Greed is good, eh? You sure?

Greed is Good? I Disagree!
by Bo Barron, CCIM

Most brokers love Gordon Gekko. How could you not? He swings for the fences and rarely misses. He lives on the edge, bends the rules, and does the deals. One word, though, is synonymous with Gordon Gekko, and that word is Greed. Brokers love Gordon Gekko because he made this phrase famous - “Greed is good.”

It’s not good, but commercial real estate has never gotten that message. Let me show you what I mean by illustration. Imagine Gekko’s boy is a commercial real estate broker going in for a listing. How does he sell that seller that he is the guy for the job? He says that he knows all the qualified buyers in this market. He touts the size, breadth, depth, and shoe shining capability of his database. He expounds on the virtues of pre-qualifying prospects with Confidentiality Agreements and registrations. He tells that seller that he already knows buyers that will want to see this property immediately. And most importantly, he promises that he will always act in the seller’s best interest.

But all of this is code for one thing: greed. Gekko’s boy doesn’t want to share. He wants to double-end this deal. Should he get this assignment, he is going to shop this property to all the buyers that he represents first without giving the market in general the ability to participate. He wants to capture the entire fee. If he can pull this off and close the deal, he looks like a hero and has come through on his promises - his legend grows.

The problem with this is the seller gets the shaft and the poor schmuck doesn’t even realize it. In reality, Gekko’s boy limits the potential buyer pool to just those that he controls. Why? He doesn’t want to split his fee. Brokers all the time are talking about how their database of active and pre-qualified buyers is the very best and biggest. What they are really saying is they hope that one of their people will be the buyer. So how does this serve the best interest of the seller when the entire market does not have the opportunity to participate in the offering? How can the seller ever feel certain that money was not left on the table? He can’t.

Let’s consider this from another angle? How do you get the best buy on a property? You find an off-market property with an owner that doesn’t understand the value or is in great distress, and then you negotiate in a silo where no other potential buyers are even aware anything is happening. The seller has no leverage and isn’t being represented by a professional with encyclopedic market knowledge, and he makes a bad deal - or a good deal for the opportunistic buyer.

What traditional CRE brokers do is convince the seller that this is the best way. Let’s not expose this property to the entire market so that competition can ensue. We don’t want multiple offers! We will only talk to our own vetted buyers. We especially won’t engage the entire brokerage community that represents a full 70% - that’s SEVENTY percent- of investors. Without explicitly saying it, they are claiming that they know every buyer in the market. When the largest 5 CRE firms are only doing 20% of the deals, and over 50% of deals are done by independent firms, this implicit claim is ridiculous.

Here are some personal examples of what I’ve gone through in representing buyers over the last 6 years. Often, I can’t get information on a property offering or it is made difficult. Three years ago, I received an email reply from a property inquiry stating that if I had my client sign a confidentiality agreement and disclose the client’s contact information, then the listing broker would send me the package. And, oh by the way, I would have to get my fee from the buyer. Eighteen months ago I was told by another competing firm that they traditionally never split their fees, but since the listing was in its final 60 days, they were willing to pay a buyer’s broker. How is the best interest of the seller being served by this model? It is not. The greed of the broker is being served.

My (least) favorite happened to me today. A shopping center is now for sale in my back yard. The seller is out-of-state and the listing brokerage is out-of-another-state. I was pleasantly surprised to see the property listed on a popular web portal. As I clicked the link to download the offering memorandum, I was re-directed to the brokerage website where I was required to register with the site, wait 30 minutes for my password to be emailed to me, only to logon and be hit with a confidentiality agreement. The process took 40 minutes. Shouldn’t we be making this as easy and quick as possible? Shouldn’t we want the most prospects possible to have good information at their finger tips? If I didn’t have an interested client who owns the center adjacent, I would have given up, and the seller of the property would have lost a local CRE professional that represents many of his most likely buyers.

There is a better way, but not if you are greedy. Advisors must literally put their money where their mouths are and place the best interests of their clients above their own. This means proactively offering half their fee as an incentive for the entire brokerage community to bring their buyers to the deal. There is no better way to expose an offering to the largest buyer pool possible. When that is accomplished, the seller can rest assured that he had the best chance to find not just “a buyer,” but the “best buyer.”

So instead of selling like you would try to buy a property, engage a market expert that can advise on value, market inclusively, and go for an auction environment of competing bids. I have even seen this happen in this down market. But this will never happen while brokers are greedy. To accomplish what I am suggesting, brokers must split their fees - even advertise the fee directly to their competition! Gekko was wrong. Good is serving the best interests of our clients.

