By Steven Silverman Uncategorized • • 0 Comments

Payment Protection Program (PPP) – Certain Banks Are Using The Cares Act To Protect themselves, Not Their Customers

Up until a few weeks ago, I was a humble commercial real estate broker, end of story. How I long for that simpler life. Now I have morphed into a counselor spending time trying to help clients navigate the real estate related issues brought on by the COVID-19 shutdown.

Under the CARES Act, a small business employer (a business with fewer than 500 employees) can receive forgivable or low-interest loans of up to $10 million. The purpose is to provide cash-flow assistance to employers who maintain their payrolls during the COVID-19 crisis. This program is known as the Paycheck Protection Program (PPP). The government and lenders are promoting the PPP (Payroll Protection Program) as a wonderful solution for small businesses. The interest rate on the PPP loans is low and if the proceeds are used for qualified purposes such as payroll or utilities the loans will be forgiven.

The guidance given to small businesses is that it is a simple process and that they should submit the PPP application through the bank with whom they have a relationship. April 3rd was the opening date to submit applications

I went with a client to Bank of America on April 3rd so they could submit their PPP application. This client has been a loyal customer of Bank of America for 35 five years and they have always maintained strong deposits in the bank. There can be no question about the long-standing banking relationship.  Bank of America refused to even look at the application, saying that the applicant did not meet the BOA criteria for the PPP loan because the applicant company did not owe Bank of America any money. The applicant business has been run in a fiscally responsible manner and at present does not have any loans or credit cards with Bank of America.  For that reason, the applicant company did not qualify for relief through the PPP program at Bank Of America.

I was shocked and my client was outraged. They are a small business and were only applying for $20,000 in order to cover payroll expenses. All the propaganda about The Bank of America taking care of existing clients is nonsense.

The PPP loan program is designed to assist employers in maintaining eligible payroll costs within the “covered period.”  The “covered period” runs from February 15 through June 30, 2020. The critical part is that the loans are made on a “first come, first served” basis, per guidelines issued  by the Small Business Administration (SBA.)

The Banks are the gatekeepers and certain banks such as Bank Of America are only processing PPP loans for customers who owe Bank Of America money. Other clients are barred from crossing the threshold

My interpretation is that there is a simple reason for this code of conduct.  The bank does not want defaults on its loan portfolio. In selecting only customers with a loan relationship, Bank Of America is protecting its interests.  By processing only PFP loans for these selected customers, the bank is more secure that it will continue to receive loan payments from clients who have existing loans. I do not believe that this policy (i.e. requiring a loan relationship with the bank)  is mandated by the SBA. I do believe that Bank of America has taken it upon themselves to select applications from certain clients in order to protect Bank Of America.  By the time Bank of America has submitted all the self-serving PPP loan applications to the SBA,  the funds allocated for the PPP loan program will have been depleted

Now I get it.  Certain banks are using PPP process to protect the banks, not small businesses. The manner in which the program is being administered by certain lenders is neither honest nor fair. Countless small businesses will be shut out completely and they will not be able to keep their employees employed. Relationships are a two-way street. Bank of America and other banks who are operating in a similar fashion will pay a price down the road when their clients leave. This has a long tail.

How wide-spread is this? I suspect that this manner of processing the  PPP applications is occurring at some larger banks. I am not sure if the smaller banks and community banks are operating in the same way. My gut feeling is that the smaller banks will take much better care of their customers. I can only speak factually about my experience with one bank. If I am wrong in my assessment,  and it turns out that it is mandatory for all banks to service only their clients with loan relationships then I apologize for this entire article and I stand corrected. If I am correct, then the system is broken and is being abused. People should know about it. There may be other alternatives. I want to share whatever I can learn with my clients and my fellow brokers.  I would love to hear from anybody who has been working with banks what their experience has been. Also, I would love to hear from lenders directly, as to how they are administering the PPP loan application process. .Kindly comment below

By Steven Silverman Blog • • 2 Comments

Commercial Real Estate Values Are At An All Time High

A few years ago, in the wake of the recession, the price of Gas fell one cent $2.00 per gal. I remember taking a photograph of the pylon sign because I did not believe that I would see this price again in my lifetime. It would be something to show my future grandchildren

Yesterday, I took another photograph. Gas had fallen to $1.79/gal. and prices are cheaper elsewhere

Price of Gas In Tampa

When the crown prince of Saudi Arabia gets a head cold the retail price instantaneously changes at my local gas station in Tampa, which is thousands of miles away.  The price either goes up or goes down depending on how people interpret the situation and the mood of the prince. The price at the pump changes again after his doctor visits and gives the prince an aspirin. In the petroleum market and in the stock market the process is forward-looking and valuation changes are rapid.  It is different for commercial real estate

The value of your commercial property has never been higher. That seems like an absurdity. We are overwhelmed by the Covid-19 Virus and the entire country has shut down.  How can this be?

