consigliere

Protect your cash: Commercial Investment Real Estate Remains Stable

In light of this week's financial sector meltdown, a long time client and friend said to me "You know Thomas, I have seven figures cash in Bank of

America

today.  With what's happening with the other financial giants and BofA saving Merrill Lynch, it really makes me nervous to have that much cash in one bank or any number of banks.  I have decided to take a good portion of it, 60-70%, and put it into more income producing commercial real estate.  There are good deals out there to be had."  I agreed completely.  We are now actively looking for shopping centers with in-place income at 8%+ of purchase price.

Yesterday, another client said he was pulling his hair out while watching MSNBC to see if his $500,000 invested with Morgan Stanley was going to go up in smoke.  He then expressed his confidence in his income producing commercial real estate as compared to the stock market.

Contrary to the news of faltering banks and the stock market diving, commercial investment real estate fundamentals in most markets throughout the U.S remain stable and will continue to do so in the current interest rate environment. Apartment Buildings and Trailer Parks are a hot commodity among investors these days due to the turmoil in the housing market; vacancy rates are dropping and rents are trending upward.  Demand for office and retail properties is down but risk can be mitigated through lower leverage, buying on actual income numbers rather than proforma and through value-add or lease-up incentives.

There are good deals to be found in all US markets from as low as $1MM to $100MM+ across all commercial income property types.  Most everything our clients buy is relatively hands-off for them as owners by nature of a property manager or lease structure such as a triple net lease. These hands-off investments provide stable steady cashflow, appreciation and good residual value.  Many clients are purchasing properties in different geographic areas from themselves and their other properties to diversify risk. Many times the subject property is 3, 7 or even 10 states away from where they reside due to the low to no management needed.

The following table overviews conservative achievable yields in today's market:

To preserve your cash from stock market declines or failing banks, consider a stable long term investment such as commercial income property today.  As your professional commercial investment advisor, I analyze your personal investment situation in terms of yield v. risk to select the right property in the right market to achieve your goals.  Call or email me right now to add or diversify your investment portfolio. We do deals nationwide.

Be well out there,

Thomas

About the Author:

Thomas Morgan, CCIM, CIPS is exclusive global real estate advisor to high net worth individuals, families and their ancillary advisors.  Thomas has been called the "go to guy" for ultra-wealthy clients worldwide who want to use real estate to protect and build their wealth.  Thomas advises clients on all aspects of real estate holdings including commercial investments; private residences; investment analysis; and portfolio strategy and optimization through deliberate asset management.  Thomas can be reached directly at 1.866.539.1777 or thomas@cmcommercial.net

Who is your tenant? S&P Tenant Credit Ratings

When purchasing a single tenant net leased investment, tenant quality and the financial ability of the tenant to perform is of utmost importance.  In essence you are buying the income stream and the bundle of rights subject to the leasehold, so how do you know you will get you monthly rent check for 10, 12, 15 or 20 years?  One way is to have the "market" rate the risk for you.  Here is the  S & P breakdown of credit ratings, to help you assess your risk:

Long-Term Issue Credit Ratings
Issue credit ratings are based, in varying degrees, on the following considerations:

Likelihood of payment—capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
Nature of and provisions of the obligation;
Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
Issue ratings are an assessment of default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
 

AAA
An obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
 

AA
An obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
 

A
An obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
 

BBB
An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
 

BB, B, CCC, CC, and C
Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
 

BB
An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
 

B
An obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
 

CCC
An obligation rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
 

CC
An obligation rated 'CC' is currently highly vulnerable to nonpayment.
 

C
A subordinated debt or preferred stock obligation rated 'C' is currently highly vulnerable to nonpayment. The 'C' rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued. A 'C' also will be assigned to a preferred stock issue in arrears on dividends or sinking fund payments, but that is currently paying.
 

D
An obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
 

Plus (+) or minus (-)
The ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
 

NR
This indicates that no rating has been requested, that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular obligation as a matter of policy.
 

Introducing ReferralRewards- Enjoy the Mexican Caribbean.... on me

On a recent visit to the Hyatt Caribe, sitting on the balcony of our top floor suite overlooking the amazingly crisp blue Caribbean, I thought to myself... this is great, I would love to share this place with my friends and clients.

So, no reason not to.

And with that, I introduce the ReferralRewards Program.

I work hard to provide clients with top notch real estate advisory services and live by the motto "a referral is the best compliment I can receive".  Beginning today, on an annual basis, I will hold a drawing every December 1st for a lucky client or associate to receive a trip for two to the Mexican Caribbean. Every referral we receive will equal one entry in the drawing with no upward limit as to the number of entries. 10 referrals from one client equals 10 entries for that client. (Incoming referrals from other associates accepted as well: lenders, bankers, title, surveyors, appraisers, etc.)

