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Medical Offices Remain Attractive Amid Pandemic

The coronavirus pandemic has been a boon for industrial real estate as increased online shopping drives up demand for logistics space, but the medical office sector has also fared well in 2020, and experts expect continued strength in that area during and after the pandemic.

While banks are hesitant to lend on properties in the retail and office sectors, financing remains available for medical office properties, experts say. And investors also continue to eye such properties, thinking that demand for services there will pick up once a vaccine is found and becomes widely available.

Here, Law360 looks at three reasons medical office properties remain attractive amid the pandemic:

Banks Are Still Interested in Lending

In the weeks after the World Health Organization declared COVID-19 a pandemic, lending all but stopped for commercial real estate. While capital is still tough to come by for retail and office assets, lenders are now providing financing for the medical office sector.

“Lenders are willing to lend on medical office,” said George Scopetta, chief investment officer at medical office owner and services provider ShareMD. “If you come to market with retail buildings, the answer is going to be no. A medical office building, especially if it’s a stabilized building, that’s an asset class that [parties] want to be in.”

Danielle Gonzalez, a shareholder at Greenberg Traurig LLP, said she has closed more than $800 million in loans on medical office buildings since the pandemic began, including an $89 million loan in late September from Starwood Mortgage Capital for eight properties owned by ShareMD.

She said medical offices, along with multifamily properties, have fared markedly better than other asset classes amid the pandemic. Federal stimulus assistance this summer helped many tenants at multifamily properties continue to pay their rents.

“I see a wide variety of asset classes. Not just medical office. … We have seen the least impact on medical office buildings and multifamily,” Gonzalez said. “It was a small blip on the radar compared to other sectors.”


Occupancy Has Remained High

Another reason banks have been willing to lend on medical office properties is due to high occupancy levels there, and tenants have remained in those properties for a variety of reasons.

For one, many medical office tenants were unaffected by shutdown orders earlier in the year. David Tabibian, a partner at Jeffer Mangels Butler & Mitchell LLP, said occupancy rates for the sector have hovered around 90% to 92% during the pandemic.

“Rent collections have been very strong — above 90%. That’s exactly what you want as an investor in an unstable market,” Tabibian said. “They are essential services, and tenants are able to still access their space and are still paying their rent. Historically, [medical office properties] have done well in downturns.”

That has meant landlords have had stronger rent rolls to show to lenders, a domino effect that inspires more confidence.

But another reason occupancy has remained high is that leases at such properties tend to be longer, which means fewer leases have come up for renewal during the pandemic than leases in other sectors.

“Landlords want longer lease terms. That’s why you see higher occupancy levels,” Tabibian said. “There are various types of equipment. … It’s more custom, more expensive, and as a result of that, tenants tend to sign longer leases at medical offices.”


More Consumer Demand Is Expected Once a Vaccine Arrives

While the medical office sector has taken a hit during the pandemic when it comes to consumer traffic in and out of facilities, experts expect demand to pick back up once consumers feel safe going in for procedures. That may not be the case for retail and office properties.

“The big distinction is the impact on medical office buildings was very much temporary, whereas the impact that we’re seeing on retail and office is much more permanent in nature,” Gonzalez said. “Once this is over, people are still going to have to go back to their dentist’s office for a root canal or their doctor for a comprehensive medical exam.”

And with real estate investors looking for places to park their capital and shying away from retail and office, medical offices will remain a solid option, experts say.

“Medical office really attracts the long-term, serious investors. There is tons of investment by [real estate investment trusts] and funds and institutional buyers,” Gonzalez said. “These are players that do thorough due diligence and are really looking for strong assets to hold for the long term.”

Expect more investment in the sector in coming months, particularly in the first and second quarters of 2021, said Tabibian, who noted there is lots of cash on the sidelines that could flow into such properties in 2021.

That investor optimism is being fueled by a sense that there will be a rush back to the properties once a vaccine is widely available.

“Telehealth … has its limitations and does not work with every specialty. At some point, doctors need to see their patients and can’t always do that virtually,” Tabibian said. “Many people have not undergone elective procedures during the pandemic. There’s a huge amount of demand for elective procedures … that’s coming as soon as there’s a vaccine.”


Source:  Law360

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Credit Unions Making Bigger Play For CRE Loans

Credit unions are an attractive option for borrowers who are seeing fewer lender bids, particularly from banks and debt funds.

Credit unions that have been working to grow market share in the commercial real estate lending space in recent years are taking advantage of open runway as other capital sources have pulled back in recent months. In fact, these institutions are willing to offer competitive terms and creative solutions.

“What we have seen from credit unions is that they are willing to finance property types that others aren’t doing,” says Pat Minea, executive vice president, debt and equity at NorthMarq.

NorthMarq estimates that its financing activity with credit unions is about 50 percent higher this year compared to last year. Since March, the firm has closed more than two dozen financing transactions with credit unions as the lender for borrowers across the board involving multifamily, industrial, retail and office projects.

There are plenty of capital sources still willing to finance multifamily and industrial assets. Interest drops off, however, for office and retail properties with financing that has become tougher because of COVID-19.

“We are having to dig a little deeper to find the terms that borrowers want in the current climate, and credit unions are a great example of that alternative,” says Minea. “They are more receptive, for whatever reason, to doing these deals that, in today’s world, are a little more on the edge.”

For example, credit unions are still willing to finance single-tenant retail and unanchored retail properties. That may be because credit unions don’t have as large of a loan portfolio and potential concentration risk to that sector as other lenders might have, notes Minea.

Creative financing solutions

Credit unions are an attractive option for borrowers who are seeing fewer lender bids, particularly from banks and debt funds. Although most credit unions focus on loans below $5 million in a tight local footprint, some of the larger credit unions will go up to $50 million or higher.

