NetLeaseNation.com

A Tax Tsunami

2010-09-01T08:30:00.001-07:00

As commercial real estate struggles to break through the economic quagmire, it must contend with a flurry of changes on the horizon. Specifically, changing capital gains tax rates, estate taxes, and FASB standards could heavily alter the landscape. Of course, they also may not. There is much uncertainty in the future and all we can really do is theorize.

Capital Gains Taxes

If the Bush tax cuts are allowed to expire (which all signs are pointing to) then the capital gains tax rate will increase from 15% this year to 20% in 2011. There are few things this rate change could induce. Investors may be more likely to cash out this year or consider continuing their investment via 1031 tax exchange.

Estate Tax

In one of the oddest strokes of lawmaking to come from Washington, the estate tax expired in 2010 but is scheduled to make a deafening resurgence in 2011. In 2009 the max rate was 45% over $3.5 million; in 2011 it will be 55% over $1 million. This will certainly cause an increase in asset planning, especially with regard to trusts. Whole swaths of people who never needed to worry about the estate tax will be searching for financial planners in order lessen this tax hit.

FASB 13

This is a tricky one. Mostly because no one really knows what the final lease accounting changes in FASB 13 will be. But there will be changes. That has been enough to worry many industry insiders, who could see these changes having serious affects. More likely than not, the concept of operating leases will go away, and no more lease classification will exist. Investors could face a shortage of financing, and tenants may demand shorter leases. However, it is too early in the game to know for sure and debate is still heavy on whether there will be any impact at all.

How these changes will affect commercial real estate (and net leases) may in the end, be an art for scryers. What will their individual impacts be? How will they affect the industry in unison? Investors undoubtedly will continue to "swap until they drop" and receive a step-up in basis for capital gains purposes, and with proper estate planning will side-step the draconian estate tax. More likely than not more money and attention will be spent on tax planning in 2011 than ever before. Lease accounting, estate tax considerations, and capital gains tax rates rising will cause most developers and investors to put their tax attorney on speed dial in front of their lender contacts.

Should We Fuss About FASB?

2010-07-16T07:15:00.000-07:00

Recently, there has been some gnashing of teeth about the possible impact on sale-leasebacks by a proposed change in the manner in which leases are accounted for under GAAP. FASB has put forward some changes which, if enacted, will effectively eliminate the distinction between operating and capital leases. For companies such as Walgreens and CVS, who heavily utilize sale-leasebacks, and typically structure the resulting leases as operating leases, this would means billions of dollars of lease liabilities would move from the footnotes to the balance sheet.

While it's true that this change will be a headache for the accounting departments of both lessors and lesses (not the least of which due to its retroactive nature) it's impact onoverall sale-leaseback activity should be zero.

Here's why:

Sale-Leaseback Economics Don't Change Because of How You Account for Them.

The underlying economics of a sale leaseback need to work independent of how the transaction is accounted for. If the cost of doing the sale lease back isn't exceeded by the return obtained on the proceeds of the transaction than it makes no sense. How we record the debits and credits of such a thing is largely irrelevant.

It’s also not like operating leases are a secret on Wall Street. Analysts and those who follow these companies closely have already baked the operating leases into the debt loads of the companies. It’s common practice to take as much as 2/3 of the operating leases listed in the footnotes into consideration when conducting ratio analysis and comparing companies.

That being said, moving the obligations from the footnotes to the balance sheet is essentially a smoke and mirrors exercise although one would have to admit it does enhance transparency. Particularly so for companies who use the practice as a matter of course. It’s amazing how often you hear that Walgreens has no debt. Apparently, those who think so don’t read the footnotes.

While rationally, this change should be a non-issue to the investors in and conductors of sale-leasebacks, no one ever said people were required to act rationally....

Zero Hour for Net Leases

2010-06-24T08:34:00.001-07:00

It is not a secret that many commercial real estate loans stand on shaky foundations. In-fact it has been recently estimated that a “sizable amount of the additional $700 billion in commercial real estate loans coming due during that time frame are loans that could not get refinanced at existing levels in the current lending environment”. This of course will lead to many foreclosures and create an investment opportunity for CRE buyers. However, for the unfortunate holder of the original asset there may be a potentially huge tax consequence. There may also be a glimmer of hope in the form of a Zero-transaction.

Simply speaking a zero transaction is the acquisition of a property using a highly leveraged loan (loan to value usually 88% plus) with all rental income dedicated towards debt service, thus producing “zero income” for the property owner. One of the vehicle’s applications is to defer tax liabilities incurred in a commercial foreclosure.

The Problem

Though it is not widely known, the foreclosure of a commercial property is often a taxable event. How the IRS computes the tax depends on whether the property was financed with a recourse or non-recourse loan. In the case of a recourse loan, tax liability is calculated by taking the difference between a property’s fair market value and its adjusted basis. The tax liability of a non-recourse loan (which the remainder of this piece will be dealing with) is calculated by taking the difference between a property’s outstanding mortgage balance and the property’s adjusted tax basis.

The “outstanding mortgage balance” is the key element which catches investors off guard.

For example:

Let’s say you bought a property for $5M (your cost basis) which subsequently has been depreciated to an adjusted tax basis of $3M. Let’s also say you refinanced this property during an upsurge in the market and pulled out $8M of equity. If this transaction was foreclosed upon (without any action to defer tax liabilities), you would face a taxable gain of $5M, i.e. the $8M in outstanding mortgage amount minus the $3M in adjusted tax basis.

Thus, investors who think returning the keys to the bank absolves them of all monetary concern involved in a commercial foreclosure are gravely mistaken. The IRS views any money previously pulled from a property via loan refinancing to be taxable gain, even though the property is foreclosed upon.

The Solution

With proper scheduling and use of the 1031 exchange, the situation above can be avoided through the purchase of a “zero income” property. The reason a zero income property can be so beneficial is due to its highly leveraged nature and its ability to defer a taxable gain through a 1031 transaction. A portion of the money an investor would have otherwise paid to the IRS can be used instead to acquire the zero income property through the 1031 exchange.

Here is how our previous example would be impacted by a zero transaction:

Assuming a tax rate of 25% (Federal capital gains rates, Federal recapture rates and state taxes), the $5M in gain would cost $1.25M in taxes. If instead, a zero transaction was pursued, the investor would need to replace the balance of the debt, $8M. By exchanging into a zero income property for approximately 10% of the $8M debt amount replaced ($800,000), there would be a $450,000 savings ($1.25M-$800,000) and the investor would own NNN property with a very high credit tenant.

In order for the transaction to flow smoothly, it will have to be properly organized and scheduled on an individual basis. It should be noted that a zero transaction is not possible without outside assistance of at least a Qualified Intermediary and qualified professional tax and accounting advice. If done properly, this strategy can be an invaluable tool for investors caught in a foreclosure situation.

Drug Store Wars

2010-06-14T06:54:00.000-07:00

Recent developments concerning Walgreens and CVS point to changes in their stores and company interactions. These range from alterations in store layout and product offerings to new rules concerning prescriptions. Both of these tenants are huge players in the net lease market and these shifts could change the way investors view them.

CVS to Expand Grocery Aisles

CVS plans to expand grocery aisles in 3,000 of their stores during 2010. They will be doubled in size, giving the company more exposure to the trillion dollar U.S. food market. Many see this as continuation of “channel blurring”, a trend which has been embraced by many retailers. As reported by the Patriot Ledger “Just as supermarkets have expanded pharmacy and health and beauty sections in the past decade, drugstores are retaliating by putting food products in the forefront.” Cleary CVS is jumping in head first by modifying 43% of their 7,000 nationwide stores.

Walgreens to Sell Beer and Wine Again

Walgreens is breaking a nearly 15 year self-imposed ban on the sale of alcohol in their stores by reintroducing beer and wine. So far 3,100 (41.3%) of their stores have already been stocked, with plans to increase that number to 5,000 by years end. Previously the sale of alcohol and other spirits made up 10% of Walgreens total sales, indicating a likely increase in sales this year. Other drugstores such as CVS and Rite Aid have continually sold alcohol. It is available in 4,300 (61.4%) of CVS stores and 28 of the 31 states Rite Aid operates.

CVS to Exclude Walgreens from Retail Pharmacy Network

CVS Caremark has stated it will end their retail pharmacy partnership with Walgreens in roughly 30 days. This occurred in response to Walgreens announcement that it will no longer participate in new CVS managed prescription drug plans. Thus, the pharmacy networks of the two will become mutually exclusive forcing customers to one or the other. This certainly heightens the competition for customers between the two and could increase marketing to that effect.

Looking at the situation from an investor’s standpoint, the first two changes are certainly positive. CVS expanding their food section is in line with a nascent trend of frugality and “back to basics” purchase behavior. Walgreens on the other hand is opening itself up to the conclusively popular trade in alcohol which should only benefit their store revenues. The only trend which could be perceived as worrisome is the segregation of prescription customers. Forcing an exclusive choice could lead to higher costs to maintain and attract new customers. However, such fears maybe overblown. A little competition never hurt anyone.

Are Cap Rates Going Down?

2010-05-21T08:35:00.000-07:00

A recent article by M.P. McQueen in the Wall Street Journal stated that cap rates for investment grade triple net lease properties were falling. Specifically it said “in recent months, cap rates have been falling because property prices nationally are rebounding. More investors are going after fewer high-quality properties, driving prices up.” In order to gain a wider perspective on this topic, we asked two industry experts, who have capital available and are active in the market, their opinions on cap rate trends today and by years end.

Here are their responses:

Jon Adamo, National Retail Properties.

I would agree that over the last few months we’ve seen a decrease in cap rates of higher quality net lease investments in the range of 25 to 50bps from pricing we experienced in 2009. There’s definitely a supply and demand issue at the root of the adjustment along with an improvement in the ability of buyers to get the better tenants/deals financed. The scarcity of new deals hitting the market will continue to keep cap rates low for the remainder of the year and may cause them to go even a little lower but not significantly. The cost of financing is still very much a factor for many deals and although banks are doing very safe deals at very safe rates and terms they have certainly not opened their doors all the way.

If you look out past the next 6 months and into the next year I think caps will be moving up with rising interest rates. I also see more product reaching the market as developers begin to reemerge and M&A activity picks up thus producing some sale-leaseback opportunities for buyers that might look to dispose of some assets. For now it seems there’s a glut of capital for good Walgreens and McDonald’s-type NNN investments and not enough to go around putting stress on cap rates but higher rates and lower ltv’s of the new financing “norm” will cause the cap rates to rise eventually.

George Rerat, Senior Vice President of Acquisitions, AEI Fund Management, Inc.

We’ve seen cap rates for high quality NNN properties decrease from around 9.5% to 9.0% today. This drop is a reflection of the dwindling supply of high quality NNN properties on the market. Construction has been at a relative standstill and as such the pool of these assets has been shrinking, forcing cap rates down. By years end we could possibly see cap rates drop by another 50 basis points. Furthermore, it may take a while for construction to pick up again, prolonging the supply imbalance for the next 1-2 years.

So the question becomes whether or not the window is still open, as supply continues to constrict and the laws of economics take hold.

Springtime for Retail, Sale Leasebacks, and Urban Investments

2010-05-12T08:55:00.000-07:00

As spring unfolds, key areas of the net lease market such as retail, sale leasebacks and urban investments seem set to grow. Numbers and analysis from the first quarter of 2010 point to better days and more opportunities ahead.

Retail

As of March 2010 consumer spending has increased over the past five months and retail sales have risen the past four. Retail sales in the first quarter 2010 are up 1.9% over the previous quarter and up 5% compared to the same period last year. Retail transaction volume totaled $3.1 billion for the 1Q 2010, which is a steady improvement from $2.2 billion in the same period last year. Furthermore, according to a major commercial real estate magazine “investors are showing strong interest in well-stabilized retail properties that generate consistent cash flows”. This description fits perfectly with net lease investments, which are defined by their stability.

Sale Leasebacks

It has been estimated that there is at least $1 billion in corporate owned essential real estate and according to RW Baird “strong corporate demand for sale-leaseback transactions”. If only a fraction of this $1 trillion were to enter the market, it would be a huge boon for net leases. Sale-leasebacks, which are almost always structured as net leases, offer corporations a chance to pull vital equity out of their real estate and enhance current operations. The real estate is sold and a long term lease is signed which leases back the property. Sale leasebacks have already provided the basis for many net lease transactions in the last two years and that trend looks to continue to pick up steam.

Urban Investments

There has been a lot of talk about the upward trend in urban investments. Walgreens purchased Duane Reade and their 258 New York metro area locations for $1 billion and those leases have been recently valued at $74 million. The German group, GLL Real Estate Partners also entered the urban market by purchasing 14,000 sq. ft. of New York retail condominiums from Hines. The urban market is one the most attractive today because it ensures a properties close proximity to large populations. As a result, net lease urban properties have increasingly been in demand.

Walgreens Goes Urban With Duane Reade

2010-04-23T06:59:00.000-07:00

Walgreens recently closed the purchase of Duane Reade, a deal which included “all 258 Duane Reade stores in the New York City metropolitan area, as well as Duane Reade’s corporate office at 440 Ninth Ave. and two distribution centers”. The transaction was all-cash and involved the absorption of $457 million in debt. This bolsters Walgreens already impressive presence in the drugstore/pharmacy market, adding a prominent urban chain and presenting new opportunities for net lease investors.

Duane Reed, which had struggled under debt and in July 2009 was downgraded to CCC+ by S&P, will certainly become more appealing now that it’s helmed by A+ rated Walgreens. In addition Walgreens has “agreed to repay or redeem Duane Reade’s outstanding debt related to the local chain’s July 2003 credit agreement, its 9.75% senior subordinated notes due 2011, its 11.75% senior secured notes due 2015, and its senior convertible notes due 2022.” The looming question is whether Walgreens will back Duane Reade leases or if they will be allowed to stand alone. If Walgreens does agree to back the leases, a high investment grade product would be added to the net lease market, if not, the asset will at lease become more attractive under the Walgreens flag.

This transaction also represents a great expansion into one the largest urban areas in the country by Walgreens. Duane Reade is centered in the New York metropolitan area and this purchase shows Walgreen’s desire to enter the urban market with force. This situation deserves close monitoring by those who are considering a net lease asset or have interest in investing in the surging urban market.

US Apartment Uptick = Net Lease Impact

2010-04-16T11:45:00.000-07:00

It has been recently reported that the US apartment market may have reached bottom and be poised for a rebound. Apartment vacancy rates have stopped rising and rents even showed a modest increase in the first quarter. As life is pumped back into this market, 1031 exchanges could subsequently rise. Apartment investors heavily utilized 1031 exchanges to move from active to passive assets (such as net leases) in the past. Will this trend repeat?

To gain insight, we have solicited the help of James Brennan Esq., LL.M., Managing Director and Corporate Counsel of Exchange Solutions Group, one of the foremost experts of 1031 exchanges.

1. With the possible return to health of the U.S. apartment market, do you expect to see increased 1031 tax exchange action?

The Baby Boom generation flocked to real estate as an investment class, particularly multifamily. With Baby Boom private investors aging and looking to make life decisions regarding retirement, relocation, and estate planning, and all of those activities are distinguishable from the active process of “adding value” to apartment complexes through sweat equity and property management. Many of those B and C investors are looking to get out of active management. After living through this cycle, they want out more now than ever.

2. What makes apartment owners keen to move from an active to passive asset?

Passive triple net leases are net insurance, net utilities, and net taxes to the tenant. Apartment owners that have built a net worth over $5 million are looking to create annuity-like income for their heirs who often are not in the real estate business. These family patriarchs and matriarchs are not looking to burden their heirs who often are busy professionals in metropolitan areas with decisions regarding leasing up property or fixing the roof. Triple net leases provide credit-rated tenants with predictable cashflow.

3. How popular are net leases for those exchanging out of apartments?

Net leases are not only used by multifamily baby-boomers but also multifamily “financial engineers”. While multifamily financing is often favorable from agencies like Fannie and Freddie many borrowers are in troubled financial shape with distressed assets. These assets often don’t pass muster to be financed or refinanced with agency debt. These investors can 1031 exchange either with low equity or after conducting a deed-in-lieu 1031 into a net lease. Once in the net lease asset, the equity can be unlocked fairly easily through either credit-tenant-lease paydown readvance or through a standard refinance. These strategies allow multifamily borrowers to get an asset banks trust more with a credit rating.

