Friday, January 26, 2007

Converting 'Dead Equity' To Productivity

A lot of people are proud that they owe nothing on their home . . . or on a piece of investment property. And they should be proud of their hard work!

BUT (you knew it was coming, didn't you) . . . when a home or other property has high or full equity, it is what we call a "dead asset." Put another way, it is wealth that you possess that is not benefiting you. Think about it -- property usually doubles in value every 10 years or so. Say you bought a house for $50,000 and it is now worth $100,000. And when you bought it you put $10,000 down and financed the remaining $40,000. Over the 10 years your mortgage payments built up an additional $15,000 in equity. So you now owe only $25,000 on a home that has appreciated in value due to inflation to approximately $100,000. As a colleague of mine here in Central Ohio, real estate investment guru Furman Tinon, puts it, "inflation pruduces more multi-millionaires than anything else." But this new worth is not benefiting you.

After 10 years you now have $75,000 of net worth in your home ($100,000 current value minus the $25,000 note you still owe from your original note). To put this wealth to use, you go to a lender and refinance. Get a 75% loan against the value of the home, of $75,000. Pay off the $25,000 outstanding loan. You now have $50,000 cash at your disposal -- tax free. You take that amount and put $50,000 down on a $200,000 investment property. That's an instant 25 percent equity in the new property. And since it is an income property, it will be easy to finance. The monthly income (rent) your residents pay you should cover your monthly mortgage on the new property, and you get to exploit numerous tax advantages, such as: deductions for any property improvements you make; depreciation/cost recovery. Plus, if you sell this property in a 1031 tax-deferred exchange after five years, you will not pay any capital gains taxes on this new property's appreciation. You move the equity you have where it will work harder!

Wednesday, January 24, 2007

Equity Office, Largest Office Landlord, Gains New Suitors

Reuters news service is reporting that Equity Office Properties Trust, which agreed to be bought by Blackstone Group in November, said Monday its board agreed to meet with a Vornado Realty Trust investor group that submitted a rival bid last week and to share information. Equity Office has entered discussions with the Vornado group, which includes Starwood Capital Group Global and Walton Street Capital, and has asked them to submit a definitive proposal by January 31. Blackstone, a New York-based private equity firm, agreed to buy Equity Office for $48.50 per share in cash, or $20 billion excluding debt.

As I mentioned in a post back in November, many institutional owners of shares in Equity, a REIT, complained that Blackstone's offer price was too low. Vornado submitted an offer last week of stock and cash worth $52 per share, or $21.6 billion. Looks like Equity Office, the world's largest office landlord, is going to be the prize in a bidding war among an increasing number of suitors.

Tuesday, January 23, 2007

Another Indicator That 'Campus' Area Multi-Family Is Strong

Some folks who read my posts say I spend too much time talking about campus-area multi-family investments. Well, that's because I believe they are among the strongest assets available. But once more, don't take it from me . . . look at what someone else has to say.

In East Lansing and Mount Pleasant, both in Michigan, a joint venture is wrapping up the purchase of five off-campus student housing apartment complexes near Michigan State University and Central Michigan University. The Pierce Co., based in San Diego, Calif., and the Fidelity Real Estate Group, a division of Fidelity Investments, bought the 3,516-unit properties for $130 million.

Fred Pierce, chief executive officer of the acquiring partnership, told Globe Street, a real estate news service, that the recent purchase is part of a $500-million national student housing acquisition program the company will implement in the next three years, mostly properties in the Midwest and Texas.

More importantly, listen to what he follows up with. "We believe that the Midwest's university markets have solid fundamentals, but yet are not on the radar screen the way the growth markets are," said Pierce. "Even if the local economy isn't doing well, these university markets are stable," he says. He adds that there is a growing national interest by investors into student housing. "There's a greater amount of institutional capital and investors than there are student housing operating companies so there's a real opportunity to outperform multifamily," Pierce notes."

Now . . . where have you heard all this before? Oh that's RIGHT! Right HERE in the pages of "Cash On Cash!" LOL

Saturday, January 20, 2007

On The Cover of 'Buy, Lease, Build' Magazine

I'm going to boast a little . . .

The Ohio edition of "Buy, Lease, Build" Magazine will feature a cover story on our Prudential CRES operation in either February or March of this year. Our 7-state Midwest franchise is headquartered in Cincinnati and the magazine interviewed my colleague David Mussari, VP and day-to-day operations chief, who discussed how we have already built a successful presence in Columbus, Cincinnati, and Lexington, Ky., with new offices and sales teams coming soon in Dayton, Ohio and Chicago, Ill. Our organization, owned by Morris Goins, is the largest Prudential CRES Commercial Real Estate franchise in the nation.

Wednesday, January 17, 2007

Know About Nonrecourse Loans? How About Carvouts?

