http://www.shelvingrock.com/blog/rss/feedsBased in Shelton, CT with regional offices in Tampa, FL and San Diego, CA, we strive to find a balance between the needs of our sellers and the interests of our investors and borrowers.Wed, 06 May 2026 04:22:57 -0700http://www.shelvingrock.com/blog/post/residential-construction-in-2020-a-look-at-the-impact-of-covid19http://www.shelvingrock.com/blog/post/residential-construction-in-2020-a-look-at-the-impact-of-covid19The COVID-19 pandemic has had far-reaching consequences globally, and those in the residential construction market are feeling the impact of the global health and economic crisis. Here is how the pandemic has affected residential construction so far in 2020 and what industry experts predict for the future.Residential Construction ResultsThe U.S. Census Bureau reported that spending on residential construction projects dropped 4.5% in May alone. Lost jobs and rising unemployment or underemployment are hurting an industry that relies on homebuyers having the means and the willingness to purchase.According to real estate site Redfin, the supply of new homes on the market fell 10.5% in the 12 months ending in April. And that situation is expected to get worse. The Census Bureau reports that housing starts and completions in April dropped 29.7% from the prior year, and permits were down 19.2%. Also in May, more than 400,000 residential construction workers lost their jobs.Delays Are Impacting the MarketThe pandemic and everything that has come with it has brought all sorts of delays to the residential construction space. Homebuyers that do want to purchase a new home are urged to exercise patience.It takes longer to get permits and inspections due to business and government shutdowns, some places have ongoing materials shortages, and construction workers are making adjustments to allow for social distancing on job sites.Different Ways of Buying New HomesNew home builders have been faced with a myriad of challenges in 2020 to meet customer needs and continue to produce results. In many cases, virtual tours of homes have replaced walking through models or recently-completed units.One of the attractions of buying a new home is that it’s something no one has lived in or touched before. That said, many buyers are faced with going through the design process virtually, and some are finding that their wants and needs have changed drastically.If 2020 has done anything, it has shown homeowners that being cooped up in an uncomfortable home can be torturous. Families are rethinking and prioritizing features like dual office spaces and outdoor recreation areas.Predictions for Residential ConstructionMuch of what happens with residential construction going forward is going to hinge on how this country responds to the pandemic. But the chief economist at the National Association of Home Builders, Robert Dietz, predicts a roughly 20% decline in single-family construction this year with a rebound at the end of the year and momentum in 2021.Even so, builders have become more optimistic. The NAHB-Wells Fargo Housing Marketing Index, which represents builder confidence in the single-family home sector, dropped to 30 in April, an eight-year low. It quickly bounced back to 72 in July.In truth, there are plenty of factors that point to a strong residential home market going forward: historically low interest rates, population growth, household formation, and the continuing growth of the older adult home buyer.Mon, 14 Sep 2020 21:00:00 -0700http://www.shelvingrock.com/blog/post/mortgage-rates-at-historic-lows-what-it-means-for-the-mortgage-industryhttp://www.shelvingrock.com/blog/post/mortgage-rates-at-historic-lows-what-it-means-for-the-mortgage-industryMortgage rates fell below 3% for the first time in history as the U.S. economy continues to struggle with the COVID-19 pandemic. Here is where those rates stand today and how the current situation has impacted the mortgage industry.Mortgage Rates Fall to Record LowsAs of July 16, Freddie Mac reports that the average 30-year fixed-rate mortgage dropped to a record low of 2.98%, the lowest it’s been in nearly half a century. Only a week prior, that same rate was at 3.03%, and this drop marks the seventh rate reduction since March. At this time last year, the average 30-year fixed-rate was 3.81%, and it was 4.94% in November 2018.Likewise, the average 15-year fixed-rate mortgage now sits at 2.48%, a 0.03% reduction from the prior week, and a 0.75% drop year-over-year. And the 5-year adjustable-rate mortgage now has an average rate of 3.06%, down from 3.48% last year.Drivers Behind Falling Mortgage RatesAccording to Danielle Hale, chief economist at Realtor.com, the factor that is driving interest rate fluctuations is the uncertainty surrounding this country’s economic outlook. Specifically, states and cities are attempting to jumpstart their economies in the midst of a pandemic that has proven to be terribly difficult to