Thursday, December 30, 2010

Things Are Looking Up

Just had lunch with a colleague from Chase Bank. He told me that his group lent way over their budgeted (read: expected) lending cap for 2010. Major markets were California, Indiana and -- get this -- Michigan. Even those areas with bad economies are seeing things come chugging back.
Sure, underwriting terms are more strict, but business is getting done and money is being lent. It is too easy to stand around and blame the banks for not lending money when there are other reasons certain projects don't obtain funding.

This news, mixed with reports that commercial real estate values are rising, is super news. In 2010 we did not see a huge drop. In 2008 and 2009 (truly starting at the end of 2007), we saw a 40 percent drop in values overall across the U.S. We have seen increases in prices in top markets across America. Pricing may well have bottomed, but we still have yet to see what is coming in 2011. There are reports that banks are going to dump some product next year. Time will tell.

There will be a broadening of buying in 2011, as REITs kick loose funds they are overloaded with, cash-heavy investors come into Class B and Class C products, and distressed assets. Some are calling the trend a "gradual thawing" of lending. Again, my conversation with my colleague from Chase (he works in a major operations center here in Central Ohio) indicated that even the most conservative of banks -- Chase is one of these -- are starting to push more money out the door.

CNBC's Closing Bell had a discussion of commercial real estate values a few days ago. It is definitely worth watching.

Even multifamily which stayed fairly stable was hit in 2008 and 2009, and values remain below where they might have been. Still, they are in stronger shape than commercial buildings, industrial and other segments.

Trophy assets, according to the guys on CNBC, those properties of $10 million and over -- in the top half dozen markets in the U.S. -- were up some 40 percent in value.

Further, National Real Estate Investor is saying similar things. That fundamentals are improving. Manufacturing expanded for the 16th straight month in the U.S., even though jobless figures havn't budged much. In addition, investors flat out are expecting stronger performance from the economy, as evidenced by 10 year treasury yield reversed a year long decline. This is a critical benchmark for commercial real estate lending.

Things just may be improving. My only concern is inflation. There will be a broadening of the buying appetite and interest rates continue to remain low. But what of the money supply that we are cranking out and how that impacts acquisitions? Current owners are going to see benefits. Those who aren't in yet may be impacted by inflation if they wait another year.

More to come....

Saturday, December 25, 2010

Merry Christmas!

A joyous Christmas to you all!

Friday, December 24, 2010

Warning Signs

PCRE colleague Tim Mehan has penned a very good piece on the many warning signs of the problems within our economy. Specifically, the looming inflation that the government denies is either here or around the corner, and yet all the signs are there.

Drop in at Tim's Ohio Industrial Real Estate Blog and ponder why bond values are crashing and how inflation is going to boost commercial/investment real estate values.

Very nicely written.

Tuesday, December 21, 2010

In The End, New Tax Bill Helps Investors

The tax bill signed by President Obama will be a boon to commercial/investment real estate. No question about it.

Though it could have been better (re-instating the death tax was clearly a mistake in my opinion), the moves will help quell the near-term fears of many business people, will spur more jobs and physical plant investment, and more. Among the better decisions: not messing with capital gains taxes and extending the 15-year depreciation for qualified leasehold improvements.
Plus, by cutting Social Security payroll taxes and estending jobless benefits, along with mortgage insurance deduction, people will have more money in their pockets. Thus, increased consumer spending will benefit retailers, which will help the retail real estate market and eventually, industrial real estate. Maybe yes, maybe no. An interesting theory. Everything put together does trend toward the positive, though.

I'm not alone in my assessment. In a Globe Street article, Dennis Heskey, senior adviser at AlixPartners, says leaving the capital gains taxes the same rate through 2012 helps the REIT market. REIT investments are a dividend play and this has the potential to help the REIT market, he says.

Adds Harvey Berenson, managing director in the Business Tax Advisory group at FTI Schonbraun McCann Group in New York City, says the extention of the 15-year depreciation for qualified leasehold improvements will encourage investment in rental property.

Overall, there is less uncertainty. There still are other problems looming, but uncertainty about tax implications -- at least for the next 24 month -- helps lessen fears of investors overall. And as Martha Stewart might say, that's a good thing.

Friday, December 17, 2010

House Passes Tax Package

Unlike how it is being presented by much of the media, the U.S. House of Representatives sometime in the middle of the night last night passed an extensive tax bill, which continues the existing tax rates for all Americans for the next two years.

After more than a week of fierce debate the majority voted against increasing taxes.

In the bill, the estate tax, more commonly known as the "death tax," has been reinstated, but at a lower rate than confiscatory bureaucrats had hoped for. Also, there are a number of provisions that allow businesses to take up to 100 percent depreciation on various property categories (equipment, etc.) in order to stimulate production and hiring.

There will be more to come . . .

Tuesday, December 14, 2010

International Monies Making A Difference

Two trends occurring (its all cyclical you know...).

One -- Domestic money is staying closer to home these days. Investors who have been putting capital into boom opportunities around the globe are keeping their seed money in the U.S. or the region these days.

Two -- International monies are once again making their way to the U.S., as overseas investors worried about world events, politics, trends or what have you, are sensing more stability -- and bargains -- on U.S. soil.

In fact, regarding the latter, only the U.S. and the United Kingdom are currently experiencing an increase in investments from overseas investors. The rest of the world is seeing a drop in foreign capital coming to their shores.

Says Kamil Homsi, president of Global Realty Capital, "the world has become more regionalized due to the uncertainty and the unstable indicators such as employment and consumer confidence." Homsi, whose company has offices in New York and Dubai, told Commercial Investment magazine in its November/December 2010 edition that the global recession has prompted investors to be more cautious about not only the types of properties they are buying, but also where those properties are located.

And commercial/investment properties in the United States, with its one-two punch of battered prices, and a stable government with no civil unrest (generally, but thats a post for another day), are prime targets for international international investors looking for what they consider to be safer havens for their monies.

Large portfolios are being split into chunks that appeal to a wider range of investors.

