Roy: Hi, this is Roy Oppenheim at “Zoom in at Noon.” This is our sixth webinar that we are doing during the coronavirus. This was put together through the help of Paula Vergara one of my associates and my son, Lance Oppenheim. I wanna thank you both for helping with me today to get this done. What we’ve doing here for those who’ve been involved with this process, a number of you have been, is that we’re almost creating a mutual time capsule of what folks, our children, our grandchildren may be able to look at what we were going through at the time.
At the same time, contemporaneously we’re trying to give ourselves an update on what’s going on. We’re also trying to give ourselves some hope and some optimism that this will come to an end like every one of these crises in the history of mankind has. And of course, when we come out of this, things are gonna be a little bit different and we’re trying to figure out how to position ourselves now, how to stay safe, and how to be able to be happy and prosperous when this crisis is over.
As most of you know, this is an interactive process. We love questions, we love comments, we love feedback. It is not the easiest to stand here and talk in a screen and just look at a PowerPoint for an hour. And so it’s really helpful when you participate and share and this becomes a joint collaborative effort.
Today we’re gonna be talking about…Slide two, The pandemics in history, weekly unemployment, updates on federal and state aid and the lack thereof, industrial production, and other market indicators, retail spending, the domino effect on real estate, real estate areas that are at higher risk, current legal first aid for real estate, and the future going back to a normal-ish. What we’re doing is kind of setting the predicate to understand how all of these issues both the history and where we currently are, and what’s going on is going to affect what real estate looks like currently, and also in the future. Next page.
As many of you know, we were at the forefront of the last economic crisis, how we defended hundreds, thousands of homeowners who were in foreclosure, doing workouts, doing short sales, doing modifications, defending foreclosures. Doing deed and lose, and suing the banks for inappropriate behavior. We’re starting to see some of this inappropriate behavior crop up again, but in a different context which we will be talking about.
Our firm was founded in 1989 by my wife and law partner, Ellen Pilelsky, and myself, Jeff Sherman is a partner. If we go to the next slide. We also have Mia Singh, and of course, Paula as our associate. And we have Wayne Patton who’s of counsel will actually be speaking next week with us about trust mistakes during the pandemic and we’ll talk a little bit about that at the end. Next page. Oh, and more importantly, Zack Sherman [SP] is going to be joining us again, as we talk about the importance of a bankruptcy strategy when dealing with a landlord that is not being cooperative in the context of the middle of this crisis.
Next slide. Our last discussion was about steps we can proactively take to adapt and survive. This week we’re gonna talk about, and take a deep dive into the consequences of the pandemic on real estate. Danielle Hale, chief economist for realtor.com just recently said that the impact of COVID-19 materialized in the latter half of March just a few weeks ago. Week by week, we are seeing decreases in new listings. Sellers who don’t have to sell right now are rethinking listing their homes. Buyers who aren’t under pressure to purchase a home are also pulling back. So the number of listings has dropped precipitously, the number of buyers out there also isn’t really clear because of the stay at home requirements.
Another factor I wanna mention is that since last week, there have been huge family offices and hedge funds that are creating massive, massive billion-dollar funds for distressed real estate. Sam Zell, who was called a grave dancer, who has been involved with economic crisis over the last 30 years, is also involved. And we’re seeing a lot of folks who are gonna be proactive as opposed to reactive and not defensive as it relates to how they’re gonna deal with distressed real estate.
We have our first question I wanna read to you all. When do you think homeowners will be comfortable allowing purchasers, appraisers, inspectors, to come into their home again? Within the month, three to six months, 6 to 12 months, rarely, but virtual tours will become the norm.
A quarter of you are saying within the month, and about half, you between 3 months and 12 months, and 15% think that people coming into your homes may not be that likely again, that’s only 14%. So we’re seeing anywhere between 3 and 12 months we’re thinking. I wanna mention that the other areas that these distressed hedge funds are creating right now is in the area of malls, offices, as well as distressed debt. Meaning the debt that’s being used to finance malls, offices, and other kinds of real estate that’s gonna be hobbled by this crisis.
Let’s go to pandemics in history I think it’s kind of an interesting…slide seven if we can. A chart here, which we thought we would share with you all. We take a look, this is a roadmap of history, the history of the most current is in the forefront, and in the back, of course, is what’s happened in the back in terms of viruses. And as we can see, COVID-19 is at the very beginning of the chart right here. Which shows that about 140,000 people so far have died worldwide. But if we compare that to HIV that was around 25 to 35 million. And the Spanish Flu which everyone is comparing this to for the most part, in 1918, 1919 was 40 to 50 million people. So that was the last pandemic that had a rapid rise of growth similar to the pandemic we’re currently dealing with.
While HIV and AIDS has killed so many people it’s been over a long period of time since 1981 to present so it’s been a very extensive period of time. While this virus has been rampant and that’s why we frequently compare it to the Spanish flu. How is this pandemic measured in prospective infectious diseases? Outbreaks are nearly constant in human history. The agrarian model of living required humans to settle in one place and live in groups, diseases became spread in large scale. The more civilized humans became, the more we moved into cities and more likely pandemics would occur because of trade routes, big cities, and social contact was much greater in these cities. Next slide, please.
Go to slide eight. Here we go. Again, we’re looking at the size of this particular pandemic compared to the others. We see that COVID-19 is tiny right over here, compared to all the other types of pandemics. But the growth of it and the speed by which it has taken over in the last few weeks is what the concern is. It has moved very fast and because of its speed, it overwhelmed our medical facilities. And that’s been one of the main concerns here. 90% of all kids right now are not in school in the world. That’s just an incredible number they may be homeschooled or they may be working online, it is an unbelievable number. You probably have to go back hundreds and hundreds of years to find so many children currently not in school during the school year. And of course, that creates tremendous dislocation for workers who have to take care of their kids.
