No commercial real estate crash ahead, Zell says :: CHICAGO SUN-TIMES :: Business

No commercial real estate crash ahead, Zell says :: CHICAGO SUN-TIMES :: Business.

Lease Accounting Changes – be(a)ware!

Lease Accounting Changes – be(a)ware!
Did you know that FASB (financial accounting standards board) and its international equivalent (IASB), are considering major changes to the way corporations record operating leases on their books? If the proposed modifications are codified, all corporations will be forced to move real estate (and equipment) leases from “off balance sheet” on to their balance sheets. This has huge implications on the profitability, and hence the growth potential, for every public and private company that currently occupies their real estate using leases.

It is estimated that if all corporations are required to capitalize their leases, the sum total could be well in excess of $1.3 Trillion (a 2005 figure) and of that amount nearly $1 Trillion would be real estate leases.

It has been suggested that the changes are intended to improve the transparency, credibility and usefulness of lease accounting. Like with most things there is undoubtedly some truth in this reasoning, but I have my own theory as to what is may be driving the change…………a potential for increased tax revenue.

Currently an operating lease is 100% deductible against corporate earnings. If instead, the lease is moved on to the balance sheet and a portion of it is viewed as an asset it would be fair to assume that it increases the potential tax obligation of the corporation (or private owner).

Regardless of the ultimate motivation of those behind this proposed change, it is important that commercial real estate advisors make sure that their clients are fully aware of this development, and if possible, take the opportunity to weigh in on the subject while FASB (and IASB) are still considering the changes.

What Makes a CCIM so Special?

Why select a CCIM professional? Our office proudly carries 3 CCIMs(Ajay Babbar, Wendy Supino and Berlinte Sebali) and a few others currently working towards the designation. An advisor who holds the Certified Commercial Investment Member (CCIM) designation is a recognized expert in the disciplines of commercial and investment real estate. The coursework and requirements needed to fulfill the designation are rigorous and aren’t taken lightly. In fact, this designation is so respected, broker allies also pursue the program, including investment counselors, asset managers, appraisers, developers, attorneys and bankers world wide.

Proficiency In Theory And Practice

A CCIM is an invaluable resource to the commercial real estate owner, investor, and user, and is among an elite corps of more than 9,000 professionals who hold the CCIM designation across North America and more than 30 countries. Nearly 9,000 additional professionals are pursuing the CCIM designation. Since the CCIM program was created in 1969, more than 15,000 commercial real estate professionals earned the designation. CCIM Institute has taught more than 225,000 students since 1969.
Recognized for its preeminence within the industry, the CCIM curriculum represents the core knowledge expected of commercial investment practitioners, regardless of the diversity of specializations within the industry. The CCIM curriculum consists of four core courses that incorporate the essential CCIM skill sets: financial analysis, market analysis, user decision analysis, and investment analysis for commercial investment real estate. Additional curriculum requirements may be completed through CCIM elective courses, transfer credit for graduate education or professional recognition, and qualifying non-CCIM education. Following the course work, candidates must submit a portfolio of closed transactions and/or consultations showing a depth of experience in the commercial investment field. After fulfilling these requirements, candidates must successfully complete a comprehensive examination to earn the CCIM designation. This designation process ensures that CCIMs are proficient not only in theory, but also in practice.

With such a wide range of subjects to be mastered and in a dynamic business such as real estate, the educational process doesn’t end once the designation is earned; there is a strong commitment among CCIMs to continuing education.

Only 6 percent of the estimated 150,000 commercial real estate practitioners nationwide hold the CCIM designation, which reflects not only the caliber of the program, but also why it is one of the most coveted and respected designations in the industry. The CCIM membership network mirrors the increasingly changing nature of the industry and includes brokers, leasing professionals, investment counselors, asset managers, appraisers, corporate real estate executives, property managers, developers, institutional investors, commercial lenders, attorneys, bankers and other allied professionals. Through this business network, CCIM members successfully complete thousands of transactions annually, representing more than $200 billion in value.

Certified Commercial Investment Members are in more marketplaces in North America – 1,000 cities – than all major real estate companies combined. Regions and chapters provide designees and candidates the opportunities to promote business and educational goals through local and regional forums and meetings.

Miguel de Arcos of Lake Mary office with Florida Governor Crist

I had the chance to meet with Governor Crist who agreed that the lifeblood of the economy is small businesses. I shared with him the dilemma that a small business encounters when credit freezes the way it has the past 12 months and how the commercial real estate industry like so many is affected by the credit crunch. I must admit I was impressed that he took the time to listen and discuss the issues small businesses face in this current economy. He committed that he would work hard to ensure that their growth and success is fostered.

