O'pen Mind

The time for smoke and mirrors has passed

noreply@blogger.com (Warren Kirshenbaum) — Tue, 18 Nov 2008 16:09:00 +0000

It was interesting to read yesterday that the top 7 executives at Goldman Sachs are going to forgo their bonuses for 2008, but that move seems like more of an optical illusion to dispel the inevitable picture of bankers as hogs feeding at the trough than helpful in a macro-economic sense. The top 3 of those executives, including CEO Blankenfield, each earned about $65 million last year because Goldman's 2007 financial year apparently earned the firm its largest profits ever. It's easy to be a Monday-morning quarterback, but, its hard not to argue that those profits were illusory and ill-gotten gains that leveraged the wider economy into a precipitous fall. Not only should these people forgo their 2008 bonuses, and many more firms should follow Goldman's lead, because a better illusion, um, solution would be for all those executives (including traders and money managers) at Wall Street firms (not geographically defined) that earned in excess of $1 million in 2007 to give back 60% (or more) of those 2007 earnings to a fund that can dovetail with the government's efforts, and can be used to aid the funding of TARP (the bailout plan) or certain additional issues now swirling around or expected to descend upon us in the near future, i.e. the automobile industry in Detroit, or the commercial real estate loan workouts that are on our agenda for 2009. It would be difficult to legislate something like this, but use this suggestion as a starting point, or a building block toward conceptualizing a way to make this idea more palatable, and perhaps even beneficial. Perhaps the IRS could issue a Revenue Procedure whereby a fund created in this manner could entitle those returning their 2007 bonuses to the fund to get tax credits against income going forward in predetermined amounts (dollar for dollar, or some alternative formulation). Clearly there would have to be an analysis of whether the money the government would forgo in tax revenue would be offset by the money that the fund could receive, and the economic benefit it could generate.

Essentially, this plan calls for private people to take cash assets held now in banks, assets that the banks are not lending against, and they would be transferring those assets to a giant fund that would re-invest the money into the economy and give those private people a tax credit, as well as a philanthropic or community purpose. Such an endeavor would present an enormous logistical challenge, but that endeavor would require creative consulting, money management and investment advice, as well as other trickle-down benefits for professional service providers, investors, and even, banks. Merely criticising the government, or blaspheming the Wall Street hogs, enjoyable as it is, is not truly productive. President-elect Obama said in his acceptance speech on November 4, 2008, that we should think about cooperation and collaboration, and this could be a good start. As a more than tangential benefit, efforts like this may stimulate areas of the market unrelated to the genesis of these economic issues, such as the rental, or the distressed asset areas that are suffering from capital failures due to the trickle-down effects of the economic storm we are now weathering. Economically, we are facing a shutdown in the availability of capital, as investors and banks are holding a disproportional amount of assets in cash, making little, if any, capital available for loans, lines, and credit facilities.

The only way to really change the game, is to actually get in the game!

It's so complex, it's simple

noreply@blogger.com (Warren Kirshenbaum) — Wed, 12 Nov 2008 16:15:00 +0000

A couple of years ago, my now 11 year old daughter asked me where I thought the world was heading, given the speed with which life, dictated, of course by computers, iPods, and PDA's was hurtling along. I said that I thought it was all going to blow up, and we'd land up back in the horse and buggy times. I think that was more of a sentiment rather than a prognostication, however, it's amazing what a few short years can do. I never really thought it would all blow up, but sometimes that's just what we need. Amusingly, there are a number of well known mainstream journalists that have graciously identified for us what caused the financial meltdown, what went wrong, and exactly how the whole system exploded. Strangely enough though, they didn't see this coming, and they didn't really know how the system worked BEFORE the meltdown. They did get one thing right, however -- it's a lot easier to be a genius after the fact.

I have a simple point for this post. Sometimes we make things a lot lot more complicated than they ought to be. We do this with our actions, inactions, miscommunications, lack of focus, and by generally getting ahead of ourselves. I watched a story on the news this morning about a school in Georgia that is having success in educating autistic children; children that the mainstream educational system has no idea how to deal with. Their solution is to focus on the children's emotional needs in order to connect with, and get through to the children. Once this connection is made they find it easier to then attend to the children's educational and behavioral issues. I don't know if this is the silver bullet, but it is a simple idea, based upon a core human need. It does seem to be working, albeit in a limited sense, as it involves private education and is very expensive. Nevertheless, I am sure there are thinkers with more depth than those that introduced this educational approach who will figure out how to lower the cost of these services and generate them on a mass-consumption basis, in order to roll the program out to a larger population. Nevertheless, the idea itself, although visionary, relies on simple human interaction and connection, suggesting that we may have lost the art of actually connecting with each other. Therein lies my point --- sometimes the answers can be relatively simple, but still we just don't see them.

I realize these are difficult times, and I am as caught up in the tailspin as anyone else is; I worry that our business will not survive these torrid times, but I have realized something really simple through all of this. Dinner time is my most important time of the day, and I am going to try to make that meeting every night. I find it to be an amazing time of coming together, bonding, and discovery. I haven't figured out much else about how to addreess the issues we're facing, but I do know that I am going home tonight to have dinner, laugh, and be in a special place, and I think that you should all do that too.