4. What is the psychographic profile of a typical investor who executes this strategy?

Apartment developers are often drivers or family stewards. These decision-makers have built wealth from the ground up often not in a traditional white-collar methodology. These hard-driving decision-makers have provided for their family, and also probably have setup life insurance trusts to allow for estate planning liquidity. Triple net leases go well with this concept of transitioning wealth to the next generation without many opportunities for losing value by the heirs. The family stewards have built wealth and are now simply trying to preserve it.

5. Are there any aspects of this strategy conducive to estate planning techniques?

In an effort to defer capital gains while family stewards are still living the patriarch or matriarch often engages in a like-kind exchange to transition between apartment assets and net lease assets. In a like-kind exchange you can trade into multiple replacement properties. Therefore, if you have three children and you sold your apartment complex for $15 million, you can buy three $5 million dollar net lease assets that produce income that can be divided up amongst the heirs. This avoids management by the one heir that may be more real estate savvy.

Equally as important, the credit-rated aspect of net leases allows trust officers and advisors to sleep at night knowing that they made defendable decisions on behalf of the trust. Therefore, if a real estate trust officer is transitioning from apartment assets, net lease income streams are fiduciary friendly.

Urban Growth

2010-04-07T06:16:00.000-07:00

A new trend is emerging across our nation’s urban areas. Driven by a desire to spend less time in traffic, live in a smaller footprint and work/play within an urban atmosphere, aging boomers and Gen XYZers alike are leaving the edge and making their way back to the city. Developers and retailers are benefiting as properties located in these urban areas are taking advantage of the changing demographic landscape.

This trend is highlighted in a recent Retailing Today story, concerning J.C. Penny’s move into Manhattan. For most of its history, J.C. Penny shied away from Manhattan because of the number of competitors and their store space needs. However, recent times have seriously cut down the level of competition, while also providing new vacant space to occupy. The result was a two-level, 153,000 square foot store, which opened on July 31st. In its first month, the new store surpassed sales expectations by “double digits”. The location, which sits above a subway station and a commuter rail line terminal, relaying 250,000 people past the store’s gates each day.

From a NNN investment perspective, NNN urban properties, like a typical strip center, benefit from a strong anchor or even shadow-anchored presence. A unique aspect of urban properties is that the anchor can be a dense concentration of office space or even a Metro station because the flow of subways, buses, cars, taxis and pedestrians is the engine that drives the street scene. As a result, NNN urban properties are experiencing increased demand, as they have remained successful in spite of the recession.

This coincides with the changing tastes of many investors from high risk/reward properties to ones with more stability and alternative uses. In today’s market, suitable NNN investment property is hard to find. Quality NNN investment property is harder still. Perhaps the hardest of all, are the $1 million to $5 million size transactions where the average investor and 1031 Exchange buyers focus their attention. Urban investments fit this niche and NNN investors have demonstrated a willingness to acquire these assets, often at premium prices.

Rick Fernandez is the Managing Director of Calkain Urban Investment Advisors (CUIA), a division of Calkain Companies, specializing in premier investment properties in high density, urban districts throughout the United States. CUIA builds on Calkain’s record of success in brokering some of the most notable transactions within the urban net lease market and focuses strictly on assets located within metropolitan regions. Calkain’s newest and proven division understands the ever-growing NNN urban investment market and the requirements of investors and developers working within the space. Our advisors guide clients through the many aspects which affect their prospective properties.

Net Lease Cap Rates vs. T Bills

2010-04-01T08:20:00.000-07:00

Cap rates are an important economic indicator for the net lease market as they effectively reveal supply and demand of NNN investment property and the return investors expect for their NNN investments. Furthermore, when compared with Treasury Bills, NNN investment property and the Net leases behind them offer an interesting picture of the ebb and flow of credit and risk and a window into the behavior of lenders and investors alike.

If we think of Net Leases as a bond like asset backed by real estate and the credit strength of the tenant, we see that cap rates and T-bills move in opposite directions in response to the rise and fall of interest rates. The returns offered by T-Bills rise when interest rates fall. For NNN properties, a fall in interest rates has an opposite effect driving cap rates lower as the drop in the cost of debt makes a lower return tolerable to NNN investors. Said another way, T-bill rates typically rise during periods of business expansion and fall during recessions. The economic engine that drives up the return for T-bills typically drives down the return offered by Net lease investments. This effect is compounded as the competition amongst investors pursuing Net lease properties drives cap rates down even further.

So where are we today? It is still too early to tell but preliminary data for 2010 suggests that the steady rise in cap rates that began in 2008/2009 may be leveling off. Lack of quality product, low interest rates and a very modest thaw of the frozen debt market may be responsible. Warren Buffet and others have pointed out that it is a fool’s game to try and time the market but the day of bargains in Net lease investments may be coming to an end.

Is Walgreens Leading Us Down the Yellow Brick Road?

2010-03-26T08:26:00.000-07:00

Walgreens has been considered the bellwether for net lease properties, its high credit ratings (A2 for Moody’s and A+ for S&P) ensuring stability relative to the market. For the past year its cap rates have been climbing and many forecasted they would continue to rise till years end, however, recent developments may indicate that are cap rates leveling off. If Walgreens can be considered a bellwether for the market, this could point to wider implications.

Starting in late 2008 fears began to mount about the inflationary effects of governmental spending. The 25 year flat lease, customary on most Walgreens net lease properties, became increasing unattractive as a long term hold asset. Furthermore, the glut of properties on the market, 200-250 in 2008-09 compared to around 100 in 2007, placed upward pressure on cap rates. As a result Walgreens witnessed cap rates go from an average of 6.3% in Q4 2008 to 7.9% in Q3 2009. Some predicted average cap rates would exceed 8% by the end of 2009. However, as the year ended and we entered 2010, it became clear the upward motion of cap rates had ceased.

There is now a sense of stabilization in regards to Walgreens cap rates. It has been reported they averaged out at 7.5% for 2009, a far cry from the 8% some predicted. This could be because fears over future inflation have subsided and/or supply has decreased. Certainly there is a perception that the economy has taken a few steps back from the precipice of disaster encountered in 2008. Such developments could downplay the risk of inflation in people’s minds. It is also known that the supply of Walgreens has dropped substantially; there are now much less than the 200 or so properties previously on the market. This could mean that the market has already achieved stabilization through our current cap rate increases and now stands at a rough equilibrium.

Though it seems Walgreens has reached some cap rate stability, it is still unclear whether or not this applies to the rest of the market. There are still reports of large bid-ask spreads between buyers and sellers, so the net lease market has certainly not leveled out just yet. However, judging from Walgreens history as an indicator, it may not be far behind.

Want to 1031 into a Property You Already Own?

2010-03-19T08:28:00.000-07:00

There are times when an investor may want to sell one of his properties and invest its proceeds in another he owns. In the past the IRS forbade 1031 exchanges in such cases, however, today there are means around it. It is known as an “advanced built to suit” transaction and though it has never been explicitly supported by the IRS, it has been upheld by private letter rulings.

The difference between the advanced build to suit transaction and a typical tax deferred exchange (or one with a build to suit component) is the type of property designated as replacement property. In a build to suit tax exchange, the replacement property is owned by a third party, with Exchange Accommodation Titleholder (EAT) obtaining the replacement property’s title, which it holds while the property undergoes its improvements. In the advanced build to suit transaction, the taxpayer is attempting to transfer funds into property already owned by him. However, Rev. Proc. 2004-51 places restrictions on using replacement property owned by the taxpayer within 6 months of the exchange. Thus, the taxpayer is unable to accept either “assignment of the LLC or direct deeding of the Replacement Property after the improvements have been made directly.”

In order to complete this arrangement, the taxpayer must enter into a 1031 like-kind exchange agreement with a QI, after which he enters into QEAA and Construction Management Agreement with the EAT. He would then send cash or agree to a loan with the EAT, allowing the EAT to purchase replacement property and carryout the improvements. The EAT then acquires title to the replacement property and sets it up in a LLC. The EAT also has authority to appoint a Taxpayer General Contractor under the Construction Management Agreement, who acts as Fund Control, making disbursements as construction commences. After 180 days, the QI will direct the EAT to transfer the replacement property directly to the taxpayer, this is accomplished by handing over control of the LLC to the taxpayer.

If completed correctly, with the right guidance and supervision, this transaction allows investors to greatly improve their own properties and consolidate their holdings. This flexibility can be extremely beneficial during recessions or other economic downtimes, when ancillary properties become less valuable and the need to improve core ones increases. Thus, the advanced built to suit exchange gives investors another tool to use in the marketplace.

What We Can Take From Warren Buffet

2010-03-17T07:54:00.000-07:00

Recently, Warren Buffet sent a letter to his stock holders in which he outlined six key points to his success. They are rather simple and based upon sound common sense; the trick is not in knowing them, but in applying them. As they are quite general in nature, they can also be applied to the net lease market, which after all, is just another form of investment.

Stay Liquid. Warren Buffet wrote:

"We will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be constantly refreshed by a gusher of earnings from our many and diverse businesses."

There are two simple lessons to be gleaned from this advice, 1.) Have cash, and, 2.) Ensure investments produce cash. While seemingly easy to follow, it is clear from the recent real estate and financial crisis that these principles are quickly lost. Overleveraging and risky investments can too easily entice people from the shores of sanity. When investing in net leases, ensure you are not overleveraged and that your investment is a sound, income producing property.

Buy When Everyone Else Is Selling.

"We've put a lot of money to work during the chaos of the last two years. It's been an ideal period for investors: A climate of fear is their best friend. . . . Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble."

This is pretty easy to understand but hard to follow. First of all its takes a considerable amount of bravery and foresight to run in the opposite direction as everyone else, secondly, it takes well planned fundamentals to ensure one has the cash to take advantage of the situation. However, for investors who do have the resources, allowing fear to inhibit investment opportunities defeats the entire purpose of investing.

Today’s commercial real estate market is obviously at a low point but those who insist on “waiting for the bottom” are in reality waiting for someone else to start investing first. In order to capitalize one must first mobilize and do so before the mob.

Don't Buy When Everyone Else Is Buying.

"Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance,"

Nothing is free. That includes “reassurance”, with which one buys off the cognitive dissonance of a decision. The most utilized source of this are the opinions of other people; we all care deeply about “what others think”. The price for this can be easily assessed in terms of cash, as demand increases price. Thus, the more people it takes to lend support to your investment, the more money you will pay for it.

Value, Value, Value.

"In the end, what counts in investing is what you pay for a business -- through the purchase of a small piece of it in the stock market-- and what that business earns in the succeeding decade or two."

When investing in commercial real estate it is very important to obtain an asset which produces value. There are many ways of assessing this, but stability overtime is usually the most reliable. A few years ago, many would have rather owned an artificial island off the coast of Dubai instead of a less luxurious grocery store in a high traffic area; it is easy now to see which one time has judged the better.

Understand What You Own.

"Investors who buy and sell based upon media or analyst commentary are not for us,"

It is important to study the fundamentals of what you wish to acquire, with net leases this is especially important. Location, credit tenant rating, past returns, and lease agreements can all impact an investment tremendously. Before making an investment it is vital to understand its attributes.

Defense Beats Offense.

"Though we have lagged the S&P in some years that were positive for the market, we have consistently done better than the S&P in the 11 years during which it delivered negative results. In other words, our defense has been better than our offense, and that's likely to continue."

Aggressiveness can be a value but it must be paired with a secure end. There is no gain in being aggressive in a market which bottoms out. As Napoleon said “Take time to deliberate, but when the time for action has arrived, stop thinking and go in.” It is important to create a strategy which will provide in both high and low tides. Take the necessary time to pick the proper asset and then proceed forth with vigor.

How Will Retail Fare in 2010?

2010-03-10T12:40:00.000-08:00

As 2010 gets underway it is inevitable the same questions which many had in ’08 and ’09 will be asked again. Concerns about the health of our economy, specifically retail, have not been resolved. Outright recovery is not forecasted and many are now predicting an extended economic quagmire. Since it appears likely the climate will be similar to last years, the companies that do well in 2010 will likely be the same that succeeded in the previous two years.

As reported by Shopping Center Business, the top three expanding U.S. Retailers in 2009 were: McDonald’s with 1000 stores, Walgreens with 554 and Dollar General with 500. These three companies perfectly illustrate that “value” is the biggest seller in today’s market. This trend has continued into 2010. In February Walgreens agreed to buy Duane Reade (257 drug stores) and the operator of T.J. Maxx and Marshalls announced “plans to nearly double its overall store count from just above 2,700 units to 4,200 locations”, with 130 new stores planned for this year.Dollar General not only plans to open 600 new stores this year, but will feature investor friendly lease terms as it moves away from its traditional modified double-net lease to a more favorable triple net lease. This will definitely be a crowd pleaser for net lease investors, who seek no landlord responsibilities and wish only to receive a monthly check.

While the 0.3% and 0.5% increases in retail sales respectively for December and January encourage the possibility that sales will significantly increase this year, it seems likely they will generally remain flat. With an average unemployment rate of 9.8% forecasted for 2010, many families will continue to place a preference on savings and value. This plays to the advantage of companies such as McDonald’s, Dollar General and Walgreens, ensuring their expansions will continue. Furthermore, a recovery may not necessitate a return to 2005 spending practices. Many consumers were badly burned through the over-leveraging which allowed for the high level of purchases seen in the “boom years”; this could encourage a long term preference for value.

In the past two years the most successful net lease tenants have been value tenants such as McDonalds, Dollar General and Walgreens. Their focus on affordable products has not only ensured survival, but allowed for great amounts of store expansion. With no indicator to say otherwise, it is likely this trend will hold for the duration of 2010.

Alert: HB 417 Facilitators Act Established in Virginia

2010-03-04T13:01:00.000-08:00

In response to the recent wave of 1031 exchange fraud, highlighted by the Landamerica case, Virginia has enacted a law which it hopes will better protect the integrity of 1031 transactions. Key to the new bill is the establishment of the three requirements, all of which are already standard practices at ES Group:

“Exchange facilitators are required to notify exchange clients of change in control of the exchange facilitator”
“Maintain exchange funds in separately identified accounts or in a qualified escrow or qualified trust”
“Maintain errors and omissions insurance or deposit cash or letters of credit; and to account for moneys and property”

Language is also inserted prohibiting exchange facilitators from participating in various forms of fraud as well as the establishment of a max civil penalty of $2,500 for any infraction.

Click here for the full bill.

Sweetgreen Springs for Success with New Location in Logan Circle (Washington DC)

2010-02-23T08:55:00.000-08:00

Calkain attended the opening of the Logan Circle location of Sweetgreen this past weekend. Located on the ground floor of the luxury Metropole residential condominium, across the street from the 15th and P Street Whole Foods, it is in prime position to succeed in this market. Sweetgreen is headquarted in Washington DC and opened its first store in August 2007. Currently it has four retail locations but its immediate success has encouraged plans for further store expansion.

The idea behind Sweetgreen is simple: a sustainable salad and yogurt bar with a chic atmosphere and unique dining experience. In the Washington DC area, this approach has established Sweetgreen as a leader in fast-casual dining by combining the convenience of fast food with healthy, high-quality menu options. Due to its favorable position, the owners think the new Logan location will be their best store yet. Calkain is enthusiastic to be representing the partnership that owns the Sweetgreen Logan real estate.

The last twelve months have seen a surge in popularity of retail condominiums located in dense urban markets. Properties located in these areas, especially in the Washington DC urban core, are experiencing increased demand as they have prospered even in the face of the recession. As highlighted by RE Business, many individual investors are drawn to urban retail because the size and price points often allows them entry to prime urban markets previously beyond their reach.

They are also a popular choice among many 1031 investors who are seeking suitable replacement property. The retail condo units are typically NNN meaning the tenant is responsible for all expenses associated with the property. The properties are actually easier for both the landlord and tenant to manage because the services required to maintain the property are already contracted by the condominium at large. The tenant simply pays the retail unit’s portion of the condo, management and maintenance fees.

Another potential benefit to investors lies in the assessed value of the property and the weight given to improvements and land. Since the improvements are a greater part of the overall value in a condominium it is possible to depreciate a significant portion of those improvements on a 15 year schedule through a detailed cost segregation study. That means a stronger return and more cash in your pocket at the end of the year.

Please contact Calkain for more details.

Franchisee or Franchisor?

2010-02-19T13:59:00.000-08:00

Currently there are around 1 million franchise outlets in the United States and over 40,000 international ones operated by U.S. based franchisors. Ownership and operation of these outlets can differ greatly depending upon their parent corporation. For instance Burger King franchises around 90% of their restaurants, McDonalds 80%, Wendy’s 79%, and Arby’s 69%. Conversely, large investor groups, such as Bain Capital, can also decide whether to license out the business model and make money off royalties or operate the franchises themselves, earning revenue directly. This decision is highly dependent upon the market in question and impacts future management of the property.

