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!

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 . . .

'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.

Owner Pain = Tenant Gain

It has never been a better time to be a tenant. Assuming, that is, that your business is going well.

Commercial tenants are in the catbird seat, as my mother might have said, because they currently hold all the cards. Many building owners and management companies are facing economic struggles of their tenants, as well as their own. Keeping renters in office and warehouse buildings -- at a time when there is significant vacancy (depending on your geographic location) -- takes skill, creativity and an ability to think forward.

Many companies are in a tough time as sales are down, the economy is pretty rough, and the future is uncertain. As such, firms that have not closed may have downsized, and do not need as much space as they had previously. Building owners have had some tenant firms move for a better deal elsewhere, consolidate to fewer locations, or go out of business. The shedding of jobs, shelving of projects and hard look at space needs is creating opportunity for tenants.

Savvy tenants can capitalize on this recessionary period by taking advantage of attractive lease rates, thereby strengthening their long-term capital positions. End users increasingly are insisting upon the ability to audit leases as well as negotiate extensions and space give-backs, options that in the old days might have been categorized as "nice to haves" now being put in to the "must have" category.

Landlords increasingly are understanding this may be a long down cycle. And as they come under more lender pressure, there is more interest in coming up with flexible rent scenarios. In one case, I was at a meeting where a tenant -- another real estate company -- noted that the landlord came to them and asked if there was anything they could do to get them to stay, considering their lease was coming due. The real estate company said freeze rent for the next five years and to upgrade the offices. The landlord spent tens of thousands of dollars redecorating the offices.

If you are a tenant, you are in a stronger position to renegotiate the terms of your lease. If you have downsized and need less space, there is a lot of competitively priced space available. And this is in pretty much all parts of the U.S. But also, tenants should remember to keep in mind, or establish, worst case scenarios as they navigate this minefield. At issue, what to do in the unlikely event (though it is happening with with increasingly disturbing frequency) of the landlord turning the building over to the lender.

Of concern to building owners are new trends toward a more mobile workforce. Some companies are permanently shedding large office locations. In return they are utilizing smaller more flexible spaces where "road warriors" can come in, log on, hold a meeting, then move on.

It is a dynamic time for commercial/investment real estate. And for now, tenants can make themselves some incredible deals as building owners strive to be more creative and keep their occupancy rates high.

The Second Mortgage An Option In Tougher Times For Both Buyer, Seller

A lot of deals on commercial/investment properties of all sizes are including second mortgages these days. Why? Because there are fewer commercial lenders, and they are being tight-fisted about who they lend to.

They have that right. I wouldn't want to lend to anyone I didn't think was creditworthy, either. But the pendulum has swung too hard toward the "do not lend" side of the equation. As it sloooowwwwwwly moves back to the center, deals are getting done via other means.

The second mortgage, for example. And it benefits both buyers and sellers alike.

Here is the example. The seller carrys back a second mortgage for 10 to 20 percent of the purchase price, while the buyer obtains a new first mortgage. The buyer makes monthly or annual payments to the new mortgage company for the first, and a second payment to the seller for the second mortgage. Make sense? This approach makes it easier for the buyer to obtain a first mortgage, and the seller gets ongoing income in addition to the lump sum payment for the majority of the property.

In addition, there are "note brokerages" I have written about previously that have buyers for such private notes. In this case, the second mortgage is a note. You can sell the second mortgage to a third party at closing, or at some time in the future. The seller of the note would anticipate taking a much deeper discount on the second mortgage if they tried to sell it immediately. Unless it has "seasoned, the risk is higher for the purchaser of the second mortgage.

Just some points to consider as we hear from both buyers and sellers that they want to get deals done but cannot get banks to cooperate.

Are 'Sale-Leasebacks' The New Black?

Sale-leasebacks seem to be dominating commercial/investment real estate news these days.

Consider the following:

- HSBC Holdings -- the parent of mortgage giant HSBC -- is selling its New York City office tower for $330 million and leasing back space there.

- Retailer Tesco, the UK behemoth that owns stores around the globe, including the U.S., is conducting sale-leasebacks of a number of its stores.