Massachusetts Lemon Law: What’s Covered and What Isn’t

noreply@blogger.com (Warren Kirshenbaum) — Mon, 10 Nov 2008 03:27:00 +0000

I have invited Sergei Lemberg to sit in the guest blogger seat today. Sergei is an attorney specializing in the lemon laws, who will update us on what we need to know about new car lemons in Massachusetts.

With all of the cars, trucks, motorcycles, and RVs being manufactured in the U.S. and abroad, it’s reasonable to expect that some will have defects. After all, vehicles are incredibly complex pieces of machinery and a lot of things can go wrong. In the best-case scenario, any defects that weren’t caught by quality assurance are quickly repaired by the dealer. In the worst-case scenario, you have a vehicle with pronounced defects that make it run poorly, that constitute a safety hazard, or that reduces its value – and the dealer or manufacturer refuses to buy back or replace it.

When that happens, Massachusetts’ lemon law can come to the rescue. Massachusetts Lemon Law covers new or leased passenger vehicles or motorcycles. It also covers used vehicles that are sold by dealers within one year or 15,000 miles of the car’s delivery to the original owner (whichever comes first).

Although it doesn’t cover minor defects (like a non-working stereo system), the lemon law does force the manufacturer to stand by its product. In order for the lemon law to apply to new vehicles, the defects have to occur during the first year from the delivery date or the first 15,000 miles on the odometer – whichever comes first. In addition, the vehicle must have been taken in three times for the same problem or been out of service for 15 business days due to a series of unrelated problems. Plus, you have to notify the manufacturer of the problem and give them one last opportunity to fix it.

If you think you have a lemon, you basically have three choices: you can use the manufacturer’s dispute resolution process; you can use the Consumer Affairs’ mediation program; or you can go to court. Before you begin, though, you should have a lemon law lawyer by your side. After all, you can be sure that the manufacturer’s team of legal eagles will be there to fight your claim every step of the way.

The good news is that, if your claim is successful, the manufacturer has to pay your attorney fees. Often, with the help of a lawyer, you can get a refund, replacement vehicle, or cash settlement without having to go through the entire lemon law process – and get your attorney’s fees covered in the process.

Obama's KISS strategy will win

noreply@blogger.com (Warren Kirshenbaum) — Mon, 03 Nov 2008 14:42:00 +0000

In my view the KISS strategy (Keep It Simple Stupid) underpins the reasons that Obama is going to win election tomorrow as the next President of the US. Obama actually understood what the issues were, and he kept his campaign focused on those issues. Race, religion, and even foreign policy were secondary to the early campaign focus on the war, and the later focus on the economy. In keeping the campaign grounded on what the actual issues were that were important to us as voters, and in fact, to adapt that focus from the war to the economy in the later stages of the campaign, left us with a feeling that Obama would be a better captain of the economy than McCain, thereby closing the sale.

In the current political and economic climate, a play off the old prosecutorial adage seems appropriate -- we could have elected a ham sandwich to the White House. Obama, however, is no ham sandwich. He has very clearly articulated that he has the capacity and the capability to think through, and actually understand the issues. We undoubtedly need a clear thinker to guide us through our current issues. We need a serious person in this job, someone who has the mental capacity to grasp the issues, think them through and make a decision; someone who is calm, unflappable, and can stay the course. This election cycle of almost 2 years has to have been among the longest, most arduous, and challenging races for the Presidency. The person who was going to win a race like this would have to show the skill and ability to understand, face, and manage the issues, raise an enormous war chest, and execute his plan in a manner that kept a vast organization of people motivated, spirited, challeged, on-point and focused. In achieving this, Obama demonstrated considerable skill and leadership, and, surprisingly, experience. Although running a successful campaign cannot be compared to successfully running the country; running such a successful campaign again against a veteran senator and all the power, connections, money, and guerilla tactics that have felled many prior Democratic candidiates certainly went a long way toward making us feel like Obama can lead us through this chapter in our history.

Nevertheless, Obama was helped by the fact that John McCain discarded the personality and embrace of his core self that had propelled and guided him to such a remarkable and succesful carrer as a military hero and attractive politician. Had the McCain of the campaign been the McCain of the past, i.e. the independent minded guy, the politician who actually answered questions based upon what he believed in and what he stood for, and not for what he though people wanted to hear; had he continued to just be himself and not a manufactured candidiate pandering to all those disparate constituencies of the Republican party, he might have had a chance. As it stands now he is just confusing himself and all of us, and has no shot of convincing the electorate what it is that he actually stands for. The voters are very smart and, particularly in this election, they are very savvy. McCain should have kept it simple and just been himself.

As an immigrant, a caucasian child of Africa, and growing up in the face of Apartheid, the fact that Obama could so successfuly put forth his case for the presidency based upon his human strengths of mental capability, determination, good choices, and steely leadership, while allowing the race and religion issues to not become a determinant of executive capability was to me an enormous and historical achievement, and could be part of the glue that unites and weaves this country into its next successful chapter.

