worth $10 million with a 60 percent LTV mortgage on a property now worth $6 million. To some people, this is sending off warning bells that commercial real estate may do as much damage to our financial system as residential mortgages did in 2007 and 2008.

Yet according to many real estate economists, this fear is largely misplaced. Commercial real estate debt will likely stall the recovery in the credit markets, they note, but because of a combination of factors, including the limited impact of commercial real estate loans on the overall economy, it won't bring about the same wave of distress as the housing downturn did.

"As far as the impact of commercial real estate on the overall economy, I don't think it's going to be the next shoe to drop," says Robert Bach, senior vice president and chief economist with Grubb & Ellis, a global commercial real estate services firm. "These problems are focused in regional banks and the Federal Deposit Insurance Corp. (FDIC) has a tested method of shutting those down on Friday and opening them on a Monday under the auspices of a bigger bank. These are not too big to fail banks. I don't see [commercial real estate] as an unmitigated disaster—I see it as a repeat of what happened in the 1990s, but the economy can handle it."

The FDIC, however, faces some concerns. A recent analysis by the agency's Office of Inspector General found that during the peak of the real estate market many banks ignored FDIC's 2006 recommendation that they keep commercial real estate holdings at less than 300 percent of total capital. Meanwhile, after dealing with 100 bank bankruptcies last year, today the agency is facing a deficit for the first time since 1933 and might lack the funds to deal with the potential fallout of a commercial real estate crisis.

In 2009, bank failures cost the agency $25 billion on top of the $20 billion it doled out in 2008. To deal with the money shortage, the FDIC is requiring banks to prepay $45 billion of insurance premiums by the end of this year. The premiums would cover the fourth quarter of this year and all of 2010, 2011 and 2012. Overall, the agency is projecting that bank failures between 2009 and 2013 will cost it $70 billion.

Meanwhile, more than $1.4 trillion in commercial real estate loans are scheduled to mature between 2009 and 2012, including $320 billion next year, according to ING Clarion Real Estate, a real estate investment management firm. That's coming at a time when new sources of refinancing remain scarce and valuations of commercial real estate properties are getting battered by weakening fundamentals. In the first half of 2009, the volume of distressed commercial assets grew 122 percent, ING reports, to $138 billion, including $32 billion in the retail sector.

The good news is that total volume of commercial real estate debt is about a third of the total amount of outstanding residential mortgage debt, which stands at approximately $10.9 trillion, according to the Federal Reserve Board's figures.

What's more, because the residential mortgage crisis affected almost every homeowner in a country with a homeownership rate of 67 percent, it had a devastating impact on consumer spending, which makes up about 70 percent of U.S. GDP. During the housing boom, Americans would refinance their homes and use the proceeds to shop till they dropped. Once refinancing became impossible, consumer spending dried up. By contrast, troubles in the commercial real estate industry might cause damage to banks and large institutions, but will have a limited effect on Main Street, says Clint Myers, strategist with Property & Portfolio Research, a Boston-based real estate research firm.

Any potential damage will also be mitigated by the fact that commercial real estate debt has been largely concentrated on the balance sheets of regional banks, rather than the big national players, and that most of the loans issued before 2005 feature solid underwriting, adds David J. Lynn, managing director with ING Clarion Real Estate.

Today, 54 percent of all commercial real estate loan defaults come from loans sponsored through commercial mortgage-backed securities (CMBS), which were a major source of real estate debt between 2005 and 2007. Loans issued by national and regional banks account for only 12 percent and 11 percent of all defaults, respectively.

After the collapse of Lehman Brothers, the government isn't likely to let another big national lending institution go under, so most of the damage from bad commercial real estate loans will be contained in the regional bank sector, Lynn notes. And the financial system could withstand the failure of several hundred regional banks without toppling over, adds Myers.

That's not to say that all those commercial loans won't cause serious problems in the credit markets. As long as banks avoid realizing losses on commercial mortgages, commercial asset values will remain artificially high, Myers says. That, in turn, will likely limit the flow of new credit into the commercial real estate market, leaving some owners cash-strapped.

Myers doubts the possibility of another large bankruptcy in the public REIT sector, since REITs have proven they can raise enough funds to survive through equity offerings. But there will likely be added pressure on privately-held real estate investment firms.

"The real stress in the system [will be on] the banks," he says. "The pace at which regional banks fail will probably accelerate from this year to the next. And what it will mean is that there will be very little new lending activity for commercial real estate and it's going to be very hard to grow." --Elaine Misonzhnik

60 Day Notice Required for Termination of all Residential Tenancies

Current law requires landlords issuing “no fault” eviction notices to give tenants 60 days in which to move, but at the end of this year this requirement will “sunset” and revert to the prior law providing only 30 days notice. This bill makes the notice requirement permanent.

