By Steven Silverman

As a commercial real estate broker I have assisted multi-family clients with both market-rate and affordable projects. The difficulty that working folks experience in finding an affordable place to live should be a concern for all of us. 

Most new apartments coming onto the market are in the luxury category. One reason for this is that due to the rising costs of land materials and labor, developers are finding that the only way for them to be profitable is to construct a premium product.  The private sector cannot obtain a satisfactory return on investment by developing workforce housing.

Financing is another obstacle facing affordable housing. Commercial lenders will often make capital available only to the top tier of the apartment rental market. Projects targeted to providing housing for poorer Americans must rely on funding from federal programs such as low-income housing tax credits.  We are not doing enough for workforce housing. The demand for workforce housing far exceeds the supply.  The biggest shortage of housing affects middle range workers that earn 60%-120% of area median incomes.

Here are two innovative approaches that I have seen in the market place that may help to provide partial solutions to the workforce housing crisis

1.       Adaptive Re-use

Ironically, the pandemic that hurt so many in the workforce may have created an opportunity to assist in the creation of multifamily apartments for middle-income workers. During the pandemic, one of the hardest-hit segments of the real estate sector was the Hospitality segment and many hotel properties found themselves in severe distress. Adaptive reuse of distressed hotels is an exciting avenue in which to expand the availability of affordable housing. Developers across the country are examining the possibility of converting distressed hotels into workforce housing. Several such projects are already underway.

For example, in Alabama, a private company has acquired a Ramada Inn that had been on the market for a year they are converting the former hotel into 120 energy-efficient one-bedroom workforce targeted apartment units. The development will include co-working spaces, a gym, a pool, daycare, storage, and even a nature trail. Rents will be in the range of 500 to $700.00 per month. The project will be completed in 2022. In Branson Mo, a former Days Inn property is nearing completion as a 341-unit apartment complex.

                                                                   Credit: Fort Worth Housing Solutions

The private developers are first out of the gate. They are undertaking adaptative reuse projects without using federal funding or tax credits. The privately funded deals can close faster and give the owner more flexibility. But there is no reason that public housing cannot learn from what the private developers are doing and pursue a similar strategy. Help is available.  I have spoken with contractors in Florida who are now focusing on adaptive reuse and can help developers and public entities in the analysis and construction of adaptive re-use projects

2.       Space Sharing

In the 21st century, we have moved towards the culture of sharing assets in order to more efficiently use the asset.  We share vacation space assets using Airbnb. We use ride-share services such as Uber, office share spaces such as We-Work, bike share, scooter share, etc. In ten years, we will have driverless cars and we can expect to see people moving away from owning a car to a shared system where they summon a vehicle when they need one

So how can we use the sharing phenomena for housing? I am a co-host of the Invest Florida Show, a weekly podcast focused on real estate investment in Florida. Hosting the show gives me the opportunity each week to learn from smart people and be exposed to new ideas.  One recent guest described his real estate investment strategy where he has figured out how to use a shared space strategy for real estate investment. He purchases small apartment buildings, removes the communal spaces such as the living room, dining room, study, etc., and converts those communal areas into bedrooms. Each property is of course different.  But, as an example, he may end up reconfiguring a unit that previously had 3 bedrooms into a space with 5 or six bedrooms. He then rents out each bedroom for $500-$600 per month. The residents share the kitchen and bathroom areas. One might think that a shared living environment with residents living in such proximity would cause problems.

This enterprising landlord also figured out how to structure the management and ground rules so that there are very few problems with residents and less work is required for him as the owner.  He told me that this is a win for the residents. It is a solution for a segment of the population.   With his projects, they have a clean, affordable space where the building is maintained, and they feel safe. The landlord gains also. By creating additional rooms for rent he boosts his revenue and achieves an acceptable return on his investment. Is there a way to scale this approach?

The shortage of workforce housing was a problem before the pandemic, and it will only worsen as the population increases. It is a social issue facing all communities. Now, as the economic hardships caused by COVID-19 accelerate, the need for affordable housing will become even more pressing. There is no panacea; not one single simple solution to solve the problem. It is imperative to think out of the box and explore multiple creative ways to address this issue.