Typically, franchisors have three main sources of income, (1) retail sales at Company-operated restaurants; (2) franchise revenues, consisting of royalties; and (3) property income from restaurants that the parent company leases or subleases to franchisees. If a company were to engage in the first, it would necessarily negate the latter two and vice versa. In order for the first option to make sense, the specific franchise would need to operate with larger margins. For example, Bain Capital, which owns a 93% controlling economic interest in Dominos Pizza, chooses to sell the franchise rights of most of their stores (including U.S. based ones) but operates outlets based in Japan. This is because pizza delivery is considered a luxury item there, with people willing to pay up to $43.00 dollars for a single delivered pizza. Thus in Japan, it is more economical to operate rather than sell the franchise rights. Conversely, in the U.S., where pizza delivery is assuredly not a luxury item, it makes more sense to sell the franchises as margins are lower.

Should a parent company choose to own and operate a store, it can receive benefits related to its applicable real estate. A location operated by a parent company with investment grade credit, will instantly increase in value. This is because the locations returns are no longer guaranteed by an individual franchisee who has no credit rating but by a company which does. Furthermore, that company can still pull money out of the property through a sale-leaseback. This allows the company to take advantage of the properties increase in value and pull capital out for other uses. These factors are highly evident in net lease properties, where credit ratings are of high importance and sale leasebacks have always been very popular. A property which is corporate owned and guaranteed will typically fetch a much higher price than an individual franchisee due to the flight to quality in the current market.

The decision between owning/operating and franchising a property greatly impacts how it is valued. It also impacts the level of commitment and funds a franchisor dedicates to it. The applicable margins of the specific locale and the opportunity for greater profitability will then be the decisive factor.

An Urban Trend or Legend?

2010-02-03T11:40:00.000-08:00

A new trend could be emerging across our nation’s urban areas. With commercial real estate prices down and many locations vacant, the opportunity has arrived for well positioned investors to grab prime space in urban markets. Though many postulate commercial real estate has not yet bottomed out (Moody’s recently forecast another year of declining prices), there may simply be offers that can’t be refused in today’s cities.

This possible trend is highlighted in a recent story by Retailing Today, concerning J.C. Penny’s move into Manhattan. For most of its history, J.C. Penny purposely avoided Manhattan because of the number of competitors and their store space needs. However, recent times have seriously cut down the level of competition, while also providing new vacant space to occupy. The result was a two-level, 153,000 square foot store, which opened on July 31st. In its first month, the new store surpassed sales expectations by “double digits”. The location, which sits above a subway station and commuter rail line terminus, relays 250,000 people past the stores gates each day.

Another development has been the rising popularity of retail condominiums. As highlighted by RE Business Online, many individual investors favor this real estate type because it often allows them to own space in prime locations they couldn’t previously afford. They are also a popular choice among many 1031 investors who are seeking suitable replacement property. Furthermore, the economic downturn has caused a glut of vacant properties to fill the market; meaning retailers who are looking to buy or lease great negotiating leverage have a wider array of property to choose from. Retail condominiums are not only located in prime space but can often be bought by investors seeking to acquire real estate for their own use. These advantages make retail condominiums very popular today.

Net Lease properties are experiencing similar effects concerning urban locations. Properties located in these areas are experiencing increased demand as they have remained successful despite the recession. This coincides with the changing tastes of many investors from high risk/reward properties to ones with more stability. Taking into account the slump in property values, not only investors but retailers alike are jumping for the chance to own real estate in high density urban areas they previously would not have thought possible.

D.C. Has Global Appeal

2010-01-29T08:38:00.000-08:00

According to a new study from the Association of Foreign Investors in Real Estate, Washington D.C. is the top U.S. city for investment. A major reason cited is the “government activism we have now”, which is spurring job growth and attracting residents. The survey also revealed other positive indicators, such as two-thirds of respondents planning on boosting their investment in U.S. real estate this year as compared to last and half expecting U.S. commercial real estate to recover by or before the fourth quarter 2010.

For the D.C. net lease sector, this survey can be seen as a portent of good things ahead. Should the some of predictions of the survey pan out and both investment in the D.C. area rise and commercial real estate see a recovery by the end of the year, it would certainly be a better turnout than many would have predicted. While it has been widely reported that D.C. is doing better than nearly all other U.S. metropolitan areas, it is refreshing to see this fact backed up by those with foreign perspectives.

Net lease properties have already been on many peoples watch lists due to their bond like structure and relative security & stability. When the economy picks up and money starts to flow again, there is a reasonable school of thought saying it will first flow into secure investments rather than the riskier types seen in years past. Net leases fit this bill perfectly.

What the Association of Foreign Investors in Real Estate Survey is essentially saying is that commercial real estate recovery has a reasonable chance to be around the corner and one of the main centers of growth will be Washington D.C. Though this is by no means certain (note the survey itself is split 50-50 on recovery in 2010), if it does prove to be true, it will be quite the year for our nations capitol. However, whether widespread commercial real estate recovery does or does not arrive in 2010, net leases in the D.C. area should see a positive year regardless of the encircling climate, due to their inherent demand and the city’s growth.

Calkain Featured in Shopping Center Business

2010-01-22T12:23:00.000-08:00

Jonathan Hipp, President and CEO of Calkain Companies, was recently interviewed by Shopping Center Business for their January issue. Among the topics discussed were the 1031 exchange and single tenet net lease markets. You can read the document in more detail here, but a summary of these topics is listed below.

1031 exchanges have suffered from the drop in market activity and though there may be signs that this trend is abetting, volume has not shown sustained positive increases. Furthermore, the bulk of properties traded are between $1-20 million, with larger deals somewhat scarce. New regulations are also being considered to strengthen 1031 standards, as the collapse of LandAmerica convinced many that more rules are needed in the market.

The demand for single tenant net lease properties remains high compared to most areas of real estate, though sales volume has certainly fallen from its previous highs. Today the market is somewhat segmented by geography, with Washington DC, seeing more net lease transactions than most other areas. Like 1031’s, most deals concern properties under $20 million, with many in the $5 million range. There is still disconnect between buyers and sellers, many are not willing to alter their expectations. Financing is also a large issue and is in-part behind the reduction of large scale deals because it is very hard to obtain large amounts of financing.

Overall, the market continues to experience corrective pains as it adjusts itself to new realities. However, there is a feeling that the worst is over, though recovery may not be right around the corner. In the end people are still buying and selling properties, they are just much more selective about when and where they do it.

Retailers Better Prepared for 2010

2010-01-13T08:11:00.000-08:00

With 2009 safely behind us, many retailers are showing greater strength and preparedness for 2010. Last years lessons have been learned well, lower overhead, better planning and a focus on value are the keys to success in this environment. Thus, whether 2010 marks the beginning of retails resurgence or simply an improvement in strategy, it looks to be a better year than 2009.

As highlighted by ICSC, discount retailers such as Target, Costco, Kohl’s and Wal-Mart all have plans to expand with new locations. The quick service restaurant industry is also set to expand with companies such as Burger King, Sonic and Panera Bread planning new store openings. Clearly the environment is conducive to the growth of value based stores. It is also forcing higher-end stores to rethink their positions; Neman Marcus and Nordstrom are now considering adding value focused offerings.

Retailers who are planning expansion are also looking at redevelopment rather than construction. With retail space experiencing heightened vacancies and lower rents, it is more economical to take advantage of existing space rather than starting new construction projects. There are exceptions to this trend, such as certain quick service restaurants like Buffalo Wild Wings, who continue to expand through construction rather than redevelopment.

Though retailers have cut their teeth on the hard times of 2009 and surely step into 2010 better prepared, in the end their fate is inexorably tied to that of the consumer. Unemployment continues to hover at 10% and many do not see significant change in the future. 2010 will most likely witness a greater quantity of deals than 2009 but will not see a return to the levels of earlier years. However, in today’s brave new world, a positive trend should be taken positively.

Buffalo Wild Wings Has Keys to Success

2009-12-04T13:20:00.000-08:00

The Restaurant Association's performance index may show that the restaurant industry has been shrinking for the past 23 months but Buffalo Wild Wings (NYSE: BWLD) has continued to profit and expand, bucking that trend. According to new analysis by MSN Money, Buffalo Wild Wings tops the list of restaurants that are succeeding during this recession. It offers an atmosphere which contains both value based products and entertainment, perfect for the climate of negative news today.

This year, Buffalo Wild Wings has seen profits increase 34% and overall revenue increase by 31%. This growth is not contained to recent events, but in-fact has been a measurable trend. Over the past four years Buffalo Wild Wings has seen revenue growth of at least 19% per year. Last year it pulled in $422 million in revenues, by 2014 Value Line predicts yearly revenues to increase to $1 billion.

Expansion has been a key to Buffalo Wild Wings success. Currently it owns 197 stores and 363 franchises. According to its 2008 report, Buffalo Wild Wings aims to grow that number to 1000 outlets nationwide. In order to reach this goal, it plans on opening 60 stores a year. So far this expansion has been both achievable and profitable. Last year the company recorded revenues of $2 million per store.

Though many companies are finding it hard to maintain operations, let alone flourish in this economy, Buffalo Wild Wings has done so. It is always encouraging to look upon those that have managed to find success and companies such as Buffalo Wild Wings demonstrate that the correct business model can function in this climate. It also represents a rare opportunity to invest in an expanding business in an environment marred by foreclosures and bankruptcies. This is why we have seen a continued supply of Buffalo Wild Wings flowing through the net lease investment market, investors like profitable and successful companies.

Commercial Mortgage Defaults Rise to 3.4% in Third Quarter

2009-12-01T07:59:00.000-08:00

According to recent reports, the commercial mortgage default rate on loans held in U.S. banks more than doubled in the third quarter, increasing to 3.4%. A year earlier commercial mortgage defaults stood at 1.37% and were at 2.88% in the second quarter. This development means that default rates are now at their highest levels since 1993.

Of all loans, those originating between 2006 and 2007 have experienced the most troubles, due to their typically high amount of debt financing.

Eight Restaurants Do Well While Market Falters

2009-11-23T12:53:00.000-08:00

As reported by MSN Money, eight restaurants have done relatively well compared to their competitors and still have the ability to expand regardless of our current economy climate. Specifically, “all of these companies are financially healthy, with reasonable debt and the wherewithal to keep expanding despite a credit crunch”.

Here is the list:

Buffalo Wild Wing Factory
BJ’s Restaurants
Chipotle Mexican Grill
Olive Garden
Panera Bread
Peet’s Coffee & Tea
P.F. Chang’s China Bistrow
Texas Roadhouse

Calkain profiled Buffalo Wild Wing Factory (# 1 on the list) in our Net Lease Advisor.

Net Lease Insider Pulse: Richard Ader on Commercial Real Estate

2009-11-20T11:05:00.000-08:00

Net Lease Insider interviewed Richard Ader, Chairman and Founder of U.S. Realty Advisors, LLC, one of the largest owners and acquirers of single tenant net lease real estate transactions. We asked him five questions dealing with the present and future of commercial real estate, his answers proved both insightful and thought provoking.

(1) Will the commercial real estate market bottom out in 2010?

I do believe the first six months of 2010 will continue to show a decline in value and rents in most sectors of the real estate market. I believe the commercial real estate market will start to bottom out in late 2010 or possibly into the first quarter 2011. A key determinant will be how the growing shadow of maturing mortgage loans is handled.

(2) Is commercial real estate’s fate tied to unemployment or any other pertinent economic factors?

Commercial real estate is tied to all economic factors due to the fact that real estate iscapital intense, and supply and demand driven. Job creation and unemployment directly impact all aspects of commercial real estate: vacancies impact rents for office buildings, and we assume that retail demand will continue at lower levels which will affect both retail and distribution properties. In addition, until the real estate capital markets are re-started, new real estate development is likely to remain at the current depressed level. In the background is the potential for increased inflation, which would impact the cost of operating properties and financing properties, but may not affect rents which are more demand driven.

(3) When recovery does begin, what areas will grow first and fastest?

I think the first areas to recover in the real estate market will be retail and distribution, with office being last. I believe when the recovery comes, people first will start shopping again. This pent-up retail demand will trigger distribution to meet greater retail demand (and permanent changes in retail patterns). Office space will trail the recovery, as companies will first re-occupy large volumes of currently unused space before starting to lease new space.

(4) Are there segments of commercial real estate that you find appealing even in this economy, including the net lease market?

We find net leases to be appealing. Like most real estate assets, cap rates today have increased substantially compared to the over-heated markets of two years ago, and lease terms are longer. There also are opportunities to buy mortgage debt at good discounts with the objective of owning the real estate or achieving equity-type returns.

(5) Would you prefer to invest: Close to home or in a stronger metro market? If yes, what are your top two choices?

I think the preference today for investments in multi-tenanted office assets should be in the stronger metro markets. Distribution should also be in the stronger distribution areas, and retail should be based on prior performance. Net leases should be driven by corporate credit. How the lessee uses the asset in its business and what alternate demand for the asset would exist if the lessee were to move out.

Sale of Detroit Pontiac Silverdome Sends Shockwaves

2009-11-17T13:31:00.000-08:00

The Detroit Pontiac Silverdome, an 80,000 seat stadium sitting on 127 acres, has just sold for the titanic price of $583,000. It was sold to a Toronto based company at an auction held by the city of Pontiac, Michigan.

This is a remarkable statement for a building which once hosted the 1994 world cup and was home to the Detroit Lions (when they had Barry Sanders). It also is a harrowing representation of the current state of commercial real estate, shining light upon on an issue many know about but have yet to seen brought into daylight. Should the fabled "other shoe" finally drop off commercial real estate, could this prove to be the rule rather than the exception?

Commercial Real Estate Crisis Overblown Says One Industry Expert

2009-11-11T07:57:00.000-08:00

Sam Zell, a “legendary real estate investor”, recently commented on the dire predictions attached to the coming commercial real estate crisis, stating that they are overly pessimistic. Specifically, he cited the cause for the current commercial real estate ailments as a “demand recession” but one not driven by drastic oversupply. According to Zell, there haven’t been major new supplies of commercial real estate since 2007.

However, he also notes:

“By 2011 and 2012, the lack of supply will fill those buildings. That's the good news. The bad news is that the buildings will be filled at very low rental rates -- so lenders won't get paid back."

CTL Financing and NNN Properties

2009-11-09T17:17:00.000-08:00

By: Andrew Fallon

Debt financing, what debt financing? The capital markets remain dysfunctional, forcing borrowers to utilize alternative sources of capital. Fortunately, net lease property developers and investors can, and have been taking advantage of CTL financing.

Credit tenant lease (CTL) financing is a non-traditional type of commercial real estate loan that allows borrowers to “leverage-up” based on the predictable income streams of long-term leases. CTL financing provides substantial debt levels based on the credit-quality of the tenant, and the net lease structure securing the asset. The collateral is the long-term lease, not the physical real estate. Lenders are comfortable providing funds knowing that an investment-grade tenant’s monthly rent check will be paying the mortgage balance. Because CTL financing is based on the creditworthiness of the tenant rather than the creditworthiness of the borrower, developers and investors can access debt to build and purchase net lease properties, which continue to trade competitively in today’s market.

CTL can be a valuable source of capital given its key advantages over traditional financing. These advantages include maximum loan proceeds and lower debt service coverage requirements. CTL loans are characterized by their high LTVs (85% - 100%) and low debt service coverage ratios (1.10 – 1.25 DCS). If you are considering the purchase or development of a net lease property, then you might want to explore the CTL financing opportunities available for your tenant.

CTL recently in the news:

Walgreens Lending: A Victim of Its Own Success

Reinventing the Credit Market for Commercial Real Estate

CTL Financing Helps Large Deal Close

Retail Cap Rates Surge in the Third Quarter

2009-11-02T08:15:00.000-08:00

Retail Traffic reports that retail cap rates surged during the third quarter:

“Average retail cap rates increased 59 basis points in the third quarter of 2009 to 8.71 percent, based on CBRE’s Valuation & Advisory Services (VAS) database. The 59 basis point gain is the largest quarterly increase the company has ever measured, edging out the 55 basis point jump recorded between the first and second quarters. Retail cap rates are now up more than 150 basis points from where they were in the second half of 2007.”

This information has some interesting implications. Cap rates have an inverse relation with prices, so we can alternatively read this article as saying that prices have dropped in the third quarter.