A Client’s Recognition

From time to time our client’s reach out to us unsolicited to share a positive experience they had with one of our Advisors. We would like to recognize Advisors Todd Haber and Jeff Henwood by posting the client’s comments below:

1.
“Please forward to whomever the powers that be in your company, my complete satisfaction with my broker, Todd Haber. On every occasion, and every instance, he has gone above and beyond the call of duty and demonstrated absolute professionalism throughout our business relationship. His caliber of professional is hard to come by these days, and I look forward to doing other business with him in the future as well. Thank you, L.R. Brand, M.S., P.T.C.A. Santizo, B.S., M.D.”

2.
Dear Jeff,
I must first convey to you that you are a person of service, and am so pleased to be working with you. you received my email and your execution was better than I have ever received from a broker so far. I commend you on same.
Thank you so much. regards,
Menchie’s Frozen Yogurt
Amit Kleinberger
CEO

3.
Dear Jeff,
I am honored to have met you, and think very highly of your business etiquette.
As CEO of Menchies, I commend you for doing a fantastic Job. THANK YOU.
Amit Kleinberger
Chief Executive Officer

Thank you Todd and Jeff for representing your client’s interests so well.

Tenants Are Back: Good Indicator The Economy Is Improving?

My office had 8 closings in September. All were transactions where our Advisors represented Tenants. Is this a sign the economy is improving?

As I examine the deals, all but one would be classified as small businesses and entrepreneurs occupying space under 10,000sf. The outlier was a Public company exercising a blend and extend(reduce the rate and extend the term significantly) of 46,000sf+. Last months stats were similar.

This is the sign I have been waiting for… I believe that the small business owners will pull us out of the slumping economy through innovation and their ability to be more nimble with the ebbs and flows of the market. When one large company crashes down, several entrepreneurs pop up in its place to plug the gaps in demand. Think about it this way, a small business that is in a growth pattern, producing jobs and demand for a product, will get bought up by a large conglomerate. Without small companies creating jobs and incomes, the large ones won’t have the fuel to grow and create jobs either. While large companies are still trying to get their overhead under control(layoffs, cutting inventory, reducing rent), small businesses are ramping up new product lines and hiring more strategically. The government should be spending more time with the millions of small business owners and less worrying about the next large firm to collapse.

If the small business movement is in fact going to pull us out of the economic mess like it did after the Great Depression, our government needs to cultivate their actions and job creation, not stifle it. Let the entrepreneurs save us once again and put America back to work by saying no to over regulation and taxation of small businesses.

Delay and Pray

So far, banks in general have been reluctant to take losses on their commercial books. This “delay and pray” strategy is preventing most banks from issuing new loans as they prepare their balance sheets for potential future losses, experts say. “Bank…s will eventually sell as they cannot extend into perpetuity and the chances that the market will rebound to their highs are unlikely anytime soon,” said Bart Steinfeld with JLL.

Commercial Loan Defaults Finally Getting Attention of Capitol Hill

http://globestcommercialgrove.wordpress.com/2009/09/03/heading-to-capitol-hill/#comment-498

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Late Summer Update

by Miguel de Arcos – Nearly a year has passed since the stock market crash of September, 2008. In spite of the recent bounce, stocks remain nearly 40% off their all-time highs. Single family housing prices, which also appear to be stabilizing, are down 20-30% in most markets. According to the S&P/Case-Shiller Home Price Index, home prices are down 33% from the peak in 2006 and are now at similar levels to where they were in 2003.

Just when we feel like maybe we can catch our breath and relax, we get hit with more dire predictions, this time concerning unemployment and commercial real estate. It’s like we’re living the economic equivalent of an Indiana Jones movie, dodging one perilous situation just in time to confront another, even more perilous problem.

For the last few months, the economic pundits have been repeating the talking points about how commercial real estate is “the next shoe to drop”. If you feel like the shoe has already dropped – and possibly landed painfully on your head – you may be correct. According to the “All Properties National Index” by Real Capital Analytics and the MIT Center for Real Estate, commercial values peaked in January of 2008 and have plummeted 29.5% since then.

Commercial values have returned to where they were in late 2004. The question, of course, is where will they go from here? Are commercial values going to stabilize like the stock market and home prices, or do we have further to fall?

The most notable characteristics of today’s commercial real estate market are 1) a paucity of transactions, 2) a growing amount of distressed assets and 3) difficulty obtaining financing. In 2007, office investment transactions averaged approximately $8 billion per month. So far this year, office sales have been averaging under $1 billion per month, or less than 13% of 2007 volume! Properties simply are not trading hands.

Meanwhile the list of distressed assets is soaring, led by hotels, retail and development sites. Real Capital Analytics’ “Troubled Assets Radar” has identified over $173 billion in distressed assets, the vast majority of which remain on the lenders’ books.