As commercial real estate brokers, we at Tampa Commercial Real Estate counsel our clients on how to improve their chances for success. One of the most important steps in the process of the acquisition of a property is to secure financing. It is imperative for investors to understand how to work with a lender and what information your lender will require in order for you to receive financing in the shortest possible time. Andrew LaSalla, a Principal at LSG Lending Advisors is a respected lending advisor who shared his thoughts on the subject with Tampa Commercial Real Estate.

How to Find Out Everything You Need to Know about a Multifamily Property, Before You Invest

Multifamily properties can be healthy investments. However, before you buy an existing multifamily apartment building, careful research must be done to determine whether to move forward with the property you’re considering.

Use this article as a guide to get the information you need before purchasing a multifamily property.

Request Information from the Current Project Owner

The first step is to ask the existing project owner for the current rent roll and the last three years of historical operating statements for the project.

Rent Roll

The rent roll includes important data such as the type of unit, unit size, rent received, any subsidies for affordable units and whether units are occupied or vacant.  It will also include move-in dates and lease expiration dates which can help you determine how long renters tend to stay in the building, whether most renters stay long-term or if there is a high rate of renter turnover.

Historical Operating Statements

Historical operating statements give the investor a snapshot view of the historical revenue of the property and ancillary income. They also provide a glimpse into the cost of expenses, including utilities, payroll, advertising, repairs and maintenance, security, property taxes and insurance, as well as other operating expenses. It is important to compare these expenses year-over-year, and look into large variances in further detail.

One-off capital expenses to upgrade the project, such as the installation of new HVAC systems, roofs, windows and siding, should be categorized separately. A common mistake is to categorize expensive, one-time repairs under “repairs and maintenance”. This will result in higher expenses and lower net operating income.

Look at the Last 3 Years of Occupancy

Investors should also review the occupancy records for the last three years.  Look into whether occupancy has increased, decreased or remained consistent.

• If the occupancy has decreased, is it due to newer projects in close proximity, increased unemployment in the area or poor management?
• If the occupancy has increased, is it due to the market, or were large concessions offered to decrease vacancies?

Review Data from Nearby Multifamily Apartments

Once you have gathered and reviewed financial information on the property you wish to buy, look at data for other multifamily apartments in close proximity and in the same market.

Compare properties in the same class (A, B or C) with the property you wish to buy. Look at unit sizes, rental income and expenses compared to the project that you are looking to purchase.

Remember that older properties, such as class C assets, may require significant capital to make improvements that would justify increasing rents to compete with newer projects.

Use Data to Plan for the Future

Experienced investors should use operating statements to assess where expenses can be reduced and where revenues can be increased in order to get the return they are looking for. Consider how long major renovations will take and how much they are likely to cost.  If you are serious about a property after reviewing the financials, request recently-completed third-party reports, including a CNA (Capital Needs Assessment) report and the most recent appraisal.

How to Secure Financing from Your Chosen Lender

It is important to note that lenders will also review a project’s historical operating statements when an investor approaches them for financial services. Lenders do not underwrite based on future projections.

When you are ready to request a term sheet from your chosen lender, having the following items available will help them expedite your request:

• The current rent roll.
• Trailing 12-month operating income statements.
• The last 3 years of operating income statements.
• Acquisition date and purchase price of property.
• Property address.
• Résumé of principals.
• Personal financial statement.
• REO (Real Estate Owned Schedule).
• Mortgage statement (reflecting current debt and reserves).
• A list of repairs and capital improvements made in the last 3 years.
• Proposed or required repairs to the project.
• Low-income occupancy covenants and approved utilities, if applicable.
• Any third-party reports that have been completed in the last 5 years.
• A copy of the organizational chart of ownership.
• The original and current HAP contract, if applicable.

Invest with Confidence

With a thorough understanding of how the multifamily apartment project you’re interested in currently operates and how it compares to competitor projects, you can make an informed decision to invest.

This blog post was contributed by Andrew LaSalla, Principal at LSG Lending Advisors. Andrew is a trusted financial consultant dedicated to helping clients secure loans for multifamily, healthcare, affordable housing and student housing properties.

Fox News aired a segment on commercial real estate. They wanted to talk to a competent commercial real estate broker with a good reputation who has boots on the ground. They were referred to me. I spoke to them for 30 min and they aired about 30 sec. Nevertheless,  I was happy to help. We are all in a difficult period.

