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Chris Schreiber I’ve been employing various versions of a land residual or development residual analysis as a check on land prices and a test of highest and best use and the indicated land value from the sales comparison approach for the past 15 years. However, when applying the residual analysis here in Idaho, there appears to be real reason for concern. What is the development approach? The development approach is basically the calculation of what a developer can afford to pay for the underlying dirt, considering the value of property as if built out to its highest and best use today. Performing the analysis can be complicated and involve a variety of cash-flow models taking into account profit, holding costs, absorption periods, cost trending, etc. For our purpose, let’s use a very simple static model: Estimated Project Value – Construction Costs, Soft Costs and Profit Implied Land Residual Now, we’ll put in fabricated numbers for multi-tenant light industrial park: $3,800,000 (50,000 square feet at $9/SF [10% vacancy, 25% expenses, 8% cap]) – $2,750,000 in Construction Costs (50,000 square feet at $55 per square foot) – $435,000 in Soft Costs (leasing commissions, absorption and permits and fees) – $318,500 Profit (10% …

Dennis S. Pellecchia In the current market, investors face an uphill battle because achieving profitability poses more of a challenge than it did in years past. One way to enhance the probability of a healthy bottom line is to avoid five common mistakes. 1. Inadequate market research Although national real estate trends are of value, the best market indicators are those in your local market. Make sure you get a handle on local rental rates, occupancy levels, competitive space supply and demographic trends. Moreover, because expansions, cutbacks or relocations by major local employers can significantly affect property prices, regularly monitor the local news for such developments. Social and historical factors also play a role. Knowledge of a famous former resident, a historical event that took place on a property, or a neighborhood’s reputation as a hotspot for the rich and famous may drive prices up. Value-lowering factors include odors drifting from nearby landfills, factories or farms; a history of neighborhood tensions or violence; and recent flooding. 2. Inaccurate financial projections Your investing decisions are only as good as your financial projections, so it’s more important than ever to look at real operating figures when purchasing an established rental property. In …

Mark Zurlini While the residential real estate market appears to be bottoming out in the New York metropolitan area, the commercial real estate market is still lagging behind, in part because of the same disconnect between owners and lenders that dominated the residential market for so long. Commercial property owners don’t want to settle for lower prices and commercial real estate lenders are unwilling to finance overpriced properties. In combination with the lack of liquidity, this gap means the transaction volume has diminished dramatically, especially at price points of $50 million and more and especially in certain commercial property sectors — hotels are the worst, multifamily is the best and retail and office rank somewhere in the middle. The slump in the commercial real estate market raises two questions: When will the market return? What do commercial real estate lenders do in the meantime? In order for liquidity to return to the commercial real estate market, a couple of things have to happen. First, the banks need to start making money. Second, confidence needs to be reestablished. The TED spread — an indicator of perceived risk in the general economy — reached a historic level of 465 basis points last …

Chad Ricks The recent downturn in the economy, coupled with ever-changing loan programs and the distinct lack of financing sources, has commercial owners and developers turning to new and unfamiliar places for their mortgage banking needs. The only constant in the world of finance seems to be change itself. Most conventional lenders are increasing loan qualifications, decreasing leverage limits, increasing rates, requiring additional collateral or exiting the business altogether. This is especially the case when it comes to the financing of senior-housing facilities, leaving Fannie Mae, Freddie Mac and the U.S. Department of Housing and the Urban Development to pick up the slack. Agency lenders are able to provide funds for multifamily and healthcare properties, while conventional sources sort out their risk tolerance. Although HUD, as the administrator of the Federal Housing Administration mortgage insurance programs, is not exempt from changes in the industry, it is at least changing in a positive direction. The agency is allowing terms to stay the same and is shortening the processing times. Historically a HUD-insured mortgage was processed according to the Multifamily Accelerated Processing Guide. On March 1st, MAP processing became obsolete for HUD healthcare loans and was replaced by the LEAN program. It …

Randy Blankstein and Noah Gottlieb An opportunistic real estate investor focuses on a single question: Am I being properly compensated given the risk level inherent in this transaction? Investors seeking IRRs of 20 percent or more are required to heavily scrutinize the risk/reward profile of an investment. Although single-tenant properties are typically associated with long-term leases and core returns, opportunistic results can be achieved in the single-tenant sector by investing in assets leased on a short-term basis. The risk-adjusted return on these investments is pragmatic and should be acceptable to all investors pursuing high-yield strategies when rationally quantified. This type of opportunistic investing is not for everyone, but institutions and high net-worth individuals seeking superior returns on real estate investments should do so by placing funds where high risk-adjusted returns are available. This can be accomplished by pursuing short-term leased single-tenant commercial real estate. The critical variable in opportunistic investment is the assumption through which returns are achieved. Investors need to focus on the incremental return factors (rent growth, cap rate compression, absorption rates, etc.). For example, a developer of an industrial park would expect to achieve opportunistic returns, but would take on development risk, construction risk, leasing risk, market …

