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)......