In investment real estate, most savvy investors will take out a loan to help purchase a property. This "leverage" (using the bank's money) is just good business. But the many types of loans out there can be confusing. There is one type of loan, if you are fortunate enough to put it in place, is some of the best financing out there.

Called a "Nonrecourse" loan, it is financing set up by the lender based on the strength of the property alone. That said, a nonrecourse loan can be approved if the property is strong enough to stand on its own based on its financials. More succinctly, the numbers make it a very good investment. As a result, in a nonrecourse loan the borrower is not asked to sign personally to guarantee the loan. The implications? Very positive for the borrower/buyer. By not being required to guarantee the loan, if something catastrophic occurs with the property and the loan defaults, the borrower is usually immune from having liens placed against personal assets.

But there are exceptions. And these are called "carveouts." A carveout is an exception to a nonrecourse loan. It results from "bad acts" by the borrower/buyer. It can be related to fraud, or mismanagement that affects the economic viability of the property. For example, a roof is allowed to leak in an apartment or office, and is not repaired in a timely fashion, for example. If this affects tenant retention, the owner could be on the hook personally for the loan, assuming it was a nonrecourse loan to begin with. It basically comes down to the new owner not just sitting back and counting monthly income, but actually ensuring that the property's value is not diminished due to neglect or other mismanagement. There is a great article on nonrecourse loans and carveouts published by financial services giant First American. Check it out at

Monday, January 15, 2007

New Albany, Ohio Commercial Building Boom

The old story has it that retail mogul Les Wexner (of the Limited, Victoria's Secret, etc.) told a friend he had an idea for "a place in the country." That vision became the developments in and around the once sleepy village of New Albany, Ohio. Homes large and small sprouted up everywhere. Today, New Albany is also teeming with commercial developments, as an increasing number of office parks, business headquarters and others move into the booming region northeast of Columbus.

And now, retail development is beginning to catch up with the abundance of office construction that’s taken place in the past decade in New Albany. New Albany Market, at the northwest corner of Rt. 161 and New Albany Road, will offer a large, new Giant Eagle supermarket, a small strip shopping center and several service-oriented outlots among its planned 150,000 square feet of developed space. The Shoppes at Smiths Mill retail center is coming along just off the S.R. 62 interchange. Work also is to begin on an expansion of the Market Square retail center in the village center.Retailers will serve those who work in area offices as well as the growing number of new residents.

"There’s quite a bit of residential activity happening to the north of the expressway," Bill Ebbing, president of New Albany Co., told the Columbus Dispatch in a recent interview. "You just don’t see it until you get out and drive around. There are 8,400 employees in the business park, too." Adjacent to the Giant Eagle, Northstar Realty plans to develop 40,000 square feet of shopping-center space. Leases are still being negotiated, but Northstar partner Jason Zadeh said they’ll reflect a community retail theme. That includes banks, personal services and restaurants, with many in place by Q4. Chase and National City are developing bank outlots near the supermarket, and four other parcels there for restaurant and retail development.
The park has exploded in the past three years, with nearly 700,000 square feet of office development, including buildings for American Electric Power, EMH&T, the New Albany Surgical Hospital and a large expansion by Abercrombie & Fitch. Additionally, a venture including the New Albany Co., Daimler Group, Georgetown and Capitol Square Ltd. has started work on a 90,000-square-foot building for Commercial Vehicle Group. Also, Tween Brands is expanding its campus by 60,000 square feet, which will boost the size of the business park to 2.5 million square feet. With the completion this year of the interchange at Rt. 161 and Beech Road , an added 1,000 acres will open up to development. The 120,000-square-foot second phase of the Market Square development in the village center has been cleared by New Albany government.

There is hardly any time to catch your breath while watching how fast development is occurring in and around the once quaint village of New Albany.

Thursday, January 11, 2007

'Real Estate Advantages' Review: Part 2

I finally finished a book I highly recommend -- "Real Estate Advantages." I wrote a brief overview of this book a few weeks ago after I read the first few chapters. Here is the follow up.

Penned by Garrett Sutton, an attorney, and Sharon Lechter, a certified public accountant, the book does a fantastic job pointing out a number of largely "unknown" benefits of real estate investing. Such as how investors qualifying as "real estate professionals" (no real estate license needed) -- depending on the number of hours they work per year on such activities -- can take virtually unlimited tax deductions from investment properties. Topics include "Benefits of Leverage," "Capital Gain vs. Cash Flow," "Creating Your Real Estate Plan," "Make Real Estate Your Business," "Setting Up Your Books," "Creating Your Team of Advisors," "Using Pre-Tax Dollars To Buy Real Estate," "Landlord Liability," "How Not to Hold Real Estate," "Asset Protection Lessons," and much, much more. But more than just a bunch of book learning, there are real-life stories. The authors provide a link to a website where you can download an entertaining audio file at no charge. On this file they describe their "real estate bloopers." Some funny, some eye-opening -- all educational. Their stories provide a real-life look at parts of the business that provided valuable lessons.

