Golf and Waffles?

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?

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?

It’s Darkest before the Dawn

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

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!

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!!!

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