Highly Rated New Book On Investing

There is a new book out that is creating quite a buzz in real estate circles. Titled, "Real Estate Advantages," the book penned by CPA Sharon Lechter and attorney Garrett Sutton appeals to every reader. Organized into two sections, the first is about tax benefits of owning real estate. The second section focuses on legal strategies, with particularly well-rounded discussions of the best way to hold title to investment property, and why.

After I finish the book in the next few days, I'll discuss some of its best sections. But to start, it appears to do a very good job of explaining all of the benefits of tax depreciation, which many investors still don't entirely understand. Specifically, the book explains how depreciation is a paper loss or tax deduction, which does not require any out-of-pocket cash payment. And, how it saves tax dollars.

More to come . . .

Investment Property: The Hedge Against Inflation

Inflation is on the rise, and investment real estate is the hedge against it. At my weekly Columbus Real Estate Exchangors (CREE) meeting this morning, we noted that the federal government is reporting wholesale prices surging in November by the largest amount in more than 30 years. So what does inflation have to do with real estate? Its simple. The key is property appreciation.

Property appreciation is truly "wealth forced upon the property owner."

A property gains in value about 2-5 percent annually without the owner doing any work. (Of course, if you make improvements your appreciation can be greater). With that, owners can pull money out through a re-finance, tax free, for use in any way they see fit. Remember, when you pull money out of an investment property you own, it is a tax-free loan that you never have to pay back. Your renters (office tenants, multifamily renters, industrial tenants, etc.) pay it back for you.

So for example, if a $100,000 investment appreciates $10,000 over a couple of years, you can pull out about 75 percent of that amount, or $7,500. Pay for kids' braces, college loan, trip, down payment on another investment property . . . whatever. All this helps insulate investors from the effects of inflation.

Inflation is actually a good thing for investment property owners. Inflation forces wealth upon them. But as one of my colleagues noted at the meeting this morning, you can't exploit this "hedge" if you don't own anything.

See our Ad in 'Buy, Lease, Build'

We've got an ad in the latest issue of "Buy, Lease, Build" magazine (Ohio edition) promoting Prudential CRES and properties for all investor levels. Business opportunities, multi-family, c-stores/gas stations, offices and more. Check it out!

Even The Big Boys Admit "Broken" Properties Provide Most Opportunity

If the big boys are doing it, so can anyone with some common sense and a good management plan.

TMG Ventures chairman and CEO Michael Covarrubias recently characterized his firm's approach to development. Interviewed by Real Estate Media Group during the inaugural RealShare San Francisco gathering to chat about the things that set his Oregon-based investment firm from the others, Covarrubias kept repeating his organization's penchant for "taking looser assets and converting them to winners." That is key to TMG, which has acquired or built a respectable 18 million square feet of commercial space--totaling $3 billion--since Covarrubias took control. Here is what he said about finding properties that need better management and some fixes, and how they are the real money makers...

"There is so much money chasing real estate and it's looking for different ways to arbitrage. Our arbitrage is to find broken assets or assets that need significant fixing, let's say an office that needs a seismic upgrade. For us the niche is value-add. That's why we'll always be different."

Covarrubias also talked of how they plan to jump into multi-family investment and the opportunities it such properties present..... "We've done condo projects, but we just got a $100-million equity investment from CalPers with which we'll be able to do $400 million of residential projects. We'll keep looking for broken deals. But with the money from CalPers, we now have a housing strategy with a long vista. I'd love to find some broken residential deals."

Like I said, if the big boys are doing it, so can anyone with some common sense. And it does not take a $100 million investment to get cash-on-cash returns of eight, 10 or even 12 percent.

Venison in the Freezer

Success this past weekend in Knox County, Ohio. Tom N., Jamie, Tom P., Pete . . .we hit an 80% return this season. Thanks for your support, gentlemen!

Huge Tax Abatements To Spur Further Growth at Rickenbacker Port

The Columbus Regional Airport Authority and Franklin County are creating a community-reinvestment area for a 160-acre strip of land near Canal and Vause roads near Rickenbacker Airport. Developers will be eligible for abatements on all of the real property they build for up to 15 years. The end result will be better lease terms for tenants. Long term, 20,000 jobs are expected to be created in the next 20 years in the Rickenbacker area as warehouses and new manufacturing pops up. County officials say the new reinvestment area will be in addition to one that’s about to be extended for 20 years. It includes nearby land in Franklin County owned by the port authority. Together, the these so-called CRAs cover about a quarter of Rickenbacker Global Logistics Park, an industrial area near the airport being developed by the airport authority, Duke Realty Inc. and Capitol Square Ltd. The new CRA covers about 160 acres near Canal Road that contains mostly single-family homes. The authority expects to close in early January on these properties, which it will add to the logistics park portfolio. Robin Holderman, vice president of real estate for the airport authority, said that the average cost per acre was $57,000. According to the Columbus Dispaptch, the Ohio Department of Development must approve the CRA, which the county expects soon. A key benefit is direct access for tenants to the Norfolk Southern rail line that borders the western edge of the Canal-Vause property. There was some opposition. Hamilton Local School District officials had to agree to it, and two incentives made it work. The authority agreed to buy Hamilton South Elementary School at Shook Road and Rt. 317 for $1.1 million. The school is expected to close in August. Also, the authority is expanding a current pre-annexation agreement that covers land it owns at the rail campus to include the Canal-Vause tract. It will reimburse the school district for property-tax benefits it loses when the houses are acquired. That’s necessary because the airport authority is a nonprofit organization and is exempt from paying property tax. Land prices in the area have been driven up by the development, and expected expansion of free trade zones. Many warehouses built in the past 24 months are still empty, but may be full in the coming months with these new moves.

