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By Alex Zylberglait, September 30, 2009 4:46 pm

What opportunites should we see coming in this period?  This is a 2-part post which I am posting today Wednesday and on Friday.

Anyway, I think that a huge number of commercial properties in all classes will hit the market as sellers become increasingly motivated due to debt maturities and needs for capitalization.  Investors are now scaling up their radar and preparing their resources  today to ensure they find attractive properties and can move quickly when these assets become available.

Read the rest of this post below which came from a section of the Marcus & Millichap Special Outlook on Government Programs and Maturities Report.

Tight Credit Hampering Commercial Real Estate Sales

The escalation of the credit crunch to a full-blown financial crisis in the fall of 2008 led to additional constraints on tight commercial real estate financing, reducing sales activity further through the first part of 2009. Prior to the near shutdown of credit markets last fall, commercial real estate sales volume was already down 70 percent from peak levels. The trend gained momentum through the end of 2008 and first half of 2009, with sales volume 90 percent below its peak as of the second quarter.

Buyer/Seller Disconnect Easing

In addition to the tighter financing climate, the wide gap between buyers’ and sellers’ price expectations is a major contributor to the drop-off in property sales. The disconnect became more severe in recent quarters, as buyers anticipated far deeper discounts due to rising distress and weaker fundamentals. There is some evidence emerging that sellers are becoming more accepting of current market sentiment, with cap rates on newly offered properties up approximately 50 basis points to 100 basis points from last year. At the same time, buyers are recognizing the difference in pricing based on market and property quality. Many investors remain on the sidelines, but interest in commercial real estate has increased, as have available inventory and offer activity.

Commercial Real Estate Investors Re-Evaluate Strategies as Downturn Continues

Until earlier this year, many owners were operating under the assumption that they were well-positioned to ride out the downturn. The deepening of the financial crisis last fall, however, led to severe job cuts across industries, as many companies were unable to secure short-term financing to fund basic operations. As a result, space demand deteriorated rapidly, cutting into NOIs and property valuations. With forecasts calling for continued economic weakness in the near term and rising distress in the commercial real estate sector, more property owners will opt to adjust prices rather than risk further equity erosion or a foreclosure.

Special thanks to my colleagues here at Marcus & Millichap, Erica Linn – Senior Analyst, and Hessam Nadji – Managing Director.

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By Alex Zylberglait, September 29, 2009 2:49 pm

Consider Tax, Legal, Liability, Succession and Management Issues When Determining How to Hold Title to an Investment Commercial Real Estate

Holding real estate in your name makes investors targets for frivolous lawsuits as property ownership is public record in most parts of the country. There are over 24 million lawsuits in the US each year. Using those numbers, the average American can expect to be sued 3 times in their lifetime. Since it makes no sense paying a lawyer to sue a poor person (and lawyers wouldn’t take a contingency case unless the defendant had easily visibly assets) real estate investors that don’t protect the privacy of their investments will be disproportional sued. Don’t put a target on your head for frivolous lawsuits.

If you have a business, avoid titling real estate in the name of the corporation. Beyond the negative aspects of adding debt to your company’s books (assuming you have financed the property) any suit related to the property will flow through to the company.   You will also face these negative situations:

• Separate taxable entity which will pay corporate tax rates
• No preferred capital gains tax treatment
• No ability to pass through losses to personal income tax

Ultimately, the decision on how to hold title to a property depends on many factors including the number and type of owners in the property, the goals of the investor, and whether that property correlates to a business of the owner.  Creating and properly maintaining a real estate holding entity to hold title to your investment real estate is a critical component to protect your real estate investment from lawsuits against you personally and from lawsuits against the property that is in the entity from spilling over to you personally.  
Properly structured real estate holding companies (LLCs, LLPs, etc) provide asset protection but alone they will not protect you from the time and expense of probate. 

Put Real Estate into a Living Trust to Avoid Probate

Probate means court supervision of your estate at your death.  Probate is expensive and takes time, so most people like to avoid it whenever possible.  Simply having a will does not avoid probate.

A living trust, on the other hand, is a legal document that replaces what you think of as your will.  The living trust makes sure your assets go to the people you choose.  It also avoids probate upon death or a conservatorship proceeding if you become incapacitated.  Properly prepared it allows couples to eliminate or substantially reduce taxes, and eliminate the time and expense of probate. 

Many people that have trusts fail to officially put their properties into the trust (“funding the trust”) which can force them into probate.  In some counties you can petition the court to include the asset in the trust but its prudent simply to place the property in the trust to begin with.