Here is another trend -- The capital constraints that still exist in the investment market are generating more business for some international brokers. REITs and other money brokers are getting more calls, and uncorking a lot of unused capital that has been sitting waiting for some of the dust to clear.

The best news? International investors who banked in years past on exhorbitant appreciation (many expected to double their money in only a couple years) have scaled back their expectations. They are buying smart these days, and conducting extensive forensic accounting on any project they look at. I can't blame them. A lot of people lost big because they jumped into huge projects on a wing and a prayer.

But wings and prayers don't add to the bottom line. And as notes, they can't be sold for they have no value. The value proposition needs to be clear. If it is, international money will make a move.

Which is good news for the marketplace here.

Monday, December 13, 2010

I Am Honored

Received an unexpected surprise last Thursday morning during our annual Columbus Real Estate Exchangors (CREE) holiday breakfast. Outgoing president Jim Simmons honored me with a memento for my work on the executive committee. Technically, as a past president (from three years ago) I am an outgoing trustee.

I didn't expect anything. Thanks Jim! And thanks to my colleagues for the off-line kudos and remarks throughout the morning. I have enjoyed working with all of you, as well!

Saturday, December 4, 2010

NNN Creativity

A simple math lesson in the beginning, but bear with me. Though the numbers in the next paragraph are small, they get more substantial later as the real-life story is laid out.

Okay, to start . . . Did you know that if you put $10,000 down on a $50,000 property the lender will happily lend $40,000 on it. At that moment in time, the lender has four times more money at risk than you do, and you will get a monthly income for the next 27.5 years. Any increase in value over the years and the monthly cash flow is yours. The lender does not participate in the benefits of ownership, yet then have four times more invested than you and the tenants give YOU the money to pay off your loan.

Now, with that said . . . if you buy gold as an investment, can you fill your gas tank with it? How does it throw off money each month to you? Specifically, how do you get to USE your investment while it is invested?

If you choose not to invest at all, whether in commercial/investment real estate or the stock market, you receive a whopping 1.25 percent in some savings account at a local bank.

So what? Well, here is why the lead-in is important. This past week I evaluated a NNN property in northeast Ohio. A fast food restaurant with drive-through in a decent area of town, this was a true Triple-Net opportunity. The tenant, a national company, as in any NNN lease pays everything -- property taxes, insurance, upgrades, exterior upkeep, building maintenance, rehabs, renovation, etc. etc. It is a pure "mailbox-money" opportunity.

I figured the acquisition of a single property (one is listed, a second similar property they would consider selling) putting 20 percent down, financing the balance for 20 years at 6 percent interest. Figuring the principal pay down, this property will throw off a 19.3 percent annual return from a buyer's initial $100,000 out-of-pocket investment. With the bank carrying the balance, it has rent bumps built in every five years for the next 15 years.

With the cash it throws off annually, after a couple short years there will be enough cash built up to use as down payment on another commercial/investment property.

This property I have discussed will likely go into contract this weekend. I ran it by two of my buyers and both passed for different reasons. One had a question on the scheduled rent hikes, a second has made two other large acquisitions in the past 90 days and needs to get those under his belt before taking on more. A third buyer is evaluating the package I put together right now and will let me know within an hour or two. But each buyer agreed that this opportunity is a no brainer.

Let me share how one of the packages I put together was structured. There is a second NNN property in the same vicinity. Same ownership and same tenant. The package I created included both properties, totalling around $1.2 million. The seller wants to close prior to December 31 (thats 17 days away boys and girls). So that makes this an all cash deal since there isn't enough time to close a commercial loan from a bank. The buyer would put down around $400,000, then obtain a 30-60 day hard money loan from a private lender via a third party investment intermediary with whom I have worked in the past. The short term loan gives the buyers an opportunity to get conventional financing but not lose the deal due to the time constraints of the seller.

The point is that anything is possible. This was one of those opportunities that comes along from time to time and you need to act quickly. But if it is not to your comfort level, that is okay too. Still, with risk comes reward (Wendy's Dave Thomas told me that when I interviewed him for a newspaper story back in the 1980s).

As I have noted in previous blog posts this year, the keys to getting deals done in this business climate is to be creative. And you have to be able to make a fast (but smart) decision. The straight purchase -- without some hair on it -- is a rare bird these days. I intend to write more about unusual purchase opportunities in the weeks and months to come. Lots on my mine as we head into the holidays and things slow just a little. It is giving me a chance to think some more on items about which I plan to write in early 2011.

Enjoy your weekend!

Friday, December 3, 2010

Capital Gains Taxes Are Going Up!

In case you were not aware, capital gains taxes are going up starting January 1, 2011.

A lot of investors are shedding some properties now in hopes of closes before the end of the year to avoid the tax hike.

No one likes taxes, particularly those folks who create jobs and provide space for employers and decent housing where people can live.

No comments from me on this. I would just go on and on and on.... Read it here.

Thursday, December 2, 2010

Ugliest Building In NYC For Sale

Originally built in the 1970s as a telephone switching station, this concrete skyscraper at 375 Pearl Street in New York City is considered by most in the city as an absolute eyesore. True, its not falling apart. Nor is it rat infested. And it isn't covered with graffitti.

But it is one, very tall, 32-stories tall in fact, long piece of concrete with no similarly towering neighbors to hide it. And it gets in the way of panoramic photographs of the Brooklyn Bridge.

Today it is an empty, giant Verizon billboard. But someone will buy it.... if the numbers work.

It ain't about how it looks (though curb appeal is important with any property). With commercial/investment properties, it is about the numbers.

Read about it yourself by clicking here. Is it really THAT ugly???? The things that make you go hmmm . . .

Wednesday, December 1, 2010

More About Blue Rock Realty Advisors

As I mentioned in an earlier post, I have joined with two colleagues at PCRE, Jack Turner and Greg Will, to form Blue Rock Realty Advisors.