contain.Mathew Speakman, an economist for Zillow, states that the markets are unsure whether the latest surge in COVID-19 cases creates more issues for the economy or if there is anything to be optimistic about on the horizon. Bankrate.com, which releases a weekly mortgage rate trend index, reveals that over half of the experts surveyed anticipate rates to remain stable in the short-term.What Low Interest Rates Mean for the Mortage IndustryLower interest rates continue to make homes more affordable for buyers. For example, on a $300,000 loan, the monthly payment on a 30-year fixed-rate mortgage (not including taxes and insurance) would be $1,262 this week compared to $1,400 this time last year.Homebuyers who may have been sitting on the sidelines out of fear are more likely to take a closer look at the housing market thanks to these favorable rates. Further, existing homeowners are increasingly applying to refinance mortgages to take advantage of lower rates and payments.According to data from the Mortgage Bankers Association, which measures total loan application volume, mortgage applications jumped 8% in the second week of July. The refinance index rose 10% and was 106% higher than the prior year. In fact, refinancings accounted for 63.2% of mortgage applications.In a normal recession, low interest rates generally stimulate economic activity. But, thanks to COVID-19, this isn’t a normal recession.While borrowers are benefiting from these historically low interest rates, it’s unclear how mortgage lenders will fare in this uncertain market. With so much economic uncertainty, lenders are assuming more risk and should be pricing accordingly.In the meantime, upwards of 25 million Americans remain unemployed, and the pandemic unemployment assistance benefits and other emergency lifelines are scheduled to run out at the end of July.Mon, 31 Aug 2020 21:00:00 -0700http://www.shelvingrock.com/blog/post/covid19-moratorium-on-foreclosures-a-look-at-the-impact-on-the-court-systemhttp://www.shelvingrock.com/blog/post/covid19-moratorium-on-foreclosures-a-look-at-the-impact-on-the-court-systemAs the coronavirus pandemic continues to worsen and spread economic turmoil across the U.S., the impact on the housing market has been dramatic. Millions of Americans continue to be out of work, and those figures could increase as the infection rate in many states keeps climbing.The government has stepped in and placed a moratorium on foreclosures. What are those provisions, and what will this look like in the court system going forward?Federal and State COVID-19 Mortgage Relief ProgramsBy July 1, there were more than 2.7 million cases of COVID-19 in the U.S., accounting for over 130,000 deaths. Federal and state governments stepped up in April to provide protection for homeowners and renters, many of whom remain out of work thanks to business closures.The orders are temporary and are either tied to stay-at-home periods or are related to judicial orders that suspend nonemergency civil cases such as foreclosures. The Consumer Financial Protection Bureau (CFPB) recommends that homeowners pay their mortgage if they can and contact their mortgage servicer immediately if they can’t. If a private lender offers a mortgage payment deferral or forbearance options, borrowers should understand the terms of that agreement.Under the provisions of the CARES Act, borrowers with federally-backed mortgages (Freddie Mac, Fannie Mae, FHA, VA, USDA) can request forbearance for 180 days with an option to extend for another 180 days. All 50 states and the District of Columbia have also implemented COVID-19 relief for homeowners, but these are state-specific and subject to change.The Court System and the Moratorium on ForeclosuresJust because there have been federal and state actions to limit foreclosures, that doesn’t necessarily mean that some will not still get processed as COVID-19 continues. Press coverage might give the impression that court orders and various provisions prevent a wider range of actions than they do.For instance, certain states have barred evictions post-foreclosure, but those orders haven’t halted the actions of a foreclosure sale itself. In a judicial foreclosure, orders might prevent a foreclosure sale and subsequent eviction. Still, those same orders might not stop the running of deadlines to answer pleadings or respond to motions.According to JD Supra, some of the ways that the COVID-19 pandemic has impacted foreclosure and receiver issues with the courts include:In court-based foreclosure processes, there will continue to be delays with existing and new cases, as well as issues getting a judge assigned.Courts will likely continue to be unwilling to entertain requests for receivers except in cases deemed an emergency.Federal judges have been more responsive to emergency requests for relief than state judges.Court closures may preclude or limit the ability of title companies to search physical records, resulting in further delays