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TrumpCare and the Effect on Healthcare Commercial Real Estate Market

By Kevan McCormack

Since Donald Trump has taken office as President of the United States, he has been very busy “making good” on his campaign promises in one of the most active “100 Days” in history and 46 million American who are 65 and older are paying attention!

There has been much talk of repealing the not so “Affordable Care Act” (“ACA” and aka ObamaCare) and many are confident this will happen, eventually.  The tricky part of it is simply a problem of optics and short term memories…call it ‘Dementia of the Masses’.  The law was sold on the basis of stopping rapid premium growth and reigning in healthcare costs.  However, most Americans intuitively know that ACA is massively unaffordable and that premiums are still rapidly increasing for a majority of Americans.  While everyone is required to have healthcare, it is not necessarily the healthcare they require.

The core of the problem has to do with two closely related concepts: firstly, the ‘Individual Mandate’, whereby everyone has to purchase qualifying health insurance otherwise pay a penalty; and, secondly the ‘Pre-existing Condition Exemption’, which prohibits a health insurer from denying an individual insurance based on a pre-existing condition.  These two concepts form the core of the law.  You can’t have one without the other.  There is concern that Congress might make the massive mistake of getting rid of the Individual Mandate provision while still forcing insurers to ignore pre-existing conditions.  This will trigger a very dangerous relationship in Economics Game Theory known as ‘Adverse Selection’ that will certainly destroy the industry!

Can Congress simply repeal the entire law?  Sure they can, but wholesale repeal is very unlikely given Congress’ history and because buried deep in the law are a few actually useful pieces of legislation regarding digital medical records and reducing waste, fraud and abuse.  Rather, Congress will steadily dismantle it in order to reduce negative ripples in the press and the marketplace.  But most importantly, Congress is likely to address the Individual Mandate problem in unison with the pre-existing condition provisions.  Pulling out the knife hurts as bad or worse as getting stabbed in the first place…but it is the first step to fixing the problem!

Outside of healthcare, Trump has promised a few other popular initiatives that seem likely to occur.  These include eliminating the Estate Tax and reducing income taxes while simplifying the U.S. Tax Code.  The Estate Tax seems easy, it is double taxation period (hence Unconstitutional), and simplifying the Tax Code is something that most Americans want.  Just imagine the day that we can pay our taxes based on a simple system where everyone pays a fair percentage of their income!  Maybe these good things will happen before the healthcare bills kick-in for our aging citizens!

When developing your next Healthcare facility will be helpful to have a finance partner who is well-versed in all aspects of the healthcare market.  MCA has been financing Healthcare and Senior Living facilities for over 20 years.  To discuss the financing of your next project, contact Kevan McCormack at kmccormack@metcapital.com.

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What is the TRUMP Effect on Commercial Real Estate? 4 Key Points

— By Sunny Sajnani

There is no doubt that Donald J. Trump in the White House is a game changer for the real estate industry. What will the newly inaugurated President (i.e Landlord-in-Chief) and his policy platform do to for the real estate markets (specifically the CRE capital markets)?  Here are few areas that Trump will most likely take on to create stimulus in our industry:

  • Trump has been very clear on his intent to ease banking regulations and financial industry reforms.  There are two specific areas of regulation that could be targeted which will directly impact commercial estate lending: (i) CMBS risk retention rules that were introduced as part of Dodd-Frank, and (ii) High Volatility Commercial Real Estate (HVCRE) rules as part of Basel III.  Though a full repeal of these banking regulations is unlikely, we should expect to see them loosened during the Trump presidency.
  • Trump has also been very vocal about his intent to invest heavily in the country’s national defense and infrastructure (including roads, bridges, airports, etc.).  Immediate increases in infrastructure spending will provide additional stimulus to the economy, and most likely prolong the current CRE growth cycle into the 10th, 11th or even the 12th inning. The additional spending on infrastructure should further create more jobs which will automatically result in tax revenue.
  • INTEREST RATES. This direct boost to the economy will likely cause faster GDP growth, some level of inflation and continually push interest rates upwards.  History indicates that real estate tends to do well during periods of high growth and rising interest rates.  In the long term, this inflationary growth could lead to increased rents and healthy capital gains on real estate investments.  These factors should serve to increase the value of REITs and other real estate equities.
  • TAX CUTS/REFORM. Trump has been proposing to reduce the number of tax brackets and cut the top marginal income tax rates.  This would be paired with a potential double-digit decrease on the business tax rates.  It also appears that the Trump administration will take action to preserve portions of the tax code that are highly advantageous to real estate developers, examples being 1031 tax-free exchanges, depreciation and the carried interest exemption for investment managers.