Even government is getting into the act: The state of Arizona has approved a plan to auction its “State Capitol Executive Tower” in a 20 year sale-leaseback. The tower houses the offices of the secretary of state, state treasurer and governor and has an estimated value of $40 million. Why? The state's current budget shortfall, approximately $3.2 billion. Further, California has announced it plans to sell $2 billion (or 62% of Arizona’s budget deficit) worth of government real estate in a similar sale-leaseback. GlobeStreet.com reports that the City of Alexandria, VA, is contemplating a simliar plan with a large portfolio of its properties. In the Midwest, the city of Chicago has already made some moves. Several sale-leasebacks with the Skyway toll road, downtown parking garages and downtown parking meter system for $3 billion.

For investors, sale-leasebacks can be lucrative for both sides. They make sense for governments because they allow them to get cash now to pay off their debts while retaining the option to buy back the property in 20 years or so. Buyers like them (I have investors looking for buildings that house U.S. post offices) because the renters are the government (i.e. taxpayers), a tenant with a strong credit rating. In some cases, the return can be twice what the investor pays, say Globe Street analysts.

Interestingly, news reports also say international investors are "heavily intrigued" by these sale-leasebacks. This creates a bit of an irony, says Globe Street, because in theory, "you could have a U.S. State Capitol building owned by China."

Hmmmm.....

Shameless Self Promotion Follow Up

So here is the announcement that went out from the powers-that-be about my inclusion in a newly created Executive Advisory Council in the Prudential Commercial Columbus office.

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PRUDENTIAL COMMERCIAL REAL ESTATE ESTABLISHES COLUMBUS EXECUTIVE ADVISORY COUNCIL

(9/23/2009) COLUMBUS, Ohio – Prudential Commercial Real Estate today announced it has established a three-person Executive Advisory Council to oversee the activities of its Columbus, Ohio office.

“The Columbus office, with 21 agents, is one of the largest in our regional network,” says owner and managing broker David Mussari. “Agents Jack Turner, Tim Mehan and Brent Greer have emerged as office leaders, have proven track records, and provided wise counsel for the business on operations and personnel. These individuals will provide additional leadership to help guide our enterprise to the next level. I am extremely pleased with their selection and know they will provide outstanding counsel as we continue to grow our business.”

Turner, Mehan and Greer are charged with executing corporate directives within the office, working as a liaison with Blue Rock Midwest’s headquarters office in Cincinnati, helping manage and grow the office, allocating resources, helping resolve conflicts, and ensuring that Prudential Commercial remains compliant with real estate laws and company policy

Jack Turner is an investment and development specialist who chairs the Columbus office’s Investment Marketing Group. He has more than 35 years experience that runs the gamut: corporate real estate services: office, multi-family, retail and industrial properties, sale/leasebacks, buyer/tenant representations, market/feasibility analysis, and development services. Jack joined Prudential Commercial in 2008.

Tim Mehan has more than 30 years of comprehensive, in-depth experience in the real estate and development industry. His expertise covers site selection and acquisition, sales, leasing, contract negotiation and administration, budgets, cost containment, value engineering, contractor selection, compliance, zoning, and quality assurance. Tim is a Certified BOCA Inspector and an expert in energy efficient (green) buildings and energy efficient techniques. The chair of the Columbus office’s Industrial Marketing Group, Tim joined Prudential Commercial in 2008.

Brent Greer is a commercial/investment specialist with experience in multiple disciplines, but with particular emphasis on multifamily, office/retail and land. He is the immediate past president of Columbus Real Estate Exchangors (CREE), an organization of brokers and agents specializing in IRS 1031 tax-deferred exchanges, and sits on the City of Columbus Property Maintenance Appeals Board. Brent joined Prudential Commercial in 2006.

Prudential Commercial Real Estate is the fastest growing commercial network in the U.S., and a leading provider of commercial real estate services. Blue Rock Midwest has offices and agents in Columbus, Lancaster, Cincinnati, Dayton and Cleveland, Ohio, and in Lexington, Ky.

Visit the Prudential Columbus website at: http://www.prucomrecol.com/

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And so there it is. I'm honored to be one of three chosen by my peers to guide the office, and our continued growth.