‘Delay and Pray’ Won’t Work for Commercial Real Estate – To jump-start the process, Segel suggests that regulators require lenders to sell or restructure 20 percent of their problem loans each year for the next five years. And to ease the impact, he suggests relaxing the mark-to-market rules and giving banks a grace period of 12 to 18 months before having to adjust the value of the loans and properties that remain on their books. This reckoning will be painful and disruptive, politically as well as economically. But at this point, even those who know the industry best acknowledge that “delay and pray” is no longer a viable strategy. Dragging it out will only make things worse. Washington Post
FDIC Plans to Auction Real Estate Loans Totaling $1.12 Billion – The Federal Deposit Insurance Corp. plans to seek bids for about $1.12 billion of commercial and residential real estate loans as part of the agency’s sale of assets seized from failed banks. The scheduled sales are composed of about $773 million in residential acquisition, development and construction loans and $351 million of debt related to commercial properties, according to preliminary announcements dated yesterday and obtained by Bloomberg News. The commercial sale is expected to be split into two pools, according to a separate announcement. One portion will have loans backed by properties in the northern and western U.S. and the other will have debt from the Southeast. The collateral for the commercial loans is in 12 states, with Florida, Utah, Nevada, Michigan and Arizona accounting for 88 percent. Buyers for the debt, a mix of performing and overdue loans, must meet qualification requirements including the payment of a $250,000 due-diligence deposit, according to the announcements. Bids are due Nov. 16. The portfolios will be sold as structured transactions, meaning the FDIC will share ownership and proceeds with the winning bidder. Businessweek
Reits Rallied in Third Period - The Dow Jones All Equity REIT index, which tracks 155 real-estate investment trusts, rose 13% during the third quarter, a sharp turnaround from the second quarter when REITs posted a 5% decline. The gain in REITs slightly exceeded that on the Dow Jones Industrial Average, which rose roughly 10.37%. Paul Adornato, an analyst at BMO Capital Markets, says that REIT stocks are rising in part due to buying from inflation hawks, who worry that consumer prices will accelerate in the years ahead as federal stimulus measures kick in and boost economic growth. WSJ
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Bank of America and CDC Small Business Finance Kick-Start Secondary Market Program for SBA Loans – Aiming to help create more jobs, Bank of America has collaborated with CDC Small Business Finance to assemble the nation’s first pool of U.S. Small Business Administration 504 first-mortgage loans for sale under SBA’s new secondary market program. Bank of America’s purchase of these loans allows loan originators to make more credit available to small businesses. “The secondary market for SBA-504 loans has been nearly frozen for two years,” said Kurt Chilcott, president of CDC Small Business Finance, the largest CDC SBA-504 lender in the U.S. “We appreciate Bank of America’s leadership and effort to work through the complexities associated with this new program. We’re confident this action will kick-start SBA’s secondary market, generating new liquidity for banks so they can expand small business lending, help stimulate growth and support new job creation.” Marketwatch
Jobs, Uncertainty Holding Back Multifamily Bull Run – There’s also been a significant shift in who is lending, and how much, for commercial product, since 2007. The most significant change has been among CMBS lenders, who accounted for 34% of all acquisition financing in 2007 but only held a 5% share at the end of the first half of 2010. National, international and investment banks also decreased their presence, from 29% to 13%. Meanwhile, regional and local banks and government agencies increased their lending activity between 2007 and 2010, rising from 6% to 12%, and 1% to 12%, respectively. Debt assumption, which was used in 16% of acquisition financing in 2007, is now present in nearly half of all deals today.
For borrowers, now is the time to act. The government’s need to finance the deficit, combined with increasing investor confidence in the economy and a search for higher returns, will force interest rates up. “At some point in time, the interest rate window will close on us, and we’re going to have to deal with that,” said Hughs. The question investors need to ask themselves today is, ‘Do you wait for property fundamentals to improve and risk the interest rate window closing?’ ” Globest.com
Most likely, you were not aware of the potential skeletons within the lease, much less where the ‘darned thing’ was even located. Probably never paid any mind to it — until recently. But rest assured, your organization was not alone. Thousands of others did not consider the ‘fine print’ lease ramifications, aka skeletons, prior to the business climate weakening. Rather, many signed on to 5-10 year leases chock full of ghastly surprises which seemed to rear their ugly heads at the worst possible time. Many businesses trusted the landlord’s real estate broker, an acquaintance, or attorney not practicing real estate for guidance; a devastatingly huge mistake. Because of this arrangement, many businesses are now faced with lease obligations that are skyrocketing into the stratosphere, while their clout within the building is steadily shrinking.