In summary, most real estate industry professionals believe that President Donald Trump, a long time real estate mogul, will likely be a friend to the industry over the next few years.  Unfortunately, we will have to wait to see how commercial real estate shifts in response to the new administration.  In the meantime, Metropolitan Capital Advisors is going to monitor market trends closely to make the most educated capital decisions in this time of “huuuuuge” change.

The author, Sunny Sajnani, is a Principal & Director in the Dallas office of Metropolitan Capital Advisors.

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Whither CRE Construction Lending?

By: Justin Laub

The mantra of commercial real estate developers around the country when speaking of the state of construction lending these days might be: ‘you don’t miss something until it’s gone’. Though we are not witnessing the complete shutdown of the construction lending industry, we are certainly witnessing a pause in, and a shuffling of the market. The tightening of the construction lending market that began as a  trend a year ago has now become a permanent fixture in today’s capital markets. Though projects are still being financed, lenders are now pickier about what they finance and the terms on which they do so. The result is that it now takes more creativity to convince lenders to finance development deals

You may wonder what is driving this changing trend? There are multiple factors. The main drivers of this trend are: i) The Dodd-Frank banking regulations that penalize banks for overextending on construction lending, ii) the sheer volume of development projects over the past three years that have absorbed much of the lending industry’s construction capacity and iii) concern amongst lenders that we are late in the cycle. All together these create the situation we are in today, whereby the reins have been pulled in on construction lending. A new wild-card in this equation, is the new Trump administration. With the possibility that they may roll back Dodd-Frank (and other) regulations as well as the post-election surge in consumer and business confidence, there is the possibility of significant change. That however, would be the subject of a separate blog.

It’s difficult to precisely quantify how much construction lending has tightened as a result of all of the above, but I would estimate that Loan-To-Cost (LTC) levels have tightened by 5-10% when comparing deals then and now on an apples to apples basis.  Perhaps a  better way to describe the situation is to say that projects at the margins (i.e. new sponsor, out of the box product type, pioneering locations, etc.)  are harder to get done these days. Banks are still lending on institutional quality deals at similar, conservative leverage levels as before, albeit it may be 5% less in LTC. Non-institutional deals however, are tougher to finance in today’s market. I would estimate that sponsors need to put anywhere from 5-15% more equity into their deals to get them across the line. Even so, greater equity doesn’t always make a viable, non-institutional project financeable in today’s market.

So what are the solutions? The alternatives today basically fall into two categories: i) you deleverage your project, or ii) you find alternative capital structures and/or capital sources to get to the leverage that you want. The first solution is straightforward, in that you simply put more equity into your project. The second solution, however, requires more creativity. There are a handful of one-stop shop, non-bank construction lenders that can get you higher leverage in exchange for a premium rate. There are also various combinations of bank and non-bank capital sources that you can combine into senior/mezzanine and senior/preferred equity structures in order to get to the leverage that you want at potentially more attractive pricing options than a one-stop shop. Regardless of what your solution is – less leverage or more creativity – the marketing effort to secure a deal today is more challenging than it was a year ago.

For strategic advice on your next development project, you can reach Justin Laub, Senior Director, at jlaub@metcapital.com. Or visit the Metropolitan Capital Advisors website at http://metcapital.com.

The author, Justin Laub, is a Senior Director in the Dallas office of Metropolitan Capital Advisors.

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