November 20, 2018
FOUR KEY TAKEAWAYS FROM THE 10TH ANNUAL SAUL EWING ARNSTEIN & LEHR REAL ESTATE CONFERENCE
While changes to the current heightened activity in the real estate market are inevitable, a cross-section of industry players is keenly aware that with change comes opportunity. Opportunities to create beneficial collaborative models, such as joint ventures and public private partnerships (P3s). Opportunities to benefit from tax-incentive programs, such as the aptly named Opportunity Zones. Opportunities to utilize alternative financing programs, such as EB-5. Opportunities to leverage untapped asset classes, such as social infrastructure, which can provide financing for educational, health care and government buildings; housing; and stadiums. These themes resonated at Saul Ewing Arnstein & Lehr’s 10th Annual Real Estate Conference, which was attended by more than 250 real estate professionals involved in the financing, development and construction of projects across multiple asset classes, including offices, retail, industrial, multifamily and higher education. Below are four key takeaways from the conference.
- Proactive real estate industry participants are constantly evaluating new ideas, implementing new strategies and exploring new markets to get ahead of the curve, particularly in distressed communities. With 20 industry leaders serving as moderators and panelists at the conference, a common theme was their focus on seizing new, innovative opportunities. Panelist David Bramble of MCB Real Estate discussed finding creative ways to complete deals in distressed communities, pointing out that it used to be difficult to get institutional investors on board and that such investors are now more involved in financing projects in these areas. “It’s not that rising tides lift all boats, some boats are flooding right around us,” David said. “The real estate industry can work in a sense of enlightened self-interest to ensure development opportunities address issues of equity and poverty.” He added that it’s nice when altruism and economics align on a project. “We have a project in North Philadelphia where a grocery store opened in a designated food desert area,” David explained. “There’s a nutritionist on staff who helps customers with ideas for cooking healthy meals.”
Panelist Anne Riggle of City Life Group said that her group is “bullish on Baltimore” and regularly works on projects in distressed markets, which open up state and federal tax credit financing opportunities. She talked about how these projects are not without challenges. “You need support for projects in distressed areas from the City and the State, so it can be 17 different entities that you have to corral, which can be like herding cats to get everyone to the settlement table on the same day.” Riggle added that it’s important to reach out to the community and engage leaders at schools and community organizations.
- With the promise of tax incentives regarding capital gains, there is a lot of excitement and attention on the Qualified Opportunity Zones program, but strict guidelines and deadlines must be followed in order to reap the tax benefits.In 2017, Congress created significant tax incentives for investment in Qualified Opportunity Zones (QOZ), of which there are more than 8,750 in the U.S. in locations very available for new development and new businesses. David Shapiro, a QOZ panelist and Tax partner at Saul Ewing Arnstein & Lehr, said, “The big value is that it creates nice incentives for cheaper equity in the capital stack.” QOZ funds can invest in real estate assets and tangible business assets. QOZ program participants include investors, developers, business and property owners, nonprofits, universities, and REIT investors. Shapiro stressed how QOZ program deadlines are significant and must be followed carefully. During a separate session on P3s and infrastructure, panelist Samara Barend of AECOM explained how tax structures don’t incentivize infrastructure projects in the U.S., but the QOZ program can be a major key to unlock the challenges to financing infrastructure projects.
- Typically more common throughout Canada and Europe, public private partnerships and infrastructure projects are moving forward in the U.S., albeit slowly. Public private partnerships (P3s) are cooperative arrangements where multiple parties from the public and private sectors finance, build and operate infrastructure projects, such as transit systems, government buildings and sports stadiums. David Wilk of The Johns Hopkins University moderated the panel discussion and began by identifying the main infrastructure asset classes: transportation, energy, water, telecom and social (education, healthcare, government buildings, housing, stadiums). Panelists discussed how 37 states and Puerto Rico have each launched at least one P3 since 2015 and how P3s are gaining increasing use and acceptance in the United States. Keith Hennessey of Bechtel Enterprises said that there is an abundance of capital available for infrastructure projects from institutional investors and sovereign wealth funds. “However, infrastructure projects move slowly and we are strategizing on how to bring them to construction more quickly,” he added. Panelist Samara Barend of AECOM indicated that the lack of tax-exempt financing has impeded the progress of social infrastructure, but that P3 financing is beginning to be used for projects such as courthouses and civic centers. Wilk concurred, and added, “Social infrastructure is a great way to transform our cities with the use of P3 financing.” While panelists appreciated that a developer serves as a single point of decision-making on a P3 project and there is a streamlined relationship with the public sector, there are still significant risks with P3 projects to be aware of at the outset.
Keynote luncheon speaker D.J. Gribbin of Madrus LLC also addressed infrastructure development/redevelopment, identifying bridge and road projects as key opportunities. As the nation’s first Special Assistant to the President for Infrastructure, a role at the White House he held until earlier this year, he dispelled some misconceptions regarding the amount of infrastructure the federal government owns and funds, explaining that it mostly happens on a state level. He stressed how infrastructure serves local needs, not just national needs, and encouraged more funds to stay local for area infrastructure projects.
- Capital stacks will shift over time, so leveraging creativity and flexibility will be key. Moderator Mary Ann Scully of Howard Bank kicked off the financing panel with a look at traditional capital stacks that include equity, mezzanine financing, and senior and/or subordinated debt, with P3 financing becoming more relevant. She asked the panel how it foresaw capital stacks changing. Allison Berman of Greystone said, “We know that changes in the market are coming and change brings opportunity to develop new products and get into new areas, such as growing our bridge loan program.” Allison added that EB-5 financing can help with the capital stack through redeployment of money into construction. “There are a variety of lending vehicles — Fannie Mae/Freddie Mac, CMBS, bridge lending, multifamily-based financing and health care-based financing — stepping into the gap left from traditional banks,” she explained. Angelique Brunner of EB-5 Capital explained how the volume of EB-5 financing has experienced a significant downward change because of visa saturation in China and Vietnam, but that it still enjoys political support from both sides of the aisle.
Tang Tang of KT Capital Group said that his firm will be satisfied to make conservative investments with less equity and more debt as the real estate market corrects. When Scully asked the panel about asset class activity, Tang said that he is seeing resistance from banks for condo investments, while Berman said that stabilized multifamily housing projects continue to outpace the market, especially in New York City.