Category Archives: Finance & Economics

ESG – Required/Desired Unmentionables

Posted on by

According to a recent Bloomberg survey:

About two-thirds of respondents in a survey of roughly 300 Bloomberg terminal users said the anti-ESG movement that started in the US last year will force firms to stop using those three letters in conversations with clients. However, they’ll continue to incorporate environmental, social and governance metrics in their business, they also said.

And the market reflects the controversy with corporate dollar denominated ESG bond sales declined from $91 billion in 2021 to $30 billion in 2023.

In addition, ESG isn’t highly ranked in importance:

Some 85% of respondents who identified themselves as being engaged with ESG said financial performance is the most important factor to consider when investing. Only 39% said the same of ESG, which was the lowest reading in the survey.

On the flip side, Bloomberg also reports that Morgan Stanley, the 7th largest underwriter of ESG debt, reports a decent pipeline growing stronger into 2024 and BNP Paribas, the largest underwriter, is predicting a banner year.

So why continue to incorporate ESG when you can mention it and don’t think highly of the concept and why the divergence in between “decent pipeline” and “banner year”?

The answer is a mix of increasing demand for ESG investments with faster growth outside of the US and regulatory requirements. While the GOP is making ESG a four-letter word in the US, the EU is strengthening ESG requirements including verification of ESG validity and compliance. The SEC is also increasing scrutiny of ESG claims.

So, the current situation:

  • Many investors, including major institutions, want ESG investments.
  • EU and other non-US investment regulators are increasingly requiring ESG reporting and in some cases requiring some level of ESG investment.
  • US and other regulators are cracking down on “greenwashing” i.e. falsely claiming ESG compliance.
  • US will fall behind EU and other countries in requiring, originating, and regulating ESG investments.

Post navigation

← ESG Lawsuits

Related Posts

ESG Lawsuits

Posted on by

According to GreenBiz: ” Lawsuits involving ESG-related issues have increased by 25 percent over the past three decades, according to research published earlier this year by the World Business Council for Sustainable Development (WBCSD)…..

Broadridge, a fintech company, also highlights regulator crackdowns on greenwashing and an increase in event-driven securities litigation — where lawsuits are filed over significant events that impact a company’s share price — as drivers of ESG-related securities and class action lawsuits…..

One well-documented impact of ESG-related lawsuits is the trend of “greenhushing,” where companies under-communicate their sustainability activities to avoid greenwashing accusations or political attacks. With regulatory agencies such as the Securities and Exchange Commission and the Federal Trade Commission taking action against corporations for misleading claims about corporate and product sustainability claims, the fallout related to greenwashing has expanded from reputational risk to compliance risk….

And this is before or in the initial stages of the “SEC’s planned climate-related disclosures rule and the EU’s Corporate Sustainability Reporting Directive…”

This doesn’t include Republican attacks on ESG or on any socially responsible investment criteria (investment managers are supposed to focus on profits, clients choking to death on discharges from their profitable investments are not investment relevant). Nor the reputational (as opposed to legal) risk of companies and investment managers claiming to be “ESG conscious” while investing in oil, or other non-green or anti-green sectors (just ask BlackRock’s Larry Fink defending ESG and then BlackRock appoints the CEO of Aramco to its board (BlackRock Appoints CEO of Oil Giant Aramco to Its Board – Bloomberg).

The full article can be found at: Get ready for more ESG lawsuits | Greenbiz
Advice can be obtained from our strategic partners. Feel free to contact us for introductions.

Digitalized Tokenized Real Estate

Posted on by

From accountants creating country club partnerships to Master Limited Partnerships, Private REITs, Public REITs, TICs, DSTs, LLCs – the real estate industry has always pursued new, more efficient, more effective ways to raise funds and diversify risk. Digitalization and Tokenization are the next steps in increasing efficiency, expanding the potential small and institutional investor base, opening investment globally, and providing liquidity for what has historically been an illiquid asset.

Digitalization is the creation of a digitally recorded investment such as proof of ownership of or participation in an asset (for example a limited partnership interest in a property) which is recorded electronically on an unalterable blockchain instead of on paper in a filing cabinet. Digitalization can be expanded to include real or near real-time updates of investment performance, valuations, and other data items needed to enhance the liquidity of the asset.