REMINDER: New Ohio Law Requiring Registration by All Rental Property Owners

Just a quick reminder that a new law that went into effect Sept. 28, 2006, in Ohio requires all rental property owners to register their contact information with the County Auditor in which the property is located. It's passage was supported by the Ohio Association of REALTORS®, the Columbus Apartment Association (CAA), and the Ohio Apartment Association (OAA).
The main objective of the Ohio House Bill 294, titled "Expedited Tax Foreclosure of Abandoned Land," was to permit certain foreclosure cases to be filed with the county board of revision now, instead of going through the judicial process. It further authorized the county treasurer or a certificate holder to compile a list of abandoned parcels of land suitable for disposition under the act's expedited foreclosure procedures. Often this is a result of delinquent real estate taxes.

The rationale of the legislation is to speed up the foreclosure process of abandoned and blighted rental properties in Ohio's larger cities and counties. In addition, the bill establishes an appeal procedure for challenging determinations of eligibility for the 10% "rollback" exemption from real property taxes. Though all properties are recorded with the auditor's office, there was a perception that bad situations can be averted if the name of a contact person, rather than just the owner, is available, especially for cases where the property has been neglected or the owner has failed to pay taxes in a timely manner.

For a copy of the proper form, contact your Ohio County Auditor. Here is a link to the overview letter sent by the Franklin County, Ohio Auditor's Office. The form is identical for all of Ohio's 88 counties. Go to: http://209.190.122.34/proprent/

Twin Condo Towers To Rise Above Ohio River

Two condominium towers on Pete Rose Way in Cincinnati, to be built where the Montgomery Inn Banquet Center currently stands, will mark the next step in development of the Queen City's riverfront. Cincinnati's City Council on Wednesday approved the $140 million development called One River Plaza, which will be built by the Miller Valentine Group. When complete, the project will be a mix of 150 condos, ranging in price from $400,000 up to $2M. It also will feature two restaurants, 5,500 feet of commercial space and about 27,000 square feet for retail - all built on a parking garage containing a little more than 500 spaces.

Fed Keeps Key Interest Rate Steady at 5.25

Wrapping up its last meeting of the year, the Federal Reserve yesterday decided to stay its course and keep its key interest rate steady at 5.25 percent, the fourth straight meeting without budging the rate. This gives a break to borrowers who until this summer had endured the pain of two-plus year of rate increases.

Policymakers held back an extra gift that Wall Street was hoping for: a signal that rates might actually be lowered soon. Discussing economic conditions, Fed policymakers said growth has slowed over the course of the year. Nonetheless, they stuck with their previous judgment that the economy will probably expand at a moderate pace in coming quarters. This time they hedged their assessment a bit and noted that recent economic barometers have been mixed.

'Cash On Cash' Definition Comes Up Again

Questions about "Cash On Cash" (the name of this column, and what it means) came up in two emails this week. I'll explain again, for while its not complicated, its not something most people deal with every day. I do, though! ;)

In investing, the cash-on-cash return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage. It is often used to evaluate the cash flow from income-producing assets. Generally considered a quick napkin test to determine if the property qualifies for further review and analysis. Cash on Cash analyses are generally used by investors looking for properties where cash flow is king. We in the business, however, also use it to determine if a property is underpriced, indicating instant equity in a property.

Suppose an investor purchases a $1,200,000 apartment complex with a $300,000 down payment. Each month, the cash flow from rentals, less expenses, is $5,000. Over the course of a year, the before-tax income would be $5,000 × 12 (months) = $60,000. You then divide your before-tax income ($60,000) by the down payment invested, or initial equity ($300,000). So the cash-on-cash return would be .20, or 20 percent.

Because the calculation is based solely on before-tax cash flow relative to the amount of cash invested, it cannot take into account an individual investor's tax situation, the particulars of which may influence the desirability of the investment.

I need to point out that this calculation does not take into account appreciation of the property, nor depreciation (cost recovery), which provide additional value when calculating a project's worth.

Word of the Day -- "Realized Gain"

I've had several emails from readers recently asking about certain definitions. So when I have time I'm going to include a word or phrase from real estate, and provide a definition. I try to post in as simple language as possible, but sometimes I get caught up in jargon. For those whom I confused, GET OVER IT! No seriously, sorry about that. I promise to work to explain as much as possible without talking down to people.

Here's the word/phrase for today: "Realized Gain." Realized Gain in a tax-free exchange is a gain that has occurred financially, but is not necessarily taxed. Example -- Reggie's land has a tax basis of $10,000. Its market value is $75,000. He exchanges the land, tax free under Section 1031 of the IRS Code, for Pam's warehouse, which was appraised at $75,000. Reggie's realized gain is $65,000. None of his realized gain is recognized, however, because he did not receive boot.

