Chaos Brings Opportunity in REITs

Real Estate Investment Trusts (REITs) have gone through a brutal time since the economy fell off a cliff last September. The Dow Jones REIT Index tumbled 60% in the last 6 months. After the fall, the index has traded sideways around the 100 level, with very choppy trading. The recession has hit this industry hard plus there are added worries about future rental income. REITs generally own real estate, property and buildings, which has been a good business over the long run. However, going through the low portion in the cycle tests believers. This is especially true in today's markets, probably the worst for REITs since the depression.

The financial world is in turmoil, which hurts REITs deeply. They own capital assets, property and real estate, financed by mortgages and other borrowings. Rents are at risk while expenses, especially interest, have to be paid. Cash conservation is key for survival, more so than in prior recessions. In just one way to cope with the credit crisis, REITs have begun a new way of paying dividends. Already three, Simon Property (SPG), Vornado (VNO) and UDR (UDR), started giving stockholders the option of receiving dividends in money or stock. Although most prefer money, those who reinvest dividends will find receiving stock to be very tax efficient. Dividend cuts are another way to conserve cash and a few have made dividend cuts.

The business model of collecting rents is becoming far riskier as the recession drags on. But REITs specializing in apartments may have more appeal (for those who don't mind playing with fire) for investment. Fannie Mae (FNM) and Freddie Mac (FRE) are providing financing to REITs which own housing, helping them ride out the recession. Also, stronger REITs will be able to purchase marked down properties at attractive prices. REITs investing in other sectors (such as business properties) will have to struggle harder to cope with tighter credit availability.

REITs able to manage debt maturities and reduce overhead will survive and prosper when the economic crisis ends. Yields for REITs are at record levels, with many at 15+%. Locking up attractive yields should provide attractive rates of return when the economy recovers. With yields this high, even a dividend cut can still provide an investor with a handsome return.

Comments

[RLLH:]

I agree with your reasoning and have been buying heavily (for me) into the REIT world. I think the blood really is running in the streets right now for real estate, and the opportunities are there. I have been buying REIT funds rather than the REITs themselves hoping they are better at telling the good from the bad.

Mar 31 10:33 AM

[uscanmexico:]

Hi,

I am searching for REIT Funds. Can you please suggest some Symbols. Do you know if there are any ETFS? If so please provide the list.


On Mar 31 10:33 AM RLLH wrote:

> I agree with your reasoning and have been buying heavily (for me)
> into the REIT world. I think the blood really is running in the streets
> right now for real estate, and the opportunities are there. I have
> been buying REIT funds rather than the REITs themselves hoping they
> are better at telling the good from the bad.

Mar 31 07:20 PM

[Planting $ ...:]

There will be some great buys in the REIT sector, but I think there is going to be a big drop before that. It is highly likely that several REITs will continue to be unable to refinance loans causing defaults and bancruptcy. This will create panic in the REIT investment landscape. Mr. Market will then sell anything related to commercial real estate. The strong companies will buy up the pieces at distressed prices, and come out stronger. I am waiting untill the panic moves from financials and residential RE to CRE then I will step in and buy.

Commercial real estate is late in the economic cycle. It will not lead us out of the economy, but rather it will recover after the general economy starts its recovery.

Mar 31 09:42 PM

[Bad Biz Finder:]

CONSUMER ADVOCATE FORMS CLASS ACTION LAWSUIT AGAINST LANDLORD, UDR, ON BEHALF OF CA TENANTS: June 8, 2009

Bad Biz Finder, a Fremont, California-based consumer advocacy group founded in 1982, announced today the initiation of a Federal Class-Action Lawsuit against UDR, Inc. A class-action lawsuit is a civil action in which people who have been wronged in a similar way unite and sue as a group. In this case, the group is UDR tenants in California from June, 2007 to the present and the “wrong” is UDR’s Residential Lease Agreement (“RLA”) containing numerous violations of California law. There is no cost to tenants to participate in this action.

Any clause in a California RLA that asks you to waive your rights under the law and to agree to the contrary, is unenforceable. This is the driving force behind the lawsuit as well as the fact that UDR has deliberately capitalized monetarily on its tenants’ ignorance of the law. (California Code of Civil Procedure section 1670.5(a) and California Civil Code section 1953.)

Although this action is based on California law, it must be brought as a federal action because (1) The amount in controversy exceeds $5,000,000; and (2) all members of the class to be certified are citizens of a state different from the Defendant, UDR, that is based in Colorado and incorporated in Maryland.