Sath Voleti Process—even the word itself has come to hold a negative connotation for many. With the plethora of conflicting information that has been written about process management and process engineering, combined with the nightmares we have all experienced as a result of bad process, many executives fear the pain associated with flawed process more than they value the benefits created by good process. So, what does process have to do with commercial real estate? Just about everything if you’re a real professional interested in creating a sustainable business and virtually nothing if you’re just another real estate cowboy or deal-junkie. In a sector as sophisticated as the commercial real estate industry it never ceases to amaze me at how many businesses have either a blatant disregard and/or a total lack of process. I’ve witnessed builders and developers suffer millions of dollars of margin erosion due to a lack of process. I’ve observed lenders and investors who close bad deals due to a poor underwriting process. I watched institutions make poor acquisitions based upon a lack of due diligence process. I’ve seen brokers take two or three times as long as necessary to get a deal to market due to …

Craig Finger New Jersey’s Sales and Use Tax Act, N.J.S.A. 54:32B-1 et seq., subjects the bulk sale of certain assets to taxation. Since only sellers who were obligated to collect and remit sales tax were required to comply with this Act and prepare the so-called “bulk sales notice,” this Act historically was not applicable to most property sale transactions. However, Governor Corzine signed N.J.S.A. 54:50-38 into law on June 28, 2007, significantly expanding the reach of New Jersey’s bulk sale statute to any transaction in which a seller makes a bulk sale, transfer or assignment. The new statute was effective August 1. The New Jersey Division of Taxation issued Technical Bulletin TB-60 (Bulletin TB-60) on July 3, 2008, explaining the requirements of the new statute. Bulletin TB-60 (available on the New Jersey Division of Taxation’s web site) contains a good overview of the requirements of the new statute and should be reviewed carefully by commercial real estate practitioners. Bulletin TB-60 defines “bulk sale, transfer or assignment” as “any sale, transfer or assignment, in whole or part, of a person’s business assets, not made in the ordinary course of business” and defines “business” as any “endeavor from which revenue or consideration …

Mark Scott The underlying crisis in commercial real estate is growing below the radar. The new mantra for lenders is Extend, Amend and Pretend. Why extend and pretend? Let’s look at recent history. In 2007 the Commercial Mortgage Backed Securities Market (CMBS) generated over $270 billion in loans. In 2008 the commercial real estate securitization market was less than $30 billion (11 percent of the previous year). In 2009 activity as of July is just $21.8 billion (Source: Commercial Mortgage Alert). Life insurance companies have also slashed their funding allocations to less that 20 percent of their 2006-2007 levels. This lack of liquidity in commercial real estate is further exacerbated by the state of the economy: As job losses continue, demand for office space declines, retailers are under stress as consumers cut back, warehousing and manufacturing space requirements are less and the residential sector for both rental and for-sale housing consolidates. Loans that just 2 or 3 years ago were underwritten at 80 percent of the then current “value” are in trouble; today that “value” is down 25 to 40 percent and the loan proceeds available against today’s lower value much less at 50 to 60 percent loan to today’s …

Michael Donohue Commercial property owners may end up paying Uncle Sam a lot less in taxes if they explore cost segregation. They can begin to realize those tax reductions and the resultant increased cash flow as soon as their next quarterly estimated tax payment. Under provisions in the 2009 American Recovery and Reinvestment Act, property owners who decide to commission a paid, engineering-based cost segregation study could possibly receive a refund on taxes paid during the last 5 years. Your tax preparers may now apply the net operating loss created by the cost segregation study to past tax bills and get a refund on taxes paid as far back as 2003. What is Cost Segregation? In typical accounting practice, 100 percent of a building’s costs are depreciated on a straight-line basis in 39 years. Yet, according to the IRS, many components of a building — and most land improvements — have shorter depreciation lives. Cost segregation allows property owners to reduce their current tax bills by identifying and correctly depreciating those assets more rapidly. Industrial buildings, from warehouses to manufacturing plants, whether purchased or constructed, will have different percentages of construction-related costs that can be reclassified from 39-year depreciation to …

As many investors know, a diverse portfolio is the cornerstone of success. And today, even in a down market, commercial real estate is an important component for many investors. Recently in Atlanta, Interface Conference Group brought financial planners and real estate experts together to discuss the state of the commercial real estate market and investing today. The conference — Real Estate’s Place in Wealth Management and Financial Planning — began with a frank, informative keynote address from Zachary Taylor, group chairman and managing partner of global wealth management firm Taylor, Fréres & Cie, a multinational concern with businesses spanning the commodities, asset management, and investment banking sectors. Taylor’s initially set out to identify the role of commercial real estate in the crafting and management a modern portfolio — it should comprise between 20 and 30 percent in total — noting that the act of doing so has changed considerably over the past 3 years. “Financial planners need to step back and understand where capital is and what is driving it, in order to keep the wealth management business moving forward,” he noted. Taylor, Fréres & Cie’s philosophy ensured that Taylor was particularly suited to address the crowd of nearly 200 …