It’s “real” estate, not hopes and dreams

noreply@blogger.com (Warren Kirshenbaum) — Fri, 03 Oct 2008 02:29:00 +0000

We buy and sell hopes and dreams all the time, particularly the American Dream. We store these hopes and dreams in the financial markets and over the past 70 plus years, our financial or capital markets have fueled growth, innovation and development, and spurred us into becoming an ownership society. Unfortunately, just as the financial markets rise based upon confidence, hopes and dreams, they also fall based upon a lack of confidence, hopelessness and dashed dreams. That’s just the way it is. But real estate is an actual investment that you can see, touch, and care for. In real estate, whether you’re building, selling, buying, investing, or looking to live there, the fundamentals still remain, and the market will cycle back. That too, is just the way it is.

Granted, banks have tightened their lending standards, they are holding onto their cash and finally settling for the spread between what they borrow for and what the money market pays, instead of the returns they sought in the speculative and risky collateralized debt market. That’s restricting capital flow right now, but there are still markets that are poised to expand, particularly with the passing of some exciting new legislation. On July 30, 2008, President Bush signed into law the Housing and Economic Recovery Act of 2008 (the “Stimulus Act”), which provides incentives intended to create greater capital flow into both the affordable and market rate areas of the real estate marketplace. Clearly, other than with government intervention, the capital markets need to work through the shock of the so-called “subprime bust” and ascertain the true monetary cost of the failure of the collateralized instruments that greased the capital markets, but this is a forward-looking article.

On the commercial side

These are not ordinary times, so there’s a need to expand one’s range of thinking. For those with investment properties, mixed use properties, two family homes or small buildings with subsidized tenants, or even for estates, trusts or other investors in real estate assets that desire tax advantaged income, the population of potential financing sources and investment opportunities may now include some that traditionally attracted a different clientele. In the past decade, or more, most new housing production has been spurred by M.G.L. c.40B, §§20-23, the statute more commonly known as Chapter 40B, which allows an override of municipal zoning authority to promote affordable housing. 40B creates an expedited permitting procedure whereby an applicant approved by a State or Federal Housing Program, such as the Department of Housing and Community Development (“DHCD”) may make a single application to a local Zoning Board (“ZBA”) for a comprehensive permit instead of navigating through multiple applications within the Town over a staggered period of time. The ZBA is subjected to a streamlined procedure, and a denial (or imposition of uneconomic conditions) by the ZBA can be appealed to the Housing Appeals Committee (“HAC”), a unit of DHCD . To be permitted under 40B, 25% of the housing units in a proposed development must be affordable.
There are various provisions in the Stimulus Act that have the potential to create additional funds to be available for investment, commercial or development real estate than were available previously:

• The Stimulus Act may allow tax credits to be available to many commercial borrowers that turned to FHA funding sources during the current credit crunch;

• For investors previously adverse to tax credit investing, the repeal of certain AMT limitations may be a positive factor;

• Additional loan funding may be available as a result of the increase in bond volume issuance authority that the Stimulus Act allows, as well as the Multifamily Housing Bond “recycling” provision, which allows bond issuers, under certain circumstances, to re-use bonds that have been repaid to back new loans. These provisions provide entities, such as MassHousing, with additional funding capability; and

• The temporary increase in housing credits allocated to the states, as well as the fixed 9% tax credit rate may allow more equity to be available to projects that may previously have been financially infeasible due to pricing declines in the equity market during this credit crunch.

For Residential Buyers and Sellers

It is more difficult to receive funding, and certainly the down-payment requirements and verification of income procedures have been thoroughly overhauled by the underwriting departments of most banks. Notwithstanding the current restrictive financing environment, there are many programs catered to the various strata of borrowers and property types that are available; interest rates are still historically low; and home values are more in line with reality than we have seen in the past decade. Additionally, the federal government has also made FHA funding available to a wider range of the borrowing population, and has temporarily increased conforming loan amounts in high cost areas, such as ours. These factors, when coupled with the Stimulus Act’s $7,500 break for first-time homebuyers, and the creation of a program that will allow some borrowers to cancel their existing mortgages and replace them with new fixed-rate loans lasting at least 30 years (for 90% of the property’s current value) may create the stimulation effect in the residential market we have been hoping for, or dreaming of.

Market based valuations in a cost basis environment:Derivatives and other depreciable balance sheet paper

noreply@blogger.com (Warren Kirshenbaum) — Fri, 03 Oct 2008 02:26:00 +0000

In a time of economic uncertainty our government is being pushed into an interventionist role in the private marketplace, and while our lawmakers are working fastidiously toward an appropriate response, the legislation being passed is complex and multi-faceted, yet thinly worded and correctly, but hastily considered.

The U.S. Senate on October 1, 2008, passed the Emergency Economic Stabilization Act of 2008 a/k/a the Troubled Assets Relief Program (“TARP”), which details the multi-faceted response discussed above.