Putting your property directly into a trust for example, “John and Jane Doe Living Trust” does not provide asset protection.  The preferred method is often to place the property into the entity (LLC, LLP, etc) and make the Trust the primary shareholder in the entity.  As always, consult your tax and legal advisors for advice on your particular situation.

Read Part 1. Read Part 2

I will post Part 4 on Thursday, October 1st, 2009.

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By Alex Zylberglait, September 28, 2009 1:35 pm

Lenders, in many cases, are working with borrowers on a modification of loan terms and avoid foreclosures. Buyer interest has been increasing as more properties become available at realistic prices as sellers-backed financing increase making up 50% of transactions compared with only 11% a few years back.

Read the rest of this post from a section of the Marcus & Millichap Special Outlook on Government Programs and Maturities Report below.

Portfolio Lenders More Amenable to Commercial Mortgage Modifications

Many portfolio lenders are actively working with borrowers to modify loan terms and avoid foreclosures. The situation is more difficult for owners with CMBS loans, as multiple parties hold an interest in the mortgage. Delinquent CMBS loans also are transferred to special servicers that have strict limitations related to property foreclosures and distressed sales, further delaying a large inventory of discount sales coming to market.

Distress Spreading

Since the start of 2008, the volume of distressed commercial real estate has swelled to an estimated $115 billion. Distress was initially concentrated among failed development and condo conversion deals, but the office sector took the lead in the fall of 2008 as the financial crisis intensified. The composition of distressed properties has since shifted again, with retail properties now accounting for the greatest share, or 30 percent of the total, up from less than 10 percent one year ago. Of the core commercial real estate sectors, retail recorded the most significant speculative construction in recent years as developers chased, and even built ahead of, rooftops into far-reaching suburbs. The reversal of housing-related fortunes and shrinking stock portfolios have contributed to the loss of $13 trillion from the overall net worth of U.S. households since mid-2007, resulting in a drastic pullback in consumer spending and a growing propensity to conserve cash.

Commercial Lending at Bottom?

Commercial mortgage originations continued to decline during the first half of 2009, reflecting further reductions in loan demand and broad-based constraints on debt capital. In the first quarter alone, originations were down 26 percent from the fourth quarter of 2008 and were nearly 90 percent below levels reported prior to the onset of the credit crunch two years ago. Fannie Mae and Freddie Mac have recorded the lightest decrease in originations over the past year, as their multi-family loan portfolios continue to perform well.

With the exception of Freddie Mac’s recent securitization, CMBS issuance has been at a complete standstill since last June, while life insurance companies generally remain on the sidelines. Over the past several quarters, real estate investors have relied largely on commercial banks for new loans, which have become wary of originating large loans and increasing their risk exposure to individual assets. The limited amount of debt available from traditional lenders has resulted in a drastic increase in assumed or seller-backed financing in transactions, which now accounts for more than half of the marketplace, compared with only 11 percent a few years ago.

Read Part 1

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By Alex Zylberglait, September 25, 2009 8:00 am

Wave of Maturing Commercial Mortgage Debt Approaching

The tight financing climate is not only hindering acquisitions but adding another layer of complexity and challenge for commercial property owners with maturing debt. In the next two years, an estimated $550 billion of commercial mortgage debt is scheduled to mature. A significant share of this debt is unlikely to qualify for refinancing without equity contributions by the owner. Issues could become more severe as debt originated from 2005 to 2007 matures, since loan-to-values (LTVs) during this period were at historically high levels, and many loans were underwritten based on overly optimistic occupancy and rent growth assumptions. The impact on the market is likely to be substantially minimized by lenders’ focus on workouts and modifying loan terms, at least in the short term.

Delinquency Rates Rising

During the first quarter of 2009, CMBS delinquency reached 1.85 percent, up from less than 0.5 percent early last year and the highest level on record. The delinquency rate for loans issued by banks and thrifts jumped to 2.28 percent in the first quarter, a 90 basis point rise from six months earlier and on par with the rates reported in the mid-1990s. Commercial mortgage delinquencies among life insurance companies Fannie Mae and Freddie Mac also have increased in recent quarters but remain low at less than 0.35 percent, as these lenders maintained conservative underwriting standards throughout the most recent real estate boom.

I’ll post part 2 on Monday, September 28, 2009.

Special thanks to my colleagues here at Marcus & Millichap, Erica Linn – Senior Analyst, and Hessam Nadji – Managing Director.