What do you think?

The facts and statistics speak for themselves. The number of people losing their homes by default and foreclosure procedure is soaring…

 
Read Entire Article Here

I attended the Interface Distressed Asset Conference last month in Miami with our Loan Sales team leader, Pat Blount. I facilitated one of the panels on the topic of “Value, who knows”? Not only was the temperature abnormally cold, so was the outlook for commercial real estate values as we head in to 2011. The most popular panel was named “Cracking the Vault, doing business with the FDIC and Special Servicers”. The room was packed as it was evident that brokers want to know ”how to do business with” and have been frustrated by the system in place but the panelists simply said “don’t call me, I’ll call you”. I didn’t see anyone in the audience satisfied with that answer.

I thought Pat Blount’s observation as a “Loan Sales advisor” versus mine as a real estate advisor was interesting so I am sharing his comments with you on my blog today. Pat is CEO of www.benewolf.com a loan advisory firm out of Oklahoma that handles our SVN Asset Recovery Team loan sales.  I had him participate on my “Value . . .  who knows” panel.

“There were forty-five (45) panelists and speakers with various backgrounds including loan sale advisors, appraisers, CMBS special servicers, commercial real estate brokers, receivers and lenders.  The consensus was that we have likely hit bottom in the residential markets (excluding land) but “not” yet hit bottom in the commercial real estate world.  This is due to two major factors (1) the massive number of CMBS maturities looming for 2011 and 2012 and (2) the off market or “shadow inventory” of bank held delinquent CRE loans that are a result of the “delay and pray” or “extend and pretend” strategy employed by most lenders during the period from 2008-2010.

As a matter of fact, one moderator asked the blunt question; “Are we passed the “extend and pretend” cycle?” and most panelists answered “yes.”  My opinion and comment is that we may be past “the pretend” period but we are now in the “modify and pacify” period meaning the lenders are continuing to modify loans to pacify regulators.

Another overall consensus was that both investors and lenders believe most appraisals are “absolutely worthless.”  All believe that you can still get an appraisal at “any value” you wish.  But since the regulators continue to accept the appraisals, “game on.”   It was interesting to note that although appraisers are the value experts in the market, Broker’s Opinion of Value  (BOV’s) are considered quite valuable, extremely reliable and very necessary when determining current market value.  This may be something real estate brokers might consider the next time they provide a BOV for $150.00 or free of charge for a lender.

I find it interesting that when an appraisal is considered too high that “nobody” believes it, but when one is clearly too low that “everybody” believes it.         

In summary the mood was predominately upbeat, this could be because the speakers largely consisted of advisors, brokers and receivers but it appears that the transaction gridlock between lenders and investors has broken for now.  As a result commercial real estate values are expected to stay flat at best for the near term but clearly the purging of the massive inventories of nonperforming loans and lender owned distressed assets is necessary for a fluid marketplace and to create an opportunity for value to return to the commercial real estate market.  It does appear as one speaker said; “2011 will be the year of the loan sale.”

For information on loans we currently have for sale and how you can bid on them visit. www.svnart.com ]]> http://www.cre-advice.com/blog/is-2011-going-to-be-the-year-of-%e2%80%9cmodify-and-pacify%e2%80%9d/feed/ http://www.cre-advice.com/blog/from-short-sales-to-loan-sales/ http://www.cre-advice.com/blog/from-short-sales-to-loan-sales/#comments Mon, 20 Dec 2010 17:52:07 +0000 Scott R. Maesel http://www.cre-advice.com/blog/from-short-sales-to-loan-sales/ It seems as though short sales are becoming common transactions throughout the residential side of the business. Prominent residential real estate companies in Chicago now tout themselves as Short Sale specialists. Not that there is anything wrong with this, but it goes to show how the residential industry has changed when it comes to getting deals done. While short sales seem to be a solution when one faces losing his equity or losing his home, the commercial real estate side of the business has many more options for a distressed property owner.

Short sales happen in commercial real estate, but a borrower also has the option of a deed-in-lieu— where the bank will take the property back based on a negotiated settlement which could range from loss of equity to other penalties.

A forbearance agreement is when a borrower signs an agreement with the bank that gives him more time to sell, come up with additional equity or change the current distressed status in some form or another. The terms of the loan are usually extended (often called “kicking the can down the road”) for a period of time in which the loan will be renewed or will sometimes expire, delaying an inevitable foreclosure.