of foreclosure proceedings.How foreclosures will be handled in the coming months remains a fluid situation. Courts will remain backlogged, and some jurisdictions might continue to change policies with respect to these matters as the situation with the pandemic continues to develop.Sun, 16 Aug 2020 21:00:00 -0700http://www.shelvingrock.com/blog/post/how-the-cares-act-affects-mortgage-collectionshttp://www.shelvingrock.com/blog/post/how-the-cares-act-affects-mortgage-collectionsMortgages have become a bit more complicated than they were just a few short months ago. Economic uncertainty surrounding the COVID-19 pandemic combined with government mandates have turned the mortgage industry upside down virtually overnight. Borrowers and lenders alike are finding it difficult to make sense of this new environment, and the mortgage industry stands to suffer due to a lack of foresight.The CARES Act Leaves Mortgage Servicers BehindThe Coronavirus Aid, Relief, and Economic Security (CARES) Act, which President Trump signed into law on March 27, offers up to a 12-month reprieve to some homeowners. Borrowers with Government Sponsored Enterprise (GSE) or federally-backed mortgage loans (FHA, VA, USDA, Fannie Mae, Freddie Mac) that have been economically impacted by COVID-19 can request a 180-day forbearance with an option for an additional 180 days. Borrowers cannot be charged any additional penalties, late fees, or interest beyond what is in the terms of their mortgage contract.Borrowers that don’t have GSE or federally-backed mortgages may still have relief options from their state or through their mortgage servicer. Many private lenders are also offering forbearance options, and most states have stopped processing foreclosure cases temporarily.While the CARES Act is a welcome relief for the millions of Americans that have found themselves unemployed or underemployed due to COVID-19, it has also created hardship for mortgage servicers. Now that these companies are no longer collecting the money they need to pay bondholders, many are finding themselves in a cash crunch. Further, these difficulties mean that mortgage companies will also not have the ability to make new loans.If the situation gets bad enough, it’s entirely possible that the U.S. could be heading towards another mortgage crisis. Even though rates are low, lenders will have to raise borrowing standards, which is something that JP Morgan Chase has done, and more borrowers will be unable to qualify for home loans.Potential Relief on the Horizon for Mortgage ServicersUnfortunately, the business relief in the CARES Act doesn’t provide any bailout money for mortgage servicers. Unless some provisions are made for this sector, the mortgage industry could be in trouble.As a small first step, Ginnie Mae announced that it planned to implement a system that would allow mortgage servicers to apply for advances. The system, generally used after natural disasters, would help servicers make scheduled payments to investors.While Ginnie Mae’s program is helpful, it may not be enough. Some in the industry are calling for Federal Reserve to create an emergency lending program for mortgage servicers. Even though the Fed has established several new emergency lending facilities in response to the pandemic, it hasn’t responded with respect to the brewing troubles in the mortgage space.A shortfall undoubtedly exists with the current plan, which threatens the survival of many mortgage servicers. U.S. Treasury Secretary Steven Mnuchin recently announced the creation of a task force as part of the Financial Stability Oversight Council (FSOC). The new task force will monitor nonbank mortgage servicers to address any industry liquidity challenges that could impact the economy.Mon, 03 Aug 2020 06:39:00 -0700http://www.shelvingrock.com/blog/post/is-loss-mitigation-increasing-with-the-covid-crisishttp://www.shelvingrock.com/blog/post/is-loss-mitigation-increasing-with-the-covid-crisis From a financial perspective, we're experiencing a perfect storm of catastrophic proportions. Most countries, including the U.S., are expecting a COVID-19-driven recession. Even though the government has taken some countermeasures to stimulate the economy, loss mitigation will almost certainly increase in every industry, but particularly in the mortgage sector.Government Response to COVID-19In response to difficulties faced by U.S. mortgage borrowers due to the coronavirus, the Department of Housing and Urban Development (HUD), including the Federal Housing Administration (FHA), as well as Fannie Mae and Freddie Mac have provided increased access to existing forbearance programs for borrowers that are experiencing income losses due to COVID-19. Some private lenders have also followed suit.On March 27, President Donald Trump signed the $2 trillion economic stimulus package called the CARES Act into law. The CARES act includes a long list of safeguards for homeowners who are experiencing financial