Next question. Okay, let’s move on if we can. Let me see where we are. Just go back to the slide, please okay. I do wanna talk about what’s called the RO and that’s really important, that’s called the “R naught.” And if you’re not familiar with it, that’s a mathematical term on how contagious diseases are measured. And so if you are below a one that means every time someone gets sick, they will only affect one person. At some points in time, this particular disease was measured at over three where one person got sick three more people would get sick. Right now, different places in the country have different “R naughts.”
So for example, Atlanta, they believe it’s well below one, New York is hovering around one, in South Florida, I’m not sure what it is. But the reality is that will determine how things evolve and will determine when different parts of our communities around the United States open. Okay, I just wanted to share some pictures with you from the history of pandemics. This was during the Spanish Flu in 1918 1919 were huge facilities where sick patients were recovering together or where they were being held. So they were isolated so they wouldn’t continue to infect the rest of the public.
This next picture is fascinating. It’s in San Francisco 1918, 1919, actual court hearings were held outside, outside obviously is a better place than inside because the likelihood of contagion is much less. And here you have an actual court hearing being held in the city of San Francisco, sometime in 1918, 1919. Of course, here we have baseball during the Spanish Flu in 1918 was actually played, as you can see there is some precautions being taken by the masks are being worn by the players. We have question number two if we can.
When do you think…here we go. Do you think that people will migrate from cities to suburbs due to social distancing? Yes, no, or unsure.
Okay, so about 50 of you think you’re unsure? 44%, 43%? said yes. 37, 38. So we’re kind of split between yes and no, and that there may be some migration. And then there’ll always migration to Florida regardless. But it’s certainly clear that for the time being, people have left big cities and are going to areas where there’s more space between human beings. But the excitement and the kinds of economic activity that historically have occurred will ultimately attract people back. And we have cities that have ebbs and flows over the years. New York has come gone, gone again, come again. And so it probably will take several years for these cities to bounce back. But they’re very resilient organic entities that have the capacity to rebound.
Next slide, please. Weekly unemployment update. Let’s take a look at this. So here we have a chart from 2004, to current of what the unemployment claims have been each week. And these are actually three or four lines here, the orange lines. And it just shows you how they spike nothing compared to 08/09, which was the last time we had the great recession. And so we’re seeing that this is gonna have some sort of dramatic traumatic impact on the community, and on the economy, and clearly on real estate for some period of time.
And the reason it’s gonna be of an impact on real estate is if people can’t afford to get a new mortgage or can’t pay their rent, it’s gonna have an impact on the valuation of real estate. Because real estate ultimately is valued by the cash flow and income that’s generated by that type of real estate. And of course, many people have applied for unemployment does not mean that many people have received unemployment we’ll go to question three. And that question is if you have applied for unemployment, is it yes or no that you have actually received your first unemployment? I’ll read again if you apply unemployment, have you received any compensation? Almost no one says yes.
So almost no one has received their…There are other states where people are receiving their compensation. Florida has just been remarkably slow and somewhat incompetent in trying to get this process going. And they’re just being overwhelmed and I do understand that it will be retroactive, but the problem is that people have to hang on till they receive their first check.
Let’s go on to an update on federal and state aid or the lack thereof. Let’s go to page 16. First one was the Florida Bridge Loan, I’m not gonna spend any time on this it was a complete joke. Only 100 businesses may have benefited from it. They touted it as the initial panacea and one of the first programs literally, was a joke.
And of course, you have the EIDL program. Also, the Florida Economic Injury Disaster Loan Program, that also was a joke. None of these programs did what they were supposed to do and virtually no one that we know received any kind of benefit from these programs. The PPP is another issue. As of April 16th, the $350 billion had been completely expanded. Congress right now is supposed to add another 250 billion to the program. There are lawsuits have already been spawned by the program because small businesses are accusing the major banks of favoring large companies. Favoring those companies that were borrowing millions and millions and millions of dollars under the program, as opposed to small businesses that maybe were only gonna borrow 50,000 or 100,000.
The larger the businesses, the more capital, and more access to debt that these large companies have yet small business is the heart of America. And the program was supposed to help Main Street and to help, you know, our local dry cleaners, our restaurants, our nail salons, our barbers, all the people that we interact with almost on a daily basis. And so the program has been a miserable failure from that perspective. Even when they do reignite it, a lot of the money is still gonna go to the larger companies.
And that brings us to I think, the next question that we have, and that is, how many public companies do you think received money from the PIP program? 0, 20, 40, 60, or 80 companies. Okay, some folks say 20, some folks say 40. Some folks say 60 and over half, you say 80 and that half is correct. Always go to the group when you don’t know, Shake Shack returned their money but that’s because they wanted to make sure that they weren’t going to receive the kinds of condemnation that many larger companies have including [inaudible 00:14:14] that took an inordinate amount of money.
When the funds do come out the 250 billion, we’re told that that money will literally dissipate in a matter of seconds or minutes, because most of the money has already been committed. It just is now waiting, almost like a racetrack for the horses to come out. And the first horses that come out of the track will be given the money and that money is gonna disappear. In such a quick pace that it’ll be like a blink of an eye.
So many people who’ve applied for the PPP probably will not get their money. It’s ironic because in many situations, folks who banked at smaller banks did better than the folks who’ve bank at bigger banks and that’s because big companies were also banking and big banks, and they were favored by the big banks. And so the whole thing is very unfortunate.