Erin Baldwin, a current UDR tenant, brought these issues to the forefront through her group and blog, Tenant Advocates of Orange County, together with her personal experience of gross oppression by UDR. She will be the primary advocate for this action. Our groups are now working as one to compel UDR to reimburse past and present tenants for monetary damages suffered from UDR’s intentional and malicious violation of California law. These are the preliminary causes of action:

UDR CHARGES "EARLY LEASE TERMINATION LIQUIDATED DAMAGES" IN VIOLATION OF CALIFORNIA LAW

California Civil Code section 1671 states that liquidated damages clauses in California residential lease agreements are illegal.

However, UDR requires that its tenants not only waive their legal right under this law but also requires them to agree to pay a liquidated damages penalty fee equal to 2-1/4 times their base rent for terminating their lease prior to the end of the lease period, regardless of the month in which they terminate. In essence, UDR's objective is to convince its tenants that it will take at least 68 days (2-1/4 months) to re-rent the vacant apartment as well as all associated marketing charges to advertise the vacancy.

In 1978, liquidated damages clauses were deemed illegal because landlords were distorting the true legal purpose or these clauses: "To set a flat fee when it’s impossible to determine the monetary harm that could result from a breach of the contract." This doesn’t apply to UDR. They know (within a slim margin) how long it’s going to take to fill a vacant apartment as they use these statistics everyday to project sales and calculate expenses.

In order for UDR to maintain its average 95% occupancy rate, it must fill a vacancy within 18 days. Therefore, 50 of the 68 days they’re charging tenants for an early move-out penalty results in UDR collecting double rent on that unit – a violation of the law. If it actually took UDR 68 days to fill a vacant apartment, that time frame would be three times longer than the industry standard and they could not compete in the already crowded and historically highly-competitive marketplace; particualrly in light of the overwhelming number of foreclosures in California forcing consumers into the rental market.

Also, California law states that liquidated damages may not be used as a penalty, or fee provision as follows: “Where a liquidated damages clause is seen as a penalty rather than an effort to agree upon a reasonable amount of estimated damages, the clause will not be enforceable.”

UDR CHARGES LATE FEES THAT ARE OVERSTATED CONTRARY TO CALIFORNIA RECENT CASE LAW

As a result of a precedent-setting case, Orozco v. Casimiro [(2004) 121 Cal.App.4th Supp. 7], California deemed “late fees” within rental agreement to also be illegal liquidated damages. Landlords CAN collect late fees; California law just mandates the manner in which the fee is to be calculated. California Civil Code section 3302 states that the late fee amount cannot exceed the standard interest rate of 10% of the base rent (noncompounded) or 1/3650th of the base rent.

For example, if a base rent is $1,700, the daily interest would be $.47 per day (3650 divided by 1700) with a maximum late fee charge of $14.10 for any given 30-day period. UDR charges a flat fee of $50.00 which, according to California law, is grossly exorbitant and as such, UDR tenants are entitled to a refund of the difference.

UDR INTENTIONALLY CONTRACTS WITH TENANTS USING FALSE NAMES TO OBTAIN & SUSTAIN A LEGAL ADVANTAGE OVER ITS TENANTS RESULTING IN SIGNIFICANTLY DIMINISHED TENANT-BASED LITIGATION

UDR fails to properly identify the legal name of “Landlord/Owner” in its California RLAs, rendering the RLA invalid.

For example, the legal name of one of its apartment complexes, Villa Venetia, is “UDR Villa Venetia Apartments, L.P.” However, UDR’s RLA for that property identifies the Landlord/Owner in the contract as “Villa Venetia.” This name is not only incorrect, it’s not even a valid legal entity. Rather, it’s an expired fictitious business name that belonged exclusively to Vista Del Lago, LLC, the former owner of Villa Venetia. According to the Orange County Recorder’s office, the name expired on August 20, 2006 and UDR has knowingly and fraudulently used it to contract with tenants since the date it purchased the property in 2004.

A similar set of facts applies to all California UDR properties and we believe it is a conscious attempt by UDR to prevent tenants from seeking their Constitutional right to file a grievance in a court of competent jurisdiction.

In addition, UDR fails to state the name, address and telephone number of the Agent for Service of Process on the face of its RLAs as required by California Civil Code section 1962. This further prevents tenants from locating the proper person or company to whom a tenant-based complaint would be served due to the fact that UDR is an out-of-state (Maryland) corporation with it corporate headquaters in Colorado.