Overbuilt Multi-Family in NW Franklin County Does Not Reflect Demand for MF Investment Properties

I read with interest today that Colin Trueman (whose father built the Red Roof Inn budget hotel chain), and Drew Berlin, long-time builder for the Trueman family (and a neighbor of mine when we were both kids in the north end of Columbus), have teamed and are developing land along the I-270 corridor in NW Franklin County, Ohio. One statement gave me pause, however, about their plans. Stating that the apartment market was sluggish, they were going to change their plans from constructing multi-family to medical office/retail near the booming Mill Run development area. True, the area is incredibly overbuilt when it comes to apartments. You can't tee a golf ball without hitting a brand-spanking new apartment complex. Renters have too many choices and occupancy in these newer units is off from projections.

But multi-family in slightly older, more established areas is booming, and demand to invest in such properties remains VERY strong. I wrote last week about all the millions of dollars pouring into the Midwest -- and Ohio -- from California investors seeking to buy multi-family projects. There simply isn't enough product on the market. But out-of-state investors are somewhat hesitant to acquire brand new projects until they have some sort of track record.

The Trueman family owned hundreds of acres along I-270 20+ years ago, and have either sold off or developed most of the property. It was a great business the Trueman family started, Red Roof Inns. It helped pay for college in the early 1980s for me -- I was a night auditor at the Worthington, Ohio property. Its nice to see the family, and an old acquaintance from my old neighborhood, teaming up to make sure the last pieces of the Trueman holdings are very nicely developed.

Past Apartment Residence Has Gone Condo

In the late 1980s and early 1990s, I lived in a really upscale apartment complex in the Columbus, Ohio suburb of Dublin, in northwest Franklin County. St. Andrew Village had a great mix of young married couples and suburban professionals, was was located near old Dublin's town center. Yet it was far newer, with restaurants and offices popping up all around it. Fast forward to 2006: St. Andrews Village is now known as "The Villas at St. Andrews." A condominum conversion has units selling from the 110,000's to the $180,000's, depending on number of bedrooms and location. I am surprised they aren't selling for more, but competing "apartment to condo" conversion projects in the area are putting pressure on prices. Still, these projects are taking apartments out of inventory in Central Ohio and are putting more pressure on existing multi-family properties- especially at a time when they already are in high demand by both residents and investors, alike.

RIISnet Will Be Hot for Matching Acquisition, Disposition Needs

I was invited to a private online demonstration today of a software tool coming to market, exclusive to Prudential CRES (for now), that enables asset managers of commercial portfolios valued at $5 million and higher to electronically -- and quickly -- match their acquisition and disposition needs. It simplifies the buying and selling process as REITs and others regularly buy and sell properties. Called RIISnet, for Real Estate Information and Insurance System network, this is an incredible tool, and I'll be writing more about it in the near future.

Hats off to the guys in Alabama who put together this revolutionary tool! I look forward to working with you!

Mortgage Rates At 2006 Low

Mortgage rates fell for the sixth week in a row, to nearly the lowest level of the year, as a slowing housing market helped keep rates down. The data is the result of the Freddie Mac (Charts) Primary Mortgage Market Survey. The 30-year fixed mortgage rate fell to 6.11 percent in the week ended Dec. 7 from 6.14 percent in the prior week, according to the survey. It was the lowest the 30-year has been since the week of Jan. 19, when it averaged 6.10 percent. A year ago, the 30-year averaged 6.32 percent.

The 15-year fixed-rate mortgage averaged 5.84 percent, down from 5.87 percent last week. A year ago, it averaged 5.87 percent. This is the lowest the 15-year FRM has been since the week ending Feb. 9, when it averaged 5.83 percent. Rates for five-year adjustable-rate mortgages (ARMs) came in at 5.92 percent this week, down from 5.95 percent last week. A year ago, the five-year ARM averaged 5.78 percent. It was the lowest since February, when it averaged 5.89 percent. One-year ARMs averaged 5.43 percent, down from 5.46 percent last week. A year ago, the one-year ARM averaged 5.16 percent. This is the lowest it has been since March, when it averaged 5.41 percent

"Continued signs of slowing in the housing market and weakness in the manufacturing sector helped keep mortgage rates down this week," said Frank Nothaft, Freddie Mac vice president and chief economist.

Who's Guarding Your Mutual Fund Investment?

Well here's another news item I'm going to print off and use when I talk about the benefits of investment real estate. And this time it's not just about its superior financial returns. The Securities and Exchange Commission announced yesterday that high-power brokerage Jefferies & Co. Inc. has agreed to pay some $9.7 million to settle regulators' charges that it illegally lavished nearly $2 million in golf trips, entertainment including a Playboy party and other gifts on Fidelity mutual fund traders in exchange for their trading business. The SEC and the National Association of Securities Dealers, the brokerage industry's self-policing organization, on Monday announced the settlements, under which two Jefferies executives also were sanctioned. Under the agreement, Jeffries neither admitted nor denied guilt. Hmmmmm. I'm sure there are several investors who placed their money with Jeffries who are mad as hornets. Mutual funds can be decent investments. And most brokers are honest. But you don't know how your broker uses your money, and you have absolutely no control over it. Well, actually, with reports like this, you kind of do get an idea how some mutual fund investments are used. Sheeeesh!