Video Link: https://www.fox13news.com/news/struggling-businesses-push-commercial-real-estate-into-the-red

Florida is surrounded by water.  Intuitively everyone knows there is a risk from flooding but we have learned to live with it. Most people have become oblivious. The thinking is that “that is a small risk that may affect someone else. It won’t happen to me.”  Why would anyone be thinking about melting iceberg when they are sitting under the hot sun in Florida? But, science tells us that the Icebergs are melting and sea levels have been rising at an accelerated pace.  Science also tells us that wearing a mask will prevent the spread of the Coronavirus. There are plenty of Floridians who scoff at this scientific notion the net result is that Florida has experienced a surging pandemic.

Florida is in the path of Hurricanes. Rising sea levels increase the likelihood that storm surges or water driven by hurricanes will flood properties.  Flooding places more real estate and more people at risk in Florida than it does in any other state, by a wide margin. As an example, 40% of St Petersburg is inside the Coastal High Hazard Area that reflects whether a storm surge from a Category 1 hurricane could cause flooding. Imagine what flooding we would see if there is a Category 4 hurricane, which has occurred several times in Florida over the past few years. General insurance policies that property owners and renters carry don’t cover flooding, A specific Flood Insurance Policy is required to insure flood water damage. No other place in the world has the insured exposure to hurricanes as Florida does.

FEMA uses the best available technical data to create flood hazard maps that outline a community’s flood risk areas.                    CLICK: FEMA LINK

There are two factors to be concerned with:
1) Annual Cost of Flood Insurance:

Banks require properties that they finance that are located in Flood zones to carry flood insurance. Flood insurance can be costly and if your property is in a flood zone, you will pay for it.

The National Flood Insurance Program is up for reauthorization this year. Fiscal conservatives have said they want to use that opportunity to reduce the program’s subsidies so that people are paying something closer to the full cost of their risk. A cut in federal subsidies would particularly hurt Florida, which despite its exposure, pays the lowest average flood-insurance premiums in the country, according to FEMA data.

It is important to understand that a wave will be punishing Florida, whether we have a hurricane or not. That wave is the cost of insurance. The reason for this is Reinsurance, the insurance designed to buffer insurers from large losses. Reinsurance prices have risen by 26%. That has caused major insurance companies on Florida to raise premiums by as much as 33%. Several insurance companies have dropped clients in areas considered to be at high risk of hurricane damage.  Citizens, the state-owned insurer of last resort is left holding the bag. Not only will not be able to cope if an expensive storm hits, but taxpayers will also be left holding the bag.  for Climate change threatens to make higher insurance (and reinsurance prices) the new normal.

2) Property Values:

The risk for Florida is that climate change could drag down the real estate markets – residential and commercial.  Relative sea levels in South Florida are roughly four inches higher now than in 1992. The National Oceanic and Atmospheric Administration predicts sea levels will rise as much as three feet in Miami by 2060.

The chief economist at Freddie Mac, warned in a 2016 report that  Flooding in coastal areas could cause a real estate crisis more severe than the Great Recession. It could spread through banks, insurers, and other industries. And, unlike past recessions, properties at risk from Flood water may not recover. 

Additional risks to property owners could come from the lending end. If we experience a storm surge and property values start to fall, banks could stop writing long term mortgages for properties in Flood zones. These properties will be more difficult to sell which will decrease their value.

The odds of dying in a car crash are 1 in 103. Because of the risk, we all wear seatbelts. The odds of flooding occurring to a property that is located in the 100-year flood plain is 1 in 100. Yet, aside from taking out flood insurance, people in those properties don’t do anything.

Properties A and B are nearby one another and on the same main road. However, Property A is located inside of the100-year  Flood Plain depicted on the FEMA map. Property B is outside of the Flood Plain. It may be worth paying more for Property A  because Property A has a superior location or it is a better building and you will transact more business at that location. That is a business decision. But all things being equal, I would advise my client to select Property B. Property B has a lower risk and you won’t have to pay flood insurance

If you are purchasing a property don’t forget to check the flood zone in which the property resides. If you have the choice between two properties, select one that is not in a flood zone. Also, wear seat belts and read science articles. 

Steven Silverman, Broker         Tampa Commercial Real Estate   www.TampaCommercialREalEstate.com