The Commercial Broker and Realty Speak Podcast Host Talks O-Zones, Tax Savings, Affordable Housing, and More
Last week, I sat down with Bill Weidner, an NYC-based investment real estate broker and host of the Realty Speak podcast to discuss the current state of the multifamily market and what buyers and sellers should know about investing in today’s environment. In our extensive interview, we talked about subjects including:
- Bill’s background and experience in the real estate industry, as well as his growing podcast
- The popularity of multifamily vs. other forms of commercial real estate
- The growing popularity of mixed-use properties in rent-regulated markets
- The impact of rent control on multifamily property values and cap rates
- What investors should know about investing in Opportunity Zones
- Property financing for multifamily investors
- Trends in the affordable housing market (particularly in light of Fannie and Freddie’s new affordability guidelines)
- 1031 exchanges vs. Delaware statutory trusts vs. Deferred Sales Trusts for capital gains tax deferral (and other benefits)
- Barriers and frustrations in the multifamily sale and purchase process
- Bill’s thoughts on a potential recession
- Listing a property on an MLS vs. off-market transactions
Hi Bill. Thank you so much for taking the time to sit down with me today and talk about multifamily investing. To start, why don't you tell us a little bit about yourself and what you do? Can you also tell us about your podcast?
Well, you know, I'm excited to be here talking with you, Alex. I've been in real estate since I was in my early twenties, in one form or another. At this point, I focus on investment sales as a broker. Before that, I was working in the general contracting business for residential and commercial properties around NYC. I've also worked in the residential mortgage industry, in the real estate appraisal business, and in residential home sales. In terms of particular markets, I've had a lot of experience around the real estate industry in New York, Colorado, and Utah, and I try to stay familiar with everything that's going on around the country.
As for the podcast, it's funny how that came about. I was transitioning from business development in the construction industry, back into brokerage. I knew that there were things I didn't know, and I knew I needed to know them. And I thought the best way to get to know them was to talk to experts. And then I said, this podcast thing sounds kind of cool. Maybe that's what I should do. I just recorded the 22nd episode yesterday. It's been a fantastic journey-- and like I said, it accomplished exactly what I was trying to accomplish. It's given me an education around investment real estate beyond anything I could have imagined.
In terms of popularity for investors, how does multifamily compare to other forms of commercial real estate, such as office, retail, or industrial properties?
In my opinion, the need for brick and mortar retail continues to be impacted by online buying options, and the gig economy has reduced the need for traditional office space, so we might see a contraction there. However, last-mile and storage in industrial are going to experience more net growth.
Taking that into consideration, the three basic human needs are food, shelter, and clothing. Of those three, shelter or housing is the one that needs to be both preserved and newly developed to keep up with population growth. Like with anything, there are cycles, however. I think if you do your homework and you make sure you're investing in what seems to be a stable, core or growth market, multifamily would be my top choice for most investors-- and its current popularity reflects that.
I know you also specialize in mixed-use properties; are you seeing an increase in their popularity during this market cycle?
Multifamily is certainly my specialty and I see a fair amount of mixed-use. An excellent example of the type of mixed-use property we might see is a 40-unit apartment building with 5, 7, or 10 retail stores on the first level. Since it is retail, you'll want to be careful and review the leases so that you can make decisions about the future viability of current or potential tenants.
If you own a rent-regulated apartment building, such as those that currently exist in California, New York, and Oregon, these commercial leases could provide you with an increase in rental income over time that otherwise might not happen for you. It’s definitely a trend that's taking place. That's why I like mixed-use property; because it gives you a little wiggle room to improve your income in these particular markets.
How about construction and development projects? Do you see them becoming more popular, or do you see mostly purchase and sale deals?
I don't know that anybody can predict that. I think some developers do new construction and some upgrade existing in-place assets for value-add deals. In contrast, institutional investors often buy stabilized core assets, so their focus is on that rather than development. I think it's more about where are we in the current cycle than what’s more popular. Sometimes that changes quickly, like it did in 2008.
