Anatomy Of A 90% LTV Office Deal

Logo der Fernsehserie Leverage

I think it’s fair to characterize the following transaction as a symbol of our current national office market boom. Gone, gone, gone are the days when lenders’ hands were tied and 30-40% minimum cash on the barrelhead was a necessity to get a deal done for an office building in a primary market. Today, leverage is back in a big way — at least in one such deal in Los Angeles reported by Globe St’s Kelsi Maree Borland.

In “Office Property Lands 90% LTV Financing”, we learn of a $21.6 million deal for an eight-story office building and parking garage financed with a mix of SBA 504 guarantee and very favorable underwriting from another lender at a rate of 200 basis points over treasuries at 90% leverage. The unnamed owner-user and their team at Sequoia Commercial Lending have put together a deal emblematic of a Los Angeles office market not only in recovery, but in bona fide expansion.

“Typically banks will only provide this type of leverage for SBA deals, therefore we approached the SBA about a 504 loan, and secured a pre-approval allowing for 85% leverage,” Christopher Farlow, a partner at Sequoia Commercial Lending, tells GlobeSt.com. “We then leveraged the SBA’s pre-approval with two banks, who were willing to provide more than 75% LTV on a conventional basis. Both of the banks have SBA divisions, so if they couldn’t do the deals conventionally at 85%, we still had the SBA 504 as a backup. Once the final underwriting was done, one of the lenders came back and asked what would win the deal. We requested 90% leverage, with a rate that was 2% over the 10-year UST, and a 0.00% loan fee from the bank. The bank agreed and allowed us to lock the rate without a deposit fee.” Farlow and his colleague Brett Twente, a partner at Sequoia Commercial, secured the financing on behalf of the borrower, and declined to name the lender for confidentiality purposes.

The loan has a 25-year amortization period with a step-down prepayment schedule. Farlow has worked with this lender in the past, and has seen them provide leverage has high as 85%; however, he was even surprised by their willingness to reach 90% leverage. When asked if leveraging a loan this high was dangerous, Farlow says, “Yes, there is obviously danger in providing this type of leverage. However, the borrowers provided personal guarantees. Their business is going to occupy the majority of the building, and the businesses are guarantors. The EBITDAR from the businesses covers the proposed debt service several times over and once the building is leased up, the value should increase by more than 25%.”

That said, deal principal and Sequoia partner Christopher Farlow caution that high leverage isn’t a trend across the capital markets, and that 90% LTV are more “one-off” deals.

It’s just that such deals seemed unthinkable not terribly long ago.

Read the entire Globe St. article here.

06. April 2015 by Wayne Grohl
Categories: office | Tags: , , , , , , , | Leave a comment

Where You Get Your Retail Traffic Numbers Can Be More Important Than What They Say

Keeping an eye on national retail trends is made much easier with a subscription to the excellent RetailCustomerExperience.com, who graces us this morning with an eye-opening piece on the dangers of misinformation lurking in various retail traffic measurement techniques.

Measuring retail traffic is done because there’s a strong correlation between retail traffic and sales – more traffic often (but not always) means more sales. But getting accurate reads of traffic is a technical problem that various sources of numbers tackle in very different ways.

Getting at the bottom of the problem, Mark Ryski at RetailCustomerExperience takes a closer look at three holiday 2014 reports. “Why You Should Take Retail Traffic Indexes With A Grain Of Salt” shows the widely varying results of widely varying data collection and preparation techniques — and suggests that even with numbers about shoppers, caveat emptor — let the buyer beware — still rules the day.

Part of the challenge is in understanding exactly where and how each of these companies is measuring store traffic. The ShopperTrak data, according to the WSJ article, is based on 60,000 malls and large retailers across the country, but in fact, according to ShopperTrak’s own website, the company analyzes data from over 60,000 locations across 90 countries and territories. How many of these stores are in the US, and which ones were included in the index? It’s also reasonable to know if any particular retail categories were over or under represented. For example, if an index is primarily comprised of specialty apparel retailers, then how representative is it of the entire retail industry?