Tokenization is the expression of the digital asset which can be administered electronically and automatically via smart contracts (short blocks of code) embedded in the token. The tokens can be traded privately (subject to SEC regulations) or be issued as a registered security and traded on an Alternative Trading System (ATS) providing access to individual and institutional investors on a global basis and secondary trading of previously illiquid investments.

The World Economic Forum estimates a potential $24 trillion in tokens by 2027. The Boston Consulting Group is more conservative at only $16 trillion by 2030.

What does this mean in plain English?

In brief, information on the property or other investment is onboarded and updated on a permissioned blockchain. This provides for the information to be memorialized so it can’t be changed, linked to the underlying source for validation, and feeds into smart contracts that can automatically perform pre-programmed functions. Capital tables, distributions, etc. are automated and viewable by investors online through a secure website portal. Audit trails are established and maintained.

The investors purchase tokens – basically think of them like shares – which they can trade on the ATS similar to trading stocks and bonds rather than the current reselling of real estate shares to specialist buyers with the typical limited market, discount price, extensive paperwork, and lengthy time for buyer’s underwriting and legal.

Investors log on to the ATS, review the documentation, decide to buy, click the button, transfer done – all with institutional grade legal, documentation, valuation, and implementation.

Issuers have the option to add components providing:

  • ESG/Environmental reviews.
  • Updated property performance information (potentially real-time).
  • Property valuations on a periodic or as-needed basis.

In short: real-time online information, updated valuations, automated record keeping, transparency = reduced workload, enhanced investor relations, access to institutional investors, lower costs, and higher values.

Contact me if interested in additional information on digitalizing real estate on a SEC registered broker/dealer.

Real Estate Markets – Not Even Close Enough to Haggle

Posted on by

Participated this morning in the monthly Columbia Business School RE Circle, the Paul Milstein Center for Real Estate International Real Estate Alumni Meeting: Updates on RE Markets Around the World.

Participants confirmed my opinions that:

Sellers are looking for 4-4.5 caps and buyers looking for 5-5.5 caps – indicating a 20% decline in value and too far apart to even haggle.

Funds that were lending at 8% and leveraging up with an A-piece from a bank can’t cause banks now charging 8%.

Lots of money sitting on the sidelines and more funds being raised with nowhere to go.

Equity funds raising money for debt funds to play lower down on the LTV.

Only asset class that’s optimistic is single family.

Values down 20% and market won’t start clearing for 6 months or so.

Banks/Special Servicers will cooperate to avoid a panic.

Mezz/Pref Equity that’s really Equity + Hope Note is the future.

White Knight Pref Equity To The Rescue

Posted on by

What is White Knight Pref Equity?

White Knight Pref Equity is the investment of new funds into a capital stack by a friendly investor to solve a refinance or other shortfall. It is the opposite of bottom-fishing or vulture investing or loan-to-own. 

How does it work?

Say for example you have a property where changes in cap rates and LTVs leaves your refinancing short by $10 million, the White Knight Pref Equity funds the gap.

Why be a White Knight?

For example, a pension fund real estate investor that I work with had a problem. They buy or JV on existing and to-be-built low/mid-rise residential rental properties and BTR projects. The market for that product is extreme competitive and even paying market rates, they kept losing deals to other buyers – even at the same price. Last to play golf with the broker got the deal.

Their solution – offer favorable terms for White Knight Pref Equity in return for a Right of First Refusal. The property owner receives favorable, even below market funding, The lender receives an acceptable rate of return and is first at the table in the event of a sale.

A win-win.

Declining Real Estate Values

Posted on by

Bloomberg published an article – Global Real Estate is Sitting on a $175 Billion Debt Time Bomb – Bloomberg – regarding the rise in distressed real estate debt and decline in values. 

The $175B in distressed real estate debt is quite striking – exceeding the combined total distressed debt of the next 9 largest distressed debt by asset types.

US real estate has declined 9% in value while UK real estate is down 20%. MSCI opines in its 2023 Trends to Watch in Real Assets – MSCI that London offices will need to decline by another 9% to be of interest to investors. But the US is lagging, not avoiding.

Of course. both distressed debt and declining values are intimately interconnected and amplified by the low cap rates and interest rates of the past.

For example, a property with $1 million net income valued at a 4.5 cap rate is $22.2 million and an 80% LTV loan would be $17.8 million. The same property at a 5.5 cap rate is valued at $18.2 million – an 18% decline in value. The loan LTV is now 98%. In short, the sponsor’s 5-10% equity and most, if not all, of the LP equity is wiped out.

