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By AZ Advisory Team, October 22, 2009 2:30 pm

In many cases commercial real estate assets will be generating a steady cash flow or be candidates for a turnaround.  Other assets will just need an experienced management team to come in and stabilize the property.

As the economy improves, by which the improving manufacturing sector shows us, real estate fundamentals should improve with it putting a halt to dropping values, rents and occupancies.

There will be opportunities to buy assets from indebted owners at very good values.  Some properties that will be foreclosed may be dead malls and offices, but many others will not be. There’s a big difference between distressed assets and distressed owners. Both may trigger foreclosures, but the latter will be big opportunities for select astute players in the sector to come in.

It’s just a matter of finding the right commercial real estate investment advisor, to help you find the right fit and the right investment strategy based on your objectives.  Contact Alex Zylberglait.

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, October 2, 2009 11:18 pm

Here’s the continuation of my post last Wednesday taken from a section of the Marcus & Millichap Special Outlook on Government Programs and Maturities Report.  To get the full report, go here and sign-up.

Negative Investor Psychology vs. Long-Term Opportunity

Government programs to jumpstart the credit markets are promising, but they are only the first step in reversing the negative feedback loop currently in play throughout the commercial real estate segment. One of the most challenging issues to overcome for the investment market will be the negative psychology that has permeated the commercial property sector. Many investors are awaiting the return of economic growth to redeploy capital into commercial real estate. These investors run the risk of missing acquisition opportunities, particularly for properties that rarely change hands, as more of these assets are now available at reasonable prices.

Central Clearinghouse for Troubled Commercial Properties Unlikely

While the FDIC will begin to accept bids on failed bank assets this summer, offerings are unlikely to include a significant number of individual commercial properties. In the early 1990s, the RTC helped to liquidate real estate- and mortgage-related assets of failed Savings and Loan Associations (S&Ls). At that time, it was typical for institutions to hold whole loans on their balance sheets. The situation today is far more complex due to the securitization of mortgage debt, which grew out of the S&L crisis. Furthermore, compared to the S&L crisis, the number of bank failures during the current downturn has been relatively low. Even if a central clearinghouse was established to liquidate bank assets, it would likely be on a much smaller scale than the RTC. Disposition of troubled loans has largely been left up to individual institutions and government agencies.

Opportunities Emerging

Unlike stocks and bonds, real estate investors must wait for properties to be offered for sale, and some assets rarely trade. As sellers become increasingly motivated due to maturing debt or capital needs for other assets in their portfolios, a wide array of commercial properties should emerge. This will mark a unique window to acquire assets that fit long-term strategies at attractive returns, including core, stable properties in solid locations. Investors with expectations of unrealistic discounts relative to quality will find it difficult to participate.

Plenty of Capital Parked on Sidelines

There is already a significant amount of private and REIT capital available for well-priced, quality assets to be offered for sale. During the first six months of this year, REITs raised approximately $19 billion, some of which will be used to pay down existing debt, but it is likely a portion has been set aside for acquisitions. As lower-leverage investors, REITs may face limited competition for large assets, since obtaining financing for properties priced at more than $15 million has become particularly challenging.

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, October 1, 2009 3:08 pm

So here we come at the last part of this topic. I hope you will be able to use them. Please feel free to contact me for more advice.

Leverage and Financing Terms Make a Huge Difference in Investment Performance and Risk

Investment financing is considerably more complex than residential financing and all options should be carefully considered.   Some important considerations when financing investment real estate include:

• Personal liability and recourse
• Rate and term
• Fees on loan origination
• Fees on loan assumption
• Lock out term
• Assumability and costs involved
• Pre-payment and/or defeasance
• Reserves and impound requirements
• Amount of financing leverage expressed as a percentage of purchase price

How to structure investment real estate debt and equity to maximize a commercial real estate investor’s returns and minimize risks is too broad a category to go into depth in this article.  Suffice it to say that it primarily depends on the needs and sophistication of the investor, the goals and risk tolerance of the investor, the expected holding period of the commercial property and any future cash requirements during the holding period for capital improvements, leasing commissions, etc.

Anticipate Tax Implications on Transfer either by Gift, Sale, or Inheritance

How long will you live?  How long will your spouse live?  As you get older, what medical  care will you and your spouse require and what will the cost of that be?  How much cash and/or income will you require annually to meet all your needs and still have enough for emergencies?  What will the estate and gift tax rates be the year that you die?

Unfortunately, the above questions cannot be answered definitively as the tax laws are as unpredictable as our own mortality.  The answer lies in a regular review of your personal and financial situation, the current and expected tax laws, and modifying your commercial real estate investment portfolio regularly to ensure that they meet your current and longer term goals.

When Transferring Wealth to your Heirs Pay Special Attention to the Unique Financial Needs and Commercial Real Estate Investment Experience of Each Recipient or Beneficiary

It is often better to name a professional trustee for a situation where the beneficiaries do not have a strong working relationship.  In the vast majority of cases however, professional trustees are at a loss when it comes to handling real estate assets.  They are illiquid, difficult to forecast value, and generally create a management crisis when left to more than one family member. 

Look at real estate investments as you would a business succession plan.  Create an exit plan in advance for beneficiaries that, due to their personal or financial situation, are not good candidates for owning investment real estate.

People that are not financially responsible, lack business experience or are constantly struggling to make ends meet are generally not good candidates for owning investment real estate.  This is due in large part to the cyclical nature of real estate and the simple fact that forecasting cash flows is an imperfect science. There are too many variables that real estate owners cannot directly control, such as the success or failure of the tenants in the property.  Giving investment real estate to an irresponsible person rarely makes them responsible and often creates more problems as they attempt to make short term decisions, as in managing cash flows, with a long term asset such as a commercial real estate.

There are ways to structure investment real estate portfolios so that the income streams are more consistent over longer periods of time. In this way, a person can give real estate to the “less experienced” and provide for a relatively clean exit path should they desire to cash out of the investment. The structuring process begins with investment management, moves to asset management, and finally property management. This process is constantly in motion as adjustments are made to adjust to changing markets, property conditions and the real estate investor’s personal financial situation.

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 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 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 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.