Blue Rock Realty Advisers is a brokerage and marketing organization focused on servicing owners and investors in institutional grade commercial real estate. Specifically, we will provide a full range of services -- asset management; brokerage in buying, selling and leasing of commercial properties; financial arrangements; real estate development; consulting; and property management.

This is a dynamic time for the commercial property marketplace. REITs are coming back into the market with increasingly frequency, lenders are shedding properties (some are problems, some are not) they don't want on the books, and 2011 looks to be a banner year for investors as product that is stable, or has been stabilized being snapped up. As I noted in earlier posts, investors are coming out of the woodwork with cash. But they still want product that makes sense. Whether $5 million or $25 million, the numbers have to jive.

Which is why we formed Blue Rock Realty Advisors. While all of our clients routinely receive first-rate service, institutional grade properties often require a different approach. Consultative, analytical, results-oriented. That is our philosophy for success.

Because results matter .....

If You Like It, ACT!

If you find a commercial/investment property, and you like it, and you've analyzed it and financially it makes sense, REAL SENSE, please read the following carefully:

Think about an 11th Commandment .... "Do not steal in slow motion. If the price is right you have to act quickly!"

Now, you notice I used the word "steal." That is a word used as a euphamism to reflect getting a real deal, price-wise, on a property. But if you think its a steal, chances are other people think the same.

If you snooze, you lose. If you wait, it will be too late.

Just something to think about on a cold snowy morning (at least here in Ohio)......

Tuesday, November 30, 2010

Ignore Our Dust

Please ignore our dust here at Cash On Cash, but we are doing some site maintenance, updating some sections of the blog, and doing some modifications to the layout and color scheme. Why do I mention this? Because it might look a little different from day to day.

Same great info, but with an updated look. That is my hope. I haven't given the site a facelift since CoC when on the air in 2006. I thought it was time for an update....

So please come back often. But bear with my construction.

Hardhats are optional....

Monday, November 29, 2010

Market Volatility May Be The Watchword (For A While)

The market goes up, the market goes down.

And we're not just talking about stocks, but some commercial real estate values. Generally, we are seeing improvements in values across the board, but is it a pattern? The jury is out on that just yet...

There were gains in reported commercial real estate prices in September in Moody's, and in October in Real Capital Analytics. Specifically, the Moody's REAL Commercial Property Price Indices increased 4.3 percent in September, the largest gain in the history of the CPPI, according to Globe Street news service in interviews with industry gurus. Ironically, the previous month's report noted that commercial property prices slipped to their lowest levels in 10 months.

All this just further illustrates the volatility brokers and investors face.

For the full story at Globe Street, click here. All in all it is an interesting overview, showing declines in multi=unit housing in the Top 10 MSAs. Yet office is up and industrial slipped hard. In Central Ohio, industrial -- while hard hit earlier -- seems to be climbing back, office is stable and retail is improving. And MUH? Well in this area, except for distressed B & C properties, apartments have stayed very stable and even strengthened in value.

It just goes to show that national stats cannot be applied to local or even regional trends. Columbus is not Las Vegas is not Cleveland is not Fort Myers is not Austin is not Los Angeles ..... and so on. Nevertheless, we still have some volatility ahead, and the question of whether lenders will dump commercial properties still is top of mind. Conventional wisdom says we will see a tsunami of sorts with commercial being dumped on the market in 2011.

Time will tell.....

Wednesday, November 24, 2010

A Look Back, And Ahead....

A good time to review fundamentals, where we've been, and where we are going.....

A Tale Of Two Properties

Okay, this has nothing to do with investment real estate but I found it worth passing along.

I came across a great piece today about home sales. And the question asked was, and I am paraphrasing here, "what would you think is the most expensive home on the market in the U.S.?"

If you guessed it is in California you would be right. But it is not Candy Spelling's sprawling property -- a spacious 55,000+ square feet -- listed for a cool $140 million. That comes out to $2,700 per square foot.

No, based on square footage, the most expensive home is a beach "shack" in Carpinteria, Calif. The cozy 641 square foot cottage is listed for $5.3 million. But on a square footage basis, get ready, it is priced at around $7,000.

What makes this place so special? Well, it has an ocean view. And then that's about it. There is the sound of rushing traffic nearby. About the only people around are surfers, and there is no significant acreage that goes with it.

Click here for more on a tale of two properties. An interesting look at two very different properties.

No takers for either property yet.....

Seriously, the small home phenomenon continues to grow. I recently sat in on a presentation by a representative of a company that manufactures small homes -- Eco-Cottages they are called. I can't help but see one sitting on a piece of remote real estate my family owns. About 550 square feet, heavily insulated to keep it warm during bitter Midwest winters, but covered in windows so that the occupant can feel they are a part of nature, and not secluded from it.

I am partial to the Palmeco model. I can envision it nestled against the Knob Hill of a certain farm on a snowy day....

Monday, November 22, 2010

Rock Steady Growth Recognized At Industry Leading Publication

Commercial Property Executive, sort of the bible of publications for owners and managers of institutional-grade commercial properties, has as its cover story this month a rock solid piece on the head of our sister company, Prudential Mortgage Capital.

During the past several years, PMC has been climbing the Mortgage Banker's Association's annual ranking of commercial real estate loan originators. According to the publication, the company stood in sixth place in 2009, up from 15th in 2007. At midyear this year, Prudential Mortgage Capital had originated close to $3.76 billion in commercial property loans.

David Twardock, Prudential Mortgage Capital president, is optimistic about the industry. His hallmark has been taking the initiative -- and NOT playing defense. He has forged relationships with Prudential Real Estate Investors, another sister company. From the outside looking in, one might think that all of our groups work together. But historically, they have not. Similarly, we at Blue Rock Realty Advisors also are forging relationships of this type, both with PMC and PREI. That synergy makes a difference, and PMC is a leader with whom it makes sense to do business. And Twardock's creativity is forging numerous possibilities. The company's growth has been steady through both good and bad times.

The article is a good read, and worth taking the time to look at. I have established a link to the site here.