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By AZ Advisory Team, September 24, 2009 8:00 am

Match Real Estate Investments to your Tax Bracket and Cash Flow Requirements

As a rule, newer properties that are net leased to strong national tenants provide more stable cash flow but with limited upside potential. Net leased retail properties have been very popular with retirees for many years due to their stability and limited management responsibilities associated with newer properties. At the other end of the spectrum is raw land, which in most cases is a negative cash flow investment through the holding period (remember property taxes and levies) and provides very limited tax benefits (depreciation can only be taken on structures, not land). Well located land however can have phenomenal upside potential for patient investors if it has a high potential for development in the path of growth.

Carefully consider and analyze the “best case”, “expected” and “worst case” financial scenarios for the property. Would the “worst case” scenario force you to sell the property to meet personal financial obligations?

Understand the Difference Between Property Management, Asset Management and Portfolio Management

Property Management: Revolves around the regular, ongoing operations of an investment property. Property management companies often specialize in particular property types, for example shopping center management. Common duties are collecting rents from tenants, ensuring that tenants are in compliance with their lease terms, paying expenses of property, preparing monthly or quarterly reports of property operations and cash flow. May or may not do leasing activities on property.  Typical fees for property managers run between 3 to 5% of the gross rents collected.

Asset Management: Provides strategic direction for a particular property based on the stated goals and requirements of ownership. Ensures that property management and leasing activities and proper and aligned with strategy. Often requires a Leasing Broker who supervises budget preparation by Property Manager. Reviews and approves all potential new leases, construction and capital improvements to the property.   Asset managment fees customarily run between 1-2% of the gross rents collected and are usually only done for large investment properties.

Portfolio Management: Ongoing analysis of multiple real estate investments, associated financing and structure, buy and sell decisions, and 1031 Tax Deferred Exchange decisions, as it relates to the unique financial and personal goals of each investor. Real estate portfolio management is the most overlooked of the three components and is critical to the long term success of real estate investors.

Read Part 1. Read Part 2. Read Part 3.

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By AZ Advisory Team, September 23, 2009 5:52 pm

Marcus and Millichap CEO, Harvey Green talks about:

●  What transactions are getting done
●  The state of the CMBS market
●  commercial real estate outlook

Click here to watch the video.

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By Alex Zylberglait, September 22, 2009 5:42 am

Have a Clear Understanding of your Overall Financial Goals, Risk Tolerance, Income Requirements, and Tax Implications Before Making any Real Estate Decision

As an investor you can have extensive information on a particular property and market but still make a wealth draining decision if you have not carefully considered all possible real estate alternatives within the context of your unique tax and financial situation.

Successful commercial real estate investors understand that building and protecting commercial real estate wealth requires expert advice on the following issues:

• Buy, sell, hold, 1031 exchange, refinance or redevelop a property
• Financing structure and impact on operations and holding period
• Amount of financing leverage for the investment to maximize cash flow and tax benefits for a particular investor without adding undue risk
• Before and after tax impact on cash flows for all alternatives
• Ownership structure (LLP, LLC, Partnership, Individually, Living Trust, etc) benefits and limitations
• Decision making when properties have multiple owners with different goals and objectives
• Partnership buy-outs
• Redevelopment and repositioning of property
• Property management operations
• Building facilities maintenance and capital improvements
• Estate planning and wealth transfer planning

Balance Real Estate Holdings by Geography and Property Type to Protect Against Market Downturns

A balanced real estate portfolio can provide for wealth accumulation while managing the risks of downturns in individual property types and markets. It’s the same concept as having a balanced portfolio of stocks and bonds that is appropriate for your personal financial situation.  For instance, when most people retire their investment portfolio is often re-weighted to include less individual stocks and a higher percentage of fixed income investments and annuities. 

Real estate portfolios should be balanced in much the same way that is, changing to reflect the requirements of the investor for their stage in life.  Real estate, like all investments has a certain level of inherent risk.  However it would be rash to simply sell the real estate, pay all of the built up taxes and using whatever is left over to buy bonds and treasury bills.  Instead, adjust your real estate holdings to match your requirements when you enter a new phase of life.

Standby for the continuation on Thursday.
Read Part 2

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By Alex Zylberglait, September 21, 2009 10:05 am

Now let’s talk about the Public-Private Investment Program or PPIP

The proposed government-private partnerships aimed at moving toxic assets off of banks’ balance sheets were initially well-received and promising, but implementation has proven difficult. To start, banks have raised large amounts of equity capital without having to sell assets at deep discounts, reducing their motivation to participate in the program. Furthermore, some potential participants are reluctant to partner with the government, wary of possible restrictions that could be imposed at a later date.