As I noted at the beginning of this post, I highly, HIGHLY recommend "Real Estate Advantages." It is far more insightful than any real estate-related "Dummies Guides" floating around at bookstores and online.

Wednesday, January 10, 2007

Subprime Lenders Dropping Like Flies

With investors withdrawing funding or demanding bad loans be made good, combined with a number of states across the U.S. passing laws to crack down on predatory lending, several subprime mortgage lenders have closed their doors in recent weeks. Among the closures -- Ownit Mortgage Solutions Inc., Sebring Capital Partners and Harbourton Mortgage Investment Corp. The Los Angeles Times reports that Ownit Mortgage filed for Chapter 11 bankruptcy in December after Wall Street investors demanded it repay more than $165 million in delinquent loans. In addition, Mortgage Lenders Network USA has stopped funding loans and placed about 80 percent of the employees in its wholesale lending operation on furlough. It is still serving its $17.8 billion loan portfolio, the company reported.

Minimal requirements for obtaining a loan from many of these lenders have seen a flood of high-risk borrowers obtaining loans they have a difficult -- if not impossible time -- paying back. Street talk indicates that other independent subprime lenders who depend on Wall Street for financing will face similar pressures.

Tuesday, January 9, 2007

Ohio Gov. Strickland to keynote 12th Commercial Developers Power Breakfast

The Hyatt Regency in downtown Columbus is the place to be on Friday, Feb. 16 as newly sworn-in Gov. Ted Strickland discusses his plans to bring more jobs to Ohio and for revitalizing the Buckeye state's economy. The event? The 12th Annual Commercial Developers Power Breakfast. It will take place in the Hyatt Regency Ballroom, 350 N. High Street. Registration and networking runs from 7:30-8 a.m, with the proram following from 8-9:30 a.m. Sponsored in part by Business First newspaper, tickets are $75 per person, and $750 for a table for 10. Register by clicking on: . It should be an interesting event!

Gators Took It

My Buckeyes took it on the chin last night. The better team won the night. Congratulations Florida Gators!

Thursday, January 4, 2007

Wall Street Journal Looks Ahead At Real Estate

Yesterday's edition of The Wall Street Journal has a lengthy story on the "look ahead" for real estate, with the summation that investors and developers will be a bit more cautious in 2007. Still, a national survey notes that 60 percent of investors say they will increase their stakes in U.S. real estate this year, even though they are becoming more selective -- which isn't a bad thing!

Retail will suffer somewhat, though rents at shopping centers are expected to rise. Office and industrial are coming on strong for 2007, with office sales staying high and rents increasing. An increasing number of foreign investors are pouring money into U.S. office projects. Multi-family (apartment) rents will continue to rise, but not as much as in 2006. With potential home buyers locked out because of inflated prices or what the Journal calls "a wait and see attitude" before making a home-buying decision, apartment investors have been the beneficiary. Vacancies have dropped and rents have been up the most quickly in several years. Further, particularly in Ohio, I am of the belief that apartment properties will continue their appreciation as home foreclosures increase due to adjustable rate mortgages (ARMs) adjusting upwards for subprime borrowers. As one of my colleagues in our Cincinnati office recently noted, the bar for home ownership in the subprime market will revert upwards as a result of Ohio Senate Bill 185, a recently passed mortgage bill that has caused most lenders to do away with "stated income" and "no documentation" mortgage products.

Translation? A number of home buyers who obtained an ARM in order to qualify for a loan are facing increasing interest rates, and likely will not be able to continue to make payments. Many will probably lose their homes and will need a place to live. Additionally, other subprime (i.e. - higher risk) borrowers will not be able to qualify for a loan at all and will continue to rely on apartment living. Both these factors will put more pressure on multi-family properties, helping drive property appreciation and increased rents.

Tuesday, January 2, 2007

'Endless' Cash Flooding Commercial Real Estate

"Endless streams of cash are flooding commercial/investment real estate and reshaping global property management." "This is a tidal wave." "Too much money has been raised for both debt and equity and it is not going to be returned any time soon."

Such are the statements in a Dec. 26, 2006 story in Debt & Equity Journal describing the virtual flood of cash available from sources such as banks, life companies and others. The obvious winners are borrowers, says Nat Zvislo, research director at Real Estate Capital Institute, in the article. Long term interest rates are continuing to drop, the prime rate has remained unchanged since August, and funding sources for investment property are more creative and aggressive than at any time in a year, he adds.

So what does this mean? Funding sources are incredibly bullish on investment real estate for institutional investors. What does this mean for individual investors? The same flood of cash is also available as lenders understand today more than ever that investment real estate is a smart bet. Going into 2007, individual investors -- borrowers -- truly are in a position to exploit the leveraging of borrowed funds and come out on top.