Let’s go slide 19. I’m not gonna spend too much time here. But this is an excellent article for the very few of you who may have gotten the PPP. It’s very complicated on how to spend that money to make sure that if you don’t mess up, you won’t have to pay it back. Or if you do mess up, you’d have to pay a portion of the loan back. This also goes to the question of people asking me if you were an independent contractor, should you apply for the PPP or apply for the unemployment?
Well, the answer is, of course, logically, you should not apply for the PPP because the likelihood that you’re gonna get is like winning the lottery, you should apply for unemployment, because there you will eventually get it. It’s just a question of when and how long as opposed to the PPP where you can apply for it, the likelihood you’re going to get it is almost nil. But this is a good link for anyone who did get the PPP and wants to know how to deal with it.
In terms of individual benefits, the good news is that Florida’s removed the requirement to report in every two weeks, but workers are still required to give notice when they find a new job or get new income. Obviously, if they don’t do that, that would be a form of perjury, and they would actually owe the money back, obviously.
Next page, industrial production, and other market indicators. Page 21, 22. Oh wait, this is very interesting. I believe at our very first webinar we talked about the construct of deflation or negative interest. And the concept of negative interest, of course, is that when you borrow money instead of you having to pay interest, you receive money. And it’s kind of almost ironic or puts it on their head. Same thing with oil here. What happened yesterday is the manufacturers and producers of oil were paying people to actually take the oil off their hands and put it in tankers.
So that meant that the people who were receiving the oil were actually being paid to take the oil. And this is not an unusual circumstance in a pandemic, where there is massive price deflation, where there’s radical price reduction across the board for commodities, labor, and also finished goods. And we saw that with the black plague and we talked about that last week. And here we have a perfect example of what can happen. But that means also there’ll be a price reset not just on oil, but also on real estate, finished goods, professional services, and everything is going to reset, and is going to adjust based on the new norms. But this is a perfect example of what we’re talking about. And we can expect similar situations in particular areas of the real estate market.
And that is why billions and billions of dollars, as I mentioned earlier, is going into these vulture funds right now because a lot of real estate will be sold off at 50 cents, maybe even less on the dollar. And we’ve talked about which those sectors are and we’ll go back to them in a few minutes.
As we’ve indicated Florida could soon see depression conditions. That was a major headline in the “Sun Sentinel” just a few days ago, and they were actually talking about what Florida life was like, during the Depression. Back then there was no air conditioning, or there was little air conditioning. So obviously things were less comfortable and they was clearly more homeless. So I don’t think we’ll see a massive increase in homeless but we will see a massive increase in evictions, a massive increase in foreclosures. We will see families doubling tripling up, which could actually be a problem if we don’t get a vaccine soon enough because we could have community spread within our own community bubbles and that would be very unfortunate.
If we do look at the unemployment right here, we do see it going down slightly. Some of that may have been because of difficulty people being able to log on. Also, it may be because most of the major industries and tourism industry, and the restaurant and other service industries took their hits already. The folks that now they’re being laid off are typically white-collar, blue collar. And frankly, we’re seeing a lot of lawyers who are being furloughed. And why are they being furloughed? And it’s simple. There’s less crime, therefore you have less defense lawyers. You have less car accidents, you have less insurance companies having to defend lawsuits. You have less plaintiffs lawyers who are suing the insurance companies because they’re less [inaudible 00:18:59].
So across the board, you’re seeing that because there’s less activity, there’s less legal work and therefore there’s less need for the use of lawyers. But this doesn’t just deal with lawyers, this will also go to accountants, it will also go to appraisers. It’ll cross the board that as activity slows down, the need for white-collar and professional class individuals will diminish. And so you will have furloughs, you will have layoffs, and you’ll have people who are just taking salary slashes for the time being.
Florida. Florida saw a hard hit during the last few weeks, numbers of unemployment were unbelievable. The most important thing is that Florida was really not prepared to move to a remote workforce such as states like California, and New York and Washington, where the virus also hit hard. But a large percentage of the population was prepared to be productive to work at home. But Florida really had never truly had to deal with that although during hurricanes, we had it but since they were short-lived, people and companies didn’t really think about creating a virtual office environment where the bricks and mortar was almost secondary to the existence of the entity.
Let’s talk about retail spending. This is kind of interesting and it also goes to the value of retail operations, malls and strip malls of course. So, let’s start on the left if we can. Are more people drinking coffee now? With Americans staying at home, here’s what they’re buying. Well, they’re buying a lot of coffee filters, vinegar I’m not sure about. Pretzels, that’s interesting. Hand lotions, understandable. Hair coloring well, you know it is what it is. Nail polish, the same thing. And baking mixes. A lot of people are baking and I understand there’s actually a shortage of big bags of flour. Money is still flowing but shifting to where it’s going. The personal care products, baking supplies, and millennials and Gen Z found that there are coffee makers outside of Starbucks.
Some interesting numbers in retail spending while people in New York are obviously not taking the subway much, there’s just a massive decrease in overall traffic all over the place. There’s a nice decrease in air pollution, particularly in New York. People are volunteering more even though they’re not leaving home, or they’re leaving home maybe just to volunteer. Pet adoptions just has probably been the most important thing, is a lot of the places where people adopt pets from have been emptied out. And then the use of electricity has decreased because of people not using their offices as much. And so some industries have benefits and other folks are gonna be repositioning and it’s important to understand these issues.