RetailNext bases its results on 34.6 million shopping trips. The company doesn’t define what a “shopping trip” is; however, it does say that it collects data from 65,000 sensors in retail stores.

It’s not clear how many unique stores are represented by the 34.6 million counts, but it’s a relevant question. For example, if these 34.6 million counts were captured only from large stores that had average daily traffic of, say, 1,000 traffic counts per day during the November-December holiday period, we would conclude that the index is based on only about 600 unique stores.

If, however, the index included only small stores that had averaged only 100 counts per day, the 34.6 million counts would represent about 6,000 unique locations. It’s important to understand how many unique stores are included in an index because the number reflects market coverage — if an index has insufficient coverage or is not based on a statistically significant and representative sample of the market, how valid will the results be?

Read the entire RCE piece here.

30. March 2015 by Wayne Grohl
Categories: Retail | Tags: , , , , , | Leave a comment

Revenue Reserve: Because Things Go Wrong

This one’s a new one on me: a premium feature documentary film framed squarely on commercial real estate, its promises and pitfalls, complete with stirring music, a well-composed visual sense and heavy hitters from NAR, CCIM, IREM and others sharing hair-raising war stories and sage advice.

Kudos to filmmaker and financial adviser Doug Orchard for making Revenue Reserve: Because Things Go Wrong. Check out the trailer above and if you’re a NAR member, come to Realtor.org for a 15% discount on a viewing of the film!

Save 15% on Revenue Reserve: When Things Go Wrong here.

27. March 2015 by Wayne Grohl
Categories: Property | Tags: | Leave a comment

“Mommy, Mommy, look at the maintenance!”

Cover of "Miracle on 34th Street (Special...

Cover via Amazon

I know this astonishing New York Times piece “When The 13-Year-Old Picks A $14 Million Condo” looks only at a few super-wealthy families and how some of them select apartments and condos in Manhattan, and I know that as such it doesn’t represent how the majority of families look for multifamily dwelling in the remaining 99.9% of the United States.  Even with all that being the case, I can’t help but wonder how it’s possible that an apartment story – or any real estate story — can give me the willies as much as this one did.

It’s one thing to involve your kids in important decisions. It’s perfectly fine to try to inculcate in kids a sense of propriety and shrewdness in making the arrangements that affect them. Taking an interest in the numbers, the locations, the social and economic conditions in which we live is all better done earlier than later in life because forewarned is forearmed.

But it’s something else entirely — something unseemly — when the super-rich hand over the process of finding new Manhattan digs to their kids, creating a kind of internet-fueled churn where brokers email cc: listings data to the teen sons and daughters of buyers.  It’s not that the kids aren’t qualified to compare and contrast the pros and cons of one luxury condo vs. another – in a lot of ways, they are. What boggles the mind is considering at what age it ends.  Twelve?  Ten?  Eight?  What’s the age cutoff where pointing and clicking — and working to close on — eight-figure luxury properties stops being plausible and starts being ludicrous?

Bonnie Hut Yaseen, an associate broker at Fox Residential, is used to the youth vote by now. “I’m seeing this trend where parents are coming in to look at my listings and proudly announcing that it was their son or daughter who found it,” she said. “They’re finding an unexpected resource in their children.”

Of course, there is cinematic precedent for all this. In the 1947 classic “Miracle on 34th Street,” a skeptical little girl will believe in Santa Claus only if he can arrange the acquisition of a house she saw in a magazine listing.

Ms. Yaseen said that in the past children saw their homes-to-be only when it was time for the parents to assign them their bedrooms. “Now, in some cases, the kids are coming on the first visit to an apartment because they want to know if it’s as good in reality as it looked online,” she said. “They’ll sometimes be there with paperwork, with a printout from a website.”

Read the entire story at the New York Times

25. March 2015 by Wayne Grohl
Categories: Multifamily | Tags: , , | Leave a comment

On Wall Street, Profits And Bonuses Dont Live On The Same Ledger

In 2013, Wall Street’s profitability was down 30.1%.  Naturally, this effected bonuses for that year.

They rose…by 15%.