A “no fault” eviction means that the tenant’s lease is terminated not because the tenant breached the lease, but rather because the lease term has expired and the landlord does not wish to renew it. In places without rent control, the landlord is free to terminate the tenancy upon lease expiration provided that the owner is not discriminating against the tenant for unlawful reasons such as the tenant’s race, religion, ethnicity, gender, sexual orientation or national origin. However, in cities that have rent control, a no fault eviction must also be expressly permitted by the rent law; as such, no fault evictions are generally limited to owner/relative move-ins, removal of illegal units, substantial rehabilitations, sale of condominium units and, for a temporary displacement of tenants with the right to return, lead abatement or capital improvement work to the unit.

The new law becomes effective January 1, 2010 and applies to all residential tenancies over one year in length.  If a tenancy is less than one year than a 30 day notice is sufficient.  The text of the law can be viewed here.

Proposed changes to the Winery Definition Ordinance of Napa County

The Board of Supervisors took up an item at its October 6 board meeting that will give the board a range of options to consider revising the Winery Definition Ordinance (WDO).  The WDO was a controversial ordinance passed in January of 1990 that was a compromise between the growers and vintners that regulated issues such as marketing, minimum winery parcel size, tours and tastings, signage and minimum percentage of Napa County grapes required in each winery.  Some of these issues have become hot topics, particularly now that the agri-tourism business has had a significant slow down.  While there are parts of the WDO that have worked very well, marketing of events is an issue that has become especially controversial.  Essentially, if an event doesn’t educate or develop the wine trade, they are not allowed, which eliminates cultural and social events including business meetings, birthday parties or weddings. The Napa Valley Vintners with the support of other grower/winery organizations came up with an alternative plan to study which would allow changes through the current temporary events/special events programs under county control without opening up the WDO.  This would make changes that would stimulate our local economy and do it while letting the industry debate the merits of regulation that only impacts the wine industry. 

-from the October 16 issue of Bill Dodd, Supervisor, email newsletter

9 Ways You Can Knock the Socks off Your Next Landlord

This article is by Get Rich Slowly staff writer Adam Baker.

We all know how to rent a typical, cookie-cutter apartment or house. Find a contact number. Set-up a walk through. Fill out the application. Pay your fee and wait for a response.

But sometimes typical just doesn’t cut it.

Maybe you’re looking to secure a unique apartment in an irresistible location. Or you might be seeking the only house for rent in a certain school district. Heck, you may even find yourself in New Zealand needing a short-term (3-month) lease when everyone wants a 6-month minimum.  *raises hand*

Whatever your motivation, here are nine ways you can knock the socks off your next landlord or property manager:

1. Create a Rental Résumé. Treat this like you would a job search. The majority of applications are going to ask for the same information. Put together a basic one- or two-page document containing this commonly requested information. Even if the landlord or property manager makes you fill out the application anyway, at least you’ll already have everything on hand. Be sure to include:
   • Full names of everyone on application
   • Dates of Birth
   • Contact information (phone and e-mail)
   • Current address (length, landlord information, reason for leaving)
   • Previous addresses (with additional information)
   • Social Security numbers Previous commenters note that you may want to wait to reveal your Social Security information
   • Current employment information (salary, length, contact information)
   • Past employment (with additional information)
   • Personal references
   • Vehicle information (make, model, plates, driver’s license number)
   • Pet(s) information (breed, size, age)
2. Pull your own credit report. Use AnnualCreditReport.com, if possible. Pulling your own credit report ahead of time will ensure that you are aware of the information contained in the report. If there are any negative marks, be sure to include a written statement of explanation (especially for any bankruptcies, evictions, or missed rent payments).
3. Obtain and include full letters of reference. Most rental applications only ask for the contact information of your references. However, as with a job, you can go the extra mile by including full letters of recommendation from previous landlords, property managers, or apartment complexes. As a property manager, I was more than willing to write these for our best tenants. Many apartment complexes have a standard reference letter they provide to past tenants upon request.
4. Provide copies of commonly requested “further information”. This is especially important for the self-employed or those with inconsistent employment length. Commonly requested information can include copies of recent paystubs, recent years’ tax returns, net worth statements, bank statements, and income/expense reports for small businesses. Also, landlords may request copies of identification like driver’s licenses, social security cards, or birth certificates.
5. Look sharp. Whether you like it or not, appearance does matter, especially for first impressions. Wash the purple dye out of your mohawk, lose the three wolves T-shirt, and dress business casual. (J.D.’s note: Did anyone notice that Dwight was wearing the three wolves t-shirt on The Office recently? I just about died laughing.)
6. Be five minutes early. Waiting does not impress anyone.
7. Find common ground. In any social encounter, discussing a topic that is familiar to both parties is one of the fastest ways to build rapport. When Courtney and I were searching for apartments here in Auckland, we talked to many different agents and owners. Early on in each discussion, I brought up the fact that I had owned a property management company back in the States. It gave us an immediate connection and built instant trust. While you may not have direct real estate experience, chances are there will be many opportunities for you to find common ground of your own.
8. Know your needs and wants ahead of time. This is a important. Decide ahead of time what features are absolute musts and which are more negotiable. For example, you may know that you need a fenced in backyard for the dog. Or, you may only be willing to consider homes with a detached garage for working on your cars as a hobby. On the other hand, an included washer/dryer may only be a strong want. You’d be willing to purchase these if the rest of the property fit your needs. Get clear on this distinction and be able to articulate this to your potential landlord or manager.
9. Don’t be afraid to ask questions. As a property manager, I always had a weird feeling about tenants who appeared nervous or who seemed afraid to ask questions. The potential tenants whom impressed me the most appeared confident, stated what they were looking for, and asked specific questions about the property. For example, it’s perfectly reasonable (and somewhat expected) to inquire about the average costs of monthly utilities.