To understand why this can be true we have to look at the appraisal process and how we arrive at the value of a property? When trying to determine the market price of a piece of property, we cannot ask a Seller for his opinion because he will give a price that is too high. We cannot ask a Buyer because he will give you a price that is too low,  because that is in his best interest. So. we ask an appraiser. Appraisers are arms-length and are highly trained to determine. It is true that there is always some art woven into the science of the appraisal process and different appraisers may arrive at a different value for the same property. However,  the methodology is strictly regulated and has been tested by time. The system has been designed to use facts, not emotions to arrive at a property value. Buyers, Sellers, and Lenders rely on the appraisal process.

The procedures that the Appraisers follow to determine property value are rigid and uniform.  Appraisers are compelled to look at comparable properties and, after accounting for differences such as property condition, location, size, etc , the appraiser will impute value to the property they are appraising. When analyzing comparable properties, the appraiser looks at sales price, lease rates and earnings of similar properties that recently transacted. The process that Appraisers have developed is based on historical information

Many Appraisers are still very busy today. There were a lot of deals in the pipeline before the COVID-19 pandemic and the lenders are, for the most part, honoring their loan commitments and Appraisers are providing strong valuations to the lenders. It does not matter that we are today in the midst of an epidemic. Appraisers have their hands tied. If they appraise a property in today’s market, they must use the established procedures of the Appraisal process to determine value. So when the Appraiser pulls up comparable properties today, he is reviewing properties that transacted recently, when we at the top of the real estate market.  Appraisers are trapped by the system. They know that COVID-19 will have an effect on property values but the Appraisal process gives themy have no basis to discount property values at this point in time. It is an interesting situation, Buyers and Lenders who had initiated a deal before the COVID-19 crisis are moving forward.to closing. To some, it does not seem to make a huge difference but others privately express concern that they are moving towards closing, fearing that the market today is probably very different from the day that they committed to the deal. Many of them don’t have a choice. They can be sued for specific performance if they back out. The Sellers, on the other hand, are holding their breath and rejoicing.

Recognizing the absurdity, some Appraisers are now putting disclaimers into their reports. They may say that the value is valid at the date of Appraisal only. Or they add a clause saying that the value herein is subject to change based on market conditions

Real estate values are the story of supply and demand. You don’t have to be a rocket scientist to understand that Covid-19 will change the equilibrium, Uncertainty changes the demand. Intuitively, we know that prices have changed. I have already had buyers that had not inked the deal,  back out. Some Buyers that had deals in progress are demanding a price concession, even if it means losing their deposit. At the same time, some sellers that I have spoken to are sticking to their sales prices saying that they have not seen values decline. They are right because history has not yet had time to reflect changes. Other Sellers, however,  have taken their properties off the market. They will take a step back and wait for the market to recover. The crisis today is very different from 2008 which was basically a liquidity crisis. This time the government is promising that money will be available,  so some market participants argue that the effect on property values will not be as dramatic. However, people die, people divorce, people move an some run out of money. Certain lenders may not restructure debt. Inevitably, some property owners will need to sell, even as demand decreases. Buyers are already assembling pools and building cash to take advantage of opportunities that may arise. As these transactions eventually get reflected in the historical  Appraisal process, property values will start to decrease.  Because the Appraisal process is historical and has a long tail, there will be a time lag in reflecting property values on the way down and again on the way up. No matter what an Appiraser or anybody else tells you, it is time for common sense.

By Steven Silverman

If you have any thoughts on this subject, please comment below

By Steven Silverman Blog • Update Tampa Bay Commercial Real Estate • • • 5 Comments

Creative Solutions For Landlords And Tenants. Lessons From The Corona Virus COVID-19

Coronavirus is affecting everything in its path. As commercial real estate brokers and property managers, we are receiving calls from tenants wanting to stop paying rent. At the same time, we are receiving calls from Landlords saying that tenants have the responsibility to keep paying.

All of us in commercial real estate have faced confrontations in the past between Landlord and existing Tenants. However, the onslaught of the Coronavirus has given us all pause for thought. Never before have we been hit with so many competing demands at the same time. How do we find the balance?

A tenant that is a fitness studio or a restaurant has been forced to close down during the crisis. The business owner feels a responsibility to pay their employees and they have to pay rent, loan interest, and other expenses. Yet they have no revenue coming in. They did nothing wrong that would have caused them to be in this predicament. Their employees look at it the same way. They did nothing wrong and feel that the business owner should still pay them even though they have been sent home from work. Of course, the rental equipment providers to the business have the same thoughts. The equipment that the business rents are still on the premises of the business and the business should pay the monthly rental fee. After all, the equipment rental company has done nothing wrong.