Investment sales are up, the Fed is working to keep interest rates low -- something that historically has favored commercial real estate. Twardock's philosophy is that of being a team player. The article is largely a profile of his career and how he has steered PMC to its current level.

Team. That means something in today's commercial investment property business. It has long been my philosophy, and it is the backbone of most successful brokers, owners and property managers, alike. And trust. Twardock notes that to earn trust you must have a solid communication plan that you follow, not just talk about.

Says he: "You have to lay out the issues, lay out what you are going to do about it and tell them where you're going next."

I couldn't agree more.

Wednesday, November 17, 2010

Kudos To PCRE Columbus

Columbus CEO magazine, the monthly glossy magazine covering business news from throughout Central Ohio has named Prudential Commercial Real Estate as the Best Real Estate Brokerage (Commercial) for 2010.

It is all part of Columbus CEO's "Best of Business" roundup for 2010.

Kudos to the team, and thanks to the editors at the magazine for the recognition!

Very nice.

Monday, November 15, 2010

A New Venture -- Blue Rock Realty Advisors

Recently, two colleagues and I at our Prudential Commercial office have established a new venture -- Blue Rock Realty Advisors.

Jack Turner, Greg Will and I are targeting larger projects -- $5 million and above office buildings, retail centers, etc. We currently are working on jump-starting a stalled $100 million development project in Central Ohio.

Turner has a wealth of retail and multifamily housing development background, and is a commercial specialist with Pru Commercial Columbus. Greg is Pru Columbus' director of property management, coordinating all property oversight initiatives for our property management clients. Greg has many years experience as multi-unit housing and senior housing finance director and liaison for syndications funded by pensions and REITs.

A strong team to be sure. We will have more to say in the near future. But for now we are busy laying the groundwork for some high-end projects that, I am sure, will be noteworthy in the coming months and years.

Thursday, November 11, 2010

Happy Veteran's Day!

I am sitting in my Columbus Real Estate Exchangors (CREE) meeting as I write this, and we just had a nice tribute to our military veterans on this Veteran's Day. My dad was a vet, gone now 17 years. One of the "greatest generation" who never talked about his experiences when he came back from the Pacific Theater of operations during WW2.

Thank you, veterans, for your service to our country!

Monday, October 25, 2010

It's About Freaking Time!

I have been down on the market occasionally, but mostly over earlier fundamentals. But I am bullish generally on commercial/investment real estate and have stated over and over that the multifamily sector is far stronger than most people realize. And things continue to improve in most markets.

So it comes witih great exuberation that I report I AM NOT THE ONLY ONE WHO KNOWS THIS!!!!

A the recent RealShare Apartments 2010 conference last Thursday in Los Angeles, the consensus of the leaders panel was the following: The industry's greatest problem these days isn't the slow economy or the lack of movement, it is the pervading sense of negativity among market participants.


Said one participants, and I am paraphrasing, we are so busy looking for negatives we forget to notice the wind at our backs.

No kidding! For those agencies and brokerages that are willing to change the way they work to take into account "the new normal" there are opportunities galore. Said another, "We whine too much about the economy. The psychology is more negative today than it ought to be." Further the panelists indicated that while some markets are oversupplied, many more are experiencing high sales prices for multifamily projects with fairly low cap rates. So low that development of new properties would be a better option.

So sayeth, officially, the story detailing the Leader Panel discussion as published today over at Globe Street.

For the full story, click here. Worth reading.

Tuesday, October 5, 2010

Capital Allocation Wheels Starting To Move?

The PREA (Pension Real Estate Association) national meetings are this week in San Francisco. It is a fascinating meeting to attend, but I have been tied up with more pressing appointments this week. Hopefully next year.

However, a colleague in the industry, Tony LoPinto, attended and had a very telling observation, which was published at Globe Street yesterday.

He wrote the following: "There is a significant turnout, with a strong contingent of plan sponsors. There are always plenty of investment managers, advisers and 'service providers,' but the likes of the pension funds, endowments and other institutional investors have not been out and about at these conferences. Their presence implies that we are at the front end of the next cycle as capital begins to recognize that it needs to get invested, albeit, there is still some concern about where this market is going. However, of greater interest are which managers will get the nod for the next round of allocations. Will the plans dole out second chances or look to platforms that have retooled and positioned a new team on the bench, or an emerging manager. In my experience, memories are short and once we get through the first stage of renewed investment activity, all the old names will be back in the game with plenty of capital. It happens with every cycle."

These observations need to be processed and considered. LoPinto knows of what he speaks. He is a senior client partner and head of Korn/Ferry International's Real Estate Practice. There is no question the many facets of commercial/investment real estate have short memories. It usually just comes down to opportunity and anticipate returns.

The best news, however, is that capital is looking for a home. And that institutional investors are sniffing around for opportunities. If its happening in the pension world, it is happening elsewhere, too.

Thursday, August 12, 2010

Prudential Quarterly Update on Commercial Real Estate

Prudential is out with its quarterly update on commercial real estate. There is some good news. Values have increased -- in some cases with dramatic spikes -- capital markets are slowly starting to open up and volume is gaining.

All is wonderful, right?

But (and it's a BIG but...), fundamentals are more than broken (still), and job growth is anemic. In fact with the stats out this week, there is no job growth.

Here is a link to the report. Worth reading.

Sunday, July 11, 2010

Sam Zell Says Be 'Bullish' On CRE

Commercial real estate has been hammered in recent months, but billionaire real estate mogul Sam Zell says it could be a lot worse, and he doesn't think it will implode as did the residential market.

He says that commercial real estate is in measurably better condition than conventional wisdom has dictated. Commenting on remarks that CRE will be the next shoe to drop, Zell told CNBC, "Well it ain't dropped yet and I don't think its gonna."

I'm not as optimistic as Mr. Zell, but he is a long-time investment watcher worth listening to. I totally agree with his assessment of the following: Commercial, unlike residential, was not an oversupply situation. It was a climate where there was a sudden reduction in demand. Specifically, as the economy contracted, businesses scaled back either in part, or more dramatically. This created increased vacancies and soft demand in most sectors. Hampering recovery is the fact that banks are not doing much commercial lending, either out of irrational, outright fear, or their business model is focused elsewhere for the time being.