Lower prices could indicate that commercial real estate, retail in particular, could now be about to experience that long awaited and much dreaded crash it was predicted to have. If the trend continues at this pace, the retail sector could be in a lot of trouble very quickly. Alternatively, this could signal the opportunity many investors have been waiting for. Numbers such as these could, ironically, spur investment in certain locations as the perception spreads that the bottom is being hit. How this trend is affected by the coming holidays is going to be an interesting thing to watch.

Is the CRE Shoe Dropping?

2009-10-23T09:05:00.000-07:00

By: Andrew Fallon

Recent CRE Headlines – Which Ones Should We Believe?
FDIC Frets Over CRE Loan Losses
3 Signs of the Next Real Estate Collapse
Is a Market Bottom Imminent?
Plan Coming on Commercial Loans
Commercial Real Estate Debt Won’t be the Next Shoe to Drop

So the commercial real estate market will be the next economic catastrophe but the market bottom is near, investors have amassed substantial acquisition capital, and the FDIC is getting ready with a plan. Will CRE be the next shoe to drop? No one is certain how this will play out and varying sources have varying opinions, but something must budge when $1.4 trillion of commercial real estate debt matures over the next three years.

As reported, those likely to budge will be community banks, many of which hold portfolios containing a large percentage of commercial real estate and construction loans. NREI reports that nation-wide, community banks hold roughly 11% of total CRE industry assets. To this point, FDIC Chairman Shelia Bair is encouraging these banks to restructure existing and maturing loans in hopes of avoiding or minimizing larger losses. Unless value returns quickly, community banks might be the next shoe to drop. That will sting, but does it mean that the commercial real estate market is collapsing, and what will the overall impact be on Main Street and the financial system.

Fear and history has everyone thinking about the residential mortgage meltdown and the widespread financial impact, but commercial real estate is a different beast. First, the majority of loans causing concern are construction and development loans, not existing buildings. Secondly, even though CRE property values are down, the underlying assets are/or have potential to be income producing properties, which can be value-add opportunities to capable investors. Lastly, there is a market for distressed commercial real estate (as opposed to second homes). Investors have been amassing cash and REITs have been raising capital to acquire many of these troubled CRE assets. According to a NREI survey, 70% of investors are preparing capital to acquire real estate assets indicating that some investors see great opportunity in commercial real estate despite the doom and gloom reports. Who are you going to believe and what’s your appetite for risk?

McDonalds Earnings Go Up

2009-10-22T12:26:00.000-07:00

McDonald's earnings rose 6% in the third quarter, posting earnings of $1.26 billion. Last year, same quarter sales were recorded at $1.19 billion and McDonalds expects this positive trend to continue.

Earnings per share also saw an increase, growing 10% to $1.15 from $1.05 a year earlier.

McDonald's success is a good sign for the net lease industry, as many McDonalds are structured as such.

Calkain Highlighted by Business Journal in Pitango Gelato Sale

2009-10-16T09:22:00.000-07:00

Washington Business Journal's Tierney Plumb recently reported on the sale of the Pitango Gelato, located in Logan Circle's Metropole, for $618,000 ($1,123 per square ft.). The sale was brokered by Calkain Companies and represented "the highest square foot price that was attained to date". Assistant Vice President Rick Fernandez represented the seller.

Read the full article here.

Is There Such Thing as a “Recover-less” Recovery?

2009-10-15T09:57:00.000-07:00

This is certainly an interesting time for the economy and the world in general. After being rocked by one of the worst financial blows recorded we are seeing a mixed bag of results:

The Stock Market?

Up. Now hovering around 10,000.

Unemployment?

Up. Now at 9.8% but as many analysts point out the real number is closer to 17%. It’s predicted to reach 10.5%.

CMBS Delinquency Rate?

Up. September posted a rate of 3.64% as opposed to .54% a year ago.

Home Foreclosure Rates?

Up. “As of last month, 7.58 percent of U.S. homeowners were at least 30 days late on their mortgages, up from 7.32 percent in July”.

U.S. Debt?

Up. It’s currently over $11 trillion.

There are no doubt numerous other indicators which should be thrown into the tea leaves but aside from the stock market it seems like we are in for a somewhat downtrodden recovery. The recession may be characterized as “over” but do most people really feel that way?

The term “jobless recovery” is thrown around a lot but looking at all these numbers, one wonders if there is also such thing as a “recover-less recovery”. If unemployment continues to rise, people will naturally spend less and more defaults will be observed. Furthermore, due to the large amount of debt accrued over the past few years, one would expect a lot of earnings to be dedicated to debt obligations, not current spending.

When giving out coupons for products businesses are often faced with the prospect of “borrowing from future sales”. They may increase sales numbers this month but next month they will go down. Collectively we did just that over the past decade, borrowing from future prosperity to have it “right now”. Naturally we are now experiencing the subsequent drought. There is nothing to really do; giving out more coupons (stimulus) only puts off the problem till later. That is why the recovery does not really feel like one. The economic growth that was supposed to sustain us today was spent yesterday.

Vacant Commercial Real Estate Reuse

2009-10-12T09:07:00.000-07:00

There is an interesting article from Business Week detailing many creative reuses for our vacant commercial real estate. Some of ideas seem more probable than others (some seem crazy). Here is an outline of some of the highlights, organized from least crazy to most.

1. In the Realm of Possibility

Hydroponics in Auto Plants:

Many auto factories have been left vacant from the recession but may serve more agrarian uses. As Business week observes, “The open bay nature of auto plants and showrooms can provide the space for hydroponic and aquaponic greenhouse operations”.

Community (Kitchen) Gardens:

Turn that unsightly vacant lot into a veritable country landscape! Many old properties were demolished to make room for new properties, only to have the recession hit, forcing the projects to be abandoned. Residents are using the land the way our forefathers did, “Philadelphia has already implemented an urban kitchen garden policy and many other U.S. cities could benefit from one.”

2. Getting Out There

Farms In-Between Freeways:

You know those grass, sometimes tree covered medians? Well instead of dreaming about plowing your 4x4 over them when traffic hits, turn your thoughts to farming! “Freeway interchanges can be transformed into self-sufficient, positive contributors to cities…Converting the un-usable green gaps of the interchange to usable farm land is a win-win for everyone.”

Affordable Housing and Malls:

This one is sort of odd because we really don’t get the rationale behind the proposal. Here is the quote in full:

“Public housing has been decimated by the altruistic construction of mixed-income, mixed-use affordable housing projects throughout the country. Unfortunately these projects have, statistically, merely relocated the poor and working poor to inner ring, dying suburbs, with dying retail and little access to the necessary basic services that were centrally located in the original housing ‘projects’. Might it be possible to use dead malls for the basic services needed by these displaced citizens, and program the proximate houses, many in foreclosure, for true affordable housing, providing both access to basic needs as well as the seeds of a sense of belonging and ownership.

Instead of being placed by “dying suburbs and retail”, affordable housing should be placed in neighborhoods populated with foreclosed houses and near abandoned malls?

3. Crazy

Wind Harvesting Super Tower:

How would you feel about your house or apartment located right next to a wind harvesting super tower? “Erect large urban/suburban wind harvesting super tower units that occupy minimal floor space but can cleanly alleviate a percentage of community energy consumption.” At least there won’t be a bird problem, right?

4. Jack Nicholson Crazy

Airships:

This is completely serious, someone did suggest the option you are about to hear. “Repurpose empty lots and/or structures to be used as landing stations for a system of small urban commuter airships. Clean transportation and a notable city feature.” Yes airships. Did you know they make a notable city feature? While we wouldn’t be opposed to having them, it seems like this idea belongs in an alternate reality universe. One without the Hindenburg.

In all seriousness, it is quite an interesting article and worth checking out.

Retail Sales Exceed Expectations for September

2009-10-08T11:36:00.000-07:00

Many retailers are quietly having a much better than expected month of September. Stores such as Kohl’s, Target, J.C. Penny, Walgreens, Family Dollar and Limited inc. (the parent company of Victoria’s Secret) all posted sales figures that met or exceeded expectations.

This is great news for the retail sector, which has been hit especially hard by the recession. If all goes well, September could actually post positive same stores sales, rather than ending in the red. If September same stores sales should drop, it will mark the first time this decade that the same month posted declines in consecutive years.

HSBC Agrees to Sale-Leaseback its Fifth Avenue Headquarters

2009-10-06T09:11:00.000-07:00

HSBC has entered into a sale-leaseback with its American headquarters in New York for a deal totally $330 million. HSBC is also considering similar sale-leasebacks for its Canary Warf tower and Paris offices on the Champs- Elysees for $1 billion. HSBC plans on leasing the building for one year, and then lease only the first 11 eleven floors (the building is has 29 stories) for the following 10 years. HSBC has commented that this results not from cutting employees but from better utilization of office space.

This deal is not thought to be connected with HSBC’s recent decision to move its CEO’s office to Hong Kong. The buyer is a subsidiary of IDB group, a holding company owned by prominent Israeli billionaire Nochi Danker.

Sale-Leasebacks have become quite popular lately as more firms require an immediate inflow of capital to maintain operations. Another prominent example is a sale-leaseback with the NY Times building. Recently, even governments have been getting in on the act, as Net Lease Insider reports sale-leasebacks are to be undertaken by many U.S. State governments.

Confidence Crisis = Core Investments = Net Lease Properties

2009-10-05T12:20:00.000-07:00

By: Andrew Fallon

The word crisis has been used in a variety of ways to describe the economic situation of the past 18-months. The National Housing Crisis. A Global Financial Crisis. Wall Street’s Capital Market Crisis. Banking’s Liquidity Crisis. This past weekend while attending a panel discussion on asset allocation, I heard a new term for the current stage of the crisis – the Confidence Crisis. The crisis terms listed above best describe what led us into the recession and the resulting chain-of-event reactions. The new term, confidence crisis, is important for determining the speed of recovery and how consumers and investors will be allocating their resources and assets. Promising surveys (WBJ) and reports (GlobeSt) have made recent headlines, indicating that investor confidence is mounting as credit rating agencies provide encouraging outlooks for retailers.

These reports are speculative because the confidence crisis stems from fear, lack of trust, and uncertainty, all of which are still very prevalent in today’s environment. As a result, consumers are conserving their discretionary spending, and investors are questioning where their funds can safely go to work for them. There is now more emphasis on wealth preservation and long-term hold strategies. This confidence crisis has highlighted the importance of core investments, which may not be sexy but can act as defensive holders of value.

Enter net lease properties, which attract investors due to the stable and predictable nature of a NNN property’s income stream. Net lease cap rates continue to creep higher, hovering between 7.00 - 8.00% in the NNN market, providing potential value add opportunities for core investment properties. Investment sales transactions are still taking place, although at a much slower pace than in 2007 - 2008. As the confidence crisis unfolds, complex high-risk investment alternatives are likely to be avoided and investors will be allocating more resources to core investments until confidence returns (and let’s hope we remember what this confidence crisis feels like so we can avoid it in the next cycle). In real estate investment terms, what’s more core than a single tenant net lease property?

A Tale of Two Industries: Residential and Commercial Real Estate

2009-10-02T08:48:00.000-07:00

Private Residential Spending: Up 4.7% in August from prior month

Private Non-Residential Spending: Down 0.1% in August from prior month

Total Construction Spending: Up 1.1% from July

These numbers indicate that while residential real estate is recovering, commercial real estate lags behind. This could be due to a number of factors, including over supply and tighter credit. Currently the commercial real estate industry is expected to "continue its slump into early 2010".

For more, click here.

Holiday Retail Sales & Outlook:

2009-10-01T07:02:00.000-07:00

The fourth quarter is typically a time retailer’s look forward to with such glee that even a child would be hard pressed to match their level of expectancy. This is, after all, the time of presents, candy, costumes, decorations, ornaments and lavish meals. Children know Santa is coming to town and retailers know parents are. In-fact retailers are so anxious to begin this cycle of profits; they are often accused of putting out holiday items too early, the infamous “Christmas creep”. However, last year retail was hit hard by the recession; today the economy looks much the same and retail must adapt.

This will be the second holiday season celebrated under our current recession and the retail sector carries no illusions about that. According to a recent survey released by Hay Group, 72% of retailers predict sales this year will be equal to or less than sales last year and 57% are planning on reducing staff levels this holiday season. In comparison, last year 60% of retailers expected an increase in sales and only 29% decreased staffing levels. While these numbers are obviously negative, they are also prudent, reflecting a necessary change in mindset rather than an unfortunate change in the economy.

Additionally, retail is adopting new promotional strategies to better fit the current economy. 43% of respondents plan on “running more promotions and/or deeper discounts” this holiday season and another 43% plan to run promotions continuously from now till new years. This reflects a shift in focus from last year, when 45% percent of retailers ran most of their promotions on Black Friday (this year only 35% will), giving people more time to save up paychecks before making purchases.

These changes may already be having a positive impact on retails outlook. According to Fitch Ratings:

“Many companies across Fitch’s U.S. retail coverage have been managing inventory positions well. Gross margins have rebounded for those companies in the discretionary categories that were hit particularly hard during the 2008 holiday period. This, combined with strong cash flow management and the resolutions of liquidity issues for several companies, has resulted in an improved overall credit outlook”.

Though this may not be the holiday season of our dreams, it will certainly be a reality we are more equipped to cope with. Through tempering sales predictions, cutting overhead costs and altering promotional activities, retailers are becoming leaner and more efficient. Furthermore, in this current market where nearly 50% of net leases are traded as retail, should credit scores and sales improve, the only thing that may be going down are cap rates.

Moody's: Retail Outlook Improves As Holidays Begin

2009-09-29T14:02:00.000-07:00

Moody’s has upgraded the retail sectors outlook from “negative” to “stable” over the next 12-18 months, though they remark that industry conditions “remain weak”. This positive change comes just as the Holiday season is about to kick in and reinforces the idea that retail will not have quite the discontented season as it did in 2008. For more, read Net Lease Insider’s insightful article.

The Party is Over: Net Lease & the Future of Commercial Real Estate

2009-09-24T12:52:00.000-07:00

In a very interesting article by Globe St’s Amy Wolff Sorter, the typical real estate investor of the future is predicted to be quite different from the one of our near past. Due to real estates most unfortunate bubble, the new investor will be squarely focused on pragmatic investments for the future, rather than “Real Estate Riches in 14 Days”. If true, it sounds like this “future investor” would be very interested net leases.

Specifically the article states:

“Experts tell GlobeSt.com that, in the wake of the 2008 economic crisis, the real estate owner of the future will undergo a seismic shift from the buy-and-flip investor to one that is knowledgeable about real estate and will stay with an asset for the long haul.”

This description perfectly fits that of a net lease investor. Net leases are primarily characterized by long term leases with stable tenants of investment grade credit. As such, net lease properties are generally considered to be low risk, dependable investments. For a marketplace suffering the effects of a hangover fueled by a lost weekend of high risk binging, net leases could represent that cool cup of tea and handful of Advil in the morning.

TARP = Successful…..TALF = ????

2009-09-22T10:42:00.000-07:00

By: Patrick Nutt

The alphabet soup of government stimulus programs can be both overwhelming and somewhat perplexing, however it does seem we are finally seeing the results of the initial TARP program, and any bi-partisan committee will most likely tell you it worked (while then adding their political spin of whether or not they approve of the current or former administration).

No, the $350 Billion dollars pumped into the financial system to prop up banks did not help you or your friend’s sister’s aunt get that new loan she wanted to buy a vacation condo, but that was never the intent. What that program was designed to do, and accomplished, was to re-gain the overall confidence of the consumer in the overall banking system. Bank of America stock, trading at $2.50 just six months ago, has rebounded to $17.50; JP Morgan Chase was at $15.00 and is back up near $45.00. If these prices are any indication that the consumer is confident in the largest financial institutions in the United States, I would say TARP worked.