What can you tell us about rent control and rent regulations for multifamily properties? I know this is a big issue in New York City, where you're based.
First of all, this is a big data question. So, I'd like to base this answer on a study conducted by my friend Jim Costello from Real Capital Analytics. The study determined that cap rates have risen and values have gone down in markets that have existing rent regulation or were anticipating rent regulation from last year to this year. So that's big data telling you that rent control hurts value.
In terms of rent control in New York, the most significant shift is the implementation of rules from the Housing Stability and Tenant Protection Act of 2019, which passed on June 14, 2019. It limits some opportunities for landlords who made building or apartment improvements to increase rents slightly over a period of time. In addition, the law eliminated the vacancy bonus, which allowed landlords to increase the rent by 20% over the last rent paid by a tenant who had permanently moved out of their rent-stabilized unit.
In the case of a very long term tenancy that kept the rent on that unit much lower than market rents it finally enabled the landlord to begin to receive a fair rent. Like I said, that’s been eliminated and it’s not fair; rent or otherwise! Bottom line is that rent regulation, while keeping rents low for some of the housing inventory, does not incentivize a landlord to continually improve that inventory and it pushes up market rate rents to make up for the loss of revenue for the regulated units. Hopefully, as time goes on, housing policy will be driven by the real needs of real people and not by the politics of it.
What about Opportunity Zones? Have you seen a lot of interest in them?
There's a lot of press on Opportunity Zones right now, and it's an investment play for a different kind of investor. Specifically, investors should know that Opportunity Zones consist of 8,700 low-income census tracts that state governors have told the IRS are the areas in their state that could most benefit from economic growth and redevelopment. The program arose from the Tax Cuts and Jobs Act of 2017 and gives certain tax benefits to investors who put their funds in a qualified business or piece of multifamily or commercial real estate located in one of these zones. Unlike typical investors, who might do a value-add deal with a 3 to 7-year holding period and utilize a 1031 exchange, Opportunity Zone investors are looking at a 10-year holding period to maximize the benefits of the program.
In addition, you generally wouldn't invest regular capital into an Opportunity Zone project. You would really only invest capital with a potential capital gains tax burden, such as funds from a recent sale of real estate, a business, stock or an expensive collectible. In addition to real estate, Opportunity Zones allow investors to invest in local businesses within an Opportunity Zone, which is why the program was initially created.
Investors should also know that all investments must be made via a partnership or a Qualified Opportunity Fund (QOF). These funds can self-certify, so it's important that if you invest in one, you choose a fund that knows and understands the rules. It's also essential to understand that there is typically a threshold of how much a fund needs to invest in construction or property improvements vs. the amount they originally paid for the property. So, this is usually a large renovation of an existing standing asset or ground-up construction. Now, in the second round of guidelines that Treasury and the IRS issued back in May, they did say that merchant builders could build real estate, and so long as they sold it to the new owner before they got the temporary certificate of occupancy that would qualify as "original use." As long as a building is located within an Opportunity Zone and held in a partnership or QOF, and follows specific guidelines, investors can benefit from the following:
- Opportunity Zone investments held for at least 5 years before December 31, 2026, will experience a 10% reduction in their capital gains tax basis.
- Investments held for at least 7 years before the same date will experience an additional 5% reduction in their capital gains tax basis, for an overall 15% reduction.
However, the big bonus is that, after 10 years, when you sell your interest in the fund, all the gain above the original amount that you invested is 100% capital gains tax-free. And you don't need to pull that money out after 10 years, so you could theoretically keep building up those tax-free capital gains for quite a while.
For people who want to learn more about Opportunity Zones, I'd recommend checking out the podcast episode on OpportunityDb; “Opportunity Zone Deal Packaging and Capital Raising” with Gabriel Fernandez.