But as the economy improves, Zell contents, the fact that we are not adding new apartment complexes, we are not adding new retail centers, we are not adding new industrial facilities, etc. will lead to space shortfalls in the coming years once the economy comes roaring back.

It is a buyers' market right now in all sectors. As for growth, about the only area that is growing is medical/office development. Pretty much all else is stagnant as far as growth goes. I'm of the opinion things are going to get a bit worse in CRE before they get better. Zell says it will only get better.

Time will tell.

Friday, July 9, 2010

New Accounting Rules To Turn Leasing Market Upside Down

Heard about the new accounting rules as they apply to commercial leases?

Your accountant may or may not have, BUT the new standard taking shape could change the way tenants choose to lease space. Further, there are broad implications for the commercial real estate market.

The Financial Accounting Standards Board, which sets American standards, has been working with the International Accounting Standards Board to merge its generally accepted accounting principles (GAAP) with international standards. No big deal you might think. At issue is a major piece of the puzzle -- the accounting for leases.

The two boards have come up with a new standard that will be enacted in 2013 that, and here is the part to which you should pay attention, will require companies to book leases as assets and liabilities on their balance sheets. Under current accounting rules, American and internationally based companies list many leases as footnotes in their financial statements. The result? Public companies will have to put an estimated $1.3 trillion in leases on their balance sheets, according to estimates by the Securities and Exchange Commission.

Because many private companies also follow GAAP accounting, the number could be closer to $2 trillion, according to experts quoted by the New York Times.

Simply put, public companies will suddenly have to record much higher rent, and will have to record this as a significant liability on their balance sheets. And, according to the proposed rules, there will be no grandfathering clause when the new standard goes into effect so active leases will have to be recorded on the balance sheet. Further, companies will record as a liability the cost of rent over the remaining term of the lease and record as an asset their right to use the space.


The implications are many and are still being debated. Some companies could become more weak in the eyes of investors, which could activate debt covenants with lenders. This situation could impact credit ratings. Interestingly, ratings agencies say they already take into consideration rent obligations. But the new standard requires additional disclosures that might well shed new light on lease terms.

Accounting for existing leases and lease renewals will also create a new set of problems. If there is a 10-year lease, the rules will require putting twice as much debt on the balance sheet as a five-year lease, so companies may elect to go with a short-term commitment. On renewals it becomes more complicated. Many firms sign leases with renewal terms, such as a 10-year commitment with an option to renew for another five years. Under the new standard, if the company is likely to exercise its option to renew, it must account fo rthe lease as it it were actually 15 years. Which means adding more debt to the balance sheet.

Doesn't sound good for lease renewal options does it?

And retailers with leases that state they owe a percentage of sales to the landlord would have to estimate their sales numbers over the entire term of the lease to book it on the balance sheet. Retail experts say this looming paperwork blizzard is causing some serious panic in retail boardroom these days. As if how to get more people to buy more stuff wasn't enough of a challenge.

The purpose of the change is to stop "significant off-balance-sheet activity for leases," said Russell G. Golden, technical director for FASB in an interview with the Times.

Mostly likely to be affected? I am thinking it will be companies that already have heavy, heavy debt loads and are in a struggle, as well as large retailers that have thousands of leases. Further, some experts believe commercial banks with multiple branches may also be hard hit when the rules roll out in 2013. And it is no secret that many financial institutions are still reeling from the economic problems the U.S. currently faces.

To the good, the new rules allow companies that lease space to assume that they are buying the right to use the space for a certain period of time. While firms will record their rent as a major liability at the start of the lease, over time they will eventually reduce this debt over the term of the lease.

No matter what you think of it, most experts call this a looming administrative nightmare. We will see . . .

Monday, July 5, 2010

When Everyone Is 'Licensed'

Much happening in the world of commercial real estate these days. Banks either won't -- or are afraid -- to lend money.

Creative, out-of-the box thinking is the only thing getting deals done these days. Often such transactions include private money -- investments from so-called "hard money lenders."

And now the Obama administration has decided it doesn't like that.

In new draft legislation that is part of the bank reform/financial overhaul bill there is language that will continue to kill commercial/investment real estate business. Never mind the White House says it wants to spur economic development, the children overseeing financial affairs either are the Marxists their political opponents claim, or they haven't a clue about the way business works.

Spend out way out of a recession? The rest of the world isn't following that lead, and rightfully so.

But now out of the box come two huge blunders, in my expert opinion. One, I will write on in a later post involves new regs instituted by Fannie Mae and Freddie Mac back in February, dealing with reverse mortgages and what could be the death-nell of the re-sale condo market due to the brilliant strategies of Team Geitner (that would be U.S. Treasury Secretary Geitner).

Front and center in today's essay are the proposed restrictions against hard money lending. Specifically, the attempt to quash creativity that may well be the only thing getting any commercial deals done these days. I'm talking about proposed rules that will restrict the number of private loans an individual may make on real estate. Specifically, the documents I have read limit such transactions to one every three years. Any more than that and the individual making the loan needs to acquire a mortgage broker's license.

All in the name of protecting consumers. The only thing worse would be to revive the Clinton-era mantra of "it's for the children." Only that's not too far from the truth. The Obama administration thinks of consumers, and the electorate, as uneducated children who must be spoon-fed and sheltered, lest they skin their collective knees.

Talk about your unintended consequences.

If things weren't already bad enough, these proposals by the Obama administration will go far toward ensuring more bankruptcies and foreclosures as one of the only sources for funding for commercial transactions will be effectively prohibited from making common-sense loans to purchasers of commercial property who are in every sense good risks. For, in case you didn't know it, most banks that used to do commercial loans are scared of their own shadows, or live in fear of the U.S. Treasury, unrealistic expectations and formulas for loan-loss reservers, etc. So they are calling in their loans and not making any new ones.

