Hornstein Fetter January 2019 Market Insight

Did you feel the impact of the Government shutdown? More importantly, if it shuts down again in a few short weeks, will it impact your investments? Without a doubt there is relief amongst the hundreds of thousands of furloughed government employees who are going back to work this week. But with a new deadline for resolution only a few short weeks away, there are several areas of commercial real estate that still hang in the balance of the government moving forward with full funding. Here’s the three areas that our clients should be most wary of:

1. The Department of Housing and Urban Development (HUD) is one of the nine government agencies that were shutdown, and HUD pays Section 8 rent. There is coverage for funding available to HUD to make payments for about 30 business days of a shutdown. The recent shutdown exhausted most of those funds, so there is uncertainty as to whether or not reserves can be replaced to keep cutting rent checks for those on housing assistance should another shutdown go into effect in February.

2. The Department of Federal Housing Assistance (FHA) was also shutdown, and that heavily impacted their lending. This is separate from Fannie and Freddie (phew!) but those seeking FHA loans, whether residential or commercial, were essentially in limbo. New FHA loans were not being processed while the government was partially closed and the only closings with FHA loans were those that had commitments issued prior to the start of the shutdown. With the deadline for the next agreement coming mid February, investors seeking FHA money to close deals need to very carefully consider ways to protect their earnest money if they are in escrow and another shutdown occurs.

3. FHA construction loans had value add projects in limbo. Investors who secured FHA money via construction loans and were improving their assets by taking a draw were essentially doing so at their own risk. There was no guarantee that improvements being made would be compensated by the FHA. This risk will continue if another shutdown takes place.

As of this writing, the current deadline for a new resolution is February 15, 2019 – roughly two weeks from now. There are major policy issues that need to be resolved and certainly our investors will follow this progress for reasons beyond the value of their assets. However, the lessons learned from the first shutdown need to be heeded as buyers and sellers execute contracts, earnest money is put on the line, and construction projects continue forward. As always, we are here to discuss the effects of events like this last shutdown as well as a future one and offer advice to those concerned about the value of their investments. Please contact us anytime at Hornstein.Fetter@Pinnaclerea.com or 303-962-9564.