hardship, many of which are in line with the programs previously announced by Fannie Mae, Freddie Mac, and HUD:The CARES Act permits mortgagors with federally-backed loans on single-family homes to request a forbearance for up to 180 days, which could be extended for an additional 180 days.To request a forbearance, borrowers must directly contact their mortgage servicer.A forbearance of up to 90 days is possible for mortgagors with multifamily mortgages that are current on payments.These provisions are seen as welcome relief for many borrowers, but the mortgage servicing industry is facing a severe crisis as the number of missed mortgage payments continues to mount.How Will Loss Mitigation Increase Due to COVID-19?Loan servicers would prefer that borrowers make their loan payments on time and want to avoid having to deal with foreclosures. The court and administrative costs of dealing with bank-owned properties don’t make this an attractive choice. But, the current economic situation caused by COVID-19 is going to have lenders busier than ever with loss mitigation efforts such as loan modification, repayment plans, and forbearance agreements.In a recent National Mortgage News article, Black Knight predicted that mortgage delinquencies could outpace the numbers this country saw during the Great Recession. The company estimates that, by the middle of May, close to 4.7 million loans were in forbearance (about 8.8% of active mortgages nationwide). And this could be just the beginning.It’s important to note that nearly one in five, or over 38 million Americans, have filed unemployment claims since COVID-19 was declared a national emergency. In April, the unemployment rate soared to 14.7%, the highest level since the Great Recession, and the Fed projects that pandemic-related unemployment could reach as high as 32%.Even with help in place for borrowers from the CARES Act, mortgage servicers are facing a “liquidity gap” because they must continue to pay bondholders during the forbearance period. Without any assistance from the federal government, that liquidity gap will continue to grow into the tens of billions of dollars. While some housing finance entities have implemented measures to address the gap, there are serious concerns that these won’t be sufficient to avoid a financial catastrophe.Tue, 14 Jul 2020 21:00:00 -0700http://www.shelvingrock.com/blog/post/will-working-from-home-for-covid19-change-the-amount-of-office-space-needed-in-the-futurehttp://www.shelvingrock.com/blog/post/will-working-from-home-for-covid19-change-the-amount-of-office-space-needed-in-the-futureAs the U.S. and other world nations begin considering ways to reopen their economies, businesses are taking a closer look at the way they work. When COVID-19 was declared a global pandemic, many companies were forced to do something they had been resisting for years - move to remote working arrangements. Several aspects of COVID-19 could have an impact on the future of commercial real estate.More People Working from HomeWhen states began issuing shelter-in-place orders back in March, an increasing number of workers found themselves pushed out of their offices and asked to work from home. Not surprisingly, this is a situation that many employees had desired for years.According to Owl Labs, about 80 percent of employees want to work from home at least part-time. In 2018, just 5 million employees, or 3.6 percent of the U.S. population, were working from home half-time or more. Because of COVID-19, about one-third of Americans are now working from home.Of course, some jobs are better suited to remote work than others. Positions that don't require a lot of collaboration, such as programmers, analysts, accountants, and processors, can be done remotely. Whether remote workers return to the office or not, there may be some lasting implications for the commercial real estate industry.How COVID-19 Will Impact Commercial Real EstateAs states and counties re-open, it's unlikely to be "business as usual" for many companies. In fact, the battle for survival has become very real. In April, there was a 26 percent increase in Chapter 11 filings from the prior year, with major brands like J.C. Penney, J.Crew, Gold's Gym, and Neiman Marcus on the list. Even if doors aren't shuttered, a recent PWC study found that about half of businesses anticipate a drop in productivity due to the pandemic.Companies that remain in operation will need to rethink how they do business. Some will continue to allow remote work, and others will ask that their workers come back into the office. How these decisions will impact the commercial real estate space remains unclear.What Will the Office Look Like Post-COVID-19?In a world not impacted by a pandemic, more remote workers translates into a need for less commercial space. But, in the current environment, organizations must make adjustments to the way their office space looks and works to allow for social distancing and prevent the