“I’ve seen credit unions inserting themselves into the lending market on a much more active basis over the past couple years,” agrees Ari Schwartzbard, a senior managing director on the Multifamily Capital Markets team at Newmark Knight Frank (NKF) in Atlanta. “We have seen them try to come up with different creative ways to get a bigger share of the market,” he adds.

In June, NKF’s multifamily capital markets team helped to arrange the financing for American Landmark Apartments’ acquisition of The Bentley at Marietta through Alliant Credit Union. The credit union provided a $22.8 million, five-year loan with a two-year interest-only period followed by a 30-year amortization. The loan includes structure components, including a future built-in rate reduction and an earn-out provision to partially reimburse capital improvement costs.

The financing execution occurred in the midst of COVID-19 when a lot of other lenders had pulled back. Pre-COVID-19, there were 10 to 15 debt funds that were extremely aggressive on the multifamily side. However, those debt funds were hit hard in COVID-19 when repo lines were pulled or terms changed, notes Schwartzbard. In addition, there were certain underwriting quirks of the deal that made it not a good fit for Fannie Mae or Freddie Mac, he says. “That created a great opportunity for a credit union, Alliant in this case, to come in and step up to the plate to provide an acquisition loan,” he adds.

In a recent episode of NREI’s Common Area podcast, Alliant Credit Union, Vice President and Head of Commercial Lending Charles Krawitz said that Alliant has been active nationally both before and during COVID-19. About 85 percent of its commercial loans are made to stabilized assets.

Stepping into the gap

Credit unions are active in providing both construction and term loans, although they tend to prefer stable, cash-flowing assets. Because credit unions are structured as non-profits, they are able to maneuver a little differently than banks, such as offering different pricing structures and no pre-payment penalties, although they do typically require at least some recourse from borrowers. The bigger credit unions are willing to do loans up to $50 million, or larger in some cases. Credit unions also differ in the property types they are interested in pursuing.

“I do not think they are more active or less active now than they were pre-COVID-19. However, they are gaining more attention because other lenders have pulled back, and therefore they are a good option for borrowers that need to transact,” says Shawn Hill, a principal at The BSC Group, a financial brokerage and advisory firm based in Chicago.

The BSC Group recently closed a $12.1-million loan with a credit union for a portfolio of three self-storage assets. The five-year loan featured a 30-year amortization and one year of interest-only payments. Because the properties had recently been expanded, the loan was structured with an initial funding at 61 percent loan-to-value (LTV) ratio and a “future funding” component for the balance at 70 percent LTV based on performance as certain leasing hurdles were met. In addition, there was a 50 percent limited recourse to the sponsors with a burn off as cash flow increased. Hill has seen credit unions focusing on permanent loans with between five-year and 10-year terms at moderate leverage of 60 percent to 65 percent with competitive pricing between 3.25 percent to 4.25 percent.

Credit unions may have a bigger appetite for CRE loans these days as compared to their bank competitors, because they have less concentration risk. Additionally, banks are highly focused on granting forbearance and preserving capital because they are not sure how deeply they will be impacted by distressed loans.

“I think credit unions have a better handle on their balance sheet exposure and are therefore able to take advantage of the lending opportunities in the market,” says Hill.


Source:  NREI

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The Coronavirus Is Changing Real Estate Sales Contracts. The Shift Looks Permanent

The contracts drawn between a seller and buyer in South Florida may never be the same again.

As coronavirus continues to spread, real estate agents are adding a “COVID rider” to existing contracts and including it in new sales. The standard force majeure clauses that protect sellers and buyer in the case of an act of God typically cover only natural disasters like earthquakes, hurricanes and tornado.

Pandemics have not been on the list. That is, until now, said Miltiadis Kastanis, director of luxury sales for Douglas Elliman.

“Yesterday’s contract is not today’s contract. Legal intervention is the smartest thing we can do,” Kastanis said.

Several Realtors say they contacted their attorneys in March, as the crisis was growing, to update pending sales contracts and write new ones that specifically include pandemic or coronavirus as covered reasons for canceling contracts. Kastanis now sends his contracts for approval first to his attorney before sending it to the buyer for review.

The COVID clause protects both the buyer and seller, he said. For the buyer, it gives them more time to complete tasks, including finalizing lending — should a bank have halted lending altogether — or complete an inspection.

It also protects the seller, Kastanis said. “A buyer may say, ‘Well, my bank isn’t lending.’ It may be an excuse for the buyer to walk out.”

It also faciliates contract extensions, said Anthony Askowitz, broker and owner of RE/MAX Advance Realty.

For sellers, such clauses act as a hedge against fluctuations in the market, Askowitz said. “Their home may not have the same value in the future. We know the value from yesterday. We don’t know what the value is going to be after the pandemic.”

The clause may also offer a sense of security to lenders, he said. “This is a protection for banks. Banks need this because it puts things in context of what people can expect. We saw that early on when people wanted to get out of their contracts, this ensured that they couldn’t.”

The addendum or clause is legally binding, said attorney Florentino Gonzalez, co-chair of the downtown Miami-based Shutts & Bowen’s Real Estate Practice Group. If the buyer tried to pull out after all mortgage, appraisal and inspection services are back to normal, “they can risk being sued for specific performance of contracts or lose their deposit,” said Gonzalez.

But because a pandemic can be infinite in nature, Gonzalez said, there will also likely be a deadline for any contract extension.

The addition of the word ‘pandemic’ as a force majeure is here to stay, Kastanis said. “It has shown to impact our market strong enough.”


Source:  Miami Herald

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