The Term Asset-backed Loan Facility (TALF) is an entirely different program aimed at thawing the frozen market for securities collateralized by consumer debt (such as credit card debt and auto loans), student loans, SBA loans, and now commercial real estate mortgages. The TALF program was announced back in November 2008, however Shopping center REIT, Developers Diversified (NYSE: DDR) is one of the first firm to actually secure financing through this program. DDR recently applied for and finalized the details on $2B in TALF financing….and here comes the interesting part, it’s not cheap! DDR is working with two investment banks; Goldman Sachs and Citigroup, to prepare the two issuances of debt. While all the details have not been made public, a board member recently commented on the basic terms:

Tranche 1
- Underwriters performed a 5-year cash flow projection
- Carved out 15% for additional vacancy and credit loss
- Applied a 9% CAP rate on the resulting Income
- Providing financing based on 30% LTV with an all-in cost of debt near 6%

While the cost of debt is attractive, the extremely low leverage point constricts the assets being used to either debt free or nearly debt free. What happens if you want more leverage you ask???? Well DDR asked for more debt with the second batch of properties valued at $1B and here is the result:

Tranche 2.
- Underwriters performed a 5-year cash flow projection
- Carved out 15% for additional vacancy and credit loss
- Applied a 9% CAP rate on the resulting Income
- Providing financing based on 30% LTV with an all-in cost of debt near 6%
- For the debt component covering from 30% to 35%, the cost of debt is above 11%
- For the debt portion increasing leverage from 35% to 40%, the cost of debt is around 13.5%

As you can see, if you need a higher ratio of debt, it becomes cost prohibitive very quickly. While this solution worked for DDR to help shore up their overall portfolio and deal with some of the smaller debt maturities, this is clearly not the answer to the $700 Billion dollar problem formerly know as the CMBS market circa 2003-2007.

Does “Green” Construction Affect Net Lease Investments?

2009-09-18T10:32:00.000-07:00

By: David Sobelman

Calkain recently published the first of its kind report on environmentally sensitive (“Green”) construction for net lease investments. We found there are obvious benefits for everyone involved in a transaction. The argument from the development community has always been that the costs for building green building do not justify the benefits. However, it has been proven that the proper use of materials and education allow for a green building to be constructed at the same costs, or less, than conventional methods. Additionally, tenants may begin to require green buildings as their costs of operations will decrease and the social stigma of occupying green buildings develops into more of the mainstream. Lastly, landlords and investors will enjoy the benefits because most green buildings qualify for tax breaks and the intrinsic value of the asset will be more marketing in decades to come.

I think it is a proven fact that there WILL be changes in construction requirements as time goes on and more people begin to realize the benefits of green buildings. Some tenants have already begun occupying prototype locations and they are gaining in popularity among various users. See more about this topic at www.calkain.com/green.

It’s the Loans, Not the Land: The CMBS Refinancing Crisis

2009-09-10T13:34:00.000-07:00

It seems to be a generally accepted fact that Commercial Real Estate is about to hit the ground like a ripe watermelon thrown off a ten story building. Stories abound about how its impending collapse will send systemic shocks rattling through our weakened economy, delivering a rude kick to the face just as it is trying to get up. Investors stand quivering on the sidelines and banks are trying to find out how they can hire Jimmy Stewart (aka It’s a Wonderful Life) to perform some crowd control once their money evaporates with the popping of this last bubble.

And you know what? These predictions, dire as they are, may not be totally off base. If recent reports are to be believed, things are not all well with the world. The delinquency rate for CMBS rose to 3.14% in July, which is more than six times as high as the level last year and by 2012, $100 billion of the $153 billion worth of CMBS loans (65%) will face difficulties being refinanced. With this kind of information, it’s easy to see why so many are pessimistic.

The thing to be remembered, however, is that this is all the result of massive artificial inflation. There is nothing inherently wrong with the land; there is nothing inherently wrong with commercial real estate. There was something horribly wrong with the way people behaved between 2004 and 2007. Essentially, taking a Louisville Slugger to the figurative credit piñata and declaring “come get it!” resulting in drastic overpricing and horrible loans. The land itself was the innocent victim of this all and today faces the repercussions of our malfeasance.

In-fact, the cash flow from most of those properties whose loans expire in 2012 is enough to “pay interest and principal on their debt”. Even in the midst of this deep recession, commercial real estate is still producing wealth. The problem is that its values have inevitably fallen from their inflated highs, making it almost impossible for borrowers to extend their existing mortgages or refinance with more debt. But is this necessarily a bad thing? Clearly the market was flooded with bad credit, so is it wise to take out more debt, or in the case of government action, tax payer funded debt, to refinance bad loans? Perhaps it is best just to let the market clear itself of its toxic waste.

We collectively went on a binge of epic proportions and today have to face the consequences. But we never destroyed or devalued assets, we overvalued them. When the dust settles it will be found that commercial real estate is still a great investment, still capable of building wealth and in reality, still is today. If the economy does get hit by a wave of CMBS foreclosures, it’s not because of the land, it’s because of us.

Bloomberg Gives Real Estate Two Sentences

2009-09-09T13:43:00.000-07:00

By David Sobelman

I was listening to Bloomberg radio in the car today and they started talking about macroeconomic indicators. After they got done talking about retail sales and the Cash for Clunkers program, they began to delve into real estate. The most amazing part of the conversation was the length of time they spent on the topic. I was so ready to start my mental rolodex of every real estate term I have ever learned in order to keep up with their conversation. But low and behold, I was disappointed. They essentially mentioned real estate as an indicator and that, at this point of the “recovery,” everything would be fine. Discussing the decrease in pricing for homes while the volume of sales increased was mentioned. Commercial real estate got an acknowledgement insofar as to say that it’s a small part of the real estate market and an even smaller part of the economy; so they weren’t too worried. Does that mean I shouldn’t be too worried? Does our entire industry deserve a long segment of discussion from the economists on Bloomberg or should we be as blasé about the market turning around as they were? Two sentences are all we got from them. All I can say is that while I see signs of improvement on a daily basis, I think there is a little more to the real estate market than could be said in two sentences. Stay tuned, hopefully we’ll get more hindsight, insight and foresight from our experts.

Is Net Lease Back?

2009-08-20T11:42:00.000-07:00

Last Thursday, Globe Street’s very own Michelle Napoli reported that Realty Income Corp, one of the larger players in the REIT market with a focus on net lease investments, has begun looking at acquisitions. Specifically, CEO Tom Lewis said:

“I know there will be some modest acquisitions in the third quarter, and I’ll define that as a trickle, and we’ll see where it goes from there.” He adds, “We are looking at transactions and buying again.”

This is highly significant information because, as Lewis states himself, “it’s been about 20 months since we put out an LOI on a property.”

The fact that Realty Income’s previously muted presence is coming to an end amongst a series of acquisitions could point to the long elusive light at the end of this recession wrought tunnel. At least, as far as the net lease market goes.

And who is the culprit for this recent spat of good news?

Why it’s those two eternal forces of capitalism, who until recently were not on speaking terms: Buyers and Sellers. The gap between them seems to be closing, especially in terms of seller expectations. Which are becoming, as Lewis notes, “more realistic.” This means that for those who have prudently stored capital, the time may be now to start buying. And in a market as tumultuous as this, net lease investments with their incumbent safety, may be the place to start investing.

Bolstering this perception is a recent upgrade by Friedman & Billings Ramsey Capital of Cap Lease Funding’s target, elevating it to $6.00 from the previous $4.00. This positive development for Cap Lease Funding, which specializes in Net Leases, could very well be indicative of the entire market. Taken together with Realty Income Corp’s new dalliances, we may be seeing the beginnings of a positive trend. So look out world, there may be sunny weather ahead.

Net Lease Solstice

2009-08-10T09:00:00.000-07:00

By David Sobelman

When describing the point at which the Sun's apparent position in the sky to reach its northernmost or southernmost extreme, one can only wonder if that is what is happening in the net lease investment community; has there been an extreme change in the industry. We have all seen transaction volume decline, but is that the only variable driving the market? What about capitalization (CAP) rates, lease terms and values of underlying real estate. Has an extreme determination been concluded on the net lease investment market? Are we reaching the "solstice" and will we now see stabilization over time? One thing is for sure, investment parameters have changed, but an extreme polarization of the net lease market has not. CAP rates remain somewhat stable as compared to more volatile investment segments, i.e., vacant properties, land, multi-family, etc. So reaching the net lease solstice has not occurred and may not as the nature of the investment segment does not allow itself the volatility of extreme market changes.

Golf and Waffles?

2009-07-28T08:19:00.000-07:00

By Bridget Lyons

Professional Golfer Phil Mickelson is taking a swing at the franchisee business. He recently made a bid to buy a Nashville based franchisee for Waffle House out of bankruptcy with his two business partners. GS Acquisitions LLC offered $20.2 million in cash and payments to the US Bankruptcy Court to bail out the ailing SouthEast Waffles, a 105-restaurant group that has locations in four states. The Waffle House parent company has a right to oppose the purchase and has declined to comment as of yet, however, they had placed an earlier bid of $19 million.

Does Greening Your Commercial Property Make Financial Sense?

2009-07-24T14:04:00.000-07:00

By Joan Pino

The term ‘responsible property investing’ refers to the active selection and maintenance of properties that exhibit social and environmental conscientiousness. ‘Responsible’ in RPI expresses an objective of accountability as well as smart business, which translates into economic benefits directly passed on to the bottom line. Recently, commercial investors with RPI ambitions have been drawn to environmentally friendly or ‘green’ buildings on account of their clear alignment with the RPI outlook. At first glance green buildings may appear as an unnecessary increase in initial capital outlay, however; investors in green buildings have confirmed them to be sustainable ventures that maximize property value while minimizing risks associated with volatility of the market, creating an ideal investment for anyone.

Until this point in time, the ‘green cost premium’ has been a major deterrent to investors greening their properties. Over the past ten years, costs of green building materials have become more competitive with conventional materials, ultimately causing the green cost premium to disappear. According to a 2006 study conducted by the Davis Langdon firm, “many projects achieve sustainable design within their initial budget or with very small supplemental funding.” If this is holds true, the need for commercial real estate investors to financially justify opting for a green building would be eliminated.

Investors in green buildings have reported gaining several significant benefits unattainable with non-green properties. Studies have documented improvements in rental performance (rates, occupancy, and retention), risk management, and tenant relations. In addition to actively seeking green buildings, investors can make upgrades to buildings already in their portfolios through a variety of improvements which will make their properties superior investments. The costs of these upgrades can even be passed on to the tenant, the entity which stands to gain the most from the evident benefits (decreased operating costs, improved environmental air quality, increased employee productivity, etc.), through a green lease. The EPA’s ENERGY STAR® program has developed a tool called the Building Upgrade Value Calculator (BUVC) which allows building owners and/or tenants to assess the financial costs, benefits and implications of energy efficient measures specific to their building and situation. The tool provides a useful financial summary (net investment cost, pay back period, ROI, NPV, IRR, etc.) calculated from the given inputs (square footage, annual utility bill, costs and predicted annual savings of energy efficient measures, possible rebates and additional savings) to give investors an estimation of how green upgrades will affect their bottom lines. The BUVC works off the income approach of asset valuation (asset value=NOI/Cap Rate), assuming energy savings flow directly to NOI. Although the tool was originally designed for office buildings, most of its functionality is applicable to all space types (the figures that the tool generates specific to office buildings are potential impact on NOI and asset value). The BUVC is a MS excel workbook that can be accessed here. The ENERGY STAR website also has suggestions for cost-effective upgrades appropriate for different building types (retail, QSRs and casual restaurants, grocery stores, office buildings, etc.).
Investing in green buildings may have been impractical and costly in the past, however; the eradication of the green cost premium coupled with increasing risk aversion begs the question, why not go green?

Calkain in the Spotlight

2009-07-20T12:05:00.000-07:00

Calkain Companies is highlighted during an ABC interview with James Brennan, Managing Director of Exchange Solutions Group 1031. Mr. Brennan overviews the ways a 1031 exchange can help many Americans defer their tax liability and speaks on possible future trends. Click on the video below to watch!

Flight to Quality Now Boarding

2009-07-08T07:48:00.000-07:00

Posted in Globest.com/Florida on July 5, 2009

By David Sobelman

I first heard the phrase “flight to quality” during my first job in commercial real estate. I was a research analyst sitting in a cubicle, staring at my computer screen and wondering why there was over 500,000 square feet of negative absorption of office space in Washington, DC--in one quarter.

The year was 2002. That was quite a rude awakening for not only me, but every landlord in our nation’s capital. What do you do with all that vacant space in such a short period? The answer: Lower your rental rate. Tenants began filling vacancies and getting better office space. It was a flight to quality.

But net lease investments are different when considering quality, which is a popular word these days. In the net lease investment industry, we’re typically not discussing the leasing of a single-tenant office building, a large warehouse or a small retail center. We’re discussing investments--the purchasing of assets for an immediate return.

So how does one define a flight to quality when considering a net lease? It depends who is buying.

People want more for their money in today’s market. However, quality varies in any investment, let alone net leases. The first quality adjustment we are seeing is a desire for choice real estate. Location is still of the utmost importance to investors.

Buying a Walgreens location in Dubuque, IA is different than buying one in New York City. You may be getting the same credit and same lease terms, but the real estate has become a big consideration for investors today.

The investor has to know that at the end of the day, they are still buying real estate. Consider the worst-case scenario: If my great tenant leaves, what am I left with? Where is the building? What is around the site? How can I access it? We are all real estate professionals, but the quality real estate was forgotten for many years.

Additionally, investors are focusing more on the credit of their tenant. Gone are the days that you can put a very aggressive cap rate on a one-unit franchise operator of a concept that you have never heard of before and close the transaction in 21 days.

The investor’s flight to quality for tenancy has become drastically more apparent in the last 12 months. In 2008, when it truly did seem that the sky had fallen and was actually beginning to dig a hole to the center of the earth, no one was really sure of how to rate a company’s credit. Those institutions that had a credit rating by a major agency, such as Standard & Poor’s or Moody’s, were being questioned because they got so many things wrong.

Companies with “A” credit or better were going bankrupt or being downgraded so fast that it was hard to keep track of them. The term “investment grade” almost became a joke. But now that the economics of the industry have calmed down and recovery is under way, the credit of a company seems to have taken on a new meaning.

History has proven that credit matters. Over the last half-decade, it was proven that if you had a net lease investment, you could get financing. Now, you truly need a credit rating of “A” or better to get above-average financing. Otherwise, you’re left with a full recourse loan with a very low loan-to-value ratio.

Credit tenants are still comparably garnering somewhat stable cap rates, but those that lack the financial reporting worthy of an overly scrutinized underwriting process are seeing their returns rise and prices lowered because of the perceived risk. The credit of the tenant has seen new meaning and the credit tenants are sought out more so now than ever before.

Lastly, the lease terms are becoming a talking point that quality seekers seem to be discussing more. The words “absolute” and “bondable” are heard more and more as investors seek new purchases. Triple net assets are trending to become, well, triple net.

The mere definition of the investment class started with the understanding that the tenant would be responsible for taxes, insurance and maintenance. Yet somehow over time, triple net became defined however you wanted to define the structure of the lease. Maybe the landlord is responsible for the roof and structure of the building, but not the daily maintenance. Or maybe the HVAC system falls on the landlord, but no other items.

Whatever the case may be, triple net became double net, single net or half a net. If there is some responsibility of a landlord, then the investor wants to be compensated for it with a higher return. So when an investor says that they want a triple net investment, they want to sit back, collect a check and never even get a phone call about the property. They want to think of the property once a year when they are filing their tax returns. The flight to quality is in the lease terms and investors are seeking out the absolute, most passive form of real estate ownership.
But a true flight to quality still depends on the individual investor. We have to realize quality can be defined a number of different ways. But net lease investments have truly seen a change in recent months, with scrutiny being placed on the attributes of an investment that haven’t been considered in years.

One may be able to take a great parcel of land but have it encumbered with an old and outdated building with a terrible credit tenant and turn it into a goldmine over time. But today’s investor has a somewhat different destination--a nonstop flight to an oasis called “quality.”

Favoring Franchises

2009-06-30T13:13:00.000-07:00

Feature article by Jonathan W. Hipp

READ NOW >>

Is Detroit a Sleeping Real Estate Giant????

2009-06-16T12:39:00.001-07:00

By David Sobelman

Probably not. But there seems to be some opportunity there. There was an article in the Wall Street Journal today, Page A3 by Andrew Grossman, that is headlined, "Retailers Head for the Exits in Detroit." The first three fourths of the article highlight the name brand retailers that have all exited the market in recent years. The news about "Motor City" obviously has not been favorable by any means but it should be known that the last column of the article highlights several success stories in recent years. Family Dollar is expanding, Aldi is "bullish" on Detroit and The Detroit Economic Growth Corporation (they recruit businesses to the area) is still in business.

The moral of the story; real estate is local. The 900,000 people in downtown Detroit still need services to survive. They need grocery stores, coffee shops, shoe stores, and the like. It just matters who the tenants are, where are they located and who do they ultimately serve. Those factors can be applied to Anytown, USA and, most likely, shed light on which retailers can/will survive in any market.