Downtown Columbus Holiday Inn To Get $4M Renovation

A Miami, Fla. hotels group yesterday announced it will invest more than $4 million to renovate the rather tired Holiday Inn on Town Street in downtown Columbus. The property has reported low occupancy in recent years. Ben Castera, president of Sound Hospitality, bought the 240-room property in July for $6.1 million. Sound Hospitality's focus is the mid-scale market. Castera said that the lobby and restaurant also will be renovated, and new windows will be installed throughout the hotel. The Columbus Dispatch reports that through September 2006 the Holiday Inn has been only half full, "far below the 65 percent average occupancy for Downtown hotels." Sound Hospitality owns three Holiday Inns in Florida, and Radisson and Hampton Inn and Suites properties in Arlington, Va.

Off Campus Student Housing A Strong Investment Choice

My business partner and I have long advocated the investment benefits of student housing properties. I can show the benefits on paper, but two industry experts have recently written on the subject, calling off-campus student housing an even better bet than most might think.

"Unlike the larger rental market, which is subject to economic swings, student housing is recession-resistant, and may well be practically recession-proof," say Richard Levy and Michael Tucker. The two are executives of the National Multi Housing Council, so naturally, readers might suspect they are biased. Still, they confirm what investors in campus area properties -- and brokers handling those properties -- already know. Off-campus housing is a tremendous place to grow investment funds.

"In addition to the favorable demographics that the echo boomers will create over the next decade, the non-cyclical economic nature of higher education is an important consideration. In good economic times, a college degree provides an important credential in the job market. In difficult economic times, people attend college to improve marketability and temporarily avoid a challenging job market," they write. A quick check with The College Board shows that many students take longer to graduate these days and remain in student housing longer than previous generations. In fact, almost 40% of today's undergraduates are over age 24, The College Board reports. So in either good or bad economies, student housing is in strong demand.

I can tell you that many owners of property around the Ohio State campus, for example, are absentee owners and have never seen their properties in person. They are quite content to get a check once a month, or once a quarter, and fully, and legally exploit their tax advantages. The same can be said for other "big city" campuses. Currently, several out-of-state colleagues in the Prudential CRES network have investors seeking off-campus student housing investments.

Who knew that people would want to return to college after all these years ? . . . only as investors instead of students?

Dollar Falls, Fed Less Likely To Raise Rates

The dollar suffered sharp falls on Thursday, hit by reports of weak US business activity and a benign inflation picture. The euro rose 0.7 per cent against the dollar to $1.3247 by late afternoon in New York. Sterling rose to its highest level against the dollar since its ejection from the European Exchange Rate Mechanism in September 1992 as UK house prices continued to show rapid growth. A report revealed that inflation in US personal consumption expenditure excluding food and energy, the Federal Reserve’s preferred inflation benchmark, held steady in October at 2.4 per cent year-on-year. Data suggested further inflation-fighting interest rate rises by the Fed, which could support the dollar, were even less likely to be needed.

Midwest Ranks High in Manufacturing Competitiveness Study

In a new study, Midwestern/Great Lakes States states ranked very highly, and Ohio ranked first among all states in a research group's assessment of manufacturing competitiveness. The Chicago research firm, eMvoy, evaluated 100,000 companies on factors including technology, stability and Web presence, and then distilled that information to create the state rankings. Ohio, Illinois, Michigan and Pennsylvania took the Top 4 spots.

The company rates manufacturers to sell its services to industrial purchasing agents. In a prepared statement, eMvoy CEO Craig Landy said: "There is so much confusion about the state of American manufacturing. The public perception is that, overall, U.S. manufacturing is weak. After looking at 100,000 manufacturers, we found that the state of U.S. manufacturing is not bad -- as long as you are in the right state.

Here are the Top 10 states in manufacturing competitiveness, as ranked by eMvoy:

1. Ohio
2. Illinois
3. Michigan
4. Pennsylvania
5. Texas
6. Wisconsin
7. Minnesota
8. Indiana
9. New York
10. California

Fools and Their Money

Craig King is a real estate guru who frequently is quoted by national business publications, and made his mark as an auctioneer of high-end properties such as ranches, mansions and developments. President of J.P King in Alabama, he wrote recently of the current TV commercial for an investment firm that does such a great job of pointing out the silliness of "in and out" trading. We've all seen it: A gentleman has just purchased artwork at an auction and immediately turns back to the auctioneer, saying, "I'd like to sell it now." "Sell what?" the puzzled auctioneer asks. "Uh, that thing I just bought." Such a scenario applies equally to certain real estate investing, King writes, and I couldn't agree more.

Let me go on the record. I don't like flipping. There is too much risk for the potential reward. And you don't get any of the tax advantages of long-term investing. It's quick money here and there, but does nothing to build long-term wealth. In the go-go 2005 market, when property flippers were "having their fun," sales and prices were being driven by what King calls the "greater fool theory" -- that is, buyers were paying inflated prices, assuming they'd find a "greater fool" who would pay even more.