Also on Episode 18 of my podcast, Realty Speak, I did an extensive interview with Toby Moskovitz, who's a well-known developer here in Brooklyn, as well as with Phil Marra and Demetri Yatrakis, Opportunity Zone experts at KPMG. I'd definitely recommend listening to that to learn more about the program and how certain investors can utilize it and be up to date on the 2nd round of guidelines released in May.
When your clients get financing for a multifamily property, what are some of the most popular loan products that you see them using?
There are many choices out there, and as many reasons why one product might work better than another in a particular situation. What I do is listen carefully to the big picture plan of the client, whether it's a refinance, a development project, or a purchase, and I connect them with a lending expert. I'll always ask the loan advisor to counsel the client on the best way to accomplish their desired short-term, mid-term, and long-term investment outcomes. But I don't get that involved in which product they would use. And I don't know that one is more popular than the other. I think it's a very, very personal decision based on what you're trying to accomplish. Realty Speak Episode 20 – “Multifamily Lending - Fannie Mae, Freddie Mac and HUD Capital Markets” gives great insights on loan products.
Do you see an increase in investors interested in purchasing or developing affordable properties? Fannie and Freddie have recently announced that their multifamily lending caps have been increased to $200 billion over the next 5 quarters, at least 37.5% of which must go towards loans for affordable properties, so I'm interested to see if that increase in capital availability has gotten investors more interested in the affordable market.
Alex, this is my favorite question of the lot. In my most recent Realty Speak episode, “Development of Affordable Housing – A Mission to Expand” where I interviewed attorney Matt Hall, and Eli Weiss, an affordable housing developer, and based on what they had to say, affordable housing is a complicated niche. It requires a lot of understanding to execute and a very long-term plan to build and hold because you won't be able to increase rents over the long term. That makes it very, very different from a market-rate project, where you have a host of value-add options. I do hope that there is an increase in affordable housing because currently there's a lot more demand than there is supply.
Of course, affordable housing won't be the right business choice for most developers, and that's okay; however, developers that do focus on affordable housing don't have to put in very much equity. This is because of all the financing incentives and tax credits that states and municipalities will give you. When it comes down to it, though, it still costs the same amount of money to build the building and purchase the land and this becomes a challenge to the numbers working.
What is the most important thing that someone purchasing a multifamily property should know? How about someone selling?
Let's talk about the seller first, because that's really where the inventory comes from. If you're a seller, you should be very careful about deciding what you'll do with your money before it lands in your account. There's a potentially huge capital gains tax burden, particularly if your property is fully depreciated. You may want to use a 1031 exchange to purchase a new commercial property, but you'll need to identify potential replacement property within 45 days, while the entire exchange needs to be done within 180 days.
Now, you may not want to do that; you may want to use part of the funds for something else, or to retire from real estate altogether. You can also potentially use an investment vehicle called a Delaware Statutory Trust if a traditional property to property 1031 exchange doesn't fit your needs. No matter what, you should talk to an experienced accountant and tax lawyer. As a broker, I'm happy to offer ideas and suggestions, but I'm not going to offer anyone tax or legal advice.
For buyers, I would say to always make sure to do your due diligence, especially involving things like environmental hazards or rent control regulations in certain markets. You also want to make sure that each tenant's lease is properly written, because if they don't have a real lease, or it isn't written correctly, that could lead to major issues for you down the line.
I also strongly believe that a buyer should make 3-4 different scenarios for the performance of the property, including the worst-case and best-case scenario. Ideally, these should predict what could happen over the next 5, 7, and 10 years so a buyer can make sure they're prepared for anything that could reasonably happen.
A lot of people are talking about a potential recession in the next few months or years, yet it seems that only more capital is flowing into the multifamily market. What's your take on that?
I'm not an economist, so I don't think I'm qualified to answer that question. However, I can tell you about my personal experience. I owned a property in a secondary market, maybe even a tertiary market, which I bought at the height of the market in the mid-2000s. It went up quite a bit in value, then went down to its original value (or even less), during the recession. Fortunately, it eventually recovered very nicely.