Jonathan Hipp of Calkain says $10 Million is the New Black

2009-06-10T12:04:00.000-07:00

Jonathan Hipp, President/CEO of Calkain Companies, gives his insight on the current condition of the commercial real estate market. While general perception would have you believe transactions have come to a standstill, the reality is much different. Deals are still being done and money is still being made. Preference has simply shifted to lower cost (and lower risk) purchases. To find out more, check out the video.

Real Share’s annual Net Lease Conference on April 29th, 2009

Fear and Loathing (At The Global Retail Real Estate Convention) in Las Vegas?

2009-06-02T08:44:00.001-07:00

By: Jonathan Hipp & Patrick Nutt

Comments by Jonathan Hipp: Let’s set the scene: We are at The Global Retail Real Estate Convention, hosted at the prestigious Las Vegas Convention Center. It’s a huge building, 3.2 million square feet of space, ready to receive a massive migration of retail real estate people from all over the country. The center is composed of over 2 million square feet worth of exhibition space and 144 meeting rooms (totaling 225,000 square feet) entrenched throughout the facility. It is here one of the largest conventions will take place; 50,000 thousand people will be packed in for four days to see and hear the latest from industry experts. Thousands of booths and tables will be set up, creating a maze of lights, sights, sounds and people that would send the unprepared into a daze. For four days, this place will be the central hub and nexus of retail real estate for the entire globe.

At least, that’s how it’s been for years past. Word on the proverbial street is that this year may be different. The new notion sweeping through offices and conference calls is that only half as many people will show up this year. Now, that is still 25,000 people, but in the context of the massive convention center, there’s no doubt people will notice the absence. Perhaps whole sections of the 2 million square feet of exhibition space will lie vacant; maybe the doors won’t be opened on 72 meeting rooms. What really should strike people is simply where did all the people go? If anyone is looking for a test of health for the industry this may be it. How bad has this recession really hurt people? If it’s to the point that half the attendance of this conference is gone, it will be a striking indictment.

This is not just some party in Vegas where people come to have fun. In the realm of business there may be no better opportunity than an industry convention to meet and gain new clients. Where else can you meet thousands of potential leads face to face, many of whom are actually decision makers at their respective companies? That’s why so many have traditionally made the pilgrimage; it literally pays off. One wonders what the attitude will be at this year’s convention; people there to look and not to buy? Let’s hope not. Hopefully the people there this year are at least viable players, ready and willing to conduct some business.

With all the supposed negative news, there are also some positive signs. Recent news may point to a healthier market for commercial real estate than some had previously thought. According to the new stress test, baseline losses for office, industrial and retail properties were projected to be 4%-5% with worst case scenarios between 7%-9%. Construction loans had baseline losses projected at 9%-12% with a worst case of 11%-15%. Multifamily housing fared a little better with projected baseline losses of 3.5%-6.5% and a worst case of 10%-11%. All told, worst case scenarios have banks loosing around $53 billion from commercial real estate loans, which pales in comparison to projected residential losses of $185.5 billion. From these numbers there is no doubt that commercial/retail real estate is healthier than it’s counterparts, hopefully that luck won’t change in Vegas.

Comments by Patrick Nutt: As I sat in the Houston airport on my way home from the annual Las Vegas ICSC convention I was thinking back over the entire experience, the meetings I had, the follow ups I needed to make, and how I felt about the whole experience. As I was “enjoying” my one-hour layover, I was informed that it would now be two hours. While I immediately regret having saved $100 on my flight in exchange for having a layover, I realized this might actually work out pretty well, as I now had time to have a decent dinner rather than surviving the entire day off tiny packets of peanuts and 5 oz glasses of the airlines best water. Over my dinner, I realized that this year’s ICSC convention was a very similar situation; I left home thinking I was wasting my time and returned realizing it was one of the most productive 2 days I’ve had in my professional career.

As I started the process of booking meetings weeks before my departure, I quickly realized I was in the minority, as it seemed no one was going to be attending. I had a high level of uncertainty going into it, wondering if the annual trek would be worth the time and effort, but once I arrived in Las Vegas and met some friends and colleagues, the small talk quickly turned to business and I realized that there really are some glimmers of hope. There were developers with new sites actively being approved by national retailers, brokers with recent closings, clients with specific AND realistic property needs, and even sellers with appropriately priced deals that made sense when evaluated based on their credit and real estate.

I’m not saying there wasn’t any pessimism at the conference, as clearly a walk around to see who was present, and more importantly, who was not present, served as a cold reminder of the times we are in. General Growth Properties booth sat in the middle of the convention, as the proverbial 1000lb gorilla, fresh off their bankruptcy announcement, it seemed as though their booth this year came complete with an erie reminder that in the world of real estate, there is no such thing as “too big to fail”. In contrast to GGP’s booth, the complete absence of America’s largest retail real estate owner, Simon Property Group was a constant discussion point among attendees.

All that being said, I was able to arrange meetings with top level decision makers, people that may have been either out of my reach or just simply too booked to make time in years past. Every meeting consisted of a similar tone: “The attendance is down and I couldn’t be happier”, “the people here are the one’s I want to do business with”, and even a slightly bitter “Good riddance!” were just a few of the comments I heard. I quickly realized, that the older generations of real estate professionals that I was meeting with have weathered the cycles, paid their dues during the down times in order to prosper in the good times. These veterans watched as the industry swelled like GGP’s debt over the latest boom, with everyone just trying to get a piece of the action, make a quick buck, while often not fully understanding what they are dealing with, and more times than not causing more harm than good over the course of a transaction.

If there is a lesson or overall sentiment to take away from this event, I would say that the show’s attendees were overwhelmingly resilient, realistic about the state of the industry, and are dedicated to a long career in retail real estate. While we may have to work twice as hard for half the number of transactions these days, if you are dedicated to being in this field, the knowledge you will learn, opportunity that will be presented, and relationships that are created through the tough times will carry with you over the lifetime of a career.

Sale-Lease-Backs

2009-06-02T08:32:00.000-07:00

Though corporate sale-leasebacks came to a halt in Europe during the first quarter of this year, it appears likely that they will soon emerge as a major force. Many firms are in dire need of financing, and with the channels of credit and debt dried up; many will soon be looking to their property as a reservoir of cash. Currently, sale-lease-backs have been halted due to a lack of debt financing and a large disparity in perceived value between buyers and sellers. However, the gap in perceived value is beginning to close and buyers are becoming more willing to buy with cash now, hoping they can raise debt later.

A sale-leaseback is a real estate transaction whereby the owner of a property sells it for cash and then leases it back from the buyer on a long term lease (usually over 20 years). They are performed in order to provide beleaguered firms with a much needed inflow of cash, without disrupting their operations.

For instance, say Wynand Industries owns a building worth $300 million, which they use to manufacture widgets. In need of cash, they decide to sell it to a buyer, Roark Enterprises. After the sale, Wynand Industries signs a lease with Roark, allowing Wynand to use the building for as long as the lease period. Thus, Wynand can continue manufacturing widgets while also receiving an inflow of cash.

In today’s economy, sale-leasebacks are an increasingly viable option for companies who need cash. The most prominent example of this would be the New York Times, who in March completed a sale leaseback on its Manhattan headquarters which had only been built two years prior. In this case, investment firm W.P. Carey paid $225 million for the space the New York Times occupied in the building (around 750,000 square feet), with the New York Times subsequently signing a 15 year lease. At the end of the 15 year period they have the option to buy back the building for $250 million. For the New York Times, a sale leaseback was one of the only options available to them. They were in dire need of cash to pay back debt and with stocks and bonds at such low levels, monetizing their assets provided the only solution.

Many companies today are facing similar situations. This is because other cash raising vehicles such as the issuance of stocks and bonds are presently unfeasible. In good times stocks and bonds could be issued with the assurance of receiving the necessary cash in return. However, today the reduced price of stocks means investors would require hefty discounts on any stock issued, while bonds are currently being shied away from unless they are from the highest investment-grade issuers. For companies who need to raise cash in order to pay back debt or continue operating, this makes those options virtually impossible. If you are at the point of needing cash to pay back debts or continue operating, the discount on your stock would be large enough to nullify the benefits of issuance and no investor would think of buying your new debt. This leaves many companies looking at their property as a source of financing.

Though the sale-leaseback market is not without its problems, they are not so disruptive as to prohibit investment. There are many interested buyers and sellers; the issue is primarily one of financing. However, buyers are becoming more willing to invest cash today, for an investment which they could not normally acquire, and find debt later. There is also the risk of default. The sale leaseback is essentially a long term relationship between two companies; a default at either end would cause serious harm. However, the risk of default can be easily mitigated with proper underwriting and due diligence. Sale leasebacks provide an excellent way for companies to convert their assets into cash, but analysis of the respective parties is required to ensure a viable transaction.

Currently, the restrictive tides of today’s market have stemmed the flow of sale-leasebacks. There is a lack of buyers due to price disparity and the availability of cash or debt. These ailments run throughout the real estate market today, leaving property investment as a whole at a stand still. However, it is likely that momentum will return to the market sooner rather than later, especially within the sale leaseback realm. The demand for cash and lack of debt is forcing many companies to consider monetizing their property. With much of this property in prime location, it is reasonable to assume that eventually buyers will be found.

“Curses are like young chicken, they always come home to roost” And So Has the Debt of Commercial Real Estate

2009-05-26T06:20:00.000-07:00

So you thought what we’ve seen so far is bad? New research from Deutsche Bank indicates that there is another financial crisis coming, specifically a “refinancing crisis”. It deals with the large amount of high risk, debt fueled loans which were taken out to finance commercial real estate investments between 2005 and 2007. Now with the value of these properties gravely diminished, it is projected that many people will have no choice but to default.
Starting in 2005 and peaking in 2007, underwriting standards went on a perilous “walk on the wild side”; bloating loans with so much leveraged debt that today they resemble cumbersome humpty dumpty’s teetering atop the crumbling walls of our nation’s financial institutions. A key element of debt (recently forgotten) is that at some point it needs to be repaid; in terms of loans this translates to the maturity date, when the principle on the loan is due. For a while people thought that this judgment day could simply be pushed back with the push of a few magic buttons on our financial calculators. But alas, it seems this time people will either have to pay up or get out of town (literally). However, if you fall into this unfortunate category, be comforted, for you certainly do not travel alone.
Of all the loans which are set to mature in 2009 or thereafter, 68.3% ($601.9 billion) do not qualify for refinancing. Coupled with the fact that commercial real estate prices have dropped 40-50% or more, it becomes obvious that most people will have no choice but to default either at maturity or sooner, translating to massive market upheaval.
However, hidden within all this pessimism there is still opportunity. Unlike previous commercial real estate crashes, such as that of the early 1990’s, this crash has little to do with oversupply. So though many people may default and loose their properties, the properties themselves will still have definitive value. It is better to think of this crisis as a cleansing of the system, a removal of all the risk and debt which plagued us. Concurrent with the outflow of bad money will undoubtedly be an inflow of good money and a sound ground for the future.

Keynesian vs. Classic: Which approach do you agree with?

2009-05-21T07:31:00.000-07:00

By: Joan Pino

As an economics major, the past year as a student has been extremely interesting to say the least. The study of the demand, production, and consumption of goods and services is always at the center of debate during a recession. Different economists, such as Ben Bernanke and Robert Barro, have been interviewed repeatedly since the start of the economic downturn by members of the media trying to make sense of the United States’ current position and what it means for the future. The two major economic schools of thought, Keynesian and Classical, are what policy makers ultimately base their decisions on to drive our complex economy.

Classical economics was pioneered by Adam Smith in his book The Wealth of Nations in 1776. He advocated the concept of the “invisible hand”, which is based on the assumptions that people pursue their own economic self-interests and that prices adjust reasonably quickly to achieve equilibrium throughout the economy. Followers of the Classical school of thought discourage government involvement and policies because of their belief that they will be ineffective in eliminating business cycles (the business cycle: boom, recession, depression, recovery). Classical economists believe that the business cycle is the economy’s natural and best response to market conditions and should be left to reach equilibrium on its own.

In 1936, 160 years after Adam Smith’s The Wealth of Nations, Keynesian economics was developed by John Maynard Keynes in response to the Great Depression and unprecedentedly high rates of unemployment. The “invisible hand” wasn’t doing its job and people wanted an explanation. Keynes satisfied the need for a new economic theory with Keynesianism, which assumes that wages and prices adjust slowly, unlike the Classical model. The slowly adjusting markets account for unemployment because wages and prices don’t adjust fast enough to keep up with the number of people firms want to employ and the number of people who want to work. Therefore, Keynes suggested government intervention with an increase of its purchases of goods and services which would then stimulate demand for output and result in companies hiring more workers to meet the new demand. Thus, Keynesians believe government policies and intervention solve the problem of unemployment faster and more efficiently than the Classical approach of letting the market clear on its own.

Today’s policy makers tend to use some combination of the Classical and Keynesian approaches, although there are certainly several economists who strongly advocate one school of thought over the other. I hope my brief explanation of economic thought and policy helps you to understand our intricate economy a little better and the reasons for things such as stimulus packages and other government policies. Do you think you are a Keynesian, Classic, or somewhere in between?

10MM is the new $100MM; A Recap of Real Share’s Net Lease Conference

2009-05-08T13:02:00.000-07:00

Between the regular conversations with industry veterans, reading periodicals and daily press releases, and watching any local or national media, it doesn’t take much analysis to realize we are in the midst of a real estate and economic downturn never before seen. With this in mind, I knew it would be of paramount importance to attend Real Share’s annual Net Lease Conference on April 29th, 2009. This event gathered of 200 of the nations most intelligent and seasoned veterans representing all aspects of the net lease, sale lease back, and 1031 exchange markets, ranging from publicly traded REIT’s, hedge funds, private equity, lenders (yes, they still exist), as well as brokers and a handful of third party service providers. The organizers and moderators were aimed at figuring out where the market is, how we got into this malaise, and what the path to recovery should look like.

The opening remarks featured a quick synopsis of a few key statistics from a recent edition of “The Economist” which talks of the telling signs of General Growth Properties (GGP) recent Chapter 11 bankruptcy filing. As America’s second largest mall owner, GGP’s large debt load created by aggressive acquisitions during the run up of the market, namely the purchase of Rouse Company for $12.6B in 2004, as well as the recessionary environment with lower consumer spending and ailing retail tenants was it’s eventual downfall. Shorter term debt matured during an unprecedented retraction in the global financial markets. With this in mind, it was pointed out that there is $594B of additional commercial mortgages maturing in America between 2009 and 2011 alone, with no financing vehicle currently available to fill that void. While I sat pondering these comments, I mentally prepared myself to listen well and take many notes. Below is a synopsis of all the topics discussed, and what I took away from each panel, I hope it proves insightful…..

Making Sense of the Economic Downturn:

Howard Davidowitz - Chairman of Davidowitz & Associates, Inc.

We, as Americans, need pain, “Pain gets things fixed”
Living standards for Americans will never be the same as they were over the past 5 years…….EVER
In regards to the national stimulus plan and associated budget deficit, we are spending at an unsustainable level.
Interest payments on the national debt will constitute 12-14% of the GDP.
Retail is the worst hurt sector “All anchor tenants are in the ‘crapper’”
There is currently 21 square feet of retail space per every person living in the United States, while the per person demand equates to 13 square feet.
(Pessimistic would be an overly optimistic way describing Howard’s outlook on the economy)

Dr. Sam Chandan - President and Chief Economist with Real Estate Economics, LLC

America was engaged in a level of spending that was unsustainable
US savings rate between 2004-2006 was negative, however we are currently at 4% positive savings rate
While a positive savings rate ultimately is a positive movement, in the near term, it will extend the current retail downturn and weakened sales levels.“Wealth Effect” = greater spending when overall perceived wealth increases, while effective personal income does not increase
Currently experiencing a “Negative Wealth Effect” where income has decreased by 10%, consumer spending has been pulled back by 20%+
This is a different downturn than the early 90’s as there was less excessive and speculative building, limiting the supply side of the equation, however the demand contraction has been greater than previously experienced.

