Thursday, November 30, 2006

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

Wednesday, November 29, 2006

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."

Tuesday, November 28, 2006

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!

Friday, November 24, 2006

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 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.

Wednesday, November 22, 2006

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!

Monday, November 20, 2006

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.

Friday, November 17, 2006

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.

Thursday, November 16, 2006

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

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 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.

Wednesday, November 15, 2006

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.....