“Perhaps more alarming than the rapid growth in the distressed totals is the very modest rates at which troubled situations are being resolved. While $60.5B of troubled assets have been added YTD, just $4.1B have been resolved this year.”
- Real Capital Analytics

If nothing is being sold, then where is all the action? Apparently, investors are focusing their attention on buying paper rather than real assets. Interestingly,

“in the first quarter of 2009, the FDIC sold mortgage loans with a face value of $1.1B, recovering an average of 46% of par, with non-performers garnering 36% and performing loans achieving 52%.”
- Real Capital Analytics, FDIC

Likewise, special servicers have just begun the enormous task of liquidating CMBS loans and REO properties. According to Realpoint, special servicers succeeded in moving $220 million off the books through the first five months of 2009, with an average recovery rate of approximately 40% of par. Obviously, $220 million is just a drop in the bucket with a troubled asset total of $160 billion and growing.

With up to $200 billion in loans maturing this year, owners are confronting a hostile reality when looking to refinance. A combination of lower valuations and higher equity requirements leave owners with few attractive options. They can either scrape together additional equity, hand over the keys to the lender, or – what is happening most often – work out a short-term arrangement with the lender. This “extend and pretend” practice, though, is temporary and can only delay the inevitable for so long.

On the subject of CRE loans, their availability varies depending on property type. Investors can still get loans for existing multi-family properties, albeit with higher equity requirements and more conservative underwriting standards. Likewise, local banks still have a healthy appetite for owner-occupied real estate and, for smaller properties, the SBA is very active. But if you’re looking for a loan for a new hotel or speculative development, good luck.

The investment real estate market remains dominated by fear and expectations of continued erosion of values. Investors are waiting for blood to flow when the lenders finally face up to reality and move the assets off their books. Rising unemployment and an increase in bankruptcies – particularly among retailers – are taking their toll on fundamentals as vacancy rates have jumped dramatically and net operating income has fallen.

Am I suggesting that today’s investors take reckless steps? Of course not. But we should also remember that real estate is a long-term investment. Most investors have seven to ten-year hold periods, and it is not uncommon for properties to be held for twenty years or more. Concerns about short-term fluctuations in value should be kept in perspective.

Good opportunities exist today. Investors should not forego the chance to acquire solid, cash-flowing assets priced significantly below replacement cost simply because other properties are falling in value.

We cannot paint commercial real estate with one broad brush. Some properties may have already hit bottom, while others remain in free-fall. But it is important to recognize that quality properties with sound fundamentals will not erode in value in the same fashion as vacant or unimproved assets. A new Walgreen’s, for instance, is an entirely different animal from a vacant big-box store.

Investment advisors always stress the importance of “dollar cost averaging” and warn against trying to time the market. This advice applies equally to real estate as it does to stocks and bonds. The time is here for investors to cautiously start tip-toeing back into the market.

Group Investing is now Hip!

Group Investing is now Hip!
By Miguel de Arcos

I am so tired of reading and hearing the bad news in the industry of my passion – commercial real estate, that I’ve stopped talking to nay sayers and am taking proactive aggressive action. We all know values have tanked, but how can we personally take advantage and help our clients through the maze? Lenders are not any fun to deal with these days. Any type of what we used to consider reasonable leverage seems impossible. What precious stash of cash we do have, we are not willing to risk on one particular deal, so forget 50%-60% down and borrowing the balance with unreasonable terms and high closing costs. Success in commercial real estate investment is usually a matter of how fast you can adapt to changes that create opportunity. The only position to occupy in today’s market is that of buyer; a buyer with cash that can perform quickly. The answer lies not in borrowing to buy assets like in the past, but reversing the leverage scenario – yes, put in MORE cash. But diversification and partners is the key.

Group investing has been around a long time, but people moved away from it when money became so easy to borrow. The heck with borrowing from lenders, organize small groups and put a boatload of money down, if not pay all cash. Don’t put too much in any one deal and raise enough to weather any storm on the horizon. If you are going to capitalize on the market we find ourselves in right now – adapt! More cash, less leverage and keep it simple without depending on the future – buy based on, quality of the asset and location, cash flow and a low % of what it would cost to replace the structure. I’ve preached that quality; quantity and durability of the income stream are the three legs of any commercial real estate investment for years. It is never truer than now.

For an overview of group investing visit http://www.groupsponsor.com I have no affiliation whatsoever with Gene Trowbridge, CCIM but have used his material and known he and his organization for a few years. His information is a good place to start and your local Commercial Real Estate advisor; local legal counsel and accounting professionals are the next step. Good luck. Go slow be deliberate. As a friend of mine says – Pigs get fat and hogs get slaughtered.