As of the end of July, PPIP was moving forward but at a scaled-down level. PPIP had targeted the removal of up to $1 trillion of legacy loans and securities from banks’ balance sheets; however, as financial markets improved, the government reduced its target for the first round to $40 billion in legacy securities only. The impacts of a scaled-back PPIP on commercial real estate investors are mixed. While it may take more time for banks to clear their balance sheets of toxic mortgage-related securities, their lack of enthusiasm for the program signals that mortgage term extensions and workouts are likely to continue as a major focus, especially for higher-quality assets.

• Legacy Securities Program. As part of the PPIP, the Legacy Securities Program allows prequalified fund managers to receive an equity contribution and favorable financing from the government to purchase legacy securities. These securities include existing CMBS that were highly rated at the time of issuance. If successful, the program could provide an important price discovery tool, one of the first steps in restarting credit markets and freeing up capital for new lending.
• In early July, the Treasury formally announced its list of nine prequalified fund managers to participate in the first round of the Legacy Securities PPIP. Fund managers have 12 weeks to raise at least $500 million each in private capital, in addition to investing a minimum of $20 million of their firm’s capital into the Public-Private Investment Fund (PPIF).
• The government committed $30 billion to the program to match equity capital raised from private sources and to provide up to 100 percent financing of the total equity in the PPIF. The first round of the PPIP holds the potential to remove up to $40 billion of legacy securities from banks’ balance sheets.
• Legacy Loan Program. In conjunction with the PPIP, the Legacy Loan Program was intended to help banks move whole loans off of their balance sheets. In June, the FDIC postponed a pilot sale by open banks through its Legacy Loan Program, citing banks’ ability to raise capital successfully without moving these assets off of their balance sheets. At the same time, however, the FDIC announced plans to test a similar funding mechanism to sell receivership assets of failed institutions this summer. While the platform may draw from the model utilized by the Resolution Trust Corp. (RTC) in the early 1990s, the list of failed banks consists of mostly smaller institutions; therefore, the quantity, size and quality of assets offered by the FDIC in the foreseeable future will likely pale in comparison to the RTC days.

Special thanks to my colleagues here at Marcus & Millichap, Erica Linn – Senior Analyst, and Hessam Nadji – Managing Director.

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By Alex Zylberglait, September 18, 2009 8:00 am

In summary…

Term Asset-Backed Securities Loan Facility (TALF)

• TALF was expanded in May to include highly rated commercial mortgage-backed securities (CMBS). Spreads on AAA-rated CMBS have since narrowed dramatically.
• At its first subscription date in July, the legacy CMBS component of TALF received requests for $670 million in loans. All but one of the bonds submitted were accepted as collateral for TALF loans.
• Two REITs are expected to soon test the new CMBS component of TALF, with each projected to borrow up to $600 million against assets in their portfolios. A substantial amount of the capital raised will likely be utilized to pay down maturing debt.
• As a result of the lengthy ramp-up time for this program, TALF has been extended through March 31, 2010, for existing CMBS and through June 30, 2010, for newly issued CMBS.

A growing number of large property owners, investors and lenders will take advantage of the program by year end.

Read Part 1
Read Part 2

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.

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By Alex Zylberglait, September 17, 2009 8:00 am

Calculating Modified Internal Rate of Return

MIRR is an alternative to the traditional calculation of the IRR in that it computes an IRR with an explicit reinvestment rate assumption.

The discount rate that equates the present value of all negative cash flows (including the down payment) to the future or terminal value of all the positive cash flows is the MIRR.

While the internal rate of return (IRR) assumes the cash flows from a project are reinvested at the IRR, the modified IRR assumes that all cash flows are reinvested at the firm’s cost of capital. Therefore, MIRR more accurately reflects the profitability of a project.

For example, say a two-year project with an initial outlay of $195 and a cost of capital of 12%, will return $121 in the first year and $131 in the second year. To find the IRR of the project so that the net present value (NPV) = 0:

Thus, using the IRR could result in a positive NPV (good project), but it could turn out to be a bad project (NPV is negative) if the MIRR were used. As a result, using MIRR versus IRR better reflects the value of a project.

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Alex Zylberglait provides commercial real estate investment advisory as well as research, estate planning, asset allocation, valuation, financing, special assets services, transaction advisory and commercial property acquisition and disposition services.