In the Guardian piece You eat what you kill: Wall Street bonuses keep soaring as profits decline, we get a clear picture of what investment banking really means. “Too big to fail” has become “too big to fail to take a bigger bonus no matter the performance”.

It’s while reading stories like this that I’m most relieved that the commercial real estate industry has an entirely different framing than Wall Street’s, one I like to call “reality-based”.  From the piece:

This year, bonus payouts will amount to a whopping 170% of the profits reported by New York stock exchange member firms – profits that continue to be eroded by legal settlements and regulatory expenses. Back in 2009, that figure was slightly more than 36% of profits, and it has crept steadily higher.

Wall Street prefers to look at bonus payouts as a function of revenue. Even so, that still means that banks like JP Morgan Chase, Goldman Sachs and Morgan Stanley are handing over about 40 to 50 cents out of every dollar of revenue they generate every year in bonuses. The argument is that they need to do this to keep their top performers in place, and to provide them with an incentive to keep bringing in more revenue. “You eat what you kill” is the motto on many a trading desk.

[…]

The problem, of course, is that if anything, Wall Street should be becoming more cautious. Investors have created a bubble in parts of the bond market thanks to ultra-low interest rates, and it has sparked a craving for any securities that will generate a steady stream of income. Bankers have earned big bonuses for helping to foster this: for feeding the bubble by issuing more and more junk bonds, even as the safety level of those below investment-grade securities deteriorates.

There are two arguments that you’ll hear from Wall Street. First, that bonuses are big because base pay is low. Secondly, they’ll tell you that they need to fork over the big bucks in order to hang on to talent, because if they don’t, hedge funds are just waiting to snap up promising young traders and bankers. Both arguments are flawed.

Read the entire Guardian article here.

23. March 2015 by Wayne Grohl
Categories: Wall Street | Tags: , , , , , , , , | Leave a comment

Commercial Real Estate News Roundup For March 20, 2015

 

Crowdfunding for RE crosses the multiple billions milestone, the biggest ocean brings the biggest bucks, and e-commerce faces big box problems – it’s all here in the Commercial Real Estate News Roundup for March 20, 2015.

General

International

Office

Industrial

Retail

Multifamily

20. March 2015 by Wayne Grohl
Categories: News | Tags: , , , , , , | Leave a comment

Inland’s Dan Goodwin: 1031 Exchanges Are No Loophole

Daniel_Goodwin

[Reprinted today is an editorial by Inland Group CEO Dan Goodwin (pictured above) focused on tax reform. Namely, that efforts to clean up the federal tax code of unwanted loopholes should leave in place like-kind exchanges as provided under IRS Section 1031 – a favorite topic of our industry as it provides a significant tax shelter (deferment) for the continued investment in commercial real estate. To the surprise of nobody, Dan’s very much in favor of 1031, but his arguments take one tack I hadn’t seen used much before — that 1031 exchange sales do generate local transfer taxes. -WG]

Why Pro-Growth Tax Reform Must Preserve Like-Kind Exchanges

Daniel L. Goodwin
CEO, Inland Group

With our economic recovery finally accelerating, pro-growth tax reform offers the potential to further prime the U.S. job creation machine. But not all reform proposals effectively safeguard key incentives that fuel domestic investment, new hiring and the enrichment of individual communities. One of the most notable provisions at risk—like-kind exchanges—empowers both businesses and individual property owners to roll over their capital into new investments that spur economic activity across the country.

In advance of debates over which provisions are unwarranted tax loopholes and which are economic growth engines, elected officials on both sides of the aisle should reacquaint themselves with Section 1031’s purpose. Like many of my peers in the investment and real estate industries, I was quite concerned when Sen. Johnny Isakson (R-Ga.) recently noted that most lawmakers do not fully comprehend the potential economic impact of limiting like-kind exchanges.

Put simply, a like-kind exchange enables a business or investor to defer—not dodge—the capital gains tax on a non-personal asset sale, provided that the capital is reinvested in a comparable asset within a prescribed time period. This practice of rolling over and reinvesting proceeds is actually a core catalyst of domestic real estate activity and helps fuel our entire economy.