Although the property could still be servicing the low interest rate debt, the minimum loan required LTV is out of balance – to which the regulators could turn a blind eye allowing the lenders to kick the can down the road – but the real distress will eventually come with the refinancing when the loan must be paid-down or deed handed over.

So, we’re entering the stage in the cycle of white knights and loan-to-own and bets on if we’re buying at a discount or catching the knife on the way down.

 

ESG – Environment/Social/Governance: What & Why?

Posted on by

ESG is the application of socially aware and responsible standards centered on the environment, society, and internal governance.

ESG investment refers to an investment strategy which seeks equivalent or higher returns while simultaneously making a positive impact in three areas: environmental, social and governance

According to the U.S. SEC:

  • The environmental factor might focus on a company’s impact on the environment, or the risks and opportunities associated with the impacts of climate change on the company, its business and its industry.
  • The social factor might focus on the company’s relationship with people and society, or whether the company invests in its community.
  • The governance factor might focus on issues such as how the company is run and executive compensation.

Investors, especially institutional investors, have increasingly focused on the ESG aspects of their investments from a mixture of concern, profit, and regulatory pressure. This emphasis has in turn put pressure on investment recipients to conform with ESG standards in a reportable manner.

More specifically:

               Environment – too often viewed solely as energy consumption/emissions addressable by decarbonizing. Environment refers to the entirety of the environment including air/water/sound pollution, energy consumption, ecological features, and aesthetics.

               Social – refers to the human factors such as labor standards, workplace health & safety, local community involvement/benefits/impacts. It can be as simple as providing nutritional advice to tenants to economic development for the local community.

               Governance – referring to the entity’s internal governance practices – is ESG a recognized standard, are there internal rules for ESG measurements and compliance, what is the level of commitment – an analysist or the C-Suite.

_____________________________

Why ESG / Sustainability

The simplest answer is that sustainability is necessary to the survival of civilization and perhaps humanity. Pretentious sounding but the UN estimates that humanity is consuming the equivalent of 1.6 planets. In other words, in the seven months from January 2022 to July 2022 humanity consumed all the biological resources that the Earth regenerates over the entire year. And as a purely financial matter, it’s also good business reducing costs and increasing profits to be explained in future posts.

 

Nashville’s Star Rises as Midsize Cities Break Into Winners and Losers – The New York Times

Posted on by

Forty years ago, Nashville and Birmingham, Ala., were peers. Two hundred miles apart, the cities anchored metropolitan areas of just under one million people each and had a similar number of jobs paying similar wages. Not anymore. The population of the Nashville area has roughly doubled, and young people have flocked there, drawn by high-paying jobs as much as its hip “Music City” reputation. Last month, the city won an important consolation prize in the competition for Amazon’s second headquarters: an operations center that will eventually employ 5,000 people at salaries averaging $150,000 a year.

Birmingham, by comparison, has steadily lost population, and while its suburbs have expanded, their growth has lagged the Nashville area’s. Once-narrow gaps in education and income have widened, and important employers like SouthTrust and Saks have moved their headquarters. Birmingham tried to lure Amazon, too, but all it is getting from the online retail giant is a warehouse and a distribution center where many jobs will pay about $15 an hour.

Amazon’s announcement has been widely described as a rich-get-richer victory of coastal “superstar cities” like New York and Washington, regions where the company plans to employ a total of at least 50,000 workers. But the company’s decisions also reflect another trend: growing inequality among midsize cities.

Nashville and the other Amazon also-rans, like Columbus, Ohio, and Indianapolis, are thriving because of a combination of luck, astute political choices and well-timed investments. At the same time, Birmingham and cities like it, including Providence, R.I., and Rochester, are falling further behind.

Source: Nashville’s Star Rises as Midsize Cities Break Into Winners and Losers – The New York Times

The Biggest Emerging Market Debt Problem Is in America by Carmen M. Reinhart – Project Syndicate

Posted on by

Likewise, for those procuring corporate borrowers and bundling corporate CLOs, volume is its own reward, even if this means lowering standards for borrowers’ creditworthiness. The share of “Weakest Links” – corporates rated B- or lower (with a negative outlook) – in overall activity has risen markedly since 2013-2015. Furthermore, not only are the newer issues coming from a lower-quality borrower, the covenants on these instruments – provisions designed to ensure compliance with their terms and thus minimize default risk – have also become lax. Covenant-lite issues are on the rise and now account for about 80% of the outstanding volume………

Like the synchronous boom in residential housing prior to 2007 across several advanced markets, CLOs have also gained in popularity in Europe. Higher investor appetite for European CLOs has predictably led to a surge in issuance (up almost 40% in 2018). Japanese banks, desperately seeking higher yields, have swelled the ranks of buyers. The networks for financial contagion, should things turn ugly, are already in place.