So what happens next? "Every time speculative fever takes hold of a market -- any market -- it's just a matter of time before you run out of fools," King says. Boy is he right! It happens with stocks, coins, gold, futures trading and more. King points out the classic case of "Tulip Mania" that gripped the Netherlands in the 17th century. Tulip bulbs were traded on stock exchanges at outrageous prices and speculators were even trading in tulip futures. The Dutch lost sight of what a tulip is - a lovely flower to be planted, watered and enjoyed."

That's where the lesson sits for all of us, and Craig has hit the nail on the head. Homes and condominiums exist to provide shelter and comfort. They're intended to be lived in, loved, personalized, and enjoyed. When they turn into commodities to be traded for a quick profit, you can be sure that "silly season," as Craig calls it, is here. Seasoned investors and investment brokers understand this. When real estate is sold without regard to its underlying value or function, the pros will step out of the way and let the novices tear each other apart in a questionable profit feeding frenzy.

In a business networking group to which I belong, one colleague mentioned a friend who invested in and fixed up a Florida house to resell. The friend intended to take advantage of the outrageous appreciation that was taking place on homes there. Ultimately, he wound up upside down (owing more to the bank than the property was worth) because of sinking values. But my colleague (a human resources guru) says his friend admitted that he didn't know the Florida market very well when he got in, and used a real estate agent -- his wife -- who also did not live in Florida (nor, I suspect, did she know the Florida market). Someone talked him into jumping on the bandwagon without his taking a moment to look and see whether the economic wheels were tightly affixed, or in this case, ready to fall off. He crashed.

Feeding frenzy indeed....there is a lot of chum floating around in the flipping waters these days. It's what's left of those who don't do their homework, don't use an knowledgable real estate investment adviser to go to war for them, and who forget (or never learned) that property investments should be about ongoing income, not "one-off" turnarounds that are full of unnecessary and often unmanageable. Craig King says it differently: The novices "soon learn an eternal truth -- that at the worst possible time, the world will run out of fools."

Rental Home Buyers Benefiting from Residential Slump

Though investment real estate still is strong, the residential housing market slump is having an affect on the sale of investment rental homes. Though income properties typically are all about numbers, the emotion that is tied to residential housing is spilling over. Its very rather unusual situation, since the formulas haven't changed. With buyers sometimes getting sellers of rental housing to accept less on the deal, new investors in Ohio and around the nation are finding themselves in even better positions. Multi-family housing remains strong with very few properties coming available, and far less inventory available that the market is demanding.

Meeting General Tibbets

I had the distinct pleasure to meet and visit for about 15 minutes with retired Brig. Gen. Paul Tibbets on Sunday in Columbus. At 93 he is a spry, highly articulate individual. In my estimation he saved my father's life in the 1940s (I would not be here had that not happened). Thank you General Tibbets! It was an honor to make this man's acquaintance. It's a day I'll not soon forget.

No Venison for Winter, Yet . . .

For those who know me very well, no luck in the field on 1st day. But there will be venison in the freezer this winter!

More Investor Money Being "Parked" In The Midwest

The Ohio market is booming for multi-tenant retail, and analysts say a lot of money is being “parked in the Midwest” by baby boomers who have previously profited investing in west coast properties. Illustrating this point are sales of two suburban Cleveland power centers--City View Center and Highland Plaza--which are scheduled to close in mid-December. City View Center, a 491,341-sf property in Garfield Heights, is being sold to a New York investor for approximately $100 million, or $204 per sf. Meanwhile, a local buyer has agreed to pay $40 million, or $162 per sf, for Highland Plaza, a 247,000-sf property in Highland Heights. In fact, investors coming out of west coast deals, and getting only 2 or 3 cap rates, are gobbling up 4 and 5 cap properties coming to market in the Midwest. Previously regarded as marginal returns, compared to the 9 and 10 cap rate deals that can be found, the shortage of investment property is so acute that out-of-state investors are still bettering their position by grabbing 4 and 5 cap projects.

Shareholders Seek to Block Equity Takeover

The Blackstone-Equity takeover is really heating up, with some shareholders complaining that the offer price is too low. I wrote about the initial takeover a few days ago -- the largest ever buyout of a real estate investment trust (REIT). Libby Kaiman, a shareholder of Equity Office Properties Trust stock, has filed a lawsuit in Illinois’ Cook County Circuit Court on Nov. 22 against the company’s management, including founder Sam Zell, to block the REIT’s $36-billion sale to New York-based Blackstone Group. Larry Kolker, an attorney with the firm, says the court will likely consolidate the suit as a class action if other shareholders file. “Kaiman hopes this suit will block the sale, unless the fiduciaries of the company can show they are causing value to be maximized,” Kolker told real estate media company GlobeSt.com. No court date has been set yet, Kolker says.

There have been several news stories in the business media in which some analysts say that EOP may not have received the best price for the deal. “James Core, head of real estate investments at Cohen & Steers Inc. – which held 38.9 million shares as of September 2006 – stated EOP is ‘worth a lot more’ than $48.50 a share,” according to the suit.