When conceptualizing the value of like-kind exchanges, think about how the IRS’s home sale exemption permits homeowners to defer capital gains taxes generated by selling their house. This homeowner tax provision encourages individuals and growing families to apply the proceeds from their home sale to the purchase of a new house. The home sale tax deferral spurs real estate transactions, which like 1031 commercial property exchanges, generate local transfer taxes and provides employment for the following small businesses: appraisers, accountants, contractors, mortgage bankers, real estate brokers as well as both law firms and title companies (just to name a few).

If a home seller had to write a check to pay state and federal capital gain taxes at the time of a sale instead of deferring the taxes, owners may choose not to sell, which would be devastating to the housing market with a consequential loss of employment opportunities for many small businesses.

Similarly, if commercial property owners were forced to pay capital gain taxes at the time of sale, a number of people would not sell, resulting in a loss of local transfer taxes and the loss of income for small businesses. Make no mistake about it; most tax free exchanges occur because commercial property owners want to move up to a larger property and reinvest their capital just like homeowners, not because they need to sell. People who elect tax free exchanges are voluntary sellers who, in many cases, will not sell if the 1031 program is eliminated.

In attempting to advance reform that will simplify our federal code and help reduce the deficit, it is understandable that leaders in Washington want to evaluate all existing tax policies. However, Congress must remain deliberate and measured throughout this process to ensure we do not eliminate economic catalysts within our existing code.

Like-kind exchanges contribute to the growth of our economy by stimulating transactional activity and promoting investments across the country.  A United States manufacturer, for example, cannot obtain a 1031 deferral benefit by moving a plant overseas; it must reinvest domestically, promoting local business growth. This reinvestment also provides revenue for local governments in the form of transfer taxes, increased property taxes, new construction and improvements to existing structures—all of which build communities, job growth, and quality of life.

To illustrate what a negative chain reaction could look like; consider what happens if a capital gains tax deters a small business from selling its long-held manufacturing building in favor of a modern structure. The business does not stimulate the local economy through the use of other small businesses; it does not contribute new local fees and transfer taxes; and it is prohibited from taking necessary steps to grow its own enterprise. Similarly, a farm family that wants to expand to a larger farm to provide work for the farmer’s children often needs to defer the capital gains tax to make the transaction economically viable.  Without the 1031 program it is doubtful that many farmers could afford to upsize; with the resulting loss to the economy of many benefits such as the purchase of larger farm equipment, as well as, all the other real estate related expenses mentioned above. If countless property owners across the country are facing a similar disincentive to sell, the health of our economy could be affected.

Remember that under Section 1031 capital gains taxes are deferred—not eliminated.  The Federal Government ultimately receives all of its taxes, while stimulating local economies and growing small businesses.  Additionally, following a tax free exchange, real estate depreciation which generates tax deductions is limited; thereby actually generating more net federal tax revenue.

To be clear, I agree that our federal tax code is in need of an overhaul. The new Congress has a tremendous opportunity to modernize and streamline an outdated system, but it should not come at the expense of eliminating tax provisions that fuel significant growth.

As new legislation is drafted, lawmakers should draw on information shared by the Real Estate RoundtableNAREIT, the Federation of Exchange  Accommodators and National Association of Realtors to better understand how like-kind exchanges increase the size and number of real estate transactions, which stimulate the economy.

Individuals, trade organizations, small businesses, and research studies confirm the obvious benefits of keeping Section 1031 as a pro-growth and pro-taxpayer economic catalyst.

Goodwin is chairman and CEO of The Inland Real Estate Group of Companies, Inc., one of the nation’s largest commercial real estate and finance groups.

19. March 2015 by Wayne Grohl
Categories: Tax | Tags: , , , , , , , | Leave a comment

Milwaukee’s Famous Pabst Brewery Building Sold

 

There was blue-ribbon property news out of Milwaukee this week –  the owners of the former bottling plant for the Pabst Brewing Co. sold their property to a developer who will convert it into a hotel and student housing center aiming at the international student market.

The announcement was greta news for Milwaukee’s adaptive reuse, historic preservation and student communities seeking housing.