The referral can be for any type of commercial real estate anywhere in the U.S.  We specialize in national commercial investment sales, primarily NNN and retail deals but have large network of commercial brokers who can handle any type of commercial transaction including leasing.  We will also consider residential referrals on a case by case basis as we have residential brokers in our network who can service these deals.

I did a great job for you and can do a great job for your friends, family and associates. Ask yourself today "Who needs real estate services?" And when the answer comes simply call or email me with their name and number and we will enter you into the ReferralRewards Program. One referral. Two referrals. Three and four... the blue Caribbean outside your door!.

Then when you are sitting on the beach sipping your Margarita, ask yourself "Who can I refer next year?" Adios Amigo

Call or email today... 

...........................................
Thomas G. Morgan, CIPS
CM Commercial
866.539.1777 toll-free
866.539.1788 fax
www.cm-commercial.net

Commerical Real Estate Market remains strong

National Association of Realtors reports 11/22/06:

The Commercial Leading Indicator for Brokerage Activity, a leading indicator for the commercial real estate market, has increased for six consecutive quarters showing that continued growth can be expected in commercial real estate sectors......  Commercial real estate practitioners can anticipate leasing and sales activity in the first quarter to be approximately 2.9 percent higher than the first quarter of 2006.

Full Story here.

Will that be Cash or New Loan?

Often times buyer clients confront me with the statement… "if I get a new loan I have to pay interest on the borrowed money, which therefore costs me money and makes my overall return lower." I think and try to explain….. au contraire mon frere.

The overall return on a commercial real estate investment will be higher when a new loan is obtained compared to the alternative of paying all cash. In other words, a leveraged investment allows the purchaser's equity (cash investment) to receive the benefit of the lender's money (aka OPM=other people's money) even though that money has a cost to the purchaser. (Note: we are assuming the LTV (loan to value), cap rate and cost of capital are somewhat balanced).

Let's mathematically prove this by looking at a hypothetical property: "Consigliere Retail Mall" located in Hot Market, USA. We will look at the un-leveraged deal called "Cash Deal" and the leveraged deal called "New Loan Deal" Both examples are pre-tax.

Global Assumptions for both deals:

-Total sf: 51,000

-Purchase Price: $4,700,000

-Year One NOI: $441,842

-Initial Cap Rate: 9.4%

-Lease Types: Absolute NNN, tenants pay all vendors directly.

-Annual Vacancy Factor: 7%

-Rent Escalations: 3% annually

-Expenses: travel for out of town owner for once a year property visit, book keeping at home office, leasing from local leasing broker at 6% per year.

-Expense Growth: 3% per year

-Acquisition Costs: $10,000 (survey, inspection, title endorsements, doc fees etc)

-Holding Period: 5 years, sell price based off of year 6 NOI at 9.8% cap rate, sales costs of 5% (Sale Price: $5,226,694)

Assumptions for New Loan Deal:

-Loan to Value: 75%

-Loan Amount: $3,525,000

-Interest Rate: 6.8% fixed

-Amortization: 20 years

-Balloon: 6 years

-Fees: 1 point ($35,250)

Detailed Spreadsheet:   Download cash_deal.pdf

Detailed Spreadsheet:   Download new_loan_deal.pdf

Drum roll……………and the results are…

	Cash Deal	New Loan Deal
Cash Investment	$  4,710,000	$ 1,220,250
Initial Cap Rate	9.4%	9.4%
Initial Cash on Cash	9.4%	9.7%
Year 5 Cash on Cash	10.6%	14.3%
Internal Rate of Return	10.78%	19.52%

As you can see from the above results table, the leveraged deal produces an IRR (overall yield) of 19.52% while the cash deal produces an IRR of 10.78%. Which one would you take?  Furthermore, look at the difference in the amount in the cash investment = $3,489,750 less cash needed to buy the same property.  WOW!  Pay less to get more, what a concept! 

Now....I know what your thinking...."let's invest the cash saved in this investment and put it in more leveraged investments to get our overall rate of return even higher."  I am on board. 

Call Thomas today for a free consultation on your commercial real estate investment objectives. Toll-free 866.539.1777 or e-mail here.

Side Notes : Good IRR definition.

A CCIM definition of IRR: "Internal Rate of Return IRR equates the present value of the cash inflows and the present value of the cash outflows. The decision rule for IRR is if the IRR is greater than or equal to the investor's required rate of return, the investment should be accepted; otherwise it should be rejected."

Press Release: CIPS

NEWS RELEASE

  Thomas G. Morgan Achieves Elite STATUS as AN International investment Real Estate advisor

Colorado, USA    11/22/06    –     Thomas G. Morgan of CM Commercial Inc. was awarded the prestigious Certified International Property Specialist (CIPS) designation and joins a worldwide network of elite global real estate practitioners with expertise in advising and working with international clients in the placement of investment capital into commercial real estate both nationally and internationally.  The CIPS Designation is awarded by the National Association of REALTORS® (NAR), which represents over 1,200,000 REALTORS® in the

United States

.

