Features

Pat Feeney It’s been a bumpy couple of years for Phoenix commercial real estate in general, but thanks in part to what some people are calling the California Effect, the Valley’s industrial market’s year-end net absorption stats are poised to wind up in the plus column for the first time since 2008. The California Effect refers to the impact of companies relocating from California or seeking a close-enough alternative to service Los Angeles/The Inland Empire. Although not entirely responsible for distribution buildings leading Phoenix industrial market activity this year, the increase in attention from these types of big-box users has been particularly noticeable. Even more encouraging is the fact that passage of Arizona’s tough new immigration law, SB 1070, has not had the negative effect on the market that some people feared. Not only has it not stemmed the flow of companies wanting to set up shop here, it’s not even been part of the conversation with most decision-makers. According to Joseph Vranich, an Irvine, Calif.-based business relocation expert who tracks the California outmigration trend, Arizona is the second most attractive state in the country for companies moving from or cancelling plans to locate in California. Texas is No. 1. …

Charles C. Pilchard The most recent Financial Accounting Standards Board (FASB) draft of proposed lease accounting changes and its potential adoption would have a severe impact on real estate owners, lenders and occupiers. While FASB is moving quickly to implement this draft aimed at greater lease transparency, several areas must be clarified now to avoid misinterpretation and to ensure adherence and accurate reporting. More importantly, adoption of this draft will result in substantial time investment by tenants, real estate owners and service companies, and lenders both at inception and on an ongoing reporting basis. Occupiers would immediately feel the impact of the accounting changes as leases will have to be capitalized, including future estimated renewals, contingent rents and, possibly, operating expenses and real estate taxes. The capitalization of leases will do three things: 1) it will result in higher front-end lease costs; 2) it will require constant re-evaluation of contingencies in light of changing market conditions and business objectives; and 3) it will impact financial ratios, loan covenants and EBITDA (earnings before interest, taxes, depreciation and amortization). Faced with whether to enter into longer-term leases that result in greater reportable liabilities, tenants will naturally move to shorter leases and likely …

Tony Thompson September 14, 2010 marked the 50th anniversary of real estate investment trusts, or what is more commonly referred to as REITs, in the United States. Originally signed into law in 1961 by President Dwight D. Eisenhower, REITs buy, develop, and operate commercial properties such as office buildings, hotels, medical facilities, shopping centers and apartment buildings. REITs offer investors the opportunity to invest in income-producing hard assets and are typically more accessible to a much broader range of investors as compared to traditional real estate ownership. But why should investors consider REITs and other alternative investments, given the wide range of investment products available today? Real estate and other hard assets have proven to be a valuable addition to an investment portfolio, often reducing volatility and increasing total returns. According to the NCREIF Property Index, which reflects returns on investment-grade, income-producing properties, the total average annual return from January 2000 to December 2009 was 7.3 percent. Conversely, during this same time period, the stock market was sitting in negative territory and the S&P 500 index produced an average annual return of -0.95 percent. Various studies, which have compiled data from the S&P 500, the Federal Reserve Database and NCREIF, …

H. Ronald Klasko With traditional sources of capital unavailable, the EB-5 immigrant investor program has attracted great interest among commercial real estate developers. Specifically, many real estate developers have chosen to form “regional centers” to attract tens of thousands of foreign investors willing to invest $500,000 for the opportunity to obtain green cards for them and their family members. In fact, the number of regional centers has expanded five-fold to more than 100 in just the last couple of years. This article will discuss the requirements of the EB-5 program and the advantages and disadvantages to developers of forming regional centers to attract EB-5 capital. The article will also discuss other options available to developers, such as having a development project “adopted” by an existing regional center, purchasing a dormant regional center and attracting foreign capital through a pooled investment opportunity without a regional center. Background of Regional Center EB-5 Program The EB-5 program enables foreign nationals who invest $500,000 or $1 million (depending upon the geographical area of the investment) to get green cards for themselves and their immediate family members. In order to qualify, the investment must create ten full-time jobs for U.S. workers. In 1994, Congress created …

Thomas J. Drought As consumer behavior expert and best-selling author Paco Underhill pointed out in his book Call of the Mall, it became clear over time that the first generation of stand-alone enclosed suburban malls suffered from what Underhill refers to as “the mall’s fatal flaw”: “its lack of mercantile DNA”. To a large degree, commercial development has historically been “an industry driven by real estate, not retailing.” But as the commercial development industry has evolved over the last decade, architectural designers and developers have developed an increasingly sophisticated understanding of the importance of creating dynamic, diverse and experiential mixed-use environments; spaces and places that offer a unique and appealing blend of retail, dining and entertainment options in a live, work and play context. More so than ever before, the question to ask is not just where, but also what. While the “location, location, location” cliché still applies, successful developers understand that a diverse and dynamic tenant roster is a critically important prerequisite to establishing and maintaining a great center. Today’s consumers have options. Standing out amidst an increasingly crowded field of competitors requires elevating your project to the top of that list of options by having tenants that give …