 

Source: The Biggest Emerging Market Debt Problem Is in America by Carmen M. Reinhart – Project Syndicate

Banks are far more exposed to risky real estate loans than you think — thanks to this loophole Big Banks increasingly back debt funds and mortgage REITs

Posted on by

…But below the surface, banks are far more exposed to risky real estate loans than commonly thought thanks to a skyscraper-sized loophole: Instead of lending to construction projects directly, they increasingly lend to debt funds and mortgage trusts managed by private equity firms, which in turn lend to developers. Slate insists that the RiverTower deal wasn’t particularly risky, that it came with a big equity buffer and that it gets low interest rates on its loans. But in other cases, such as ground-up construction loans, the risk to lenders is more obvious…

 

Real Estate Lending | A-Notes

By Konrad Putzier and Rich Bockmann | November 06, 2017

Rising seas could wipe out $1 trillion worth of U.S. homes and businesses | Grist

Posted on by

 

Some 2.4 million American homes and businesses worth more than $1 trillion are at risk of “chronic inundation” by the end of the century, according to a report out Monday. That’s about 15 percent of all U.S. coastal real estate, or roughly as much built infrastructure as Houston and Los Angeles combined.

The sweeping new study from the Union of Concerned Scientists is the most comprehensive analysis of the risks posed by sea level rise to the United States coastal economy. Taken in context with the lack of action to match the scale of the problem, it describes a country plowing headlong into a flood-driven financial crisis of enormous scale.

 

Check out interactive map to see how your home, zip code or community does: http://US Coastal Property at Risk from Rising Seas.

Union of Concerned Scientists report at: Underwater: Rising Seas, Chronic Floods, and the Implications for US Coastal Real Estate (2018)

Grist: Rising seas could wipe out $1 trillion worth of U.S. homes and businesses

Is the global economy just a giant debt scam? What the financial elite doesn’t want you to know | Salon.com

Posted on by

Let’s restate that, because it gets more shocking the more you think about it. The bailout money came from the European Central Bank and the IMF, largely meaning the taxpayers of France, Germany and other prosperous nations of Western Europe. Exactly none of it went to restore social services or repair roads in Greece. All of it was used to make payments on the Greek government’s existing debt — most of which was to banks in Western Europe. So Angela Merkel and François Hollande (then the French president) and other political leaders extorted money from their own taxpayers, on the pretense that they were helping out a small, struggling nation on Europe’s southern fringe, and siphoned it directly to the biggest European banks, largely in their own countries. It was a direct wealth transfer from ordinary people to the financial elite.

Source: Is the global economy just a giant debt scam? What the financial elite doesn’t want you to know | Salon.com

An Infrastructure Plan That Would Actually Work by Willem Buiter & Dag Detter – Project Syndicate

Posted on by

The total value of commercial assets owned by state and local governments is sure to be of the same magnitude, or larger. After all, local governments own and operate most airports and ports, as well as utilities such as water, sewerage, and electricity – all of which are in desperate need of funding. But real estate comprises the bulk of public commercial assets. By some estimates, publicly owned assets account for as much as one-quarter of the total market value of real estate in a city or county. At the same time, many localities need additional funding for affordable housing.

All told, this public wealth represents a substantial opportunity for investors, local governments, and society as a whole. If professionally managed, the yield from such a vast portfolio of commercial assets could fund not just critically needed infrastructure investments, but also any other public goods and services that are in demand.

Source: An Infrastructure Plan That Would Actually Work by Willem Buiter & Dag Detter – Project Syndicate

Seychelles Finds A Novel Way To Swap Its Debt For Marine Protections : The Two-Way : NPR

Posted on by

The Seychelles have brokered a novel deal that will allow the island archipelago to swap millions of dollars in sovereign debt for protecting nearly one third of its ocean area.