In pertinent part, TARP contains:

• An increase in the statutory limit of the public debt to $11.3 trillion;

• A US Government purchase of “troubled assets” in the order of $700 billion, funded by the issuance of treasury securities pursuant to Title 31 Ch. 31 of the US Code;

• An equity stake in financial institutions that sell their troubled assets to the Government;

• Foreclosure mitigation efforts;

• Executive compensation and corporate governance standards for financial institutions from whom the Government buys troubled assets, such as a claw-back on bonuses and payments based upon materially inaccurate information, and a limitation on golden parachutes;
• A temporary increase in FDIC protection to $250,000 per applicable account;

• A patch for the alternative minimum tax;

• One year extensions of the wind energy production tax credit and the new markets tax credit;

• An eight year extension of the investment tax credit for solar energy projects; and

• Authority under the securities laws for the SEC to suspend the application of Financial Accounting Standards Board Statement 157. FASB 157 is the “mark-to-market” accounting standard (“MTM”) adopted after the S&L collapses of the 1990’s. MTM forces financial institutions to value assets based upon the market value of the assets, rather than the purchase price of the assets.

The proposed easing of the MTM rules is a challenging issue, and one that requires deep thought and discussion. MTM has required write-downs well exceeding $500 billion due to the deterioration in value attributed to mortgage backed assets. Proponents of the suspension of MTM argue that these write-downs have precipitated the market woes we now face. Regulators favor the easing of the MTM rules, as it would lessen the cost of the bailout proposed by TARP, while opponents argue that the current crisis is one of confidence. Accordingly, valuing mortgage backed assets based upon purchase price would lead to illusory balance sheet values and resulting confidence issues. In considering this issue, it must be noted that Wachovia was purchased by JP Morgan Chase for only $2 billion when it collapsed, yet it had an asset value of $75 billion.

The underlying goal of TARP seems to be to spend $700 billion to inject no more than confidence into the marketplace. TARP essentially transfers the “troubled assets” to the US Government, the one entity that currently may be strong enough to hold the assets until a market for these assets recovers. As a result of TARP, financial institutions will have swapped their toxic paper for cash loaned to the US Government by foreign and US investors. The hope is that this will lead to an easing of the credit-crunch we are now facing. But will it? In the short term, cash-rich financial institutions may still be uncomfortable in lending that cash to consumers and businesses, unless confidence, arguably the underpinning of our market, makes them loosen up some capital. This so-called credit crisis may be more appropriately termed a confidence crisis, if not a loss of trust in the financial engineers of our economy. TARP is about restoring trust and confidence, but it proposes spending $700 billion to do that. Impossible as it seems to value the cost of the “troubled assets” that now have no market, the market is marking TARP with a cost of no less than $700 billion, and I would be remiss, to consider easing up those mark to market valuation rules.

The white knuckle business cycle of the finance market

noreply@blogger.com (Warren Kirshenbaum) — Tue, 15 Jul 2008 19:36:00 +0000

As the ink dries on the first half of financial 2008, we seem to be huffing and puffing up a steep hill that keeps getting higher and higher. Press speculation about our approaching the summit continues to fade into the recycling bin with increasing regularity. The Fed is concerned about inflation, but the Treasury Department says it's more disturbed about anemic growth, and the financial markets are spooked by the price of oil. Interest rates are low, but getting financing is a bear as the banks, the economy's call-girls, who, seduced by profits from products meant only to make capital accessible to lower-income households, opened the spigots too wide, and have now slammed the door shut, other than to dance on each other's graves a la` Bear Stearns. The Australian and Canadian dollars have almost reached parity with the U.S. dollar, the Euro is at $1.57, and the pound is at $2. That's good for foreign investors in U.S. based assets and U.S. exporters, but it all adds up to an environment in which it's becoming increasingly difficult to get a deal done locally. Understandably, this is a trying time period -- as hopes surge that the housing correction is bottoming out, massive flooding in the midwest threatens lives and crop production; oil soars to over $140 per barrel; and the Dow Jones Average regurgitates the gains of the bull market. It is clearly difficult to earn a dollar these days.

The commercial real estate market is experiencing a hangover as the players who can obtain financing are embracing a spectator role by holding out on capturing assets that they expect to continue to fall in value. The preferable strategy is to make moves now that can position you well in the upward cycle. We cannot buy at the bottom and sell at the top in any event. We just have to hold on, and stay in the game. Granted, it's a white knuckle time, but the point of this article is that the current market events represent a necessary fallout; not only will the economy be better off for it, but it needs it. Consider the case of Cambridge Park 125 Realty Corp., et al. v. Board of Assessors of the City of Cambridge (Lawyers Weekly No. 20-034-08) in which the Appeals Court held that "[w]here the owner of commercial real estate in Cambridge seeks a real estate tax abatement, that request should be granted because the subject properties were overvalued for fiscal years 2004, 2005 and 2006." Realigning real estate that was subject to higher tax rates and increased rents because of overinflated assessments is clearly a needed correction.

Fundamentally, we need to rebuild the foundation that has become necessary to be competitive in today's globally linked grouping of economies. Yesterday's building blocks are just that, as inconsequential as yesterday's news.