Adaptive Reuse Makes Economic Sense

According to the National Trust for Historic Preservation, “Reusing existing buildings is good for the economy, the community and the environment. At a time when our country’s foreclosure and unemployment rates remain high, communities would be wise to reinvest in their existing building stock. Historic rehabilitation has a thirty-two year track record of creating 2 million jobs and generating $90 billion in private investment. Studies show residential rehabilitation creates 50% more jobs than new construction.”

Add to this the numerous tax credit programs available in many states for adaptive reuse, and such projects look better and better for buyers and sellers.

One Size Doesn’t Fit All

On the other hand, some Milwaukee brewery reuse news this week was not so great. Owners of the former New Bavaria Brewery complex scrapped tentative plans to convert their three buildings into a craft brewery, 40 apartments, a church and a community center. Hopefully, the future brings better news for the New Bavaria Brewery, because Milwaukee’s brewing history and manufacturing history clearly has potential to remain a vital part of the of the modern landscape for posterity.

18. March 2015 by Wayne Grohl
Categories: Green Building | Tags: , , | Leave a comment

Zillow and Truila Finally Merge, Form Zillow Group

After a exhaustive seven-month anti-trust review by regulators, the Zillow-Truila merger was finalized on February 17.   Zillow negotiated a $2.5 billion stock/swap merger and formed the Zillow Group that now includes Zillow, Truila, StreetEasy and HotPads. This merger created the largest online sales and rental market for residential property.

This is a pivotal day in online real estate and we couldn’t be more excited to welcome Trulia to Zillow Group,”  Spencer Rascoff, Zillow Group’s CEO, said about the acquisition. “Each of our brands share a consumer-first philosophy, and our powerful combination of insights and expertise will drive even greater innovation for consumers, empowering them with essential information they need to make critical financial decisions. Our combination will also enable real estate professionals to more efficiently and easily reach the nation’s largest audience of engaged buyers, sellers and homeowners, and extract even more value from their advertising.”

Paul Levine, previously Trulia’s chief operating officer, will now work as the pre

– See more at: http://chicagoagentmagazine.com/zillow-trulia-deal-complete-whats-move-inc-s-next-move/#sthash.kmv0jgSI.dpuf

 

 

 

This is a pivotal day in online real estate and we couldn’t be more excited to welcome Trulia to Zillow Group,”  Spencer Rascoff, Zillow Group’s CEO, said about the acquisition. “Each of our brands share a consumer-first philosophy, and our powerful combination of insights and expertise will drive even greater innovation for consumers, empowering them with essential information they need to make critical financial decisions. Our combination will also enable real estate professionals to more efficiently and easily reach the nation’s largest audience of engaged buyers, sellers and homeowners, and extract even more value from their advertising.”

Paul Levine, previously Trulia’s chief operating officer, will now work as the pre

– See more at: http://chicagoagentmagazine.com/zillow-trulia-deal-complete-whats-move-inc-s-next-move/#sthash.kmv0jgSI.dpuf

This is a pivotal day in online real estate and we couldn’t be more excited to welcome Trulia to Zillow Group,”  Spencer Rascoff, Zillow Group’s CEO, said about the acquisition. “Each of our brands share a consumer-first philosophy, and our powerful combination of insights and expertise will drive even greater innovation for consumers, empowering them with essential information they need to make critical financial decisions. Our combination will also enable real estate professionals to more efficiently and easily reach the nation’s largest audience of engaged buyers, sellers and homeowners, and extract even more value from their advertising.”

Paul Levine, previously Trulia’s chief operating officer, will now work as the pre

– See more at: http://chicagoagentmagazine.com/zillow-trulia-deal-complete-whats-move-inc-s-next-move/#sthash.kmv0jgSI.dpuf

This is a pivotal day in online real estate and we couldn’t be more excited to welcome Trulia to Zillow Group,”  Spencer Rascoff, Zillow Group’s CEO, said about the acquisition. “Each of our brands share a consumer-first philosophy, and our powerful combination of insights and expertise will drive even greater innovation for consumers, empowering them with essential information they need to make critical financial decisions. Our combination will also enable real estate professionals to more efficiently and easily reach the nation’s largest audience of engaged buyers, sellers and homeowners, and extract even more value from their advertising.”