UDR ILLEGALLY PROFITS FROM ITS RATIO UTILITY BILLING SYSTEM (RUBS) IN VIOLATION OF THE CALIFORNIA PUBLIC UTILITIES COMMISSION'S (CPUC) REGULATION PROHIBITING A NON-UTILITY FROM "SELLING" ENERGY OR WATER

UDR defers the cost of utilities for common areas, vacant units during repair and cleaning, leasing offices, swimming pools, property lighting, and laundry facilities to its tenants via it Ratio Utility Billing System (RUBS). UDR does not have a logistical need to do so as there are numerous residential energy meters at each property.

In its California RLA, UDR sets forth a "RUBS" calculation that is incomprehensible, vague, uncertain and unintelligible because all variable within the forumula are outside the control or knowledge of its tenants. UDR requires that its tenants agree that the following formula is fair and equitable:

“Total monthly utility cost for the community (minus an allowance for common area use if applicable [which is not applicable in the present case]) divided by the number of persons residing at the community times the number of persons residing in the Premises using the applicable ratio multiplier [1 person = 1; 2 persons = 1.6; 3 persons = 2.2; 4 persons = 2.6; 5 persons = 3; each additional person, add..4 to the multiplier.]”

In addition, UDR sustains another double revenue stream by not only charging its tenants to source the energy and water being supplied to the onsite public laundry rooms but by also charging them to use the coin-operated machines.

UDR ILLEGALLY DEFERS INJURY LIABILITY VIA ITS "HOLD HARMLESS" CLAUSES IN VIOLATION OF CALIFORNIA LAW AND FAILS TO MAINTAIN HABITABLE PREMISES

UDR’s California RLA contains several “hold harmless” clauses creating a perception of justifiable negligence in its failure to maintain habitable premises including, but not limited to, vector control, water quality, construction defects, and tenant and guest safety standards for security, unit and vehicle intrusion, sexual offenders, theft, and violence.

According to California Civil Code section 1668: “All contracts which have for their object (directly or indirectly) an attempt to exempt anyone from responsibility for his or her own fraud, willful injury to the person or property of another, and/or a violation of law (whether willful or negligent) are against the policy of law.”

UDR WITHHOLDS SECURITY DEPOSIT SUMS VIA ILLEGAL FEES AND PENALTIES WHICH MUST BE PROPERLY DEFINED AS LANDLORD'S OPERATING COSTS AND RESPONSIBILITIES

UDR’s California RLA Paragraph 37, “Resident’s Other Liabilities,” contains the following language: “In addition to all other obligations of Resident and remedies of Landlord under this Lease and the law, and to the fullest extent lawful, Resident shall be liable to Landlord for charges including, but not limited to those, for the following:”

Then it lists sixteen (16) items that constitute fees and penalties that may be deducted from a tenant’s security deposit. These items including such things as the leasing agent's time to let a repairman into an apartment unit, replacing dead or missing smoke detector batteries, reasonable administrative charges for Landlord's time and inconvenience for eviction of Resident, special trips for trash removal and so on. These are within the scope of UDR’s operating costs, responsibilities as a Landlord, and typical costs of doing business and cannot constitute legal deductions from a tenant’s security deposit. (California Civil Code section 1950.5)

UDR ILLEGALLY EVICTS ITS TENANTS

Tenants that have been or are presently in the process of being evicted under the terms and conditions of UDR’s California RLA have significant defenses against this eviction. If the terms and conditions of the RLA are deemed illegal under California law, then UDR will have difficulty evicting a tenant under those illegal terms and conditions. Fraud in its intentional misrepresentation, concealment or omission of material facts in the RLA renders the contract void ab initio (or from the beginning).

NOTICE TO ALL UDR CALIFORNIA TENANTS

If you have an interest in participating in this Federal Class-Action Lawsuit, please contact Erin Baldwin via the following three methods:
1. Via email at [e-mail]
2. Via telephone at 714-617-4703
3. Via a comment on our mutual blog at badbizfinder.wordpress....

She will email you an Intake Questionnaire to certify you as a member of the action. Once the questionnaire is completed, signed, and the original documentation requested is provided, you will be included in the action.

Bad Biz Finder is a non-profit organization and will only accept donations of time, office supplies, postage, printing and marketing services. We don’t accept cash donations and believe the best donation is one of your time to aid us in furthering our goal of creating a more equitable and fair environment for all California tenants.

Bad Biz Finder

Jun 10 12:10 PM