spread of germs.For the past several years, office spaces have become more densely-populated with a trend toward open office plans. In general, there is little separation between co-workers, who are often seated face-to-face at workstations. This is likely to change.Companies that had been trying to get by with less office space could require more to allow for physical distancing. This could mean more physical offices for workers, or at least more space between cubicles. Further, conference and break rooms will need to be larger to accommodate the same number of people.Commercial real estate firm Cushman & Wakefield created a new design concept called the "Six Feet Office" that allows for a six-foot distance between workspaces as well as physical barriers and foot traffic routing to diminish face-to-face encounters. According to Julie Whelan with CBRE, "It is too early to tell if companies will lease less space." The trends of needing less space due to remote workers and more space due to social distancing could cancel each other out. Wed, 01 Jul 2020 07:39:00 -0700http://www.shelvingrock.com/blog/post/are-zombie-house-laws-having-an-impact-on-the-mortgage-industryhttp://www.shelvingrock.com/blog/post/are-zombie-house-laws-having-an-impact-on-the-mortgage-industryWe fear zombies because they sit between two distinct worlds, neither living nor dead. But while undead people are thankfully limited to pop culture, plenty of homes are neither living nor dead, and disputes over how to free them may already be affecting the mortgage industry.Aim For The HeadHow do homes become zombies? The foreclosure process is a long and difficult one, as lenders and homeowners have to take several steps before a home is repossessed by a financial institution, including attempting a loan modification, mediating disputes, and of course resorting to the legal system.As a result, there are approximately 1.5 million single-family homes and condos in the foreclosure process with no resident. And like a zombie, the longer they lurch through the legal system, the more off-putting they become, attracting pests and trash, falling behind on maintenance, and dragging down local home values.There’s a solution; require somebody, anybody, to keep the homes in good repair. The problem, of course, is just who that “somebody” is.Fight Or FlightThe state of New York, at the end of 2019, took steps to resolve that question with the Zombie Property Remediation Act. It essentially gives municipalities tools to speed up the process, compelling the lender to either foreclose on a property or discharge their obligation and give it to local government. While the overall time limits vary, generally banks have three months to make a decision one way or the other.So what will lenders do, and will these laws spread elsewhere? Both are good questions. Foreclosed properties are between two worlds in another respect: They have outsized impacts in terms of raw numbers, with a million households going into foreclosure every year… but that represents just 0.5% of all homes. New York City, for example, has approximately 2,000 zombie properties, out of 761,000 residential properties in the city proper, and averages 3,000 first-time foreclosures a year. So only a tiny fraction of homes even become zombies in the first place.It’s simply too soon to tell for most lenders. It looks, so far, that small lenders are facing more problems than larger ones, which may potentially force those lenders out of the market. It may also drive down their appetite for risk, limiting the number of lenders homebuyers below a certain credit score can tap into.Most states seem to be taking a wait-and-see approach to New York’s laws, or are making moves with broader impacts. Minneapolis, for example, is doing away with single-family zoning altogether, and other municipalities are revising their zoning laws to limit the number of vehicles and to encourage building close to transit stops.That said, however, the only good place for a zombie home is away from a balance sheet. Once litigation costs and taxes are factored in, they’re often just as unpleasant as their namesake. By the time we know the impact of these laws on lenders, lenders should already have put them in the ground.Sun, 14 Jun 2020 21:00:00 -0700http://www.shelvingrock.com/blog/post/how-will-home-prices-change-in-light-of-covid19http://www.shelvingrock.com/blog/post/how-will-home-prices-change-in-light-of-covid19To keep the medical system from being overwhelmed, the economy has, in many sectors, gone into stasis. The real estate industry has seen inventory drop substantially as open houses and other sales tactics become taboo and seller interest dwindles, balancing supply and demand. Yet there may be problems lurking in the future.The Present: No Demand, But Also No SupplyRight now, the problem is less pricing than sales. There's little demand, as people stay home and take stock of the economy. Yet since there was already