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.........
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....
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!
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.
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.
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.
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