Highlights of the REISA Conference 2009

The conflicting currents of cautious optimism and impending doom were on display during the Real Estate Investment Securities Association (REISA) annual conference, held October 18-20, 2009 at the Bellagio Hotel in Las Vegas, Nevada. Approximately 700 attendees, approximately half of whom were registered representatives, enjoyed an unprecedented 45 educational sessions and keynote addresses by Alison Levine, team captain of the first American expedition to Mount Everest, and Dr. Mark Dotzour , chief economist and director of research for the Real Estate Center at Texas A&M University. As evidence of the new energy and interest in the organization emanating from its recent rebranding from TICA to REISA, conference organizers estimated that almost fifty percent of conference attendees were either non-members of the organization or new members attending their first annual conference.

While I wasn’t able to attend all of the breakout sessions, I did manage to attend quite a few, and below are my top five highlights from the conference.

1. The commercial real estate market: more bad news. The general consensus among industry experts speaking at the conference is that the commercial real estate market will get worse before it gets better. The lack of liquidity in the debt markets will continue to cripple the commercial real estate market. Job losses continue to weigh on market fundamentals with few companies reporting plans to hire in the next six months. Commercial real estate prices are down 40-50% from their peak in 2006-2007 (known as a “fairyland” that is unlikely to return anytime soon) and may not show significant signs of change until 2012-2013. The key economic indicators to watch are (i) the personal savings rate (the flattening of this rate will mark the end of the recession) and (ii) corporate profits.

2. Capital Markets Remain Frozen. Lenders remain reluctant to lend due to regulatory and risk management concerns. The CMBS debt market has yet to resurface, but there have been some positive developments in recent months that offer some sense of optimism for the future. In September, the IRS issued guidance in Revenue Procedure 2009-45 that may make it easier to modify CMBS loans by providing relief from tax regulations that would otherwise prohibit loan modifications. CMBS loan servicers now have some additional flexibility to work with borrowers before a loan defaults. With $150 billion of CMBS debt scheduled to mature between 2010 and 2012, this flexibility could have a significant impact, but loan servicers and borrowers will still face a variety of obstacles in reaching mutual agreement on a loan modification.

Multi-family properties are still financed through financing from Fannie Mae, Freddie Mac and HUD, but the agencies, while active in this down market, do not express much interest in TIC or DST structures at this time.

There is a premium in today’s market on so-called “relationship banking.” Some sponsors are having success developing relationships with regional and local lenders.

3. New products and deal structures present opportunities. Conference presenters such as Keith Allaire predicted that syndicated debt programs will remain popular as a variety of sponsors are promoting: (i) opportunity funds that will invest in distressed debt, discount debt or CMBS paper; (ii) senior equity and mezzanine debt funds that will provide short-term deficit financing; (iii) oil and gas programs; and (iv) equipment leasing programs, not to mention the increasing amount of money being raised by registered REITs that are not publicly traded. A common theme of these programs is that sponsors waive upfront fees and compensation to better align their interests with those of their investors.

4. RIAs present an untapped distribution platform. Sponsors are increasingly looking to distribute their programs through investment advisers as a complement, or in some cases as an alternative, to the network of independent brokers. The benefit to the sponsor community is that this network represents a relatively new and untapped distribution network for their shows, not to mention a more favorable compensation model that, at least early in an offer, can save you 6-1 8% on upfront sales charge. For the investment advisor community, the challenge from a regulatory compliance perspective is structuring their compensation around these illiquid Regulation D securities. The key issues relate to management, valuation and liquidity. Some investment advisory firms are comfortable with their policies and procedures in this regard. Other firms less comfortable given the lack of definitive guidance on these issues have encouraged REISA to seek a formal request for guidance from the SEC, and REISA has responded by forming a special working group to explore these issues to clarify how RIAs can be offset. in connection with Regulation D private placements.

5. The bar for sponsors has been raised. Not surprisingly, the economic downturn has brought with it an increase in litigation, arbitration, bankruptcies, loan defaults, contract defaults, sponsor defaults and, in the most egregious cases, criminal prosecution. Regulators and industry associations promise increased scrutiny on Regulation D private placements and the industry professionals involved in these transactions. Industry surveys suggest that it will be difficult for new sponsors without a proven track record to successfully enter the private placement market, as past performance and a niche management or investment strategy will be critical to a sponsor’s efforts to raise funds. capital during these difficult times.

From a disclosure perspective, sponsors are leaning toward more disclosure and transparency, paying more attention to investor relations and reporting. At the same time, however, sponsors are facing increasing pressure to control costs, particularly initial offering expenses (sales commissions, legal fees, etc.) and to develop structures that better align the interests of sponsors with those of their investors.

Favorite Quote: Keynote speaker Dr. Mark Dotzour set the stage for a very informative and often hilarious presentation, beginning with the following comment:

“I’m not a motivational speaker…I don’t have any self-esteem, so I don’t care if you have it when you leave here.”