The latest strategy for a lender is when he chooses to sell the loan to another party, preferably a private group, so that the manner in which the borrower and lender negotiate their personal deal is not regulated by FDIC standards. This allows a lender and borrower to work things out amongst themselves if they so choose. However, this is not to say that private owners who have bought the note will ultimately foreclose on the property. This is especially true if the underlying real estate has value above the original purchase price of the note. At this point, most people will want the defaulted borrower out of the property to capitalize the value they earned if they bought it below market or loan value.

To capitalize on the Note Sales strategy of disposition for our clients, Sperry Van Ness Commercial Real Estate Advisors has entered the national commercial loan sales arena. This expansion into the commercial loan sales marketplace occurred as a result of an exclusive strategic partnership formed with Benewolf, a premier provider of loan sale advisory services and Sperry Vann Ness on a national level. This allows SVN to be a fully integrated advisory firm with services ranging from brokerage, leasing, asset & property management, work-out & restructuring services, loan sales, electronic loan, review & bidding platform, and real estate auction services.

From short sales to deeds-in-lieu to loan sales, there seems to finally be more options for borrowers to dispose of troubled assets than ever before. As turbulent as our industry has become, at least more creative solutions are available to our clients.

Popular water cooler talk about our ailing commercial real estate marketplace may now be “so-2009″. Evidence continues to mount that we have turned the corner on several levels. Most know that job creation must recover to make up for lost time, but market-timing indicators are very favorable for users and investors of commercial real estate.  The window for good opportunity is wide open right now.

For the first time in years, we are noting positive absorption of commercial real estate space.  This, after the two previous years registered red ink in the same analysis. The delivery of new space has largely stopped, and there was no significant amount of speculative space delivered to the market.  Capital providers and developers have turned the building spicket off.  Vacancy rates are stabilizing in many parts of the country. Despite a continuing imbalance between landlord offerings and tenant-users, vacancy levels are still not at historic highs in many areas.

So what is the compelling indicator of market opportunity for a user or investor?  We still have more sellers than buyers, and a large percentage of space on the market has lingered for over one year.  Yet, digging deeper, some interesting analysis can be made.

While our vacancy rates have declined over this last year (as indicated by the positive net absorption), rental rates are still falling.  Landlords who have had little activity these last few years are getting anxious to fill their space and tenants moving to new space can negotiate advantageous lease rates.  Landlords cannot wait for the market to “catch up” with the good news and stabilize their rental rates.  Short term, tenants are still able to take advantage of the landlord’s pain these last three years, even though market conditions could be interpreted to be favorable for landlords now to hold their asking rates.

One out of every ten property owners in our area has listed their buildings for sale, which is twice the rate typical in the mid-2000s.  Transaction volume is still low and asking prices per square foot are dropping.  Negotiation imbalance can be seen in the selling price to offer price differential, which favors the buyer.  .  Simply put, buyers are in a superior negotiating position.  Consequently, we’ve seen opportunistic buyers start to enter into the market to seek value.  For example, our office recently fielded eight offers immediately on a discounted lender owned property offering, priced significantly below replacement cost.  When an offering is priced at 50 cents on the dollar or less, the market will respond.

Capitalization rates have risen over the last few years, and now approach 9% on average outside of major metropolitan areas.  This means the investor can obtain higher returns than those available in the last decade.  With the fresh memory of CRE problems over these last three years in mind, buyers are asking for higher returns in their negotiations.  The “core” end of the market has more buyers looking for high yields, but ones that are relatively safe for years to come.  The “distress” end of the market has buyers looking for sufficient discount to entice them to take on the market risk.  Meanwhile, the middle of the road properties seem to be the ones receiving almost no attention from buyers.

We will have a few more years before legacy financial issues are fully washed out.  As more distress properties are released to the market after lenders have moved into ownership, very nice buys are available to users and investors.  Those who can participate in this “workout” are taking advantage of this unique “good news, bad news” environment.  Just like a physical “work out”, the users and investors diving into the market now will be stronger in the long run.

From Sperry Van Ness Accelerated Marketing | Atlanta, GA - Via CitzBizRealEstate Atlanta, commercial real estate services provider Cassidy Turley recently analyzed the election results, and opines that the chances for major changes are not very great, noting that “divided” governments of the past have seen growth in government spending and the size of government… And they feel that the nature of this “lame duck” government will not be positive for business. However, they do feel that almost 4 million office jobs will be created over the next 5 years.  And introduction to the report begins:

Since World War II, the US House of Representatives has changed political parties seven times. Last week’s mid-term elections turned the shift of political power for the next two years in favor of the Republican Party in the House. With a divided Congress and opposing political parties controlling the Executive and Legislative branches, there are numerous implications for commercial real estate. Cassidy Turley Research provides a brief outlook on the mid-term elections in relation to federal debt, legislation, US employment, and the commercial real estate markets.