Members of the CIPS Network are crucial players in today’s global real estate market.  The CIPS designation recognizes members who have achieved the necessary professional training and experience to work successfully with international clients and properties.  To earn the CIPS designation, REALTORS® complete rigorous coursework devoted to learning cultural differences and international business practices.  Designees must also prove achievement in international real estate transactions.  Morgan joins a distinguished society of over 1600 real estate professionals throughout the world who have earned the CIPS designation.  “This is a highly prestigious award in our industry,” said Jim Harris, CIPS, NAR International Operations Committee Chair.  “Mr. Morgan is now established as an expert in international investment real estate.”

            

For more information on the CIPS designation, visit www.realtor.org/international.  To schedule an investment consultation with Mr. Morgan, please contact Thomas directly at 1.719.207.0770 or by e-mail link on side column.  For further information on CM Commercial’s investment real estate brokerage and advisory please visit www.cm-commercial.net 

My dog has a Long Tail, does your blog?

After completing The Long Tail (book and then blog) by Chris Anderson and then attempting to apply to the business of real estate brokerage I went looking for others already on the scene.  o.O has some of the best theories 1 and 2 of the long tail in real estate brokerage.  Real Estate Tomato has strong ideas and points also and really puts his ideas into use for himself.

RET, if you will, clearly accomplishes his goal

"To Provide Realtors With Outstanding Service, Knowledge and the Technology to Make Them More Successful."

..with the connection of his blog and me; chalk one point up for RET AND maybe I will buy a t-shirt also (two points) or if you send me one I will wear it :) (five points) Point System kind of like ActiveRain).  Hey, I am Realtor and he provided me with Knowledge and Technology...as for the successful part we will see if these blog ideas (not just RET and o.0 but others also) and other Internet technologies bring the success.  (Who defines success anyway?)

As for me, o.O's ideas of one man shows or small shops (like mine, 2 brokers) can compete with the big guys ring true.  Today, I read in RCA Report, (even though it was on my desk in June)

....in an industry where the top five real estate companies account

for less than 15 percent of all transactions

and 70 percent of all commercial

transactions are valued at

$1.5 million or less, there will still

be plenty of room for growth at all

levels in 2010.

Even though the big guys are big, there are a lot of small guys closing 85% of the deals.  That in itself would look like a long tail.

Us small guys have the access to the same technology as the big guys and know how to use it (is that a threat?). Brochure services, market data, available property data, analytical tools, networking, we have it with the click of a mouse (or many many clicks of a mouse).  In a David and Goliath scenario, the Internet combined with our ability to make quick yet informed decisions levels the playing field and adds value for our clients.

Our niche is not a property type nor a specific market.  We are doing deals on nationwide basis crossing property types.  Yes, I know you are saying they are generalists and "jack of all trades, master of none".  Think what you will.  We specialize in and sell "investment real estate" which to our clients means cash flow and appreciation; yes general but very specific depending on clients. 

Our guys come to us and say "I need an 8 cap or a 5% cash on cash and I'll be happy".  Of course there are the other considerations of risk (yield v. real world conditions), leverage,  management (lease type or mgr available) and geography (not necessarily close to them as owners but ease of getting to property via direct flights etc.) as well as other individual investor concerns.  We place the right property with the right person, same as the business has always been, but we match the individual client's needs to a property quicker and more effectively than ever before because we provide a greater choice (nationwide) which in the past was being limited to what comes available in only our home market; for our clients, all property is an income stream and the strength of that stream is what counts (tenant, lease, market, capital inflows/outflows) not "I need a property on 3nd and Michigan Ave.. built out fo brick with some income".     Sometimes when we introduce a client to a property that we identified for them it is like Lassie coming home to his/her owner (that is another controversy, 8th paragraph down) .

And of course the two other concrete beliefs in the profession that a) "real estate brokerage is local" and b) "relationships are everything" throw my theory right out the window?  No.  Both these topics will be future posts but....

a) I am doing a deal right now where the property is in Texas, Seller in Pennsylvania, Buyer in Cali and me in Colorado. Local right?  and

b) These days relationships are not the good old face time and hand shakes and participating in Rotary or Church or a friend of the family.  Relationships can be just as meaningful and binding over phone, fax, e-mail and Internet. Why did Murdoch just acquire MySpace if text messages, banner ads, blogging, chat and web interaction is not effective as a relationship platform?  (Not saying I use banner ads to sell my clients property but....)

Add a bit of hard work, loyalty, honesty and knoweledgable advice into the mix and we're off to the races.