We are the world's largest economy, but we are not as dominant as we once were. That, however, is a challenge not unlike the one we faced in the early 20th century when our economy needed a new level of ingenuity in order to transition to industrialization. We are going to have to adapt our fundamental underpinnings to accommodate the new global marketplace to continue to enable us to lead. Currently, however, we have lost our edge. I see this period as the natural re-ordering of things. Our economy is flushing out the toxic waste that we fed off for years and years. It's not that it's a correct strategy, but while India and China were playing to their core strengths and seeking growth without regard to inflation, we were recycling the same old business strategies, but picking up only debris. Collateralized Debt Obligations are just an example of how we survived by churning leveraging strategies that were meant only to expand the inventory of available capital to fuel growth and development. We put the system into overdrive until the engine burned out, and now we need to replace the engine. It's a cycle, just like the body ridding itself of unnecessary and unusable waste. It's not pretty when it happens; it can be painful, and very challenging, but it's necessary. After this cycle is completed, I have no doubt the economy will be able to clear the hurdles, and reach the summit of the hill, regain its strength and be able to add building blocks that are sustainable and necessary.

The issues facing our economy have never been about a subprime loan bust, overly aggressive mortgage brokers, or the failure of mortgage based hedge funds, as has been widely speculated and implied.

Remember, this is a cycle, and it will flesh itself out. In the meantime stay on the playing field.

Opportunity missed by SJC to explain permitting issues

noreply@blogger.com (Warren Kirshenbaum) — Tue, 17 Jun 2008 17:27:00 +0000

While reading recent Supreme Judicial Court (SJC) decisions addressing comprehensive permitting under G.L. c.40B, §§20-23, the statute more commonly known as Chapter 40B, it became difficult not to conclude that the SJC missed an opportunity to offer clarity on local permitting issues.

Chapter 40B allows an override of municipal zoning authority to promote affordable
housing. It creates an expedited permitting procedure whereby an applicant approved by a State or Federal Housing Program, such as the Department of Housing and Community Development (DHCD) may make a single application to a local Zoning Board (ZBA) for a comprehensive permit instead of navigating through multiple applications within the Town over a staggered period of time. The ZBA is subjected to a streamlined procedure, and a denial (or imposition of uneconomic conditions) by the ZBA can be appealed to the Housing Appeals Committee (HAC), a unit of DHCD (1). To be permitted under 40B, 25% of the housing units contained in the proposed development must be affordable.

What, however, are affordable units?

Terms like Chapter 40B; affordable housing; and low-income housing have been
morphed together. Although part of the same universe, they are, however, separate planets. The 40B permitting process allows a development containing an affordable component to be permitted in an expedited manner. Chapter 40B is supposed to promote affordable housing; essentially housing that is affordable to households earning 80% (2) of Average Median Income ("AMI") (3). Low-income housing serves households earning less than 60% of that area's AMI. Low-income housing tends to create rental units utilizing State or Federal subsidies to plug financing gaps, including low-income housing and historic tax credits, tax-exempt bonds, HUD subsidies, FHA insurance/below-market-rate loans, or federally based State/Local subsidies, such as HOME Funds, or CDBG grants. A 40B project may be conventionally financed. Both methods place restrictions on rents or sales prices for households of certain income levels. Although the word "affordable" in the housing context may evoke the passionate cry of NIMBYism, albeit disguised as a more lofty concern; it should not do so, as a project permitted under 40B may have an affordable component, but it is not a low-income dwelling house, or a housing project. Today, affordable units in a 40B project are aesthetically indistinguishable from the market-rate units; it is their interior finish that is more determinative of their below-market rate pricing.

Affordable housing can allow senior citizen renters to pay $1,100 a month for an apartment that would otherwise rent for $1,500; or educators, first-time homebuyers, and first responders to buy a home for $320,000 that would otherwise sell for $440,000. Build 25% of your units in this manner, and you can apply for a comprehensive permit under 40B (4). Because Chapter 40B allows ZBA's to deny a 40B
application (5) with impunity if 10% or more of the Town's housing inventory is affordable, how this subsidized housing inventory or SHI is calculated, and its composition are important local issues.

In Town of Hingham & another v. Department of Housing and Community Development, No. SJC-10013, May 27, 2008, the SJC was presented with the question of whether DHCD correctly determined that only 25% of the units in a continuing care retirement community would be counted toward the Town's SHI. As DHCD's decision was not a final action, the SJC avoided the question, deciding that it lacked subject-matter jurisdiction because the Town had failed to exhaust its administrative remedies. In Town of Wrentham v. West Wrentham Village, LLC & another, No. SJC-10066, May 27, 2008, Wrentham's ZBA denied an application for a comprehensive permit under 40B, arguing that the Town's SHI exceeded 10% by including 300 units from a facility for the mentally disabled managed by the Commonwealth. HAC reversed the ZBA's denial. The SJC once again sidestepped the issue by ruling that it lacked jurisdiction over the matter, as the Town
had not exhausted its administrative remedies.

Whether the SJC was correct in determining that it lacks subject-matter jurisdiction is not the question posed by this article. Rather it is to ask why, with a statute as opaque as 40B, the Court would not have taken the opportunity, even as an obiter dictum, to issue some transparency as to how Towns could count affordable units; and whether facilities for the mentally disabled or continuing care retirement communities contain affordable housing units. This to me is an opportunity missed.

Footnotes:

(1)84% of HAC cases have favored the developer.

(2) In Boston, $66,150 for a family of 4.