The mistake, whether most business owners will admit it or not, was seeking a relationship with a broker that did not have their best interests in mind upon signing the lease.
A quick education: As tenant representatives, corporate real estate specialists, we provide solutions to organizations prior to the execution of long-term contractual commitments. Along with becoming trained experts within the commercial real estate ranks, we analyze the strength of your industry and couple it with the needs of your organization and clients to help determine the best possible real estate scenario. This, along with a staid responsibility to you and your company’s long-term goals allows the strongest tenant rep brokers to survive and become successful time and time again.
Now, given that brief overview of our niche within our profession, a quick and simple analogy. The landlord’s broker is to your organization as a plantiff’s attorney is to the defendant. The plantiff’s attorney does not represent your interests, rather is performing his/her service to protect his client: the plantiff. In court, the outcome will sometimes benefit both parties, but typically sides with one side or the other, the plantiff or the defendant. Unfortunately, in commercial real estate there is no judge to determine right from wrong or, in our situation, who gets what in a building. But, if you choose to work with a tenant representative, you have a greater chance of sharing the outcome, or better yet, potentially winning an outcome, as you are equally represented.
Given your knowledge of tenant representation, we have written a few typical tactics that the landlord’s brokers will use to lure your company into the landlord’s arms. Remember, even if the offer seems to good to be true, it likely isn’t. Let us investigate.
These are the most common tactics as evidenced by our clients….
1. “We can get you a great deal because of our relationship with the landlord.”
This one is my all-time favorites. The landlord’s broker, especially in this climate, is programmed to create as much potential income for the property owner, and themselves, as possible. Put simply, the greater the sum of money you pay over the term of the lease, the greater the commission to the landlord’s broker. As for the owner, the higher the rental price you pay, the higher price the property can sell.
A broker that will represent your interests, not the interests of a landlord with whom that broker has a fiduciary relationship, is essential for ‘peace of mind’ for any organization. Because many building leases contain landlord-biased terms and obligations, these buildings have a high level of tenant dissatisfaction. By keeping the language in the lease general, or possibly out of a lease all together, some landlords may routinely strong-arm, or worse, violate the landlord/tenant contractual relationship.
So, when a broker entices you with claims of a special relationship with the landlord, you must consider if the relationship is to represent your interests, exclusively. That it does not.
2. “We can provide great service because we have a lot of branch offices.”
Although working for a real estate brokerage that maintains the largest geographic footprint in the country, I am positive that your company does not require one that maintains an abundance of branch offices. Today, landlords can list their property (for sale or lease) online, whereby notifying the entire broker public of the opportunity within the city or small town. Because commercial real estate brokers are tight-lipped on dealings, even within their own organization, inside information is only as good as your specific broker’s past dealings. The reason for secrecy is that it protects their fiduciary relationship to the client and allows them to gain value for future dealings.
So, the key to signing a quality lease, one that benefits your organization now and in the long run is having a broker that has quality site analysis tools and resources, expertise in dealing with landlords and their buildings, and tested negotiation skills and persistence. This will depend on the caliber of the tenant representative, not necessarily the amount of locations that the brokerage offices.
3. “Hurry up and get the deal done, before….”
More than anything else, landlord brokers push tenants to get a deal done. These brokers will tell tenants that if they don’t quickly commit to a space, another party will take it. This pressure is not necessarily as prevalent today as the leasing market is not as robust, but smaller tenants still recognize these threats.
Hurrying into a space risks neglecting comprehensive due diligence, overlooking costly drawbacks in a building, failing to properly analyze total costs, and potentially commencing a transaction that can become a serious liability.
4. “Because you are a large tenant, you have fewer alternatives.”
Believe or not, some of the worst leases have been signed by the largest companies, likely due to top executives feeling they ‘had’ to be in a particular building. While it is true that the number of large, contiguous spaces in a specific area are limited at any point in time, this definitely does not mean large companies must accept whatever terms these landlords offer.
Getting a great lease deal may require large tenants to recognize every possible bargaining advantage. It is critically important for a large user to begin the site search early. Starting early typically provides flexibility to consider a greater number of options (lease vs. buy) as well as spaces as they come onto the market. Alternatives for large space users may include leasing or buying existing buildings in the same area that can be repositioned, leasing or purchasing in areas once considered out of bounds, or build-to-suit development opportunities with desperate developer and construction units.
By uncovering viable alternatives, objectively analyzed in detail, you will understand your true costs and trade-offs. Only with this background will you know if a premium is being demanded for the solution you prefer, or whether it is a premium you think is worth paying. Equally important, you will be able to pursue preliminary negotiations. If they do not lead to satisfactory terms or conditions, you will have time to walk away and begin negotiations elsewhere.