too little supply in many markets, and potential sellers have taken their homes off the market, the result has been an economic balance. This is cold comfort to the real estate industry as lower overall sales batter realty companies, but it does mean that, at the moment, there's little chance of a housing price crash overall.However, the current situation won't last forever. There are already a few factors that need to tending carefully, or a crash could well be in the future.The Future: Too Much Or Too Little?The first factor is the most obvious: At least 26 million jobs have been destroyed by the economic consequences of COVID-19, as of this writing, with more likely on the way. It's not clear yet how many of those millions will have jobs to come back to or the ability to go back to them. Nor is it clear how many of them are mortgage holders.Second, as the government has ordered mortgage payments put on hold, mortgage servicers are facing a crisis not all of them will survive. Where their mortgages wind up and how they're handled could mitigate any problems or flood the market with inventory, depending on how the dice fall.Third, plummeting mortgage rates have also put a squeeze on lenders. Rates are so low that thirty-year mortgage holders can refinance to fifteen years, and once the current situation lifts, we could see a "sugar high" of prices as new lenders flood in, setting the stage for a crash when rates inevitably rise again and that demand dries up.Finally, there's the rental question. All of the above issues not only apply to rental properties, but as Airbnb has faced a crisis of collapsing bookings, it's rapidly become clear that the platform was locking up rental properties that could have gone to long-term residents. A surge of rental inventory may drain supply from the buyer's market, especially if high numbers of foreclosures force more customers into renting.The impact will vary widely. Metropolitan areas were already facing a housing crunch and will likely use the post-COVID world to make changes, such as banning certain types of rental listings on Airbnb, or accelerate ones already in the works, including major zoning changes, to increase construction and create jobs.Suburban areas were facing a murkier future; some may find themselves struggling to maintain prices as more homeowners struggle to find new jobs. Others may see stability or even a supply crunch as homeowners refinance on shorter terms and stay put. All of this is on top of major changes as Baby Boomers retire and either age in place or move, and Millennials become the largest generation in the real estate market. Keep a close eye not just on national trends, but regional and local as well because Americans will see very different housing prices in different regions as these factors unfold.Sun, 31 May 2020 21:00:00 -0700http://www.shelvingrock.com/blog/post/exploring-the-impact-of-covid19-on-mortgage-delinquencyhttp://www.shelvingrock.com/blog/post/exploring-the-impact-of-covid19-on-mortgage-delinquencyEvery recession is different, and the 2007-2008 Great Recession, driven by a collapse in home prices, was no exception. The current economic situation, though, is completely different, and the impact of COVID-19 on mortgage delinquency is a tricky thing to predict.2008 Vs. 2020First, consider what happened in 2008. Leading up to the crisis, there was such a demand for mortgage-backed securities that banks issued far riskier mortgages than they should have. Once those risks stopped paying off, the bills that came due couldn't be paid, and that cascaded throughout the system.2020 is, essentially, large chunks of the economy simply stopping. While roughly a third of the workforce has the option to work from home, the rest don't. Adding to the trouble, non-essential industries like entertainment have been hard-hit with layoffs. Since 64 percent of Americans own a home, some mortgages are bound to be impacted, but how many is hard to figure.Adding to the issue, from a financial perspective, is federal and state mortgage forbearance and a halt to most eviction proceedings. This prevents the spread of the virus, since homelessness is a major risk factor for spreading any disease, and this needs to be the top priority. However, it has the potential for a rolling delinquency crisis.Short-Term Scramble, Long-Term ChaosShort-term, mortgage servicers are stuck in the middle. Servicers generally buy loans from lenders and handle the day-to-day operations, so a suspension in mortgage payments cuts off their cash flow. As of this writing, there appears to be no real effort to bail out servicers. This will mean a scramble to stay in business, and some won't make it.Roughly five percent of mortgage holders have asked for some form of forbearance so far, but applications are rapidly rising. There will likely be more as people tap into savings, pick up “essential” work to make ends meet, and take other actions. Estimates are that up to