Help for Commercial Real Estate in 3 Easy Pieces

April 30th, 2010

Help for Commercial Real Estate Investment in Three Easy Pieces

U.S. Real Estate Optimism Not Rooted in Fact

January 14th, 2011

The American entrepreneurial spirit is a wonderful thing, and for decades that “can-do” attitude has made the United States the leader in innovation and economic results. This outlook is also responsible for the fact that, each January, we witness a wave of optimism across America – bold confidence in the upcoming year that borders on giddiness.
Everyone in the real estate industry wants to believe good news, particularly now, as we begin a third year of depressed real estate conditions. But wanting something to be true doesn’t make it so, and as much as I dislike saying it, the recent optimism surrounding the real estate market is based more on hope than fact.
The facts reflect a national unemployment rate of 9.4% according to Trepp LLC [http://www.trepp.com] research. That number is alarming on its own, but when you isolate out the burgeoning employment created by government bureaucracies in Washington, D.C., one has to wonder how that number might grow. Real estate will not pickup in either residential or commercial properties unless and until substantial new jobs are created. So far this has not happened.
On the residential side, recent facts published by RealtyTrac [http://www.realtytrac.com] data service reveals that over one million homes were repossessed in 2010, an increase of 14% from 2009. Keep in mind that this number was reduced due to the stalled foreclosure proceedings in the last two months of 2010 resulting from the foreclosure document brouhaha. Last year set a record high for new bank-owned properties. Newly released year-end 2010 facts about real estate from the Federal Reserve Beige Book [http://www.federalreserve.gov/fomc/beigebook/2010] describe the real estate sector as sluggish overall, citing lack of employment growth and difficulty in obtaining credit as the two main impediments to improvement. Due largely to the decline in the real estate market, our states and municipalities are facing reduced revenue, and having to make strategic and severe cuts in spending. Furthermore, the FDIC reports that 157 banks failed in 2010 – 17 more than in 2009 – so even employed people will find it more difficult to buy a home, because their financing options are reduced.
For commercial real estate, 2010 facts provided little foundation for optimism, unless one of two things happened: you owned and sold an institution grade property in Washington DC or New York City, or an A or B multifamily property in a 24/7 city (this is where foreclosed homeowners and job-seekers are moving). It is true that transaction activity in 2010 for properties over $5 million increased 109% from the previous year, reaching $46 billion [Source: Real Capital Analytics], but those numbers must be kept in perspective. We were climbing out of a pit. Remember 2008, when the last quarter numbers were already depressed by the grinding recession? That year, transactions were at $154 billion. New commercial construction, according to the Federal Reserve’s latest Beige Book, is “subdued or slow” overall, indicating ongoing lack of demand and an inability to absorb existing vacant space. And, while there has been discussion of the potential for as much as $30-40 billion in new commercial mortgage backed security (CMBS) activity in 2011, issued by Wall Street firms like UBS AG (NYSE:UBS), Deutsche Bank (NYSE:DB) and JPMorgan Chase & Co (NYSE:JPM), the fact is that there is an estimated $49+ billion in CMBS loans coming up for refinancing in 2011. Data firm Trepp reported that December 2010 delinquency for CMBS reached a new height at 9.2%. Underwriting has tightened up and as a result, only the best, institutional grade real estate will qualify for new CMBS loans. That leaves the majority of commercial real estate searching in vain for refinancing.
2011 will see a small improvement in real estate markets, both residential and commercial, up from steep declines in previous years. However, words like “soar”, “blockbuster” and “turnaround year” – all from recent headlines – must be understood to reflect our need for good news, as well as the general spirit of entrepreneurship that exists here in America. Taking these banner exclamations at face value requires either collective amnesia or inking – and neither is good policy when it comes to investing your money.

Susan Lawrence is an inherently optimistic but practical real estate consultant and President of Real Estate Strategies, Inc. [ http://www.restrategies.net].

U.S. Real Estate Optimism Not Rooted in Fact

5 Property Management Tests for Commercial Real Estate Owners & Asset Managers

January 4th, 2011

Real Estate Tax Deferred Exchanges

March 30th, 2010

Real Estate Tax Deferred Exchange Basics

Got Dirt? Land as Investment – Part II

February 26th, 2010

Got Dirt? Land as Investment – Part II

In Part I we discussed the three main categories of land available now. In Part II we review the reasons land is attractive to investors and how you can estimate potential profit:
o Land that is purchased raw and then entitled has good potential for appreciation. Vocal environmental groups have made development more difficult and there are more costly hurdles in place to develop a parcel. The NIMBYs (not in my back yard) dominate development hearings. The end result of this is a diminished supply of entitled development land. When the construction industry resumes activity, demand for entitled land will resume with it.
o Land is simple to own. You don’t need leasing brokers, property managers, tenants, or a maintenance staff.
o The secret for buying land is relatively simple – follow the roads, airports and commuter rails. Roads are extended, widened, and new roads are built for a reason. With transportation an essential part of what makes land valuable, chances are that property located on or very near major transportation routes will be a good investment.
o Compared to developing buildings on land parcels (horizontal development), developing the land itself (called vertical development) is relatively inexpensive and less risky.
Land value is determined primarily by property zoning, the location of the property, and the condition of the land itself. Typically, land suitable for dense development (apartments, hotels, high-rise offices, etc) will command the highest prices. That is followed by retail, office and industrial zoning, with single family and agricultural at the lower end of the pricing range.