5. “The landlord’s draft lease is boilerplate with standard lease terms.”
So-called “standard terms” in a lease that is drafted by the landlord’s attorney, one that protects his interests, does not exist. Lease terms often include tenant budget-busters such as operating expense loopholes, vague landlord performance standards and weak audit rights, among potentially hundreds more.
Don’t be pressured into accepting “standard terms.” A lease negotiation should be driven by your business objectives, not by a landlord’s desire to avoid risk (and pass it on to tenants like you). Your needs must be translated into lease terms.
6. “Just focus on rent and workletter – let lawyers worry about the fine print.”
Many corporate executives imagine they have locked in their biggest costs by shaking hands on these two terms. However, ignoring the rest of the lease can/will be disastrous. There easily are 20+ significant non-rent costs in a typical lease, many hidden, and it’s contrary to the interests of landlord brokers to identify these costs – or do anything that may jeopardize a lease transaction.
Lawyers do not claim to know how desirable or undesirable a landlord draft lease is from the standpoint of the current real estate market. Lawyers aren’t experts on the economics of building operating systems. Lawyers aren’t expected to know how various ways of charging for electricity will affect costs. Lawyers don’t audit landlord billings, so they don’t see whether particular landlords honor or evade lease terms – and what must be done about it. Lawyers typically review a lease without ever visiting the building, and many problems are missed because a lease didn’t address certain things which must be seen to be appreciated – or avoided, as the case may be.
Hire a representative, no matter your relationship with the landlord, landlord’s broker, acquaintance of broker or management.
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Commercial Real Estate Loan Prices Rise in August - The aggregate value of Commercial Real Estate loans priced by DebtX that collateralize CMBS increased to 81.0% as of August 31, 2010 from 79.4% as of July 30, 2010. Loan values were 77.0% as of August 31, 2009. “A falling yield curve and the strong demand for product contributed to an increase in CRE loan prices in August,” said DebtX CEO Kingsley Greenland. “Both positive price trends more than offset the historically high rates of loan delinquency and default among CRE borrowers.” Benzinga
Office leasing in D/FW still in negative territory – The North Texas employment market has turned the corner this year, but companies are still holding back on office leasing. Through the first nine months of 2010, net office leasing in the Dallas-Fort Worth area declined by about 700,000 square feet, according to preliminary numbers from Cushman & Wakefield of Texas. Most of the office occupancy decreases have been in the Telecom Corridor along North Central Expressway and in Las Colinas. Consolidations and relocations by Hewlett-Packard Co. Alliance Data Systems Corp. and Fidelity Investments added to the office vacancy in some areas of the city. Meanwhile, net office leasing has grown the most in Frisco and West Plano and on North Stemmons Freeway in northwest Dallas County and southern Denton County, the commercial real estate broker reports. Dallas Morning News
U.S. Reits Use Stock Sales To Grow After ‘Balance Sheet Repair’ - U.S. real estate investment trusts are selling shares to fund property acquisitions after using record cash from equity offerings last year to reduce debt and cover dividends.UDR planned the stock sale, with proceeds of $359 million, to make the acquisition, add rental revenue from the apartments and improve the company’s balance sheet, Chief Executive Officer Thomas Toomey said. “It’s a great opportunity for us,” he said in a telephone interview. “Overnight, you can raise $350 million.” Bloomberg
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Pollster.com is a web site which collects political data from publicly available polls that provide representative samples of the population or electorate. The site is easy to navigate and provides interactive charts that update as soon as fresh data arrives.
As you can see in the first chart below, the race for Texas Governor has remained relatively unchanged with the incumbent Rick Perry (R) maintaining a slim lead over Bill White (D).
The second chart below shows that the United States Gubernatorial Races in 2010 will overwhelmingly be won by the Republican party, with or without a Perry victory in Texas.
(Regarding Congress see third, fourth chart and commentary below)
Elections for the United States Senate are scheduled for 37 of the 100 seats. As you can see by the 3rd chart, it is a virtual ‘dead heat’, although those seats that are available will heavily favor the Republican party.
After the 2008 elections, the Senate was composed of 57 Democrats, 41 Republicans, and two independents who caucus with the Democrats. Of the remaining seats currently up for election in 2010, 19 are held by Democrats (seven are retiring or were defeated in the primary) and 18 are held by Republicans (eight are retiring or were defeated in the primary).
Election data for the United States House is not yet available via Pollster, but evidence in the 4th chart indicates that of the 435 seats that are up for election, Republicans are showing significant improvement from the elections in 2008 when they wound up controlling only 41% of the House.