And why do they think its worth a lot more? Because real estate provides higher returns they virtually any other investment and they don't want to be pushed out of the Equity gravy-train unless they have been adquately compensated. Stay tuned....this story will likely heat up further.

Tomorrow is Thanksgiving; Remember to Give Thanks

Tomorrow is the Thanksgiving holiday in the United States. So often, we spend more time making out a grocery list than taking a moment to reflect and be thankful for what we have been given, and have earned. Please thank a veteran or an active duty soldier. Please thank a family member for all they do. And please take a moment to remember those who have gone before us in the fight for freedom.

Blackstone Continued: Betting on Continued Rise in Investment Real Estate Values

This is a follow-up to my earlier posting about Blackstone Group's unsolicited acquisition of Equity Office Properties Trust. From the Wall Street Journal: "With its bold move to buy Equity Office Properties Trust in the largest real-estate deal in history, Blackstone Group is betting that commercial real-estate prices haven't gotten out of hand, despite a big run-up in recent years. Blackstone's move to convert the publicly traded real-estate investment trust into a privately owned business rippled through the REIT industry, lifting shares of such companies across the board by 3.2% in anticipation of more buyouts and mergers." More validation of what we are telling our clients . . . investment real estate continues to climb.

Milton Friedman's Passing

Not everyone noticed, but last week one of the world's most forward thinking economists passed away. Milton Friedman believed in the freedom of the individual, and distrusted government economic intrusions. He has been praised around the globe for his savvy. While there is one thing he did that I disagree with -- helping draw plans to withhold people's income tax during WW2 (leading to today's lack of understanding among most Americans about just how much tax they pay and the fallacy of wealth redistribution) -- he challenged the world to re-think old-line approaches to economics. I was 17 and attending a teen conference in Washington DC in 1977 when I was given one of his books. It opened my eyes. Accused of being, as New York Times columnist David Brooks remembers, "a free-market crank," Friedman's theories, later put into practice, have created a situation where America and much of the world today are experiencing the greatest economy and highest prosperity ever known in human kind. Thanks Milton for all you gave us . . . your research and unabated opinion . . . your books . . . your time . . . and your belief in clear language instead of incomprehensible "academic-speak." Unfortunately, there are some who now have forgotten (or disagreed with) the lessons you taught; who suggest that government should impose heavy regulations to "correct" a relatively few minor problems generated by our hard-charging, highly fueled, incredibly strong economy. And mostly for political gain. Milton, you are already missed.

Why the Name "Cash on Cash?"

I had a couple of people email me privately the past few days and ask why I call this blog, "Cash on Cash." The simple answer is that this is a common term used in investment real estate. As an investor, your "Cash on Cash Return" equals your net operating income, minus debt service, divided by equity invested. It is, in other words, the annual cash flow that an equity investor receives. Questions? Drop me a line and I'll explain in more detail!

Multi-Housing Investment Factors

Today I had a prospective investor ask me about the financial benefits of multi-family housing as an investment vehicle. I gave him the run-down -- positive and negative -- and realized it makes sense to share this information here. So, here are the factors affecting multi-housing investments.

- Apartment buildings can be leveraged to a higher degree than other commercial properties.

- The tax shelter benefits have been favored, although investors usually do not purchase apartments solely for the inherent tax benefits. Benefits include cash flow, leverage and appreciation.

- Real estate has never been considered a liquid asset, and prior to the mid-1980s, apartments were usually more liquid than other real estate vehicles. In the late 1980s, the apartment market slowed as a result of the loss of favored tax treatment. After a period of adjustment, they are regaining popularity. The resale market is generally good.

- Less sophistication is required to own and operate apartment buildings.

- A utilitarian demand exists because people need a place to live.

- Variety of apartment sizes and prices allows various types of investors to enter the apartment ownership market. From "Ma's and Pa's" to major corporations and pension funds—all own apartment buildings.

- Responsiveness to entrepreneurial efforts. Unlike other real estate vehicles, apartment building value determinants (occupancy, income, expenses, financing, etc.) can be affected by the owner, and it is easier to do (as opposed to an office building, where major tenants have long-term leases that cannot be renegotiated until the end of the lease period).

- Professional management is usually available, but at a cost.

- Unit mix must be matched to the demographics of the area (e.g., studio apartments are less likely to succeed in a family area).

- Not having key or anchor tenants may be an advantage.

- Exposure to government regulations (primarily rent control).

- Institutional and seller financing availability.

- Apartment visibility and close proximity to major highways, labor, transportation, shopping, and residential housing tracts are good elements.

- Pricing apartment buildings involves the use of the gross-rent multiplier, price per square foot, price per unit (CPU), and capitalization rate as "rules of thumb," or value measurers.

- Deferred maintenance can be extremely costly and detrimental to achieving investment objectives.

- Ratio of land to improvements affects the amount available for depreciation, and this affects the tax benefits associated with the property.

- If the owner is required to pay utilities, it will substantially affect the expenses connected with the property.

- Vacancies affect the appeal of the property, as do the number of units on the market, and whether or not rents are in line with competition.