Next question is question five. What is the cost of an average hotel room today? Is it $16 $32 $75 or $99? Yeah, I got y’all on this one. Okay, so 9% said $16, 32% said 32, 33% 75, and a quarter of you said 99. Unbelievably, the average hotel room currently in the United States is $16. Actually, it’s like $15.64 according to something I read in the journal this morning. The occupancy rates are so low that these rooms are currently virtually worthless.
Let’s keep going. Domino effect on real estate. Okay, so we talked about our big cities losing their sex appeal. A number of you thought that for a while they may but, of course, as we talked about cities may come back. The pandemic revealed the fragility for densely populated areas. Densely populated real estate has more aggregated costs such as HOAs, taxes, mandatory community services, etc. Buyers are looking for more space between one another. And developers have to rethink about going up versus other types of real estate that would allow for more space and for less social contact. Either in elevators, hallways, laundry rooms, and areas that could spread communal diseases such as a virus that we’re dealing with.
Of course, do we plan for something that’s gonna occur in another 100 years, or are we concerned that this kind of situation could happen again in a few months, or in a few years, depending on how we were able to resolve this with a particular vaccine? One thing I wanna mention is that, as we do create new living spaces, that homes are gonna be reconfigured to also be secondarily workspaces. Architects are going to need to redesign living spaces and developers are gonna have to rethink how we organize ourselves as a community.
Another question? We have a question? No. I tried to apply through a credit union and the Bank of America where I’ve had personal accounts I was rejected. They said they could not process my request, as I don’t have a business account with them. Any thoughts about that? Yeah, my thought is that they’re are a bunch of idiots and that it’s just terribly unfortunate that, you know, they’re treating you that way. The reality is they’re trying to protect themselves from fraud, and they wanna make sure that they have an existing business relationship with their borrower. Because they’re concerned that even though the SBA is guaranteeing a loan, and that’s gonna pay the grant. They wanna make sure that they’re not accused of not having fulfilled their due diligence, because of the speed by which they had to process their loans.
They want to make sure that they had some flags that they could use to say, “Okay, these guys we know, they’ve been doing business before, their accounts have never had an issue. We feel comfortable having them go through.” So it really depended on the extent and nature of your business relationship. But I know a lot of folks who had good strong business relationships with the larger banks and they also got rejected, so don’t feel bad. Any other questions or okay.
Let’s talk about hotels a little bit more. The need for social distancing goes directly against the central idea of the hospitality industry. Hotels and short term rentals are trying to cope with creative new offers. We have on the left here, a hotel room that is being offered for a day rate for you to use it as an office. And this is one concept. In Spain, we saw some bed and breakfasts that are being used as convalescence facilities for folks who maybe are recovering from the disease or were exposed to someone with the disease and they don’t wanna expose it further to their family. And so they’re literally staying in their rooms in these hotels and are convalescing there. And other of course, hotels have been used as hospitals. And so we’re gonna see major repositioning of hotels, some will become residences, others will be used for other unique types of situations. But the hotel as we know it is going to morph into subcategories of providing additional new services that weren’t really needed.
And so we have been working under one roof, and of course, sheltering in our place. And so we are gonna see massive foreclosures, repossessions, and workouts in the hotels. And again, that’s why the large vultures have specifically targeted hotels as one of the first areas that are going to see massive change as we come out of this crisis.
Let’s talk about strip malls. Well, in some strip malls, the owners have borrowed money from securitized trusts and therefore, there is very limited availability for the managers of those mortgages to provide any kind of dispensation or benefit to the tenants. And that’s where we get into a problem with how does a tenant deal with a landlord that is being rather obstinate because they have a mortgage company that is breathing down their neck. Also, we have here a picture of the Mall of America is completely desolate, is the largest mall in the United States. And the question is how does a place like that continue to operate? And what is the value of that mall today versus five or six weeks ago?
This is very interesting. And this is just coming about in the last day or two. We’re seeing a move to try and protect the folks who are working in the supermarkets. They have an inordinate percentage of people who are getting sick and dying. Whole Foods, for example, already in Chicago has closed one of their facilities, and it’s only being used for the purpose of delivery and pickup. There’s going to continue to be an ongoing discussion if supermarkets are a safe place right now, or if one should really just be having your food delivered or have pickup. Walmart, I know is doing pickup and I know many other folks use Instacart and other and other types of services to have their food delivered.
But the issue would be that if we change the supermarket construct to being pickup and delivery only, then do these facilities need to be in the places where they are, which would be high traffic areas which have good exposure to pedestrian traffic and of course, vehicular traffic. And the answer is, they could easily then be in warehouses, which then means that those big boxes are gonna have to be replaced with other facilities. And that the nature and quality of that kind of real estate could drop precipitously. I do wanna mention that the whole foods in Chicago, you know, converted their place, you know, converted their bar and their other facility for pickup. But what’s interesting is that in Plantation, Florida right here, they had done the same thing where they took out their bar. But they did it a few months ago before this whole crisis happened. So there’s already been a move afoot to have more pickup.
Okay, we have a question. Should supermarkets moving forward not be open to the general public and continue to focus only on pickup and deliveries, that is the question? So about a third of you are saying yes, and two-thirds of you like the experience, as do I, of going and squeezing your own tomatoes and making sure your bananas aren’t too ripe or not ripe enough. And we’ll see if that’s something that we still are going to be able to experience and for how long. That’s a very interesting question. And its impact on real estate is dramatic.
Okay, let’s talk about big shopping malls. The demise or survival of big shopping malls is one of the biggest economic uncertainties. Are we gonna go out and run around like we’re freed herds when this problem is over, or are we gonna continue to use virtual services delivery, curbside pickup, and online shopping? And the answer is probably going to be something in between because it isn’t gonna be like we’re gonna go from a red light to a green light. We’re gonna go from a red light to different shades of red, to different shades of yellow to certain dark greens. And you know, at what point are we gonna have this full green light? And the answer is, we won’t get that full green light till there is herd immunity, or in the alternative where there is a vaccine. And that will take months, if not a year or two, as we all now know.