Town Hall meeting

Bruce MacDonald – President, Net Lease Capital Advisors
Richard Ader – Chairman, U.S. Realty Advisors
Peter Budko – Executive Vice-President and Chief Investment Officer, American Realty Capital
Gordon DuGan – President and CEO, W.P. Carey & Co.
Kyle Gore – Managing Director, Real Estate Net Lease Group, RBS Global Banking & Markets
Glen Kunofsky – Senior Director, Marcus & Millichap

Overall sentiments

In 2006, a similar panel discussed “what is the hot investment”, with the response of “everything”, while just 3 years later, the exact opposite is true, with no clear product type to pursue aggressively.
Opinions were very segregated between the Institutional investors and Private markets.
Recourse lending is here to stay – similar to yield maintenance which was instituted during the S&L crisis of the 1990’s.
Corporations will increasingly be attracted to Sale Leasebacks as an alternative to raising capital, however many corporations may have missed their opportunity, as either their corporate financials have deteriorated or the necessary capital to facilitate the transaction is simply non-existent.
Inflation was addressed as an issue to watch, with the current spending initiatives led by the government, it is not a matter of “if” it will be an issue, but “how bad” it will be.

Institutional investors

Most were out of the market for the past 3-4 years, as there was an excessive amount of capital in play, driving terms below where most saw as reasonable.
Only willing to pursue Credit Tenant transactions – true Investment grade tenant, signed to a lease of 15 years or greater, on an absolute net basis, with pricing based on the spreads displayed in the corporate bond market.
While corporate credit is key, real estate fundamentals must be present – market rents, market pricing for $/sf of building, etc.
Collectively mentioned that they were very inactive and overly the stressed that credit is everything in their underwriting.
There is a large amount of uncertainty over the implied pricing of a large transaction in today’s market, as funding a deal over $50MM requires an “act of god”

Private Market Comments

Investors are underwriting real estate as the primary driver in their decision making process
This includes an understanding of market rental rates, reasonable building and land costs, and reasonable re-tenanting for alternative use.
The large premium for purchasing a real estate asset that includes an income stream has been largely eroded.
The days of purchasing retail bank branches paying $80/sf in rent when market is $20/sf are over.
Private market players generally have a depository relationship with a local lender that is still providing relatively aggressive loan terms, although it is full recourse

New Realities of Debt Financing

Gerald Levin – Senior Managing Director of Sale-Leaseback Capital, Mesirow Financial
Barclay Jones – Executive Vice-President of Investments, iStar Financial
Andrew Kroll – Director, Debt Capital Markets, SunTrust Robinson Humphrey
Daniel Own Mee – Executive Director, Tremont Realty Capital
Nicholas Muzychak – Managing Director, Parkland Financial Advisors, LLC
Randy Reiff – Founder, Spartan Capital, LLC

Overall Sentiments

The Commercial Mortgage Backed Securities (CMBS) market may never come back, that product is inherently flawed.
The world as a whole is over-leveraged
Recourse is here to stay for the most part, you will have to pay a significant premium on an “A” product to get non-recourse.
Current rates vary between 5% to mid 6% for recourse money, some lenders will do non-recourse at low leverage at 7%+.
If CMBS market comes back, syndicating bank will have to remain in the deal, potentially structured as having to hold 20-30% of the paper
There is no product that currently exists to fill the void of the CMBS market, however lenders and capital sources are actively working on a solution, but it will be a slow evolution with many victims before a real product exists.

When posed the question of “In today’s market, describe a deal you would pursue”, here is what a representative from the following institutions answered:

Mesirow Financial – recently closed a $60MM deal for a “A” rated tenant, but we had to utilize 4 separate lenders to fund the transaction.
Suntrust Robinson Humphrey – True Credit Tenant Lease deal on a Sale-Leaseback or Build-to-Suit terms.
Spartan Capital – There isn’t a deal worth pursuing at this stage
Parkland Financial – Similar to Suntrust’s response – would need to be a true Credit Tenant, with 15+ year NNN lease through either a Build-to-suit or Sale-leaseback transaction.
iStar Financial – There are currently no real opportunities worth pursuing
Tremont Capital – Strong credit-tenant with strong real estate fundamentals on a basic 70% LTV transaction.

Net Lease Insider:

Paul McDowell – CEO, CapLease, Inc.

There is more pain to come on the real estate side of things
Public markets and owners have taken their hits (for the most part), but there are still private investors trying to hold on to bad assets.
Deal size - “$10MM is the new $100MM”
In regards to a lack in confidence in credit ratings as a guideline, “default of an ‘A’ rated company may occur, however it almost always requires many years of bad corporate management, and generally is coincided with downgrades along the way”
Real estate investors are like “wildebeests trying to cross a river filled with crocodiles. There is pressure to move forward by the herd, but everyone knows the first to act is in the most danger”
2-3 years ago the outlook was “Everything is good and there is no end in sight”, however today the outlook is “Everything is bad with no end in sight”

Roundtable discussion - Net Lease Opportunities in the Medical Office Sector:

This sector has garnered a lot of attention, as a recession resistant product type, however the basic fundamentals of market rental rates must be present
Tenant creditworthiness is being overly scrutinized, as the relatively hot properties must be guaranteed by one of the top two health care organizations with the market place
While private physicians tend to be good at creating a large amount of cash-flow, they generally lack the ability to build significant net worth when compared to a typical tenant guarantee in other sectors.
There are some attractive medical office tenants that fall within the private market for single tenant assets, such as Affordable Care, Fresenius Medical, etc.
On-campus medical facilities will fetch 25-75 basis point premium over off-campus facilities.

Underwriting Credit & Tenant Retention Strategies:

Merrie Frankel - VP/Senior Credit Officer, Moody’s
Benjamin Butcher – CEO, STAG Capital Partners
Robert Corry – Managing Director of Real Estate, Gladstone Commercial Corporation
Peter Mavoides – President & CEO, Sovereign Investment Company
David Steinwedell – Managing Partner, AIC Ventures
Gordon Whiting – Founder & Sr. Portfolio Manager, Angelo, Gordon & Co.

Experiencing relatively similar actual ratios of defaults, per letter grade, as the early 1990’s recession
A signaling event that things are looking better would be “Tenants Paying on Time!”
When tenants want rent relief, they better offer up to date audited financials and be willing to have an “open book” relationship between tenant, landlord, and lender (if debt is in place)
The Sale Lease Back and Net Lease business should be 15+ years view.
Property types to pursue, if not a publicly rated entity, should only be critical assets that are part of their core business in irreplaceable locations.

All in all, after eight hours of discussion covering all aspects of the net lease business, I can truly say that the general sentiments were that of determination to survive and profit on the way out of this mess. The number one issue is DEBT. We need a lot of it, and have none available. Lower leverage is a good thing, and it will take a while to de-leverage, but near-term debt maturities will sink many owners. Most people have realized we are currently at the ID stage, where we have realized the majority of the problems, and now need to focus our efforts on finding a solution. The “blame game” for why we are here can be sorted out later, right now we need to be creative yet conservative to move forward. If you have any questions about items mentioned, or would like to discuss any of the topics in greater detail, Please feel free to contact Patrick Nutt at pnutt@calkain.com or 813-282-6000.

Medical Office Real Estate May Be the Way to Avoid Un-Healthy Investments

2009-05-04T18:24:00.000-07:00

By Winston Orzechowski

While many real estate investments are losing value, the Medical Office sector has shown remarkable resilience. The segment is holding up much better than other property types and this trend projects to continue. So who do we have to thank for this bit of good news? Well the Baby Boomers of course. Though a recession can slow many things down, one thing which it cannot alter (although it may seem like it can) is the progression of time. The simple fact is that as more boomers age, they will inevitably have an increased amount of medical issues which subsequently turn into an increased amount of medical costs. This all adds up to relatively inelastic demand for medical services and their pertaining medical office buildings. So if you’re considering investing in today’s market, there may be no firmer investment than our nation’s infirmaries.

1031 Thy Name is Diversity

2009-04-30T10:56:00.000-07:00

By Winston Orzechowski

It is common to think of a 1031 transaction as one involving land for land or buildings for buildings. However, this is a tragic oversimplification.1031 transactions deal with “like-kind” property and in most people’s minds “like-kind” means both pieces of property are alike, such as trading land for land. But do not follow this train of thought when dealing with real estate; in the eyes of the IRS “like-kind” refers to all “qualified real estate”, opening the doors to a wide array of transactions.

For example:

In one case a person wished to exchange18 oil wells valued at 1.375 million for an apartment or office building. If they were to simply sell the oil wells and buy their building of choice, they would face a substantial capital gains tax; however, through the use of a 1031 they are now making this exchange tax free. That is because oil wells are considered qualified real estate and are eligible for a 1031 involving all other qualified real estate. Other qualified real estate types include: Coal mines, mineral rights, timber, and vineyards.

This all means that investors have an immense selection of properties to both acquire and exchange using a 1031.

Note: The example above pertains to real estate. A 1031 can also be used for property other than real estate such as medical equipment or airplanes, in which case the property would have to be alike i.e.: airplanes for airplanes, medical equipment for medical equipment.

I Want a WAG!

2009-04-22T12:28:00.000-07:00

By David Sobelman

NYSE: WAG! Walgreens has always been the stereotypical net lease investment. Bringing together single-tenancy, strong credit, triple net lease, and a "Main and Main" location, investors have sought out Walgreens as long term/stable investments. This current market cycle has only accentuated the desire for a WAG in one's portfolio. It wasn't that long ago that when you explained the potential return one would receive from this bond-like investment, roughly 6.5 - 7.5%, people would shun the notion of accepting that yield for such a long and finite period. However, compared to today's Money Market and CD rates, that CAP Rate doesn’t look all that bad. In fact, it may be higher than what people are currently receiving in similar "stable" investments.

There are dozens of Walgreens for sale today. But when you have several to choose from, the real estate of the site becomes ever more important. Gone are the days that you could purchase a WAG in Leoti, KS and believe that it is the exact same investment as one in Sarasota, FL. Lenders will look at the assets completely differently, even though the same lease, same credit and same building (most likely) will be present.

So pick your investments wisely as even WAG investors are becoming more discriminating.

2009-04-16T13:13:00.000-07:00

By Nicole Hipp

If I were to make a bobblehead of myself it would resemble a many-headed monster….to wear all the hats that I don each day as I morph in and out of my many roles. It’s career week in my 6 year old daughter’s classroom this week and on Tuesday evening she asked me “Who is Daddy? I mean not his name but what’s another thing we call him?” Ok, so I had to bite my tongue and resist all the clever answers immediately spinning in my head and said “Net Lease Broker”…which for some people, in this economy, could have a whole different meaning! And then she asked about me and I said “Bookkeeper”. And to avoid the next question I immediately offered a piece of distracting trivia to make my job sound a lot more exciting (in case she was compelled to share it with her class). “Did you know that bookkeeper is the only word in the English language with THREE sets of double letters all in a row?” (Recent news to myself as well!) She stared at me blankly perplexed much like she did when I tried to teach her “The Hustle”. So I tried to better explain that I count all the money and write checks to pay bills. She must’ve understood because as soon as Daddy stepped in the door, she proudly announced, Mommy is a book writer! Which is not a complete mistruth as I do have one of those in the works. And then the next day when I picked her up from school she shares “I told my class you are a book reader.” To a 6 year old this is quite the profession. Something they aspire to, so I accept it. After all, being a book reader to our kids really is a great thing. For many families, the economic downturn has been an upturn for the quality of family time. The creative juices that flow when you are trying to save money can be fun. Children now have a greater opportunity to learn some values – not just of money. And instead of constantly finding yourself on the run or eating out, families are eating in and entertaining themselves with each other AT HOME. The rat race got way out of control. And now consumer spending is down. It hurts in some ways. But when we are not out “consuming”, where are we? Hopefully at home with our families….book reading.

Teaching New Dogs Old Tricks and Old Dogs New Tricks

2009-04-13T05:38:00.000-07:00

By: Patrick Nutt

While it may not come as a surprise to everyone, the real estate market and broader economy is in a bit of a downturn. Many have focused their attention on the negative signs and headlines cast through every channel of media, but I’ve taken a much more micro-economic view; as in the economy located within the confines of my personal checking account. I quickly realized that there wouldn’t be any deposits into my “local economy” from TARP or the federal stimulus plan, so the best way out of this recession is to put my head down and work hard, with the belief that it will all pay off one day. A quick survey of my inbox indicates that many brokers have left the industry, whether by force or by choice, which instantly creates an opportunity to grab market-share and build a pipeline to benefit from the eventual recovery.

There are countless articles, webinars, seminars, teleconference marketing symposiums, and any other fancy titles for listening to people tell you how to do something better these days, most of which focus on tips of the industry pros for surviving the current down cycle through using technology, and being creative. I recently listened to a teleconference call discussing marketing and branding ideas for commercial brokers, and one example was discussed where a broker made bobble-head dolls of himself to pass out to his clients and prospects. This may be an extreme example, but it just goes to show you that necessity is the mother of innovation, and right now, generating business and maintaining relationships is a necessity.

Every possible form of electronic communication and networking seems to be on the forefront of discussion, covering everything from Myspace and Facebook to using Twitter and blogging. The popularity of these items and technological gap between industry veterans and the younger members in the brokerage community has caused many “old dogs” to try and learn a new trick or two. At the end of the day though, no “Tweet”, text, or email will be able to replace the old fashioned phone call, face-to-face meeting, or even a written letter. I have been fortunate enough as one of the younger members of this industry to learn from veterans that still preach the basics and have seen it pay off. Now’s not the time to skip the basics and forget the fundamentals, so when you’re trying to teach an old dog a new trick, don’t forget the learning can flow both ways, and it’s never too late for a “new dog” to learn some old tricks.

What is Your Generation?

2009-04-03T13:55:00.000-07:00

by Anonymous

Every generation wonders what the future holds for them, and every generation also has its own set of challenges to overcome. And guess what? People always manage to survive. They work the problem. The human spirit is a wonderful thing! And a lot of good changes happen when times are tough; it’s just part of a cycle. Those before us struggled and worked hard to make the world a better place for themselves and for their children. So here we are; now it’s our turn to figure it out! It’s our turn to be the grownups.

Life is a roller coaster ride. Each generation gets a new ride. And each generation is confronted with and ultimately defined by its own set of circumstances. No doubt, some generations are luckier than others. Some are faced with wars, some peace, good financial times, bad financial times, excesses, sacrifices. Luck of the draw… Some get to ride years with healthy economies, real estate booms, low interest rates, and even surprises such as Internet booms. Others get to ride through weak economies, Stock Market crashes, real estate busts, high interest rates. I guess if you live long enough, you’ll get to see it all!

Just have to ride it out. Maybe let out a big laughing scream with your hands in the air as your roller coaster hits the zero gravity drop! Make good decisions, stay healthy and be grateful spring is here! Be thankful for all the good, and muddle through, just like all the generations before us did!

The Unknowing Student…

2009-03-25T06:46:00.000-07:00

By: Shane Scanlon

As a soon-to-be college graduate, my cohorts and I should gain a sense of freedom; alleviating oneself from a lifetime of structured learning and accruing debt. Graduates across the country are finally given the excitement of trying to map out the next 60 years of their lives; however given the current volatility of worldwide economies, we have found ourselves coping with the greatest deal of uncertainty. With the tailspin of the financial markets and many “gen Y-ers” experiencing a first-hand account of their parent’s retirement plans diminishing, another question remains: What are we to do with our money?

As a child, my father always stressed how first impressions are everlasting, and I find that notion true based on my personal experiences to this point in my life. If true with people, I also feel could be true with investing and in a student’s case, there may be a lifetime of paranoia linked to this practice. Between the Dow Jones standing at a mere 58% today compared to its 52-week high and Bernie Madoff organizing the largest investment scandal by a single person, students are going to be left vulnerable in search of a stable avenue for their money. As surprising as this may sound to some of us within the industry, there are people out there who are not aware of passive investment in real estate. The media has engraved the idea of “Flip This House” to be investment real estate which has left people in their mid-20’s shying away from wanting to learn more due to their home-value tumble. In a study done at the University of Tampa, only 5 students of 40 were aware of what a net-lease investment was, and also 33 individuals identified investing in real estate “unfavorable.” When following up with some of these individuals I had found that none of the 5 students who knew what a net-lease investment was were in the 82nd percentile who suspect investing in real estate to be unfavorable.

I see a long-term opportunity for many professionals involved in real estate investment. Sure, it is unreasonable to assume a 23-year-old college graduate earning $42 thousand annually is going to be able to currently afford a $5 million Walgreens, however the ability to penetrate this market with the idea of educating can be advantageous. By simply creating awareness of what a net leased asset is and the passivity of such an investment, you can engage an entire age group who is looking for that trustworthy “someone” to provide answers during their greatest period of ambiguity.