Karl Hanson Not long ago 90 percent occupancy in quality buildings was the norm. Rental rates were increasing. Property values were soaring. Now, fast forward to today. Markets face occupancy rates around 80 percent, give or take a few points. Rental rates have declined. Property values have dropped significantly. At first glance, it looks like the effects of the inescapable real estate cycle. However, the depth and duration of this downturn has generated a new phenomenon that has caused some property owners to make the conscious decision to allow buildings to remain dark. They are referred to as zombie buildings – physically present but devoid of life. The table was set at the peak of the market when values were high and cheap credit was readily available. Many commercial real estate owners purchased or refinanced buildings at historically high leverage ratios predicated on inflated values. As the market softened, rental rates declined, cap rates climbed and property values fell. For those owners who were not fortunate enough to maintain their pre-recession occupancy levels, they were faced with a difficult decision – invest additional capital in the building to attract new tenants or let the building go dark? In a normal …

Jim Lemos The lack of sale transactions continues to stifle the commercial real estate market and a recovery nationwide. Much attention has been focused on the “market value” gap between buyer and seller over what is market value today. However, while the value gap has started to close, another issue has raised its ugly head. Investment sales brokers cite the severe impact a lender’s prepayment penalty is having on potential sales transactions. The current U.S. Treasury rates now stand at levels unseen since the 1950s. No one in the commercial real estate business today was in business making loans at that time. Back then lenders were not dealing with yield maintenance calculations or the more obtuse and expensive defeasance penalties prevalent today. The fact that a borrower needs to hire a group of consultants and attorneys to handle a CMBS defeasance payoff suggests the concept might have been invented by our Congress. Needless to say the costs associated with prepayment of a loan today is prohibitive in far too many cases. The result is obvious; a sale trying to absorb a 15 to 25 percent prepayment penalty is a transaction that is stillborn. Mortgage bankers are reacting to investment sale …

Commercial real estate is a driving factor in the economy, but with the onset of the recession, employers began tightening their belts. This led to nationwide layoffs and a steady increase in the unemployment rate. Coupled with irresponsible lending practices, more and more residential loans defaulted, sending homeowners into foreclosure. Today, foreclosures are at an all-time high, clogging the court systems and leaving banks with an overabundance of property on their books. Unfortunately, experts suggest that the collapse of the residential market is not the end of the crisis and that the commercial real estate market is next in line for a major hit. Despite the grim outlook, investors are finding creative alternatives to traditional investing. Increased vacancies lead to more concessions and defaults. Commercial vacancy rates tie directly into the economics of supply and demand. That is, the greater the supply of commercial space, the less the demand, and vice versa. If the supply of commercial space surpasses demand, vacancy rates tend to increase. Since 2007, more than 7 million Americans have lost their jobs. This has taken a major toll on the demand for office space, forcing landlords to offer a variety of rent concessions. Some landlords have …

The commercial real estate recoverythat’s underway took approximately less than 2 years because there’s much more of a rush to mark-to-market than in previous recoveries. There is also better information and research as well as more institutional influence in the market both by the public market REITs and by the private market pension funds. What this means is that we've gotten to a point where it's much more attractive to buy commercial real estate. There is still some uncertainty where prices are still high, but there has been much more of a methodical effort to get the process right. The banks are doing the same because of the pressure from the regulatory agencies. Capital is very selective,and that’s a challenge, but it should be a challenge. There should not be the easy money that we saw in the peak of the first quarter of2007. The re-pricing of rents has been as significant as the re-pricing of assets in sustaining this recovery. As challenges go, we are surprisingly less concerned about the next 2 to 3 years because the Federal Reserve Systemis providing tremendous liquidity and low interest rates to the market. The United States is becoming a favored nation again …

If you’re a developer/owner, your first question when reading the title of this column is probably: “How can I get penalized by the liquidated damages on my construction project? Liquidated damages are supposed to protect my interests.” Liquidated damages are designed to protect owners, but if not enforced or drafted properly, they can be unenforceable, thus penalizing the owner. If a construction project is not completed on time, it can have serious consequences. For the owner it can mean the loss of use and/or loss of income; financing damages; and increased project supervision costs. These types of damages are often difficult to calculate. Therefore, owners may want to fix these damages ahead of time by liquidating them. If done correctly, this will benefit the owner by establishing a known amount that it will compensated for late completion. On the other hand, liquidated damages may benefit the contractor by creating certainty in the event of delay and in some instances, perhaps reducing the contractor's exposure when the owner's actual delay damages are greater than the liquidated amount. Liquidated damages are typically assessed against the contractor as a fixed amount on a per-day basis. In many instances, they are assessed in different …