As you all know, and probably have heard, and we talked about this weeks ago that some of the big-box retailers weren’t gonna make it. Neiman Marcus just announced I think last night or this morning that they are in fact going to go bankrupt. They may be acquired by one of their competitors, it’s unclear. But Neiman Marcus was going the way of Barneys even before this crisis. And so some of the folks and some of the things that we’re seeing is just an accelerated process of what was going to happen regardless of this pandemic. So even the move to working at home, big companies have already been working at home for years. The Google and Facebooks have been operating almost right now as a virtual company, even though they have massive, massive office spaces, they’ve been able to do this for years.
And so it’s really the little guys and the rest of us who haven’t joined that bandwagon that have done so in a pace that we haven’t seen, since probably the Industrial Revolution where there was just massive, massive changes. The changes that we’re seeing are probably the same kind of changes when moving from kerosene to an electric light bulb. And the change of that initially was slow and then it happened so fast that in the blink of an eye, you went from Hurricane candles and hurricane whatever the hurricane lamps are called to the electric light bulb. And I think we’re seeing here, this massive move from people in an office congregating every day to working at home yet still being a viable business or a thriving business.
Let’s talk about office space. You know, it’s very interesting I mean, in the past, you know, no one thought twice about going into an elevator, no one thought twice about the HVA system and whether or not the air was being circulated among the entire building or just the folks next to you. No one worried that they were next to a medical office. And if you were breathing in their air. I mean, these are all major issues or if you had your own private bathroom within your office. Or if you have to use a public bathroom where the exposure to germs would be exponentially higher because you’re getting all the germs from everyone who uses that bathroom.
These are the types of questions that landlords are going to have to address, and they’re gonna have to address them very quickly. Some folks are thinking that HVA systems are gonna have to be per office, some people are talking about using ultraviolet light to make sure that the air is properly cleansed and purified so that the virus can’t go through the HPA system. I think we’re recognizing now that this virus isn’t just a matter of touching your face. It’s clear that it’s aerosol, it’s almost vaporized. And if someone is talking to you too closely, if they’re breathing on you, if they sneeze on you that those micro air droplets can travel quite substantially.
Of course, they can’t travel as much outside and that’s why you had the San Francisco courthouse that was operating in 1918, 1919. You didn’t have trials that were going on in 1918, or now in a court now because there’s a common perception and knowledge among the scientific community that this thing can spread from person to person just by breath, by sneezes, by coughs, etc. And so obviously, being outside is clearly better than being inside. And that’s the negative impact of the office space environment for the next year or two.
Let’s talk about current legal first aid for real estate. Okay, I wanna talk about first appraisals I put here BC and AD. BC means before Corona and AD means after the disease. So, anyone who gives you an appraisal before the virus from a legal perspective, from just someone who’s observing the community right now, that appraisal is worthless. And so a real appraisal needs to be done right now in the current crisis. And it’s gonna be very interesting to see how an appraiser takes a massive hundred-year event and incorporates it into the valuation of real estate. To say that you’re gonna look at something that happened 90 days ago, is like “Alice in Wonderland.” I mean, you’re in a different world. It’s almost like the “Wizard of Oz.” I mean, you’re in a different world a different environment and so to use an old appraisal is nonsensical.
AD, after the disease, we need to figure out how real estate is gonna re-peg. And as realtors many of you are realtors are on the presentation today, you need to properly advise your clients that they need to be cautious about using an old appraisal. Inspections people getting into homes is difficult, but not impossible obviously, it’s happening. Surveyors generally can work outside so that’s okay. And closings, our sister company Western Title, we have been doing closings, we’ve been doing closings remotely. And of course, we’ve also been doing closings online and also mobily.
And we’re gonna talk about that because that’s really a very important context. The idea that people are gonna huddle in a conference room we talked about this weeks ago, is going by the wayside. There are some folks who are still doing it, I don’t think it’s a good practice and I would highly discourage it. Next, please.
Okay, so this is very interesting. It’s kind of in the weeds, but it’s really important. Before the crisis on January 1st, the State of Florida allowed for something called remote online notarization. And that meant that you could have a promissory note, a mortgage, and all your documents electronically executed on at a tablet like this. There’d be no paper documents, and that the documents would be recorded electronically. Unfortunately, other than for cash closings, this process has not gone over very favorably with most of the banks. The banks are still concerned that they would like an original wet-ink note. And that’s part of the hangover effect from the last economic crisis because they want to make sure that they weren’t accused of photocopying, fabricating them, so they wanted to have a wet-ink note.
The other thing is, even if they did have a wet-ink note, which you could do through a hybrid closing, the banks were also concerned that they would want to have a wet-ink mortgage. And even though the mortgage could be recorded electronically, they wanted to make sure that they had a wet-ink mortgage. The problem with the notarization statute was that it didn’t allow for notarization of wet ink documents. Now the note doesn’t get notarized, but the mortgage does as with some other affidavits. But a number of the title underwriters and I guess with the Department of Insurance determined that they would allow for remote ink notarization as opposed to remote online notarization.
And so now what you have…remote ink notarization means that you have a notarization process that’s not done through Zoom, it’s not done through Facebook Live. But it’s done through specific portals that are geared for the industry, where a notary is online, video chatting, having been able to demonstrate who the individual is through knowing your customer similar software that in fact is used by the folks who check you out at the airport. And once you determine that the person is who they say they are, they can sign the documents, but they also have to sign the documents electronically.