a quarter of all mortgages may need forbearance.Add to this the servicer failures, the attendant debt sales, and the likelihood of deceased mortgage holders, and you have murky waters. Some are concerned about potential "balloon" payments forcing unemployed and underemployed homeowners out of their properties. Others wonder about the impact of probate on delinquencies.To predict the impact on mortgage delinquency, you'll need to monitor several factors:How many mortgages go into forbearance, and where: Areas hardest hit by the economic shutdown will likely have more delinquencies, simply due to raw numbers.Which servicers go out of business, and who buys their debt: Depending on methods of collection, such as balloon payments, delinquencies may spike.Unemployment after the economy starts again: It's not clear yet how persistent the current levels of unemployment will be, but unemployment and mortgage delinquencies tend to be linked. Higher unemployment leads to more delinquency.Outside Factors: Keep in mind that all of this assumes there will be no bailout of servicers and no relief for mortgage holders. That may change as the crisis deepens or political shifts occur. It may also vary from state to state. States with strong homeowner and tenant protections will likely see fewer delinquencies.Finally, remember that the downstream impacts of this will likely take years to play out. It's not clear yet how many people will be able to come back to work, whether they'll have jobs to come back to, and the overall impact on the economy. Those are effects that only time will reveal.Sun, 17 May 2020 21:00:00 -0700http://www.shelvingrock.com/blog/post/how-has-official-guidance-on-opportunity-zones-affected-investorshttp://www.shelvingrock.com/blog/post/how-has-official-guidance-on-opportunity-zones-affected-investorsIn 2017, as part of the Tax Cuts and Jobs Act (TCJA), state governments were allowed to designate certain low-income Census tracts, up to 25% of those tracts in the state, as “opportunity zones.” This allowed certain tax benefits, provided certain standards were met. The problem was that the plan, as passed, was very much a work in progress, and clarity hasn't arrived until relatively recently. So, how has that clarity affected investors?The RulesTo get the tax benefits, investors have to set up what's called an Qualified Opportunity Fund, which must invest more than 90% of its assets into a Qualified Opportunity Zone Property. The property has to be “significantly” improved, generally defined as an original use, or the basis of the property must be worth at least twice of its non-land assets. Capital gains taxes are deferred for investments put into these zones, and if they're held for ten years, all capital gains are waived.There's quite a bit more detail to the rules, of course, but these are the basics: It has to be an investment inside one of these tracts, it has to be an original use, and it has to increase the value.The RisksCapital gains deferment is just one factor to consider when building.The main problem, as any experienced developer knows, is how you define significant improvement. Is remediating a brownfield and turning it into a solar farm one, for example? Would demolishing an old housing development and constructing a new one qualify? So the more clarity available, the better, although it's likely as more investors arrive with different approaches, and as disputes work their way through the courts, the regulations will have detail added to them.One core factor is that the sooner a project starts, the better; while some rules have a grace period before they go into effect, or sunset certain provisions, it's a narrow slice of time in the real estate process.Complicating matter has been how individual states designate opportunity zones. Some states have been criticized for designating relatively affluent areas as "opportunity zones," which may open the door to further risk down the road or even loss of the benefits in the first place. The lack of a requirement that residents in the tract itself benefit from the investment has also raised concerns among critics. For projects that lack any real interest from the public, such as industrial use, this may not be a factor; for others, it may render any tax benefits worthless.The core lesson most have taken away from the guidance is that this policy is not going to radically alter the economics of any particular project, or inspire completely new ones, for the most part. Instead it will create another factor to consider in the complex web of decisions that go into any real estate development project. In an industry where a tax break can make the difference between breaking ground and abandoning the plans, understanding Opportunity Zone regulations thoroughly will be key to whether they should be used. Investors should get involved because they believe in the project overall, not because there may be a tax break.Mon, 04 May 2020 05:39:00 -0700