Thursday, July 29, 2010
ULI Presentation: July 22, 2010
Instead of having traditional class tonight we went over to Dallas to hear a presentation regarding the Trinity Trust Project. Once upon a time the Trinity River was a clean river, but the settlement of Dallas is where that all changed. Also the river used to contain lots of limestone, but has been removed. The whole thing with this project is that the vision is to turn it into a big urban wetland park. Dallas believes that if they can sell the water they can sell the land. Basically there will be no income producing propperties for this project. It is completely a public project. He did show us one concept for the project and it looked like a bunch of lilly pads but all I gathered was that it was for aesthetic purposes. During this whole presentation I kept wondering how this project was going to be funded. I just see it being very expensive and don't see any incentive for investment from private players. The only way I see it happening is being completely publicly funded by raising tax dollars and such etc. I don't see the citizens of Dallas being too happy about taxes being raised for a project most of them will never utilize anyway.
Thursday, July 15, 2010
Class 6: July 15, 2010
Cities are starting to look at penalizing banks for not managing foreclosed assets. Banks do not want to asset manage though because they do not do it well. You would think we would learn from our mistakes in the 80s. Instead of just foreclosing and then turning around and putting it on the market maybe banks should branch out and have a property management division within their business plan. The way things are now though banks just let the property sit in their portfolio for long periods of time without maintaining the property or getting it ready for resale.
Obviously one of the biggest problems with commercial property today is that a lot of them are “underwater”. In other words the borrower or property owner owes more than the property is worth. A lot of this has to do with the perfect underwriting that went on before the crash. Properties were underwritten with 5% annual increases in rent with zero vacancies and then valued with really low cap rates. This is not realistic however and when the crash happened borrowers could no longer make their loan payments. This is a problem when cap rates rise drastically and when most commercial loans have five year balloons and as these balloons come due it will be hard for borrowers to find refinancing.
We talked at length about a few topics and articles that seemed to contradict themselves. One of the articles which talked much about the things in the paragraph above, but 2010 is just the start of all the balloon notes coming due. This means 2011 could be the big “shitstorm” of when commercial real estate really starts to tank. This notion directly contradicted with an article that said institutional investors are starting to turn away from stocks and look at ‘alternative’ investments with commercial real estate being one of them. The same article went on to say that professionals in the industry see it getting worse in 2010. The majority of those asked believe 2011 will be the turnaround year while others think it will be 2012 or 2013. So why would institutional investors be so interested in commercial real estate? The answer is that they see it better as long term investment. It stated in this article that an Oklahoma Teacher’s Fund made a 24.5% return in 2009 with 70% of their money in stocks. So why would you want to go to real estate when they can earn that kind of return in a down economy?
Atlanta is the worst in the country when it comes to problem CMBS loans.
I mentioned in an above paragraph about how lenders and owners etc. used to underwrite properties to meet a perfect standard. Now that there is more conservative underwriting standards and bottomed out property values J.P. Morgan Chase and Bank of Scotland may be treading back into the commercial mortgage backed securities market.
Not many property owners own their property free and clear, but for the ones that do they may have an opportunity to sell their properties on a quicker timeline. This could be done utilizing seller financing. By offering better rates than a bank, a seller can entice possible buyers to purchasing their property.
Workouts- Negotiations between the lender and borrower to restructure a loan. The lender does not want to hold the real property because of the costs. So ways of negotiating a workout is to change the terms or maybe an interest-only payment. An idea discussed that I really liked is to relieve the borrower from payments for an agreed on amount of time and in exchange the lender would receive a portion of the appreciation upon sale of the property. Also a lender could also basically take control and really monitor the operations by watching what checks an owner writes or picking which tenants can and cannot occupy the space.
The final thing we discussed is the tax implications of debt relief. If a lender relieves a borrower of debt than the borrower has to report that debt relief as taxable income. I tried to provide some insight to tax implications as I have heard my uncle and dad talk at nauseam about a workout my uncle is doing. To put it simply the mortgage is worth way way way way more than the property, but if foreclosed upon then the mortgage balance is recognized as the gain per se, not the value of the property. And if the lender grants relief of the debt than there will be huge tax burden for the investors of the property.
Obviously one of the biggest problems with commercial property today is that a lot of them are “underwater”. In other words the borrower or property owner owes more than the property is worth. A lot of this has to do with the perfect underwriting that went on before the crash. Properties were underwritten with 5% annual increases in rent with zero vacancies and then valued with really low cap rates. This is not realistic however and when the crash happened borrowers could no longer make their loan payments. This is a problem when cap rates rise drastically and when most commercial loans have five year balloons and as these balloons come due it will be hard for borrowers to find refinancing.
We talked at length about a few topics and articles that seemed to contradict themselves. One of the articles which talked much about the things in the paragraph above, but 2010 is just the start of all the balloon notes coming due. This means 2011 could be the big “shitstorm” of when commercial real estate really starts to tank. This notion directly contradicted with an article that said institutional investors are starting to turn away from stocks and look at ‘alternative’ investments with commercial real estate being one of them. The same article went on to say that professionals in the industry see it getting worse in 2010. The majority of those asked believe 2011 will be the turnaround year while others think it will be 2012 or 2013. So why would institutional investors be so interested in commercial real estate? The answer is that they see it better as long term investment. It stated in this article that an Oklahoma Teacher’s Fund made a 24.5% return in 2009 with 70% of their money in stocks. So why would you want to go to real estate when they can earn that kind of return in a down economy?