So it’s almost like two closings, having an electronic closing, as well as a wet ink closing that is notarized after the fact by the notaries when the folks who signed the mortgage and the other documents, throw in a FedEx envelope, which has to actually be sealed on the video. And then after that, it gets sent back to the title company [inaudible 00:37:28]. All this is done in the comfort of your own home.
Next page, please. We have a question. We do have another question. Hi, Roy, a somewhat repeat question to you from three to four weeks ago. We’re mom and pop landlords we cannot continue endlessly without rent. What do you expect to happen to individuals that have rental property? How do we recover? We financially cannot go without rent. We should not be considered evil landlords when this is our job. We have worked 30 years to get that to retirement, and rent is our only source of income. Savings were wiped out in 2008. The lack of eviction ability seems to border on a socialist or communistic structure. Do you anticipate lawsuits against U.S. government regarding the lack of control of your personal property?
Okay, so, first of all, you can’t sue the government for this. It’s a government action and you can never sue a government for government action. I will say that the history of the United States is that unlike any other country, we have provided the best rights to property owners anywhere. And that’s why there’s historically been this amazing flight of capital, worldwide capital, to the United States. So what we have to look at in this pandemic, is United States protecting property rights better or worse than any place else in the world?
And the likelihood is, we’re probably slightly better in protecting property owners, but in this worldwide pandemic, we’re trying to make sure that no one is unnecessarily thrown out. What most landlords are doing is doing workouts with their tenants, trying to get them to pay something, and trying to extend their leases or do something. Eventually, the landlords will be allowed and will have to evict those tenants that have taken advantage or can’t afford to stay there. It’s just a question of when and it’s gonna be a terrible situation. But what the government’s trying to do is kick the can down the road as far as possible till at least there’s a vaccine and until such time that the economy can recover so that people who currently can’t pay the rent will have the ability to get a job and be able to recover somehow. Or be able to move in with someone else where they can at least shelter in place.
So it’s a terrible crisis. I think in this particular case, everyone’s in this together, the tenant is no better than the landlord, the landlord is no better than the tenant. Obviously, what the landlord needs to do if they have a mortgage is to do something with their mortgage company. Everyone needs to call their mortgage company, the landlords need to call their mortgage company, and then you have to work with your tenant. You are correct right now that if you bring an eviction action, while you could get a judgment, it is unlikely that Bay or Broward County, or maybe even in Palm Beach County, that you will get a judge that is going to enforce a residential eviction at this time.
And then if the person chooses to go bankrupt, which we’re gonna talk about, that could stymie things even further for the landlord. I highly advise that you get a good lawyer, whether it’s us or anyone else to help you navigate this particular situation. And it’s a tough situation because we are representing landlords, we are representing tenants, we’re representing borrowers, we are representing lenders, and we are trying to provide them the best path for their particular situation. So there is no easy answer to this and the whole thing is just heart-wrenching. But at the same time, we are where we are, and we have to figure out how to extend this process so that we can come out of this whole.
Next question. Is there anywhere we can live that is not affected by this? Well, if you pull out the maps, you can see that some counties in this country have very few infected individuals or anyone who has died. At the same time, many of those places have terrible hospitals or don’t have hospitals nearby. And so you’re kind of rolling the dice saying, well, I’m gonna go here because the likelihood is I’m not gonna get sick from the virus, but if you have a heart attack, what is the likelihood that you’re going to make it to a decent hospital? And so you also have to figure out how you’re gonna get there. Are you going to fly there, are you gonna drive there. But there are many places in the country that have not been terribly affected and you can look that up very, very easily.
Does your firm do asset protection work? And the answer is that Wayne Patton next week is going to be talking about trusts and estates. And of course, asset protection planning which go hand in hand. Let me go up here, what do you think will happen with the mall that they are building in West Miramar that’s supposed to be bigger than the Mall of America? I have no idea but the likelihood is that it’s probably gonna be built not as fast and not as quickly as anticipated. It’ll probably slow down a few years. And hopefully, people will have short term memories and things will somehow come back. But maybe not. Maybe there’ll be precautions taken in how it’s designed so that this experience incorporates itself into the very design of the building.
Let me see, with reference to your slide on the scale of pandemics throughout the years past versus COVID-19, is it truly accurate to define this as a pandemic or could it have been distorted into that notion?
Well, I’m not an immunologist, you know so for me to answer that is a difficult question. I think it was a pandemic because its impact that it was having on the hospital system, not necessarily on the actual number of deaths, but the number of deaths that were projected. Here in the United States had we not done the social distancing, we would be talking about a few million deaths based on the “R naught,” number, and how quickly the disease was spreading.
Okay, so I think we’ve talked enough about Ron and we’ll talk a little bit more about commercial tenant-landlord relationship and I’d like to bring Zack Sherman on board now. Zack, are you there, buddy? Zack, are you there?
Zack: Hi, Roy. Yes, can you hear me?
Roy: Yes, I wanna introduce you. Zack is a good friend. Our firms work hand in hand we’re strategic partners in helping our clients and connections with landlord, tenants, as well as for bankruptcies in general. And there’s a new section of the Chapter 11 code sub-5 that we’re gonna talk about as it relates to landlords that are trying to throw their commercial tenants out right now. Go ahead, Zack.