But thats just my opinion. I will link to this post in a day or two with documents illustrating the government's position on regulation. Seriously, I cannot for the life of me understand why the arbiters of power and control, who say they want to be transparent, are so damned hell on "licensing" everyone. Oh yeah...wait, its that "control" thing.

Like licensed mortgage brokers had nothing to do with the real estate collapse that started a couple years ago? As John Stossell would say, "Give me a break!"

More to come.........

Sunday, March 28, 2010

Busman's Holiday Questions Unearth News, Insight

On the road, I can't help but nosing into local real estate wherever I go.

Right now I am in SW Florida on some family business, but while here I have been in touch with a number of people, getting caught up on the latest sats regarding regional and local real estate trends.

Garren Grup, a good friend I made last year and colleague in the business, had some good news regarding values in the Lee and Collier County areas. Specifically that the two counties are the fastest growing counties in all of Florida regarding business (and real estate) recovery. But my guess is it is coming back fast because these two counties likely fell harder and sharper than any other counties in the Sunshine State.

There are still many, many MANY vacant, brand new strip retail centers in many areas I have driven. Also it isn't hard to find commercial buildings where work suddenly stopped last year (or before. On the housing front, there is hope that values here have reached bottom and may be on the way up, albeit slowly. Interestingly, word is that most of the foreclosures in these two counties occurred in Lehigh (in Lee County) and in Golden Gate Estates (in Collier County). So there are significant values there for investors who want to jump into the single family housing rental market.

Along Vanderbilt Beach where I am staying there are many condo units for sale. I was amazed, frankly, at how many were listed in one particular building where my family used to own. The number is staggering and the word is "make an offer." West of U.S. 41 values have been hurt, but families are not as likely to have been forced into foreclosure. East of U.S. 41, it is another matter, according to Garren and others.

And therein lies the potential. When you are in a market that has been hit hard, the question becomes when to jump back in. And how long will the recovery last...or even how strong will it be?

A half dozen years ago the play was one of leverage. Buy smart with cheap money. No money down if you can get it. True, there were those who jumped into no money down deals, or interest only transactions, but they often paid full price because they didn't know what they were doing. Those folks got burned as their notes were converted or as values fell. But those folks who bought right (at a smart price) AND leveraged are in a stronger position today.

Today, the leverage opportunity is harder to come by. Today it is all about buying distressed properties, stabilizing them, and holding them to appreciate. Its what we call "a strong upside." Many opportunities here. I'm heading out to some multifamily open houses this afternoon. It should be interesting.

More to come....

Tuesday, March 23, 2010

Headed To Regional Blue Rock Commercial RE Meeting

Its time for our twice annual regional network meeting of Prudential Commercial Real Estate agents who are part of the Blue Rock Midwest network. Agents from three states converging in western Ohio to share best practices, network and do some out-of-the-box thinking and problem solving.

It will be a change for me this week. I am not speaking at this meeting and it will be nice . . . oh so nice . . . to not have to worry about times, or tech setups, etc. I just get to sit back and soak it all in.

I'll likely have some things to write about, so stay tuned!

Monday, March 8, 2010

Cross-Cultural Mutual Benefits

When we talk about use of self directed IRAs to fund real estate transactions, as I have mentioned in a couple of earlier posts you don't have to be purchasing the real estate yourself. You can be a hard money lender to someone looking at alternative financing programs to get a project jump started.

But even an outright purchase of a property by an investor using their SDIRA funds can be turned into a "mailbox money" situation. That is, where the owner is truly a passive investor and receives checks monthly from another party. This is increasingly a way for people from different cultures to mutually benefit, depending on how the deal is structured.

Let me give you a very real example.

All over the United States, refugees from Somalia have immigrated, adding a rich new culture to our existing melting pot. Some somali immigrants have money to invest in projects, others do not. Some came for a better life. Some escaped war and famine and are hoping for something better in the United States. A place where hard work and dreams can be turned into something very special.

Somalis, because of their moslem faith, do not and cannot pay bank interest on loans. It would be a violation of their religion to do so. Therefore, they don't qualify for traditional bank lending programs.

A way around this that benefits both the somali entrepreneur/investor, and someone with SDIRA monies -- or someone using traditional financial means to purchase a commercial/investment building operates as follows:

- The traditional investor uses private funds, or a bank loan, or SDIRA monies to purchase a building.
- A somali entrepreneur/investor buys it on a land contract from the new owner. The new owner is, in effect, the bank. The entrepreneur/investor makes monthly payments for the building and is responsible for all costs -- insurance, property taxes, all utilities, interior and exterior maintenance, maintenance of drive/parking lot, etc. Factored into the monthly payment is the monthly principal AND the interest on the loan as granted by the traditional investor (from Point 1) who bought the building. Only "interest" is never mentioned in the document. That money is incorporated into the monthly payment.

All sides win. The person who bought the building is acting as the bank, and the "New American" entrepreneur can fill the building with tenants, manage it, and ultimately own it when the land contract is paid off. In Ohio, land contracts usually are paid off in just under five years. The risk to the traditional investor is mitigated by being able to take the building back if the entrepreneur/investor misses any payments.

There are many opportunities like this out there these days. It takes thinking creatively, and cash on cash returns can easily approach or exceed 20 percent, depending on the project. Here in this office, one of my colleagues is doing quite a bit of work in the somali community, and pairing individual investors with immigrant entrepreneur/investors who can benefit from each other's knowledge, enthusiasm, access to capital, and access to a community of potential lessees.

It just takes a little big of out of the box thinking.

Sunday, March 7, 2010

Government Trying To Help Commercial Sector, But . . .

An incredible dynamic is now occurring within real estate. As many writers and market watchers have observed, and we practitioners are living, credit markets and politics are impacting commercial real estate far more than market forces these days.

The Term Asset-Backed Securities Loan Facility -- better known as TALF -- was designed to help the residential market by helping market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities collateralized by student loans, auto loans, credit card loans, and SBA guaranteed loans. As a result, the various Federal Reserve banks lent more money to banks, so that they could lend more money for real estate transactions.