- Investors can move up to larger properties through IRS 1031 tax deferred exchanges, thereby delaying payment of capital gains taxes.

- Parking conditions and the number of spaces available, as well as the type (covered, carports, open).
Furnished vs. unfurnished affects the rental schedule and amount of depreciation available.

Blackstone Group Announces Buyout of Equity Office Properties Trust

Associated Press is reporting this morning that private-equity firm Blackstone Group has agreed to buy Equity Office Properties Trust, the nation's largest publicly traded office-building owner and manager, for about $19 billion. Blackstone Group is manager of the world's largest buyout fund. Equity Office Properties Trust is the world's largest office landlord. The management and trustees of Equity Office, which was founded in 1976 by investor and current chairman Sam Zell, are not part of the buyout group. Chicago-based Equity said late Sunday its board has approved the offer by Blackstone's real estate arm of $48.50 per share, which is an 8.5 percent premium to the stock's closing price Friday on the New York Stock Exchange.

Short North Developer Proposes Parking Solution

Public parking is in short supply in the Short North area of Columbus. But Arms Properties, a central Ohio development group, has announced plans to address that need as part of a residential proposal. Arms is floating an idea to build a 250-space public-parking garage as part of a project that would include a 10-story, 179-unit condominium building. Ibiza Urban Oasis would rise in the place of a nondescript office building in the 800 block of N. High Street. The classic urban-infill project is across the street from Arms Properties’ Dakota condo building, which is expected to be occupied in February. Rajesh Lahoti, a co-owner of the development company, said he thinks Ibiza’s biggest asset could be a three-level, publicparking garage.

"The lack of public parking in the Short North has held us back, especially the business district," Lahoti told the Columbus Dispatch. Lahoti, who with his partners owns three Short North nightclubs and three residential projects including the Dakota, said Arms Properties would operate the garage through a third-party company. He said they’re still working out financial details, but he thinks the condos and garage could be built by the end of 2008.

Short North development projects have been generally successful. But the biggest objection I hear from businesses that like the area for a future move is lack of parking. This proposal would be a boost the area sorely needs.

36+ Hours After THE GAME

A 42-39 win over the Michigan Wolverines on Saturday. The so-called Game Of The (21st) Century at Ohio Stadium. I won't bore you with a lot of detail, but just some observations. For the first time in years I did not have tickets to the OSU/UM game. I was invited to a combined tailgate with close friends and colleagues from Wagenbrenner Companies, Casto, and Ruscilli Construction/Development. Many of us had never tailgated at the stadium without later going in to see the game. Great food, and a 50-inch plasma screen, high-definition television about 150 feet west of The Horseshoe made it feel like we were inside. With a 5 second broadcast delay, we frequently knew big plays were about to happen when hearing the roar of the crowd inside preceding the snap of the ball on the TV screen. With about 6 minutes left to play, portal workers opened the gates to allow easy access for departing fans. At this point, they don't enforce the "no pass out" rule. So, several of us made our way into Ohio Stadium with smiles from the ushers. We stood in the aisles to watch the final plays as the clock ticked down the final 5+ minutes. And, of course, we HAD to rush the field at the conclusion of the game, which found the undisputed No. 1 Buckeyes moving on to the BCS championship game on January 8 in Glendale, Arizona. An incredible moment for this life-long Buckeye fan, shared with several long-time friends.

Emerald Bank Being Purchased

A northeastern Ohio bank, Middlefield Banc Corp., has announced it will purchase Emerald Bank in Dublin, Ohio for about $7.3 million. Emerald Bank, founded in late 2004, has made great inroads in its short tenure as a highly competitive lender for commercial and investment properties throughout the Buckeye State. Middlefield Banc Corp., the parent company of Middlefield Banking Co., has $325 million in assets and five bank offices between Cleveland and Youngstown. Emerald Bank has $39 million in assets and operates one office in Dublin. The deal is expected to close in the second quarter of 2007, pending regulatory approval.

State Teachers Retirement Furor Over Fees To Hire Real Estate Experts Dies Down On Word Of Performance Returns

Word this week is that the furor a month ago the State Teachers Retirement system in Ohio paying an outside agency significant fees to recruit real estate agents for the organization is dying down. Critics charged that State Teachers Retirement should not be paying huge sums to find new hires. STR officials fired back recently that real estate investment is so lucrative, and far outperforms all other system investment vehicles, that the recruiting fees will be a drop in the bucket compared to the returns STR and its members will receive through professionally mananaged real estate portfolios.

This is another validation of real estate as a key investment strategy to building wealth. STR stated real estate doesn't just do better than stocks, mutual funds or other investment vehicles; the agency stated that real estate is far outperforming every other investment type in use.

1 Day to THE GAME

Well it all comes down to No. 1 and No. 2 tomorrow in Ohio Stadium. Buckeyes vs Wolverines. Two storied programs in an intense rivalry. Incredibly, I know people who have taken today (Friday) off in Columbus. They are treating The Game weekend as a 3-day holiday. I've got an appraisal today at 3 pm on an investment property we have in contract on 11th Avenue in the campus area. Two hours after we leave there, the city will start towing cars on that street -- and others -- in an effort to eliminate things for drunken fools to burn or tip over following the game. Rivalries are great, but this violence thing has gotten out of hand. Needless to say, all of the Columbus business community hopes that things don't get too insane after the clock runs out around 6:30 or 7 pm eastern time Saturday night.