Zack: Thank you, Roy. Thanks again for having me. I think this is maybe my third or fourth special guest appearance, and I very much appreciate it and you do a great job with this. So just talking a little bit about bankruptcies and we talked about this last week and this also goes to the question on if you are a landlord, what I’m gonna talk about is really more towards if you are a tenant. But if you are a landlord and you’re getting pressure from your mortgage lenders, then you as a landlord, if you have multiple real properties, you could file a Chapter 11 bankruptcy under this new provision, the Subchapter 5 provision. And buy yourself some time and also attempt to modify the mortgage or mortgages on your property. So, landlords are not without recourse, you know, in bankruptcy, we talk a lot about tenants, but landlords can file bankruptcy too. Sometimes we have a situation where the landlord and the tenant are both in bankruptcy.
But anyway, what I’m gonna talk about are the ramifications really from the tenant standpoint. And, again, if lender pressure for landlords is heightened and keeps going, and we’re in this, you know, much longer, landlords are gonna exert more and more pressure on their tenants. And that’s gonna lead to, you know, three or five-day notices, eviction lawsuits, and then the question is, what can we do in bankruptcy? So, generally speaking, as soon as a bankruptcy petition is filed, there’s an automatic stay on all collection activity. So with respect to a commercial tenant, Chapter 11 bankruptcy is filed it’ll prohibit the landlord from taking any action outside of bankruptcy court to repossess the premises.
The one big exception is that a landlord has not stayed in bankruptcy and may seek to obtain possession with respect to a lease that has been terminated by the term of the lease, either before the case was filed before the bankruptcy case was filed or during the case. So what this means is that you know, in some jurisdictions, a lease is terminated when there is a judgment of eviction. So timing is very important. For tenants who are considering filing bankruptcy to stop an eviction or an eviction that might be happening in the very near future, you have to make sure that there’s actually still a lease because if the lease is terminated, then the automatic stay won’t apply.
So let’s assume that a bankruptcy case is filed prior to a final judgment of eviction, the lease is not terminated and the bankruptcy case is filed and there’s an automatic stay. And the question is what happens then? What rights does the tenant have at that point? Generally speaking, a tenant has the right to disagree with what the amount is of rent. So if your landlord is charging you for multiple months of rent and you paid or there’s some other defense under the term of the lease agreement, then you as the tenant have the right in bankruptcy court to contest that amount.
Roy: Can I ask you a question, Zack?
Roy: In theory, one could bring impossibility inability to actually bring fruition to the lease because of municipal or state or local ordinances that prevent you from being available. And of course, you also could have a force majeure provisions that could theoretically kick in. And those could be defenses that you could assert presumably in the bankruptcy court, I would imagine?
Zack: Right. It would be in the form of essentially an objection to claim. You have the same right to object to a claim in bankruptcy as you would in state court. So any rights that you would have under Florida law, or whatever state you’re in, you would have that right to contest a claim in bankruptcy court.
Roy: And the beauty of this body of law is that pandemics don’t have a good body of law right now anywhere in the country in terms of force majeure impossibility. And there are suits popping up all over the country now in all different types of contexts where people are trying to change or break out of their obligations, because of this mutual impossibility. I mean, the landlord can’t provide quiet time, you know, quiet enjoyment, because you can’t enjoy the place. And the tenant can’t be there because their customers can’t be there.
So these are the kinds of things that could get worked out in bankruptcy and keep you in there and buy you the time that you need to be able to reopen and get your restaurant or whatever else it might be back on its feet. Is that right?
Zack: Right. Yeah. You know, right now they’re novel arguments, but there are arguments that absolutely a tenant will have the same to bring in bankruptcy court, you know the courts are still navigating through this. There’s some unique bankruptcy provisions that are being triggered with this pandemic that attorneys are using. And attorneys are gonna need to navigate through those unique provisions.
Roy: So just the bottom line, and I just wanna reiterate this to the realtors who are out there, the owner who is out there, the tenant who’s out there, if you get a three-day letter, you know, that’s the beginning of your landlord saying that they’re serious about possibly evicting you. If you get that complaint, it is at that point that we need to file the bankruptcy immediately. Because if they get a judgment on the eviction, your bankruptcy will not protect you at that time, because the lease then has been terminated by an order of the court. And so we need to jump in at the right time. So the time to communicate with us is probably when you get the three-day letter. And at that point in time, we have to then begin to create a strategy of how we’re gonna be able to keep you there. And how many days did you say again that one could say there Zack, you think, once you file?
Zack: Well, yeah so once you file assuming that the automatics stay is in effect and the lease hasn’t formulated, the next step is a tenant has to either assume the lease or reject the lease. Assuming the lease means you wanna stay in the space, you wanna retain the benefits under the lease. You have 120 days after the bankruptcy case is filed. So, four months after the bankruptcy case is filed to decide whether you are going to assume the lease or reject the lease. If you assume the lease after that four-month period, that is when your back rent would be due. And usually what happens is during that four-month period, some sort of settlement is reached with the landlord.
At the same time, the bankruptcy rules require you to continue paying the ongoing post-bankruptcy monthly payments. And you have 60 days, within 60 days, so two months of the bankruptcy filing to begin making those payments unless the court extends that for cause. And again, this has never happened before since the advent of the bankruptcy code in 1978. So, you know, we don’t have a lot of history of cases to look back on. But I would think that cause would exist for a judge to extend that deadline. And that four-month deadline that I just mentioned, can also be extended by another 90 days, up to 210 days. So it’s quite possible that by filing a bankruptcy you can build yourself a considerable amount of time to either work something out with your landlord or repay the debt.
And again, going back to the beginning with this new streamline Chapter 11 code Subchapter 5, it’s very favorable for debtors who file. So it’s not like the Chapter 11s that you’ve heard of before these really geared more towards the debtor’s favor.