Lunch Time Photos in Downtown Tampa – Two of Tampa’s busiest streets – the streets are empty

Corona’s impact on downtown Tampa 1 – Florida Av at lunchtime

 

Corona’s impact on downtown Tampa 2    Tampa Rd at lunchtime

 

Some tenants have taken the view that the default course of action is to stop paying rent. Landlords, after all,  are wealthy and if the Landlords want them to remain on as tenants the Landlords should help them. The problem is that Landlords are in business just like everyone else. They have expenses and they have mortgages. Landlords did not cause the crisis either

The only thing that everyone can agree upon is the opinion they each have that they themselves did not cause the crisis and therefore should not bear the burden

We can only address the situation if we take the position that landlords and tenants are both parts of the same food chain. Neither can survive without the other and everybody has to participate to keep one another alive.  It will be painful for everyone. Tenants take the first hit. Workers may not get his full pay, the service providers will not get all their fees and the owners will cut their own salaries. Eventually,  Landlords will have to accept some portion of the rent burden. However, it should not be that tenants just sit back and hold out their hands to their Landlord. Tenants should take immediate steps to avail themselves of State and Federal programs that provide relief.  If a tenant does request assistance from their Landlord, it seems only fair that they demonstrate to the Landlord that they have taken concrete steps to help themselves.  Some Landlords have already created forms that tenants must complete evidencing that the tenant has applied for help before coming to the Landlord. Many landlords will themselves be going to their lenders to ask for relief.

China has demonstrated that the only way to stop the crisis from snowballing is to be proactive and take bold action. Time is of the essence to find creative ways for tenants and landlords to work together. By being proactive and having discussions with Tenants, Landlords can mitigate some of the issues that will certainly arise.

Here are a few examples

1. Assuming this is a short term problem, allow the landlords to apply the tenant security deposit towards rent. Later, when the crisis has subsided the tenant can rebuild his security deposit by adding a few hundred dollars to each month rent check
2. The Base rent is reduced by 50% for ninety days. The tenant with a Net lease still pays CAM expenses. The unpaid 50% base rent is repaid to the landlord over the period of the remaining lease term ( I am not an attorney and you should always obtain legal advice when modifying a lease. However, if it helps you, here is one letter that I created that worked for both Landlord and Tenant Sample Letter)
3. Blend and extend. A variation of this is for there to be a reduction in rent paid for a period of time, with the lease to be extended commensurately
There is no “one situation fits all” solution. Tenants that are behind on the rent or habitual late payers may not have earned the forgiveness rights cited above. It could be argued that they were already traveling on the road to failure. Some Landlords that are heavily leveraged may not have the luxury to negotiate. Solutions will vary depending upon which state you are in. Much of the focus in the media has been on residential leases. California has already served notice that commercial landlords must give a 90 day grace period if requested, and commercial tenants cannot be evicted during that period. Florida is traditionally more conservative and I don’t expect Florida to take the same path. Many individual negotiations must take place to address specific situations, with parties applying creative band-aids to each circumstance

This is also an opportunity for Landlords to strengthen the lease quality of their tenants. It may be better for the Landlord to let the tenants that are of poor quality leave, rather than continue to be stuck in a lease with a poor quality tenant. Other tenants that want to negotiate rent concessions can be given new leases. Perhaps the rates will be better or other terms will be improved to the good of the Landlord. Another idea is to require tenants in the new lease take out some kind of insurance that will protect the tenant and the landlord from future business interruption

I remember in New York when there was a transportation crisis in the 1980s. This sparked a fundamental change in behavior. People started walking. Prior to the Transit strike, women would rather be caught dead than be seen without their high heeled shoes. During the strike, women began to wear sneakers with their skirts and dresses. they carried their high heeled shoes in their purse and put them on when they reached their destination. That continues to this day. In the midst of the Coronavirus, We are not shanking hands anymore. Instead, we pump fists. I would not be surprised if this becomes a permanent behavior change in society. We, in the real estate world, are always seeking situations that have upside potential. People have learned that shaking hands has a lot of downside.

The Corona Virus has given us many things to think about. A crisis can bring out the worst in people and it can bring out the best in people. Landlords and tenants are not necessarily polar opposites. Their interests are aligned in many ways. How they interact and support one another in navigating this crisis will impact the entire business and real estate community. Eventually, the Crisis will pass. Perhaps the Coronavirus crisis will spark creative solutions for Tenants and Landlords that will still be relevant long after business returns to normal.

Steven Silverman is the Broker at Tampa Commercial Real Estate. We have boots on the ground in the Tampa Bay, Florida and we are pleased to share some of our thoughts and observations. If you have thoughts or solutions that you can contribute to your real estate community, please comment on the blog page below. We are all in this together. Let’s learn from one another