US Quarterly Investment Real Estate Outlook

The Quarterly Report on the U.S. real estate investment market, including a lengthy analysis of the current REIT (real estate investment trust) environment, is now out from Prudential Real Estate Investors, a sister firm to Prudential CRES. Here is the executive summary:

• Despite higher long-term interest rates in the second quarter
and a modest slowdown in transaction activity, commercial
real estate loan origination and securitization activity in
2006 should surpass the record levels set last year.

• REITs rebounded sharply in the third quarter from their
relatively weak second-quarter showing and should
outperform the broader equity markets for a remarkable
seventh consecutive year.

• Although the near-term outlook for the U.S. property
markets remains healthy, slower economic growth will
affect investor and tenant demand for most, if not all,
property types.

• With space market fundamentals across all major property
types healthier than they have been in years and with little
evidence that supply will outstrip demand in the next 12
months or so, private real estate should continue to perform
well. This year, we expect the NCREIF Property Index
(NPI) will deliver a total return at the high end of our
forecast range of 12% to 15%. Returns will likely moderate
further next year, but as long as the economy does not
weaken suddenly and long-term interest rates do not stray
too far from the 4.5% to 5.25% range they’ve been in for
most of 2006, the NPI should still deliver 9% to 12% in
2007.

For a copy of the full report, drop me a note and I will email the PDF.

Now 2 Days to THE GAME

Just heard on the radio that University of Michigan police will be on hand in Columbus on Saturday. Though they will not have arrest authority, they will be here to "protect" the UM team and fans coming down from Ann Arbor, Mich. With so much riding on the outcome of this game, I guess no one is taking chances. Columbus' finest are probably smarting at the idea that out-of-town police are coming in to protect their own. Still, its going to be one great matchup on the field! And with an expected Buckeye win, all the nut-jobs that come in from off-campus will surely be out in force. Hopefully, Central Ohio and Columbus' image won't get the "black-eye" that has come with out-of-control celebrations in past years. Celebrate? Yes! Tip over cars and set couches on fire? Grow up! Go Bucks!

CREE Meeting

My business partner, Bob Deis, gave a talk preceeding our weekly CREE (Columbus Real Estate Exchangors) meeting in east Columbus this morning on capital rate of return. We had a packed house, but I think there were other reasons (like breakfast being served?). This rates of return discussion is often not understood by residential agents who dabble in commercial brokerage. With home sales slipping it seems a lot of residential folks are trying to pick up commercial accounts. This is frustrating when you're in a deal and having to explain to the residential agent who is on the other side how it all works. Trust me...it ain't like selling a house, and at the risk of offending some residential agents, they aren't doing their clients any favors when they do not understand all the ins and outs and positive tax implications of an investment transaction.

Anyway, CREE is an organization of commercial/investment agents and brokers who specialize in real estate "exchanges." These are IRS 1031 tax-deferred exchanges, that enable the seller to indefinitely defer paying taxes on capital gains. We have weekly meetings to tell each other about properties we have listed, or properties we are looking for for our clients who want to buy. We don't just "pitch" properties to each other to see if someone is interested. We brainstorm and problem-solve to help each other sell listings. You see, I might have the third or fourth leg of multi-leg transaction, and be able to help the selling agent with one property put together the puzzle for the benefit of all our clients. A question about capitalization rates from a few weeks ago led broker Furman Tinon to discuss the issue at last week's meeting. Which led to more questions on overall rates of return. Bob stepped up to discuss cash-on-cash returns, after-tax returns, etc., which is what he and I deal in virtually every day with our clients. Something for everyone this morning. Heard about homes in the country, development land in and out of Columbus, investment rentals, a large restaurant near Cincinnati that might be perfect for an outdoors store or conversion to offices, folks looking for apartment complexes, and more. To the good for one of my clients, I learned about four new-build rental homes for sale at the resort area of Indian Lake, 90 minutes northwest of Columbus. I've got a client who is coming out of the sale of a duplex in the Ohio State University area and this might work for him in an exchange as he and his partners exploit the tax advantages of moving to ever-larger investment properties.

3 Days to THE GAME

Okay, yes this blog is supposed to be about investment real estate. But living in Columbus, Ohio when the Ohio State Buckeye football team has been ranked No. 1 since before the season began, is undefeated, and is about to take on its Big 10 arch-rival Michigan Wolverines, there is no way not to address it. At 3:30 pm on Saturday, the Bucks will host UM in a match of No. 1 and No. 2 in the nation -- the first time in 103 meetings these two teams have been ranked such when they square off against each other. We already beat a No. 2 team earlier this season -- the Texas Longhorns. And my beloved Buckeyes, I am confident, will overpower the Wolverines. Without tickets for this year's Game, after several years of being front and center in Ohio Stadium, I'm trying to decide whether to head to the stadium area and watch on the Jumbotron at the Hiney Gate party, or watch it from a 50-yardline view in my leather recliner. Oh the dilemma.....