Once you’ve established yourself as a strong candidate…leverage it! Knocking the socks off your landlord is not just for fun! After positioning yourself as an ideal applicant, don’t be afraid to start negotiating.

Here in Auckland, Courtney and I had luck negotiating ourselves into a three-month lease even though it ended in the middle of December (bad timing when trying to re-rent). At our last apartment in the States, the complex ended up waiving both the application fee and our required deposit.

Try asking for a 10% rent discount. Many apartment complexes run unadvertised specials, and the individual landlord will often discount if he believes you’ll be a quality tenant.

I’ve seen people have luck requesting upgrades on appliances or requiring that an owner furnish a washer/dryer when previously it wasn’t included. If your condo or apartment charges extra for amenities (gym, pool, parking), try asking for access to be included in your rent.

Most people are scared because they think it’s uncommon to ask for more. I’ve been on both sides of the rental equation and this sort of negotiation happens all the time.  If you don’t ask, the answer will always be “no”. So get out there, impress some people, and take your apartment or house hunting to the next level!

'Buyer's Choice Act' (AB 957/Galgiani) Signed Into Law

Legislation Protects Consumers Purchasing Foreclosed Properties

SACRAMENTO, Calif., Oct. 13 /PRNewswire/ -- The Escrow Institute of California announced today that Governor Schwarzenegger signed Assembly Bill 957 into law. This bill, authored by Assembly Member Cathleen Galgiani (D-Tracy), protects consumers by ensuring that they have the right to choose their own real estate service providers when purchasing foreclosed properties.

AB 957, known as the Buyer's Choice Act, prohibits sellers of so-called REO properties - typically foreclosed properties owned by banks - from requiring the buyer to use a particular title company, escrow settlement or other real estate service provider. This unethical, anti-competitive practice drives up costs for homebuyers and takes business away from locally owned companies. The problem has become particularly acute in the Central Valley and Inland Empire, areas that have faced some of the highest foreclosure rates in the country. Recent data indicate that 11 of the nation's top 20 foreclosure rates are in California metropolitan areas.

"Homebuyers should have every right to choose their title, escrow and real estate service providers based on price and quality of service," said Assembly Member Cathleen Galgiani. "AB 957 ensures that buyers can make marketplace choices that suit their own best interests, rather than getting forced to serve the financial interests of some international bank or other corporation."

The Buyer's Choice Act enjoyed overwhelming, bi-partisan support in the Legislature, with State Senator Jeff Denham (R-Merced) providing important assistance. AB 957 was sponsored by the Escrow Institute of California, and received support from the California Association of Realtors and numerous real estate professionals from across the state. The bill requires that REO sellers provide a disclosure notice to buyers informing them of their rights to choose their own title, escrow and other real estate services. Sellers who violate the provisions of AB 957 are subject to enforcement action by state regulators and liable to buyers for civil penalties.

"It's just not right that independent escrow companies and other local real estate businesses are being literally locked out of the foreclosure sales market," said Escrow Institute of California CEO Tim Egan. "These local companies oftentimes offer the best price and highest quality of service available to consumers. Excluding these companies from REO sales kills local jobs and eliminates competition in the marketplace."

For additional information regarding AB 957, please visit www.escrowinstitute.org.

SOURCE Escrow Institute of California via Fidelity National Title Company of Napa, CA .