Atlanta is the worst in the country when it comes to problem CMBS loans.
I mentioned in an above paragraph about how lenders and owners etc. used to underwrite properties to meet a perfect standard. Now that there is more conservative underwriting standards and bottomed out property values J.P. Morgan Chase and Bank of Scotland may be treading back into the commercial mortgage backed securities market.
Not many property owners own their property free and clear, but for the ones that do they may have an opportunity to sell their properties on a quicker timeline. This could be done utilizing seller financing. By offering better rates than a bank, a seller can entice possible buyers to purchasing their property.
Workouts- Negotiations between the lender and borrower to restructure a loan. The lender does not want to hold the real property because of the costs. So ways of negotiating a workout is to change the terms or maybe an interest-only payment. An idea discussed that I really liked is to relieve the borrower from payments for an agreed on amount of time and in exchange the lender would receive a portion of the appreciation upon sale of the property. Also a lender could also basically take control and really monitor the operations by watching what checks an owner writes or picking which tenants can and cannot occupy the space.
The final thing we discussed is the tax implications of debt relief. If a lender relieves a borrower of debt than the borrower has to report that debt relief as taxable income. I tried to provide some insight to tax implications as I have heard my uncle and dad talk at nauseam about a workout my uncle is doing. To put it simply the mortgage is worth way way way way more than the property, but if foreclosed upon then the mortgage balance is recognized as the gain per se, not the value of the property. And if the lender grants relief of the debt than there will be huge tax burden for the investors of the property.
Thursday, July 8, 2010
Class 5: July 8, 2010
Hospitality Industry – Part of decline of hospitality market is the cost savings going on by corporations and businesses. Companies are trying to cut travel costs and there are many ways in which it is being done. Conferences at convention centers and such are a thing of the past with teleconferencing and technology advancing the way it is. There is no need to set aside blocks of rooms for business trips anymore because of shorter meetings or no meetings at all. Also, with the internet you may not need to travel your employees to sell products or go to tradeshows. It all comes back to that we are moving away from building relationships face to face and it is all being done through computers.
Coming more and more efficient when it comes to utilizing resources when it comes to business travelers and using your employees.
A property can reach maximum efficiency. Once a property becomes fully occupied and all tenants are paying bills on time then reached maximum efficiency. Same goes for OPEX, can only lower expenses so far while still maintaining property and also debt service because you can only go to a certain low point for your cost of debt. The other income line in a pro forma is where a property owner or manager can be creative and figure out other services that may generate extra revenue. Which brings a question, why invest in a property that has reached maximum efficiency? Invest if you want a fixed income security because otherwise there is no upside.
Travel with a purpose – essentially instead of asking yourself where should I go? Ask yourself why go there? So instead of traveling to getaway type place just to go there find out your motivation for wanting to travel in the first place.
Train vs. Plane vs. Car – A point was made in class that because of transit oriented developments trains may become more appealing as a mode of transportation. I agree with this, but still think it will take a while before it becomes people’s first choice to ride the train at least in Fort Worth. In Texas I would argue that most people are like me in that they would just prefer driving and would go on to say that most people enjoy driving even on long trips over any other mode of transportation.
Most important initiatives for hotel operators in 2010 are to streamline business practices and become more efficient and to seek out new revenue generating opportunities. Part of this is focusing on customer engagement efforts such as dining establishments, or coffee shops. Point brought up in class that business travelers need free Wi-Fi and maybe an overnight dry cleaning service at a hotel. Basically hotel operators need to focus on service to their current and prospective clients.
Gulf Coast hotels were not doing well but after oil spill occupancy rates have gone way down. Right now people are just not traveling to the gulf and if they are they are just not spending money like they used to. At this time though is when they make all their money because of the season so now fear not even able to make it next year because they won’t have the cash reserves from their busy season to keep the afloat.
Beijing and Shanghai prices are grossly inflated. Transparency is weak in Latin American markets as they are not very forthcoming with performance measures. New multi-million dollar deal mixed use project could go up in Iraq. This is the first big real estate project in the post-Saddam Hussein Iraq. 3500 residential apartments, office tower, 5-star hotel, and upscale shopping mall are all part of the project. Some believe because of better security in Baghdad it should make foreign investments more prevalent.
Coming more and more efficient when it comes to utilizing resources when it comes to business travelers and using your employees.
A property can reach maximum efficiency. Once a property becomes fully occupied and all tenants are paying bills on time then reached maximum efficiency. Same goes for OPEX, can only lower expenses so far while still maintaining property and also debt service because you can only go to a certain low point for your cost of debt. The other income line in a pro forma is where a property owner or manager can be creative and figure out other services that may generate extra revenue. Which brings a question, why invest in a property that has reached maximum efficiency? Invest if you want a fixed income security because otherwise there is no upside.