However, if you were to look at specific core markets, like New York City, you'd see that, while there was a contraction in values after the recession, people there didn't experience it as intensely as they did in many other markets. So, I think capital always flows. It just flows to different places, depending on the circumstances and current market conditions. For instance, looking at my example, the value of the property went on a bit of a roller coaster and took about a decade to recover. However, in New York City, by 2012, a lot of properties were well on their way to surpassing their pre-2008 values.
As far as whether there's potential for a recession or not, I'm observing the same things everything everyone else is. However, we don't know until it happens.
I think many of our readers understand the basics of using a 1031 exchange to defer paying their capital gains taxes, but they might not be as familiar with other ways to defer capital gains, such as a Delaware Statutory Trust or a Deferred Sales Trust. Could you tell us a little bit about these and how they work?
Most people do know about 1031 exchanges, but Delaware Statutory Trusts and Deferred Sales Trust are somewhat less understood. It's funny because the acronym for both of those phrases is DST. However, when someone says DST, they're typically referring to a Delaware Statutory Trust, and I'll explain what that is.
When someone utilizes a Delaware Statutory Trust, it's similar to Tenants in Common (TIC) except that instead of direct ownership, the investor purchases an ownership interest in a trust that holds title to the property. According to the IRS, you're allowed to 1031 exchange into a Delaware Statutory Trust which qualifies you to defer capital gains as you would in a typical property to property 1031 exchange. You are a passive investor though and as such have no control over the operation or when it will eventually be sold.
We discuss some of this on Episode 3 of my podcast, where I interviewed 1031 expert David Gorenberg and Len Berkowitz, a cost segregation expert. I'd definitely suggest listening to it if you'd like to learn more about various ways real estate investors can save on taxes.
Now, onto the other type of DST, a Deferred Sales Trust. A Deferred Sales Trust permits an individual to sell a property and defer the capital gain taxes because the trust held the property and it was sold from the trust. The seller is a note holder to the trust and will receive income from the trust. However, it's important to realize that Deferred Sales Trusts are generally irrevocable trusts, so you're giving up some control over your assets and following an investment plan that was created for you by your financial advisor and is overseen by your trustee.
If you want to learn more about Deferred Sales Trusts, I'd also highly recommend checking out Episode 5 of my podcast, where I interviewed attorney Michael Burwick about the entire process.
What's the difference between purchasing a property listed on commercial MLS like Loopnet vs. purchasing a property in an off-market deal? Should investors always be asking their commercial brokers to look for off-market deals?
I think that whether you want to use an online listing portal or sell off-market is dependent on the market that you're in. Let’s say you're in a market where there's a lot of demand and a lot of capital.
So, in that situation, if you’re an owner or a broker and you have good connections with people that you know want to buy this kind of real estate, and it's priced well for everyone, then you may not need to use an online listing portal. Buyers sometimes like these off-market deals because they don't want to be in a bidding war, because that's not the best way to buy investment real estate. Plus, there's a lot of time and expense that goes into underwriting a deal and conducting due diligence. As a buyer, you don't want to be investing time and energy and capital when you're competing with 15 or 20 other people. Plus, sellers sometimes like off-market deals because they want to have a discrete transaction.
However, you may be in a location where there's little capital being deployed, and a lot of properties on the market. Then, you'd want to put a property on an online listing portal to get it out to as much of the marketplace as possible.
In either case, whether doing a deal off-market or using an online listing portal, sellers and buyers would benefit by engaging a licensed real estate broker in the state where the property is located.
Bill, thank you so much for taking the time to speak with us today and share your wealth of knowledge and expertise. How can our readers contact you?
I strive to be a resource across the industry and I’m happy to share information with anyone who reaches out. They can send me an email at email@example.com or call/text me at (917) 232-8529. They can also visit my website and listen to the Realty Speak podcast at https://realtyspeak.nyc/.