(3)AMI varies from place to place, and is set by HUD.

(4)20% of the units can go to renters earning 50% of AMI.

(5) A Town may be granted a moratorium on 40B applications where it has increased its SHI by 2% over the prior 12 months, or it has a
0.75% SHI increase and an approved Plan of Production.

These are tough times, but they present solid opportunities

noreply@blogger.com (Warren Kirshenbaum) — Wed, 28 May 2008 00:49:00 +0000

The end of the first financial quarter of 2008 resulted in a systemic market decline, reflecting Wall Street's conclusion that the U.S. may be headed toward a recession. Testifying before congress, the Federal Reserve chairman, Ben Bernanke, said, "The American economy could contract in the first half of 2008," a statement that meets the technical definition of a recession. The Washington Trust Co.'s Winter 2008 Economic Outlook suggested that market performance would be affected by: (a) the decline in consumer confidence to its lowest level since fall 2005, due to the ongoing weakness in the residential real estate market; (b) rising energy and food prices, as well as higher corporate financing costs, which have impacted inflation and challenged the Fed; and (c) the colossal write-downs and losses incurred by the nation's largest financial institutions. The effect of the collapse of Bear Stearns on market confidence was underscored by Bernanke, who explained that the Fed needed to intervene because, "[w]ith financial conditions fragile, the sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and could have severely shaken confidence . . . and . . . cast doubt on the financial positions of . . . Bear Stearns's . . . counterparties . . . ." The Fed guaranteed $30 billion of Bear Stearns' positions, many of which may be residential collateralized debt obligations (CDO's). This signals a shift in focus for the Federal Government; an active hand approach. Treasury Secretary Paulson recently unveiled a plan whereby the Federal Government will adopt a stronger regulatory posture in its administration of the financial markets, while Fed Chief Bernanke encouraged congress to help homeowners caught up in the mortgage crisis. Bernanke believes the President's recently enacted stimulus package will bear fruit in the second quarter of this year, just in time to battle this elusive recession they are grudgingly acknowledging. Perhaps the current economic forces we are facing will be short-lived, perhaps not. The effects of the housing market have stretched into other sectors, from the financial services sector, to the sporting world, which financed stadiums with variable rate public debt instruments. The issue never was solely a sub-prime lending problem, as it was originally billed. The credit-crunch is real, because in order to be a borrower, someone else has to be a lender. Mortgage companies, such as Blue Door Mortgage in Wellesley, MA, have been pointing this out in their client letters for months. When risk-averse investors abdicate the capital markets for treasuries, fearful of the losses that financial institutions have incurred from their CDO positions, the result is higher borrowing costs for those corporate borrowers able to secure capital by offering higher yields relative to the yields on comparable treasuries; and a dearth of capital for other corporate and individual borrowers due to asset class, appraisal/valuation or credit issues.

These issues are not isolated to one sector of the economy; they affect all spheres of the marketplace. Nevertheless, there is opportunity in tough times, and strategic business moves that can be made will position the smart and the street-wise to take advantage of the inevitable boom cycle that will follow. Private businesses and investors can purchase failed projects at reasonable prices and complete them in time for the upward cycle that, with positive consumer sentiment can lead to an increase in consumer discretionary spending, new leases for rental apartments; the opening of new storefront businesses, and the warehousing facilities needed to service the increased consumer demand.

Knee-jerk collateralization due to economy rather than the deal

noreply@blogger.com (Warren Kirshenbaum) — Wed, 28 May 2008 00:19:00 +0000

Typically in financing a deal, lenders underwrite a loan relying on the project's cash flow; they use financial covenants, such as a debt service coverage ratio as a testing mechanism; insert a reserve requirement; manipulate amortization periods; peg rates to the treasury market, LIBOR, or the FHLB; utilize a loan to value ratio that relies on appraised value; and ultimately underpin the pricing of the deal to the credit quality of the borrower. Collateralizing a loan against the property itself, with recourse to the borrower usually suffices to secure the financing. In some circumstances, other valuable consideration, at the lender's discretion, may be pledged by the borrower, but, traditionally, these terms are based upon the deal fundamentals themselves, and not on the state of the marketplace.

Recently, however, I closed a transaction for a client where the lender secured the loan with substantial and various forms of collateral, seemingly unwarranted by the deal itself. There was a solid appraisal, robust cash flow, and a strong borrower. I couldn't help but wonder whether this was a kneejerk collateralization response by the lender; an over-collateralization based upon the declining economy and battered investor confidence rather than the deal itself? The result of such policies may serve as a self-fulfilling prophecy in that encumbering additional collateral may affect future cash-out refinancings, and carry with it an opportunity cost which could result in a larger overhang on the market than the underlying conditions themselves may have created.

We are currently seeing a credit crunch that is just as attributable to consumers curtailing their spending, lenders tightening their credit standards, and investors shying away from certain products, than it is attributable to the effects of the underlying mortgage crisis itself. These market conditions cause our legislators to overreact, and unwittingly intensify the original problem.