Travel with a purpose – essentially instead of asking yourself where should I go? Ask yourself why go there? So instead of traveling to getaway type place just to go there find out your motivation for wanting to travel in the first place.
Train vs. Plane vs. Car – A point was made in class that because of transit oriented developments trains may become more appealing as a mode of transportation. I agree with this, but still think it will take a while before it becomes people’s first choice to ride the train at least in Fort Worth. In Texas I would argue that most people are like me in that they would just prefer driving and would go on to say that most people enjoy driving even on long trips over any other mode of transportation.
Most important initiatives for hotel operators in 2010 are to streamline business practices and become more efficient and to seek out new revenue generating opportunities. Part of this is focusing on customer engagement efforts such as dining establishments, or coffee shops. Point brought up in class that business travelers need free Wi-Fi and maybe an overnight dry cleaning service at a hotel. Basically hotel operators need to focus on service to their current and prospective clients.
Gulf Coast hotels were not doing well but after oil spill occupancy rates have gone way down. Right now people are just not traveling to the gulf and if they are they are just not spending money like they used to. At this time though is when they make all their money because of the season so now fear not even able to make it next year because they won’t have the cash reserves from their busy season to keep the afloat.
Beijing and Shanghai prices are grossly inflated. Transparency is weak in Latin American markets as they are not very forthcoming with performance measures. New multi-million dollar deal mixed use project could go up in Iraq. This is the first big real estate project in the post-Saddam Hussein Iraq. 3500 residential apartments, office tower, 5-star hotel, and upscale shopping mall are all part of the project. Some believe because of better security in Baghdad it should make foreign investments more prevalent.
Thursday, July 1, 2010
Class 4: July 1, 2010
A lot of Developers in Dallas have been applying for funding through HUD and being turned down by the city of Dallas. To be eligible for HUD financing 51% or more of the units have to be “affordable.” Dallas receives HUD funds from the federal government but then denies its developers access to those funds because does not want too much low income housing in Downtown. So basically author of this article believes Dallas is making a conscious effort to deceive the FEDS by accepting HUD money but then not using it for its intended purposes. A lot of this has to do with the image we have in our minds of low income housing. When someone hears low income housing they may think of drug dealers and prostitutes etc. and I really think this is the case here. I have never been the biggest Dallas supporter but I believe this is what is going through Dallas city officials’ minds. Dr. Forgey then made a very good point that to truly create diversity and a live work play environment then you need to have affordable housing for the people that serve food, clean toilets etc. (Don’t want to sound elitist but it does bring up an interesting point).
We discussed for a while the social obligation someone may feel to help find low income families find a new place when they are being forced to relocate.
When a group find a development with actual affordable housing it can cause an economic boom in the area. It makes sense because if it is truly affordable people will not live outside their means and have more discretionary income. This leads to more profitable businesses in the area which could also drive up property values.
Thought for the Day: If any average Joe off the street is making money buying and selling real estate then something is fundamentally flawed because it should not be that easy.
TAXES
The U.S. is broke so trying to figure out how to generate more revenue. Basically, they are proposing taking away the capital gains tax and taxing the income at your tax bracket, essentially turning a 15% tax rate into a 30%+ tax rate. Maybe too much money is chasing real estate deals and this will take away some of the players in the market. Policy has skewed real estate values in that it transfers risk from individuals and corporations and lenders to society.
In San Francisco they are proposing that tenants that rent a space would have to pay a commercial rent tax. This is absolutely retarded in that it will do nothing but drive small businesses out of San Francisco. Shifting burden away from landlord and on to the tenant is what this is doing.
INDUSTRIAL
Retailers are tightening up inventories therefore manufacturers are not getting the orders needed which leads to a lot of available space. Canada’s economy is strong at the moment and going through their own real estate bubble.
We discussed for a while the social obligation someone may feel to help find low income families find a new place when they are being forced to relocate.
When a group find a development with actual affordable housing it can cause an economic boom in the area. It makes sense because if it is truly affordable people will not live outside their means and have more discretionary income. This leads to more profitable businesses in the area which could also drive up property values.
Thought for the Day: If any average Joe off the street is making money buying and selling real estate then something is fundamentally flawed because it should not be that easy.
TAXES
The U.S. is broke so trying to figure out how to generate more revenue. Basically, they are proposing taking away the capital gains tax and taxing the income at your tax bracket, essentially turning a 15% tax rate into a 30%+ tax rate. Maybe too much money is chasing real estate deals and this will take away some of the players in the market. Policy has skewed real estate values in that it transfers risk from individuals and corporations and lenders to society.
In San Francisco they are proposing that tenants that rent a space would have to pay a commercial rent tax. This is absolutely retarded in that it will do nothing but drive small businesses out of San Francisco. Shifting burden away from landlord and on to the tenant is what this is doing.
INDUSTRIAL
Retailers are tightening up inventories therefore manufacturers are not getting the orders needed which leads to a lot of available space. Canada’s economy is strong at the moment and going through their own real estate bubble.
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