It’s hailed as the first of its kind. “Seychelles is clearly breaking new grounds and with it, it has positioned itself as a world leader in ocean governance and management,”

https://www.npr.org/sections/thetwo-way/2018/02/23/588273709/seychelles-finds-a-novel-way-to-swap-its-debt-for-marine-protections

Opinion | A New Map for America – The New York Times

Posted on by

From 2016 but even more salient today. Compare to Trump’s Infrastructure Plan once released and see where the plan misses the key points.

Congress was once a world leader in regional planning. The Louisiana Purchase, the Pacific Railroad Act (which financed railway expansion from Iowa to San Francisco with government bonds) and the Interstate System of highways are all examples of the federal government’s thinking about economic development at continental scale. The Tennessee Valley Authority was an agent of post-Depression infrastructure renewal, job creation and industrial modernization cutting across six states….

What would this approach look like in America? It would start by focusing not on state lines but on existing lines of infrastructure, supply chains and telecommunications, routes that stay remarkably true to the borders of the emergent super-regions, and are most robust within the new urban archipelagos…

Where possible, such planning should even jump over international borders. While Detroit’s population has fallen below a million, the Detroit-Windsor region is the largest United States-Canada cross-border area, with nearly six million people (and one of the largest border populations in the world). Both sides are deeply interdependent because of their automobile and steel industries and would benefit from scaling together rather than bickering over who pays for a new bridge between them. Detroit’s destiny seems almost obvious if we are brave enough to build it: a midpoint of the Chicago-Toronto corridor in an emerging North American Union.

To make these things happen requires thinking beyond states. Washington currently provides minimal support for regional economic efforts and strategies; it needs to go much further, even at the risk of upsetting established federal-state political balances. A national infrastructure bank, if it ever gets off the ground, should have as part of its charter an obligation to ignore state lines when weighing

Source: Opinion | A New Map for America – The New York Times

Why cities should stop fighting big banks and create their own – Salon.com

Posted on by

Frack-happy, Trump-supporting North Dakota probably isn’t the first place you would expect to find a working model, but since 1919, the state has used the Bank of North Dakota to finance everything from student loans to sewer upgrades and small business loans. The bank just posted its thirteenth consecutive year of record profits, earning more than $136 million in 2016. And unlike at a big private bank, that money goes right back into investing in the people, rather than into investors’ pockets.

Source: Why cities should stop fighting big banks and create their own – Salon.com

Bank of America confirms Dublin as location for EU hub

Posted on by
Even if the UK reverses and doesn’t Brexit, the genie is out of the bottle. While London may survive as Europe’s premier financial center in a no-Brexit scenario, it will be by a smaller margin and with more competition.
Frankfurt and Dublin will be more important as financial centers with or without Brexit. Paris will gain – especially as high-speed transportation links advance. Just as Wall Street now stretches coast-to-coast, the European financial industry will spread across Europe. And don’t forget, non-financial institutions are also important and also relocating. For a country with strict gun control, the Tories-led UK has amazingly managed to shoot itself in one foot with no-Brexit and both feet with Brexit.

Wall Street giant Bank of America Merrill Lynch has picked Dublin as the preferred location of its EU hub, joining a growing number of international financial groups to outline initial plans for how they plan to deal with the fallout from Brexit.

Speaking to The Irish Times in Dublin on Friday, group chief executive Brian Moynihan said this will result in the bank’s existing Irish subsidiary merging with its current most important EU banking unit, based in London.

It will also involve the group setting up an EU trading operation, or broker-dealer, in the Republic, which will require separate Central Bank approval, he said.

 

Source: Bank of America confirms Dublin as location for EU hub

Putting America’s ridiculously large $18T economy into perspective by comparing US state GDPs to entire countries – AEI | Carpe Diem Blog » AEIdeas

Posted on by

 

It’s pretty amazing how ridiculously large the US economy is, and the map above helps put America’s GDP of $18 trillion in 2015 into perspective by comparing the GDP of US states to other country’s entire national GDP. For example: 1. America’s largest state economy is California, which produced $2.46 trillion of economic output in 2015, just slightly above the GDP of France during the same period of $2.42 trillion. Consider this: California has a workforce of about 19 million compared to an employment ….

Source: Putting America’s ridiculously large $18T economy into perspective by comparing US state GDPs to entire countries – AEI | Carpe Diem Blog » AEIdeas