Today, while it did bring some credit spreads in to help commercial transactions a bit, it did not do much. In this writer's humble opinion, another government program that got in the way. What Washington really needs to do is get out of the way, in my opinion.

What will make keep commercial/investment real estate healthy is less intervention by federal officials. Already we are seeing monkeying around taking place with loan loss reserves at other wise healthy financial institutions. This pressure, in turn, puts pressure on borrowers. Not just future borrowers, but those who already have loans outstanding.

Residential real estate appears to be bottoming out. But what is to happen with the commercial/investment sector remains to be seen. Everyone says the big turnaround for commercial real estate will be in 2011. I am thinking 2012 but who knows. Still, it is a good time to buy. Money is cheap (for now) and manyh distressed properties are out there waiting for a good owner and good management.

Just some thoughts on a Sunday.

Monday, March 1, 2010

When You Don't Know What You Don't Know

I like to think I am a pretty smart guy. Well schooled in a number of disciplines, self taught in many others. I am routinely looking to try new things, go on new adventures.

But I also know what I am not. I am not an attorney, though I know many things an attorney might recommend. I am not an accountant, but do know many things (though not all) that a CPA might recommend.

With that said, however, I am the first one to tell you I don't know what I don't know.

I was reading a story in a local commercial newspaper this afternoon, and learned that law firms are facing issues with clients coming in who have tried the "do-it-yourself" legal route and created bigger problems than that with which they started. With the advent of the net, and big box stores, people can do almost anything themselves. But can they do it well? There is a classic line from the first Jurassic Park movie, where actor Jeff Goldblum's character asks rhetorically (and I am paraphrasing here...), "While all your scientists were running around asking themselves whether they could grow dinosaurs, did anyone ever ask ' should we?' "

The same can be said of all the do-it-yourselfers running around selling self-help books and DVDs telling people to go out and jump into real estate. Sure, you can file your own legal forms with something you find on the internet, and you can try to write your own sales contract, but should you? Now, I am one saying the same thing, but with a caveat. GET SOME PROFESSIONAL COUNSEL when you are doing so. Did you feel like I was shouting with that last sentence? I was. For too many people are getting themselves into trouble buying investment properties -- usually single family houses -- because they don't know what they don't know.

As noted above, the legal profession is facing the same challenge. Many people come in to an attorney asking for help to "fix" a problem that the individual thought they could handle on their own, either with advice from the uncle who is a retired lawyer, or with some downloadable forms. I know plumbers who are making a fortune from the calls they take, often from a wife, asking the plumber how soon they can come out to the house to "fix" the do-it-yourself project that the husband started after a trip to a big box (either orange or blue) hardware store.

But the advice to get a seasoned commercial/investment real estate agent working on your behalf -- usually at no cost to the buyer/investor -- goes for commercial buildings and other investment properties, as well.

Obviously, some will say I have a bias as I am a commercial/investment Realtor. True that. But I know companies that outsource their payroll, outsource their marketing, outsource other HR tasks, and outsource their transportation for their hundreds of employees who travel tens of thousands of miles. I know one particular company that conducts inventory audits of retail chains. This company's philosophy is generally as follows: "We aren't a transportation firm, so we shouldn't own a fleet of cars. We are not an HR company, so we should not have such a department. We are not payroll experts, so we outsource that program. We are not marketers, we outsource our PR and marketing programs," . . . and so on. They do what they do extremely well, because it is the one thing they focus on.

There are individuals who understand real estate well enough that they write their own purchase or sales contracts. They know what they're doing. Another very large segment will always rely on experienced agents to do the legwork, negotiation and paperwork for them. But a vocal minority will go back and forth between using an agent, or doing it themselves, all the while touting how easy it is, and enticing others to jump in the water not having a clue what they are doing.

I think I have written in these pages before that I don't pretend to be an attorney, why should an attorney pretend to be a real estate agent. The same goes for accountants, or general contractors, and so on. It is understandable that people feel more empowered to "do it on their own." But then is it a good use of their time if much of what they are doing is spending time on the learning curve, when the better use of time would be to effectively review potential properties their agent has found for them.

Even more, how many budding real estate investors out there cal tell me right off (without looking it up) the meaning of :

- Leverage
- Cash on cash return
- Hard money
- Littoral
- Seasoned note
- Gross rent multiplier
- Brownfield economic development grant
- Non-recourse loan
- Deferred gain
- Capitalization rate
- Rescission
- Boot
- Joint tenancy
- Property syndication

These are just a few that came to mind as I was typing along here this evening. I have written in the past in this blog about the shows on cable television that hype flipping -- one of the ways people have lost a lot of money. You may as well blow it in Las Vegas, for it is in every sense of the word "gambling." Never mind the fact that the buyer is gaining none of the tax advantages of holding a property for investment. Nevertheless, I am encouraged by a new show I caught on one of the cable networks recently where an investor counsels people who have purchased a property on how to best get it ready for rent.

Recently on one show, the show host made recommendations that made a property owner's eyes bug out (figuratively, of course). The buyer/owner travels much of the time for work, and has little furniture in the large, two-story house he recently purchased. The owner wanted ideas on how to removate the partially finished basement into living quarters that he could rent to a tenant to help pay on his mortgage. I sat watching the TV and said out loud, "the guy is never there, he should live in the basement and rent out the first and second floors of his home." I sipped on my red wine while I waited for the results of the design the investor/host would unveil. Lo and behold, he said the same thing I did. Rent out the top two loors and renovate the basement into a beautiful apartment.

As I am chuckling about my clairvoyance (nah, just common sense), the owner was trying to figure out what to do, starting with picking his jaw up off the floor. The guy bought the house for purposes of an investment....he plans to move later but keep the place as a rental. So why not start now? It was so very far from his radar he was having a tough time processing the thought. Think about it...he could realize a far higher income from renters than he could by simply renting the basement.

