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.
Sunday, July 11, 2010
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.
Confused?
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 . . .
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.
Confused?
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.........
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.........
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