We have seen responses like this before. In the early part of the decade, when the public equity markets were faced with large scale corporate implosions, such as those of MCI and Enron, investor confidence was shaken, and legislators pounced into action, enacting the Sarbanes-Oxley Act (SOX). In hindsight, SOX was a heavy-handed response intended to cleanse the equities markets and restore investor confidence. There were those who warned that we
may have been over-regulating the markets; creating a disincentive for new public offerings or even for the continued public listing of existing issuers, particularly smaller cap companies and foreign issuers. In early 2000, there was a great deal of interest, and substantial multinational business opportunities created by companies across the globe wanting to list their shares on U.S. equity markets. The concern was that SOX could change that business climate, and it did. The law created a complex reporting structure and potential liability for signators of annual and quarterly reports. SOX enriched auditors and securities lawyers, but drove issuers away from the equities markets.

Understandably, an argument can be made that the recent private equity boom may have had its underpinnings in the SOX marketplace, as it created a climate at that time that painted privately-held companies as a more lucrative and high octane option than the expensive,
overregulated, and "on-balance sheet" world of public companies. Similarly, the lightly regulated hedge fund marketplace became a lot sexier. Was this capitalism at its finest; the creation of new business opportunities, or was it only benefiting a select economic strata of society, a consequence that would have little effect on the broader marketplace. Well, considering that we now have a staggering trade imbalance between our imports and exports, a mind-numbing deficit, a weak dollar, and a global economy less focused on the U.S. marketplace than at any time this decade, perhaps the latter. Today's deterioration in the financial markets may have had its origins in the housing market, but the resultant dent in consumer and investor confidence has deflated the capital markets. So far, there has been legislation tailor-made to assist struggling homeowners, but presently the legislators have leveled no particular focus on the commercial real estate market. Let's keep it that way. Bankers will acknowledge that delinquencies on commercial transactions have inched upward, but are still at tolerable levels. Over-regulation, whether by statute, or action by market participants, just like an over-reaction in a personal situation, generally exacerbates, rather than remedies the core problems. Underwriting and collateralizing a deal on its own fundamentals sits better with me, as it is rational and market-oriented.

Food for thought - it's a marathon not a sprint.

The dirty "R" word

noreply@blogger.com (Warren Kirshenbaum) — Tue, 18 Mar 2008 14:22:00 +0000

I'm going to call it. Recession is a dirty word, a word that just doesn't roll very easily off politicians tongues. It's not what you want to hear, and it's a word that you just don't want to use in an election year. The Boston Globe yesterday quoted Peter Dunay, chief investment strategist for New York based Meridian Equity Partners, as saying that " . . . [t]his is why we're probably heading into a recession." Kudo's to you, Peter, for heading down the pathway that few have dared to go, even though you put on the brakes with the "probably" qualification. Henry Paulson, the Wall Sreet titan who is currently the Bush Administration's Treasury Secretary, stopped short of using the bloody "R" word, but has acknowledged that the economy has slowed down. Mr Paulson stated on Good Morning America this morning that the economy has taken a downward turn. When I see a man like Henry Paulson sitting at the helm of the Treasury Department, and taking a front and center position on the morning talk shows to ease our concerns, it makes me comfortable. It really does help. I do know, however, that when I see JP Morgan tap dancing on the grave of Bear Stearns, doing the same jig they have done on many graves in the past, I know that we are in a recession. Chase is the grim reaper of the economy. All banks tend to take away the umbrella they gave you when it starts to rain, but no bank is better at not only taking away the umbrella, but stepping on the face of its troubled clients; clients that it financed in the first place, and then buying their businesses out from under them. You know that the jig is up when you see Chase circling overhead.

It's not, however, all that troubling to say that we are in a recession. Recessionary times are challenging, and they require a different set of skills. For those of us that are used to workouts, and tough deals we're okay with the word recession; the more hair on it the better we say. There's opportunity in tough times, so let's just deal with the fact that its here, and do our best to bust out of it. There are many strategic business moves that can be made in these times that will position the smart and the street-wise to take advantage of the inevitable boom cycle that will follow.

We like to help clients understand that if you are in a position to invest, build, create, produce, and deliver in times like these, you can position yourself very well for the next cycle. And let's face it, you'll be helping move the economy out of its "slump" or whatever they want to call it.

You still need the address for GPS to work

noreply@blogger.com (Warren Kirshenbaum) — Mon, 17 Mar 2008 01:58:00 +0000

As attorneys, we find ourselves from time to time being called upon to guide clients through business situations that require skills more akin to a consultant than a legal advisor.

In that role, I find the following advice helpful:

Understanding the objective of the decision is often a key to the decision itself. There should be a business plan underpinning a strategy. The instinct of a business person gives one the ability to understand what a business needs. That is, knowing the general direction to head toward. That knowledge, however, does not necessarily impart on us the knowledge of the business' prime destination, or what is needed to get there. It is these objectives that the business person needs to understand in order to identify the destination, and it is our job as counselors or consultants to assist in framing and defining these objectives.