Anyway, the reason for telling you this is because many people want to go the do-it-yourself route. Saving a buck? In this economy I get that. But for most buyers, there is no cost for using a real estate agent. For sellers, office, retail and industrial sales are off. You want someone who knows the ropes. I have a client that owns numerous retail strip centers around the Columbus area. He has tried to rent them himself, and he knows his stuff. But he doesn't have the "time" to deal with it. He asked me to list two of his retail lease spaces on the west side of the city last fall. They are both leased now. They had been empty since LAST winter. His family trust has income, and he is doing the things he wants to do.

Wrapping up, none of us knows what we don't know. You will find that the good commercial/investment agents have the hearts of teachers, not sales people. I want to help my clients succeed. Because it keeps them coming back. I have a couple of investor clients who are one what can best be described as a "one-a-year plan." That is, they are buying one commercial property every year. Every five to seven years, they are exchanging/selling these properties for something a bit larger, building equity and taking advantage of indefinite tax-deferral opportunities that have been in the U.S. tax code since the 1920s.

And they contract for my services because: A) It is not their specialty, B) It is not the highest and best use of their time, and C) They know that they don't know what they don't know.


Tuesday, February 23, 2010

Ohio Bankers League Economic Summit Answers Questions About Futures and Depth, Breadth of Recession

In case you wondered why this recession is taking so long to dig out of, its because the hole we have been in (collectively) is so much deeper and broader than anyone imagined.

Today, I was the guest at the Ohio Bankers League's 1st ever economic summit -- a one-day gathering of bank execs from around the state of Ohio who got together to hear news from the state department of development, and from a representative of the Federal Reserve of Cleveland.

The news? Consumer confidence is up. But then I got back to the office and read a news report that consumer confidence is at a 10 month low. Hmmm..... I think a lot of that has to do with the mixed signals coming out of Washington DC, attempts to hijack healthcare and institute what most thought was a dead cap and trade plan. People are holding onto their money, buying less, and less willing to commit to spend in the near future.

Also, we learned that unemployment was far higher this time around in Ohio and elsewhere than in previous recessions. The good news is that exports of U.S. good seems to be trending up, and banks have excess money in reserves. Bottom line they have money to lend. But the requirements for getting that loan are much tougher.

Actually, the requirements are like they used to be. Banks have gone back to what worked in the past, though some consumers and investors are frustrated.

Also on hand was the director of the Ohio department of development, who talked of monies available from the state for new business development.

A number of us at the table, guests of First Citizens National Bank, had the ear of two members of the Ohio House of Representatives. When asked what ideas we had for stimulating the economy, helping create jobs, etc., the conversation at the table became quite interesting and animated. We discussed everything from burdensome taxation (Ohio is one of the highest taxed states for business), to solor energy and the reluctance of big Ohio power companies to play ball on solar unless they have ownership of it, and how this author is torn because he feels that the market -- not politics -- should dictate how the economy recovers. And yet, using the solar and energy company example, huge numbers of private initiatives that truly WOULD create jobs are stifled because there is no incentive for the power companies to partner.

All in all a very good day. There may be some media coverage of this meeting and presentation. If so, I will link to it. If not, I will provide a more detailed write up with specifics given by the various speakers.

I couldn't help but smile when I heard the opening remarks of Ohio Bankers League President and CEO Mike Van Buskirk. He noted how it is not policy, but people who make the difference and make an economy grow. He pulled out some history notes to mention how one young Mr. Rockefeller was selling fruit, and doing okay, but in danger of losing his job, when he learned about oil from a friend. Van Buskirk also told the audience of how one young Thomas Edison, like Rockefeller a hard-working Ohioan, worked on the railroad, and had converted a car into a rolling laboratory for some of the things he was "curious" about. All well and good until the car one day exploded. After that he moved east and really got going with his research labs. And finally, the story was told of one Harvey Firestone, who worked for a Columbus company. But misfortune befell him, and he wandered up to Akron, Ohio to see if he could get work there. The rest is history.

All it takes is people who want to work, sweat, and make a difference. The key, in my mind, is making sure that government stays out of the way and lets market forces rebuild, or re-set the switch, if you will, on the economy. Recently two disastrous pieces of legislation (no I'm not talking about healthcare, or cap and trade, though those two definitely qualify) are being kicked around. One at the federal level and one right here in Columbus.

First, a bill in Congress would prohibit seller financing on a property unless the seller actually lives there, or is licensed as a mortgage provider/lender. Congress may as well kill most commercial real estate transactions if this ridiculous proposal passes. In this economic climate, the only way to move commerce -- and move property -- is to get creative. There are many lenders who are willing to "be the bank" on second mortgages for a buyer. These days, sellers have to be able to do something to help the buyer to buy! But not if Congress has its way.

And second, a proposal being tossed around by Columbus City Council would require the registration of "vacant" properties and a payment of a $100 filing fee. Is it about raising capital for the city. Well, yes. But moreover, the city is mistakenly confusing vacant properties (in investment real estate all properties go vacant at one time or another as one tenant moves out while another prepares to move in) with "abandoned and neglected" properties. There is a HUGE difference. Whether the city gets it, I don't know. There has been at least one public hearing on the matter, and Council heard about the hardships they are creating loud and clear. I am hoping they will revamp the proposal, which is mostly designed to deal with abandoned housing, and who is responsible for upkeep, as well as taxes.

We all have a long way to go. That was evident from the presentation today. But its do-able!

Wednesday, February 17, 2010

Interest Rates Are Now Ready To Start Creeping Up

The interest rate the Federal Reserve charges to lend money to banks has gone up.

The increase in the Federal Funds Rate is going to be passed along. Get ready . . .

Thursday, February 11, 2010

'Repurposing' Commercial Properties: The 'Wonderland' Example

The "WONDERland" development in Columbus is perfect example of how commercial properties can be "repurposed." That is, how properties built for one purpose can be re-used or renovated into a "higher and better use."

Click here to read more about this exciting development project just getting off the ground.

The vlog below is my take on the project.