Paul Levine, previously Trulia’s chief operating officer, will now work as the pre

– See more at: http://chicagoagentmagazine.com/zillow-trulia-deal-complete-whats-move-inc-s-next-move/#sthash.kmv0jgSI.dpuf

According to Chicago Agent Magazine, the finalization was “a pivotal day in online real estate and we couldn’t be more excited to welcome Trulia to Zillow Group,” as Spencer Rascoff, Zillow Group’s CEO, said about the acquisition. “Each of our brands share a consumer-first philosophy, and our powerful combination of insights and expertise will drive even greater innovation for consumers, empowering them with essential information they need to make critical financial decisions. Our combination will also enable real estate professionals to more efficiently and easily reach the nation’s largest audience of engaged buyers, sellers and homeowners, and extract even more value from their advertising.”

Zillow Group’s largest competitor is Move, Inc who operates NAR’s realtor.com.  Move is owned by News Corp (NASDAQ:NWSA), but is operated by the National Association of Realtors.  On Tuesday, Move said in a statement on the Zillow-Trulia deal that “Zillow’s year of the merge will be Realtor.com’s year of the surge. As our competitor grapples with the challenges of integrating two very similar businesses, Realtor.com will continue to provide the most accurate and up-to-date property listings in America, as well as the most valuable professional tools for brokers and agents.”

The multifamily / apartment listings on the platforms mentioned above are give it the commercial angle that makes this long-awaited mega-merger worth watching.

13. March 2015 by Wayne Grohl
Categories: Listings | Tags: , , | 1 comment

Independent Living Facilities: How They Fit Into The Boom

I was reviewing the various names our industry has used to describe the senior living property sector when I noticed that one appears to be picking up steam: independent living facilities.

The definition of independent living refers to more than facility type — it means a perspective on care that does encompass elderly care without stopping there.

The Shifting Definitions

About independent living, Wikipedia says:

As seen by its advocates, is a philosophy, a way of looking at disability and society, and a worldwide movement of people with disabilities working for self-determinationself-respect and equal opportunities. In the context of eldercare, independent living is seen as a step in the continuum of care, with assisted living being the next step.

The term has different applications as well.  In the very useful glossary at SeniorHousingNet.Com, independent living is characterized two ways — first as “Multi-unit senior housing development that may provide supportive services such as meals, housekeeping, social activities, and transportation (Congregate Housing, Supportive Housing, Retirement Community). Independent Living typically encourages socialization by provision of meals in a central dining area and scheduled social programs.”

Yet within the very same definition, we find that independent living can also be used to “describe housing with few or no services (Senior Apartment)”

With a spread of definitions that broad, the appropriate terminology needs a much closer look before a pro forma is drafted for prospective investors.   And as with so many other commercial real estate specialties, state regulation looms very large in making these definitions stick (or not).

ALFA and state regulation

The Assisted Living Facility Association (ALFA) is very active in all the areas one might expect a national trade association to be, including providing regulatory resources that spell out guidelines, licensing terms and answers on a state by state basis.

ALFA’s state regulation and licensing resources can be found here.

Improved residential markets means getting rent payments cash out of home equity is getting easier 

According to Marcus & Millichap’s latest report on the sector one thing driving a great deal of growth in independent living facilities is the access to equity in their homes by seniors. A rejuvenated residential market has re-opened the pathways to obtaining the rents late in life that drive the independent living market sector.  As Paul Bubny at GlobeSt says:

[…], the pipeline is filling up for independent living facilities, with MMI predicting that new construction will add 2.4% to the existing stock. Thanks to an improving residential market enabling seniors to unlock equity in their homes, MMI says IL occupancy is expected to rise 50 bps to 92.3% by year’s end, while average rents advance 3.1% to $2,923 per month.

11. March 2015 by Wayne Grohl
Categories: Senior Living | Tags: , , , , | 1 comment

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