Roy: Of course, on slide 42, you can take a look, we could just address those four points real quickly.
Zack: Yes. So, when you are negotiating with your landlord, you know…and this is really for prior to filing any bankruptcy. You know, most leases come with personal guarantees. And you have to be really careful if your landlord is trying to prevent you from filing bankruptcy and giving you extensions, but they want you to sign a personal guarantee, you may find yourself in personal liability by…or you will find yourself having personal liability by signing those guarantees. And you really wanna see what your options are because it might be that a bankruptcy for the company is better than putting yourself on the hook personally.
Same thing with extending the term of the lease. You know, if your landlord wants to tack another five years and you’re not ready to do that. Again, you might be better off filing a bankruptcy than adhering to whatever the landlord wants in that respect. Also analyzing the price of the lease against the current market prices. Maybe you don’t wanna stay in the lease, maybe the rent that you’re paying is above the market rent, and it doesn’t make sense for you to do a bankruptcy and assume the lease, maybe you should reject the lease. Maybe you should move out and then deal with the debt, you know, another way.
And then finally, keep up with the current law and guidelines. So, for example, you know, I know right now, residential evictions are not happening. Commercial evictions theoretically could before you pull the trigger on any bankruptcy, timing of any bankruptcy is usually dictated by some sort of triggering event.
And you wanna make sure whether or not you’re a creditor…And this goes for any creditor is able to actually do what they’re threatening to do. So If you have a landlord that’s threatening to evict you right now and you’re, you know, a resident, well, there’s no need to file bankruptcy because your landlord cannot follow through on the threat that they’re making. So keep up with the current law, keep watching Roy’s “Zoom in at Noon” and you’ll be up on all the current law.
Roy: Zack, thank you so much. We have like five minutes left. I wanna get through this and I wanna open it up for questions. Listen, you’re the best, thank you we’ll be in touch as well.
Zack: Thank you very much.
Roy: Take care, buddy. Thank you. Okay, let’s go slide 43. Okay, U.S. stimulus may merely be a delay for the virus foreclosure wave. And we’ve talked about this from day one, that’s clearly gonna be the case. We saw the exponential increase in unemployment. Ultimately, the floodgates are gonna open, and at that point, it’s gonna be a mess. And that’s gonna be both for evictions as well as foreclosures.
There’s somewhat of an ironic twist here and I have to share this with you and maybe no one else will find this in a perverse way humorous. But the folks who are at the biggest risk right now, this very moment, are not the homeowners but the very services who were the villains in the last crisis. They are the folks that in many ways, falsified documents to get people out of their homes. They’re the ones who created fake assignments, they’re the folks who illegally notarized documents that hadn’t been properly notarized previously. And they are now at the brink of bankruptcy and if they themselves do not get a bailout, they will go bankrupt.
And so the irony that they’re going to get a taste of their very own medicine cannot go by lightly here. And so in some crazy way, we may have to bail them out in order to keep the economy going. But the humor the irony, can’t escape those of us who had to deal with them in their inappropriate and fraudulent practices last time around just 10 or 12 years ago.
Going forward, let’s talk about what the new normal is going to look like. Here’s a school in Asia where students are back but this is how they are now dressed. Here on the street in New York, we’re having folks look at maybe a stand that’s still open right now but you know, it is what it is. And then here we have children dancing, but they’re all wearing face masks, just like the ballplayers were 100 years ago when they were playing baseball. So in order to get our communities back open again, the U.S. government has issued some guidelines that local municipalities, governors, and counties, are gonna have to follow. There are a number of things that have to work first people to continue to telework at home.
Another thing is that social distancing is probably gonna be here for probably somewhere between 12 and 18 months. And eventually when proper protocols are set up and we have enough immunization in the community, things may get back to something that resembled what we previously once had. I think for the time you can kiss the middle seat in the airplane goodbye. The A380 is now going to be a terrible casualty of the crisis. 500 people going from point A to point B is an unlikely scenario anytime soon. In fact, I was looking at how long it took for the aviation community to rebound from 911, which is catastrophic an event that it was, it didn’t affect major localities, except those places that were particularly hit. And it took five years for people to feel comfortable to get back on airplanes to bring airplane use to the level that it was.
And so maybe it’s gonna take five years here, or maybe it’ll happen faster but who knows. The other thing I think we’re gonna see in the office space market is that there’s gonna be more flex space. So people having their own offices, the offices will be a place where people come to congregate, but a lot of the work and heavy lifting will be done at home. Are there any questions that we have out there or not? Let me see we have one question.
Okay. Now that employers know their employees can work from home, office space is going to suffer immensely. I agree with that. I think that landlords are scratching their head about that. It’s gonna be something that’s gonna re-peg. And the value of office real estate is going to dramatically change. We have another question here. What happens if the borrower is in the middle of a construction to perm loan for his home, the borrower now owns the land the house is three quarters built. And the borrower has a change lower in income due to the virus, can the bank now refuse to convert the loan?
During the middle of the loan I don’t think…but you have to look at the loan covenants. Because sometimes you have to provide updates on your financials depending on the size of the project. But many times the bank is stuck and they have to continue financing. I’m gonna read the rest of question because it’s a very long question. And I think we’re running out of time, is there any other questions?
Okay, so I just wanna remind everyone “Zoom at Noon,” next Tuesday at noon, with Wayne Patton, who’s of counsel of our firm and we’re gonna be talking about trusts and estates as well as asset protection planning in the time of COVID-19. Roy Oppenheimer from the trenches “Zoom in at Noon” thanks so much again for joining us. Stay safe stay well. God bless. Thank you