For a link to the entire report, click HERE.

To answer this question comprehensively, we’d need more time that it will take to analyze tonight’s election results. And what’s worse, we’d probably be just as boring. But let’s give it a whirl–in an abbreviated sense….

Capitalization (”Cap”) rate differentials are driven by a variety of factors, but perhaps most notably by the tenant’s creditworthiness and thus its ability to fulfill the terms of its lease obligation(s). That’s why we see lower capitalization rates, and thus higher relative prices, for solid, national, and recognizable tenants such as Wal-Mart, Walgreen’s, and Sherwin-Williams. The converse is true when dealing with lesser known, financially weaker, or even suspect tenants. Investors will typically demand higher cap rates, and thus lower relative prices, for assets leased to a mom-and-pop operation. The mom-and-pop might have a stellar business plan and possess market dominance, but its lack of a track record and deep pockets will penalize it in the marketplace. Too many questions exist regarding the tenant’s ability to perform. Combine a lack of track record with a suspect business plan and the cap rates will catapult into the stratosphere. Imagine looking at a sale-leaseback offering from Looney Larry’s Liposuction Clinics…. What sort of cap rate reward would you require to weather the risk posed by relying on a monthly rent check from Looney Larry?

Once an investor is satisfactorily comfortable with the tenant’s ability to perform, other factors will be evaluated in determining a cap rate. A key factor will be the length of the primary or “guaranteed” lease term. Usually the longer the guaranteed term, the better, although some investors may disagree in that long-term leases may lack protection against inflation. Walgreen’s, besides its excellent reputation and financial strength, also usually provides 25 year primary terms. Such leases are typically rewarded in the investment community in the form of lower caps/higher prices. Investors will simply pay a premium to take as much uncertainty out of their investment as possible.

Other factors can be categorized as “real estate specific” and “geographic.” These categories may bleed into one another a bit. By real estate specific we might think of things like the overall cost per square foot of the asset or the age and condition of the building. To understand these factors let’s assume we have two brand new Pizza Huts for sale. They’re located in two similar but different markets. Suppose the land cost at one of the locations was higher than the other and consequently the one with the higher land cost was for sale for $500 per square foot (PSF) while the other was offered at $400 PSF. One would expect the cap rate to be slightly lower for the lower cost PSF building because the overall risk of the investment would be perceived to be slightly lower.

Perhaps a better example would be two Pizza Huts in the same market where one was a new build-to-suit while the other was placed in a renovated, 30-year-old building. Presumably investors would accept a lower cap rate for the newer building because the underlying real estate is perceived to be of higher quality and expected to enjoy a longer useful life.

Geographic factors can be macro or micro. Macro factors would account for cap rate differentials among regions of the country. California, for instance, will typically command a lower cap rate/higher price for an investment than its counterpart in say, Fargo. Micro factors include location factors within a specific community. Is the location “Main and Main” or is it a second tier site where one would have to rely on advance GPS technology to find it? Presumably the Main and Main location would have more residual value and thus command a higher price/lower cap rate.

While these factors should not be considered exhaustive, they will probably be found in most investors’ decision-making matrix. We may have missed something, so if you’re an investor, know an investor, or simply play one on television, please leave us some feedback in the “Comments” section below. We’ll all benefit from your expertise.

And with that we’ll get you back to the election results. We sincerely hope you’ve approved of this message.

The Army instituted the program to address the overwhelming necessity to revitalize and increase base lodging accommodations and maintain the properties over the long term. According to a U.S. Government Accountability Office report released on July 30, the U.S. Department of Defense operates approximately 70,000 hotel rooms and in fiscal year 2009, shelled out nearly $1 billion to operate the hotels in fiscal year 2009. “The real need for the Army was to deliver capital improvements to their hotels; for the government, it is a lot easier to get capital to build than for improvements on an annual basis,” Aole Ansari, Senior Vice President and General Manager, Lodging Portfolio Operations with Actus, told CPE. Actus was tapped to create a lodging development and management plan in 2006, and the PAL program has been moving forward steadily ever since.

Story by: By Barbra Murray, Contributing Editor | Commercial Property Executive