“With every challenge comes a new strategy for taking action.” – Ralph Marston

Musings Of A Veteran Broker

2009-03-16T07:26:00.000-07:00

By Guenter Manczur

Those of us who have been around long enough to see prior real estate cycles remember only too well the period of 15% – 18% interest mortgages, the closure of numerous industrial banks and the much larger savings & loan debacle that was followed by an era when RTC-controlled properties seemed to be the only ones being sold.

Yet here we are, some 20 years later, having recently experienced an unparalleled period of price appreciation and economic growth in almost all sectors of the real estate industry. The expectation of constantly increasing prices has been the business model for many property owners, and countless purchases were made with the full expectation that an owner could re-sell any property, any time, for a profit.

Is it reasonable to expect that explosive growth can continue unchecked for long periods of time? Of course, not. Most of us agree that prices fluctuate with supply and demand conditions, and that periodic imbalances will result in price corrections.

In these times of being inundated by a barrage of negative financial news, it’s helpful to remember that commercial real estate transactions will continue to happen even in a down-market, albeit at a slower pace.

It’s Darkest before the Dawn

2009-03-03T07:10:00.000-08:00

By Jonathan Hipp

It is very easy to justify why it’s okay to be mediocre in today’s real estate market when you listen to the news in its various forms. And then there are all your colleagues and competitors validating all your fears. Markets like this require you to adopt the champion’s creed if you are going to succeed and grow even when all common sense seems to justify the opposite way of thinking. I believe that misery like’s company and it’s easy to become involved in those types of conversations and relationships with family, friends and associates. The thought and attitude used to be that the good times would never end as capital was flowing relentlessly and it seemed everyday that somebody was flipping a property for a big profit and brokerage commission even before they had gone to settlement. It was so easy; we all had keys to the castle. Many brokers and investors made big money by just showing up and playing the game. So here we sit today licking our bruised wounded egos and reflecting and asking where we go from here. I find this from Roger Staubach, former chairman and CEO of the Staubach Company, very fitting for the challenges our industry and ourselves face today.

“To me success is being able to feel good about how you’ve done things. You have to have balance in your life. You can’t think only about ‘what’s in it for me?’ You have to give back and ask for help and say you’re sorry and contribute to the success of others. And you can never give up. Athletics taught me that. You must work hard, prepare, learn from your losses and continue to fight until the very end.”

It’s very true we don’t know how long this cycle will last and we probably haven’t reached the lowest point yet. But I can tell you that it’s always darkest before the dawn.

Cohorts of Capitalism

2009-02-25T13:17:00.000-08:00

By Cheri Martin

I’ve heard all the statistics, which seem ever-increasing on a daily basis, but during my recent search for a new apartment and subsequent endeavors to furnish my humble abode with furniture and electronics, I have cause to reconsider the widespread premise that America is in a recession.

Capitalism the basis for our economic wealth system in America has been described by different economists, different ways. Milton Friedman, an American economist, statistician, public intellectual, and Nobel Memorial Prize recipient in the field of Economic Sciences once supplied “the social responsibility of business is to use its resources and engage in activities designed to increase profits through open and free competition without deception or fraud.” [NYT, 1970] The Economist, a weekly news and international affairs publication which advocates free markets and minimum government regulation to prevent business monopolies, has hailed Friedman as "the most influential economist of the second half of the 20th century…possibly of all of it."

Fast forward to the start of the economic downturn in December 2007, the fall of Wall Street and the financial sector, coupled with the end of the housing boom and, consequently, nearly 3.6 million people unemployed to date. Yes, for many Americans, including me, the current climate is quite frightful, but I wholeheartedly believe this is merely a market correction and a return to moderation.

For example, when I began looking for an apartment in December 2008, I found less than 10% vacancy rates and $1,200+ pricing. Some of the residential communities, offered special lease incentives, but the lease structures were based on competitive rates and pegged to make money, rather than lose it. This was contrary to the message that mainstream media sends to me everyday that the times could be indicative of the end of days for America the Beautiful, as I know and love her, as a capitalist society.

In January 2009, after 60 years in business, a major US retailer of specialty consumer electronics, appliances and PCs announced that it was closing its doors. Since the announcement, the retailer has closed many of its stores and liquidated inventory to sale at select locations. A few weeks ago, I ventured out to check the prices on their large, flat screen televisions. Upon my arrival, I found the prices were higher on the products with only a minimal discount being given, than they were before they filed for Chapter 11 bankruptcy. “How is this possible that your prices are higher when you are going out of business, I thought, when most of the remaining inventory is previously used display screens?” It just did not seem logical. The store was packed with people like me interested in seeing how much bang they could get for their buck. There were a few takers, but mostly window shoppers willing to return when the real discounts were applied to the products.

My expedition to purchase furniture led me to several different retailers offering similar style and quality products, but under different brand names with moderate to high- end pricing. All the stores were located in the same 1 mile demographic. One of the high-end retailers was going out of business, so I wanted to see what I could find. What I found was $3,000+ beds, yes, ONLY the bed, and $7,000 sofas, definitely out of my league. Given the lack of foot traffic in the store during my visit, probably not a realistic approach for most consumers during these times, especially when the moderately-priced retailer offered the same merchandise at lower prices, with additional discounts and credit financing.

Piero Sraffa, an influential Italian economist, defined capitalism as an entire system of social relations among both producers and consumers, but with a primary emphasis on the demands of production. According to Sraffa, “the tendency of capital to seek its highest rate of profit causes a dynamic instability in social and economic relations.”

The economists seem to have the right idea across the board that capitalism and its success or demise is largely based on relationships, how we choose to forge forward as businesses and consumers, employers and employees, government and citizens. I believe the techniques used to be successful by some in the commercial real estate field are a good example of those that should be applied to revive our sluggish economy. I’ve seen Buyers, Sellers and Brokers alike make concessions on pricing, terms, closing costs, referral fees, etc. in the best interest of getting the deal done and not squandering prime opportunities. The principles of building loyalty, while cultivating new clients are essential to longevity and boosting your image and presence.

Many Americans have money which they are ready and willing to spend and credit to use, but wisely. Some of the businesses I dealt with during my quest, showed me that they recognize how significant the emphasis should be that is placed on the “relationship” component in order to get deals done, which I believe is why they have weathered the current economic storm, and continue to do so. These businesses realize that as cohorts of capitalism, we have a shared responsibility greater than supply, demand and product, to embrace capitalism and protect it, no matter how volatile the times! Capitalism is synonymous with freedom from my viewpoint, and isn’t that what America is ALL about...FREEDOM!

Show me the Money!

2009-02-18T10:19:00.000-08:00

By Nicole Hipp

I have a confession to make. I am not a sports fan. You won’t ever find me slathered in body paint and dancing and screaming on national TV. However, you might find me accompanying my husband or kids to a game and holding my daughter up so she can dance the winning dance and I’d even help my son paint his face red, white or blue, as such a task really does seem to require a woman’s touch. I’ll have a beer or two, buy the cracker jacks, watch the super bowl commercials and hopefully chat it up with another un-sports fan. Okay, I admit it; I’ve even bought my dog his own football jersey with his name on it. But really, I’m not a sports fan. I barely know the rules. But I like the rules. Maybe I’m a closet sports fan.

Sportsmanship is healthy. Healthy for the environment (beer bottles are all plastic recyclable with no caps), healthy for the economy, healthy for the community, and healthy for the family. I’ve given this more thought recently because of where I live and have worked.

I live in Loudoun County, VA and used to work in southeast Washington DC. Loudoun County was the second fastest growing county in the nation during the economic boom. (“Boom” is such an ironic term for economic growth. As a mother, when things go “boom” it’s not usually a good thing!) Recently however, it is starting to resemble a ghost town with beautiful new commercial spaces and homes sitting vacant. So when it was just announced that Donald Trump was buying Lowes Island Golf and Country club, I asked “Why?”. Then I just had to defer to his decision and try and ascertain what potential he saw. I started thinking that maybe the potential he saw was geographic. The greater Washington DC area is somewhat insulated to economic crisis due to the significant presence of the federal government and all its contractors. But the private sector, retail and service industry of the greater metro area is not immune to it, unfortunately! Rather, I think that the investment is in the sportsman. In tough economic times, a sportsman is still sportsman. Once a sports fan, always a sports fan. I’d venture to say that a sports fan’s blood may run thicker than some family members!
Most parents wouldn’t discourage our children from becoming involved in a team sport. Being a player on team teaches one how to be a team player later in life. When considering a recent hire, what finally bumped one applicant to the top of the list was her experience as a college sports team captain. And when a family becomes involved in a team sport, coaching, attending games and practices, supporting and exercising, it becomes a win-win for all.

So is it the same with a professional sports organization and the community. The presence of a professional sports entity or structure in a community breeds economic growth through jobs, hotels, restaurants, shops, and transportation. It’s a solid long term investment. And in many major cities, during a home team sporting event, the crime rate drops significantly! I reflect back to the 1990’s when I worked in Southeast Washington DC in the US Navy Yard. When I walked to work, never alone, I used to literally have to step over garbage, used needles, and even passed out stone cold drunks on the curb. Being in the shadow of the US Capitol and adjacent to the Navy Yard did not boost or help the socioeconomic conditions of the neighborhood. Now fast forward a couple years. Last summer I went with my family to a Washington Nationals game at the new stadium constructed adjacent to the Navy Yard. I was stunned. I couldn’t quit blabbering about what the neighborhood used to be like. The transformation in such a short period of time was nothing short of amazing. Even in this economic downturn, the only direction for this neighborhood now is UP.
So now I hear discontented rumblings in my county again about citizens unhappy about the county’s recent decision to partner itself with the Washington Redskins. Some people are unhappy about the expense related to marketing and branding itself with the sports team. Pennies compared to the return the county could get. Kudos to the county officials who decided to secure that the Redskins will keep their training camp in our county. Players buy and live in homes in our neighborhood. If the Redskins ever decided to move their training camp out of the county, it would have very negative effects on our already dwindling economy that went “boom.”
Like Cuba Gooding Jr. said to his agent (Tom Cruise) in the movie Jerry Maguire, “Show me the Money”. The clip from this movie (http://www.youtube.com/watch?v=OaiSHcHM0PA) has an important lesson for brokers and agents of today that seem faced with an impossible task. Stick with it, give it all you’ve got and your faith in a good solid investment, even against all odds, will pay off.

I Have A Confession!!!

2009-02-13T06:17:00.000-08:00

By Patrick Nutt, Senior Associate

I have a confession to make: I am a commercial real estate broker. Just one part of being a broker is the constant networking and socializing, staying on top of the latest trends and rumors throughout the industry. Nowadays, attending industry functions similar to last week’s ICSC event feels more like going to a support group than a high energy networking event. An introduction to someone outside of the real estate world generally proves to be even worse, with a typical conversation generally going something like this:

Party A: “So, what do you do for a living?”
Me: “I’m in commercial real estate.”
Party A: “Oh, sorry to hear that, how are you doing these days?”
(As a point of reference for some people that may not know, “commercial real estate” is actually my field of occupation, not a rare, incurable disease.)

Sure, the commercial real estate sector has seen better days, everyone knows that, but what most aren’t aware of is the relative stability in the net lease sector. Consider that, according to a recent CoStar report, retail sales volume as a whole was down 43% for 2008 vs. 2007, however during that same span, shopping center transactions alone are down 90%. In addition, when you talk about the re-pricing of assets and adjusting cap rates, Shopping center caps are rising (prices falling) at twice the rate of single tenant sites, rising 145 basis points over the past 12 months.

I suppose I could provide some lengthy, in-depth, study and analysis of what has caused this, but I prefer to take a more “common sense” approach these days. Plain and simple, net leased assets are more often occupied by national tenants, where shopping centers may feature a national anchor, their rent rolls and CAM fees rely heavily on the local tenants, precisely those that may lack the necessary operating capital to sustain the current recession. The passive, long term leases and strong national tenants which generated the popularity of single tenant net leased sites over the past 5-7 years are precisely what have afforded this stability.

Shopping centers, office buildings, and other commercial properties are most often occupied by multiple tenants, signed to shorter term leases of 3-5 years. As these leases prepare to expire, tenants are using this opportunity to request rent reductions, lower CAM contributions, and even shorten primary lease terms. While those landlords deal with shrinking rent rolls, tenant turnover, and rising operating costs due to higher vacancy, finding a buyer to jump into this situation could prove difficult. Add in the fact that financially sensible debt is tough to find, the only deals trading these days seem to be the smaller, lower leveraged purchases under $7M occupied by strong tenants. These criteria sound an awful lot like a typical McDonald’s, Burger King, Pep Boys, Advance Auto Parts, CVS, or Walgreen’s transaction, don’t they???

Like I said, commercial real estate may have seen better days, but if I had to pick a niche to work in during this down-cycle, the net lease nation sure seems to be a pretty good place to be.

Patrick Nutt, Senior Associate

ICSC Tampa – What did you hear?

2009-02-04T13:10:00.000-08:00

Yesterday, at the ICSC conference in Tampa, I felt like I was either the smartest person in the room or the dumbest. In most cases, if you’re wondering, I’m the latter. However, I knew that the roughly 700 people in attendance were all thinking the same thing, what am I going to hear that is different than the nightly news? Besides the hard statistics that were presented to us, it was essentially the same as every other day. Companies laying off people, rents being reduced and people just happy to have jobs. I actually heard one tenant say that they wouldn’t pay more than single digit (under $10 per square foot) rent for any of the their new deals.

Whatever the outcome of yesterday’s meetings, there were a lot of people there truly willing to spend some time out of the office. I mean, what else was there to do?

Although, the one bright spot I heard is that Florida is still one of the best growth markets in the country, but lost the coveted “the best” status in 2006. Being in third or fourth place in this market is probably the best thing that could ever happen to the state. Getting a big “slap in the face” that you actually have to know what you’re doing to make money in real estate could be the best thing that ever happened to us.

So, while I contemplated slitting my wrists on the walk to my car after listening to Henry (Hank) Fishkind, Ph.D., a big-time Florida economist, I decided that I wasn’t going to let the “Doom and Gloom” run my life. So I drove to Chick-fil-A and got myself a sweet tea. That always fixes everything. In fact, they should have served them at lunch.

Buyer Perception

2009-01-13T02:11:00.000-08:00

What is happening with the perception of today's net lease investor? The private investor, those individuals that are seeking to invest their own money, is essentially seeking a deal. While most net lease investments, by nature, do not have drastic potential for increased future yields, the intital capitalization rate has become more important than in years past.

There have been many transactions over the last several years that garnered extremely low returns for the investor. Sometimes those cap rates were below five percent, but it seemed to make sense for the investor because they were purchasing a depreciate asset that had a sound tenant paying their rent.

However, those very same tenants, with the very same lease terms, are now proving that the buyer is looking to receive a better initial yield then they previously sought.

Lets take a stereotypical net lease investment as an example; a Walgreen. Your local Walgreen is always on the best corner in town, they are an extremely viable company with an investment grade credit rating and their lease is as passive as they come. Additionally, the length of the lease is for an initial term of 25 years with no escape clauses.

There was a day when this bond-like investment would trade at a yield of 5.75%. Which means that the investor would be locked in to that exact same yield for the duration of the lease. But investors felt OK with that since they were also gaining a strong sense of security with the above average real estate they were purchasing as well as the credit rating of the tenant. In today's market environment, however, that very same investment would trade above a 7.00% cap rate. Quite a large difference from years past, but the perception has changed for the investor and they are requiring added yield for their investments, even though the same intrinsic indicators of the investment have not changed.

It is something to consider for both buyers and sellers in today's market that assets priced fairly and appropriately will always trade in any market.

Welcome to Net Lease Nation!

2008-12-28T03:20:00.000-08:00

This is the first entry in the newest, most up-to-date net lease blog. While others have tried to explain the nuances of a net lease investment, most are academic or strictly post other's news articles. Net Lease Nation will give you straight and forthcoming positions on issues that affect net lease investments. We encourage feedback from our readers, either positive or negative, and hope to create a dialogue that will foster interesting conversation in order to better understand the topics that are most prevalent in today's markets.

There will not be any sales pitches here and any comments from readers are highly discouraged to do the same. The purpose of this blog is to just discuss the issues at hand. There is no secret that today's market provides plenty for everyone to discuss. We should take advantage of these issues and make sure we are able to express the facts and opinions about them accordingly.

We look forward to your candor and hope you will be able to regularly join us to see what new topics are being discussed.

Thanks.

Welcome

2008-12-16T08:43:00.000-08:00

Welcome to the NetLeaseNation.com Blog!