When estimating future value of the land, because there is a dearth of recent comparable land sales on which to base your estimate, you can use the “back door” approach to valuation often used by the developers who will be the buyers for vacant land. A pro forma is developed as though the planned development was already completed, and a projected net operating income (NOI) is estimated. By then applying an estimated market capitalization rate for that kind of building to the NOI, a value for the completely developed project is estimated. All hard and soft construction costs and the developer’s profit margin are deducted from this estimated value to arrive at the land value. Another way to estimate values is to go back and look at 2003-2005 closed transactions for similar land parcels. Those sales, because they are “pre-hyped up real estate market” pricing, are indicative of conservative estimates for future value.
Susan Lawrence is president of Real Estate Strategies, Inc. based in Winter Park, Florida. The company’s experts assist commercial real estate owners, trusts, lenders, private equity companies and foundations in evaluating and developing strategies for commercial real estate investments. Additional information on qualifications and services may be found by visiting www.restrategies.net.

Got Dirt? Land as Investment – Part I

February 26th, 2010

Got Dirt? Land as Investment – Part I

Many real estate investors have never considered land as an investment, but there are others who will not invest in anything else. Over previous decades, huge fortunes have been made by landowners. The question is whether land can be a profitable investment in these economically tough time, and the answer is a definitely yes.

There are several categories of land now available for investment at deeply discounted prices. It’s a veritable land smorgasbord out there.

Land investors are not the same as land speculators, who basically pursue a “buy and flip” strategy. It is the land speculators who bequeathed us the first category of available land. Between 2005 until mid-2007, the land flippers settled like kamikaze locusts over every available parcel, buying under the “greater fool” theory of investment and driving up land prices. These speculators were aided and abetted by local banks that failed to underwrite either the borrower’s capabilities or land value. As a result, there are numerous parcels of land now offered at deep discounts by desperate speculators or their lenders.

The second category of available land is the tracts that were purchased, and perhaps partially improved, by developers without the deep pockets needed to weather a down-turn. Many of these tracts have fundamentally sound development plans. You may have seen the developers thinly disguised pleas for help in advertisements seeking equity investors for a project. Those pleas for equity are often not successful; the developer is simply trying to hold on to his own equity investment and have some prospect for future return. Land investors can often buy the entire development tract at a bargain price.

The last category, often overlooked, is the land parcels where there is no financial pressure to sell. It could be surplus land owned by government entities, corporations, heirs or individuals. The owners just want to sell, and in order to compete with the land inventory dumped on the market by distressed loans or investors, and stalled developments, they have competitively priced the land. Sometimes, these sellers will even finance a purchase.

In the next post, I’ll offer some reasons that investors like buying land, and different ways of predicting land’s future value.

Susan Lawrence is president of Real Estate Strategies, Inc. based in Winter Park, Florida. The company’s experts assist commercial real estate owners, trusts, lenders, private equity companies and foundations in evaluating and developing strategies for commercial real estate investments. Additional information on qualifications and services may be found by visiting www.restrategies.net.

15% Capital Gains Tax Rate To Fade Into History

February 15th, 2010

Welcome to Real Estate Strategies, Inc. first blog.  We will blog tips and helpful information on our website dedicated to making ownership of commercial real estate less complicated and more profitable.

Let’s say you own commercial real estate that you have owned for five or more years and you want to sell it to fund retirement (or something else) using the profit from the sale.  But with the market so slow, a sale this year probably means a sizeable discount on your property’s value and hence, your profit.  So, you have been sitting on the sidelines.

Sales of most commercial real estate are subject to long term capital gains tax (tax on the profit made over the investment, or basis, in the property).If you have a low basis (the property cost plus acquisition expenses) in the real estate, it may make sense to sell in 2010.

Here’s why.  Although real estate lobbyists are trying hard to prevent it from happening, it is highly unlikely that Congress will allow the current 15% rate on gain on sale to remain in place when it expires on January 1, 2011. The sheer scale of our national debt indicates taxes of any sort will increase. The best we can hope for appears to be minimal (say 5%) annual increases in the capital gains tax rate until it gets close to 40%. If you wait until next year, you will likely pay the government at least 20% of your profits – maybe more.

Delaying your sale another year is a gamble on what Congress might do to capital gains rates (a bad gamble!) and on whether real estate valuations will increase in the near term (another bad gamble!).  Think long and hard about those gambles and whether they are worth the risk.

Susan Lawrence is president of Real Estate Strategies, Inc. based in Winter Park, Florida.  The company’s experts assist commercial real estate owners, trusts, lenders, private equity companies and foundations in evaluating and developing strategies for commercial real estate investments. Additional information on qualifications and services may be found by visiting www.restrategies.net.