Often I find business people perceiving a need, and then making decisions without knowing what the objectives of the decision are. For example, a business person may recognize that the business needs marketing assistance. They have not, however, determined exactly what they hope to achieve from the marketing assistance. Is it brand awareness in order to strengthen an existing customer base?, or is it to try and leverage the existing brand into expanding revenues for a new product line or service? What is the actual game plan, the destination? Without defining the objectives, it becomes difficult, if not impossible, to prepare a job description; identify the line of command and responsibility; and insert accountability for performance issues. The end result inevitably becomes a failure on the part of the business to execute on its ideas, which results in the squandering of financial resources, and a loss of the resource of time. It should be noted that people will perform to their capabilities and their training. It is up to management to guide that performance toward the intended goal, and not to expect successful performance toward an undefined goal. If the goal is unknown, it is not possible to guide one's personnel toward anything but failure, and that is management's failing, not personnel's. Such management is akin to programming an address into a GPS system, and when the GPS system guides you to the address that you programmed in to the system, blaming the GPS system for taking you to a place to which you did not want to go. Businesses need to accept the responsibility of their own decision-making, and clearly define their objectives, so that the GPS system can lead them to the intended destination.

Never make a decision, embark on a venture, or a course of conduct without understanding what you hope to achieve from the decision/course of conduct. You cannot know that you have reached your destination, achieved a profitable result, or even whether you are going in the right direction if you do not know where your destination is.

A Housing Crisis - Is that what the smart money thinks?

noreply@blogger.com (Warren Kirshenbaum) — Sat, 12 Jan 2008 02:38:00 +0000

In a meeting this week, a realtor that I work with said that the meltdown in the housing market is more about the media's perception of the market than the state of the market itself. Today, Bank of America made public that it plans to buy the mortgage giant, Countrywide Financial. The newspapers tell us that the economic indicators are showing recessionary tendencies. The stock market, with its wild unpredictability seems to be digesting the reality that consumer spending cannot reach a level high enough to offset the effects of the mortgage meltdown from touching the economy as a whole; particularly when, in addition to long term borrowing costs increasing on jumbo loans, gasoline, insurance rates, home heating oil, and even shipping and postage are at uncomfortably high levels. In times like these, people tend to tighten their belts; they spend less, and those with resources take a more conservative view. I represent real estate developers, particularly those building housing. These are people that approach business with the steely resolve of a poker player. They are well accustomed to throwing as much against the wall as they can, and then going with what sticks. However, even though they know that the real estate market tends to cycle up and down, many of them are sitting on the sidelines. The analysts and pundits state that the capital markets are facing low levels of liquidity, and underwriting standards have tightened. So if you were in a liquid position, where would you be putting your cash? Better yet, if you were the repository of the cash, let's say you were the bank, what would you do? You would keep the money locked up in the bank, right. This wouldn't be the time to buy, or develop more housing would it? Actually, I have been telling my clients that this is precisely the time to lay the groundwork for the next upward trend in the market. Nevertheless, a lot of participants are keeping liquidity out of the market. Revisiting the question --- what then are the banks doing? Well, Bank of America just bought the biggest mortgage lender in the country, and I bet they aren't buying them just to service their 9 million existing loans. I am sure Bank of America's business plan anticipates them originating a lot of new loans. Perception is not reality, reality is what we make of the indicators, and to me the smart money is saying that things aren't that bad.

It's My Turn

noreply@blogger.com (Warren Kirshenbaum) — Thu, 03 Jan 2008 23:26:00 +0000

I have been thinking about creating a blog for some time, and the first week of a new year seemed about as good a time as any to get my blog going. It's not a New Year's resolution, it's my attempt at conceptualization, expression, and sharing. Basically, it's time to show up. I am a real estate lawyer in Boston, but that is not the inspiration, nor will it comprise the overwhelming subject matter of my blog posts, although items of interest from the legal world will certainly creep into my posts.

Today's segment germinated on the commuter train going to work, while reading the sports section. I was pondering the thought, as I often do, that life and sports carry the same lessons and insights. It's the 10% rule. What really matters in life and sports is not the 90% of things that you do well, or those tasks for which you are trained, and can execute flawlessly. That is what is expected of you. The difference, the distinguishing feature, talent, or attribute, whether it be in providing extraordinary service to clients, winning the game, or succeeding at the task, whether it be professionally or personally is how you react, respond, tackle, and complete the 10%. It's not the 98 perfect pitches, it's whether the batter, at the right time, has the aptitude, hand-eye coordination, or presence of mind to take advantage of the one pitch in a hundred that is one-tenth of an inch off the plate. The point in the meeting, personal interaction, courtroom argument, or deal negotiation where the blink of an eye, the shifting of a foot, or the twitching of a shoulder muscle tells you that they have no answer to your question, strategy, or pursuit. The way that you deal with that opportunity is what makes the difference, that's the long touchdown pass that wins the game, it's the 10%.

Hopefully, I will have have some nuggets of wisdom to post here, I will try to articulate my interpretation of zeroing in on that 10%, or at a minimum present you with some entertaining story, anecdote, or observation.

In any event, welcome to my blog.

I read a 2006 article by a smart lawyer, Fred Tannenbaum, who quoted Oscar Wilde's observation that good judgment comes from experience, and experience comes from bad judgment. Fred was illustrating the point that we often miss the real meaning of it all, and that sometimes you just have to get into the game.

So here goes . . .