consigliere

Guest Blogger: Current status of the Commercial Mortgage Market

Although the current status of the commercial mortgage market leaves a lot to be desired, we are optimistic things will improve during 2009.  The Wall Street conduit lenders have not re-entered the market, and will likely remain on the sidelines for the entire year.  Banks and Life Companies will be the main sources for short and long term debt, with many borrowers taking on mezzanine debt or outside equity in order to structure a deal.  While many Banks remain out of the market, there are still many that will offer good short-term (1-5 years) financing options to strong borrowers.  Life Companies continue to offer longer term fixed rate debt, although at very conservative loan-to-values.  This is something we anticipate to “loosen up” however, as alternative investments to commercial mortgages become less attractive to these institutions.  Short term rates seem to be holding in the 5-7% range, while longer term rates have settled in the 6.5-7.5% range.  There don’t seem to be many forces that will raise rates in the short-term, so as lending criteria becomes slightly more aggressive we should see a good time to borrow this Spring and Summer.  One thing will remain constant this year, and that is a flight to quality in terns of properties and borrowers.     

Guest Commercial Loan Post by:

 

Mark Jeffries

Vice President

Q10 | Essex Financial Group

8400 E. Prentice Avenue, STE 910

Greenwood Village, CO 80111

Direct: 303-843-4023

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.
 

2 years, 5 hour exam and 4 letters later....CCIM

Just returned from the CCIM mid-year meetings in Newport Beach CA.  (nice place)  I finally finished my CCIM education and designation!  I enjoyed the process very much and highly recommend the program to ANYBODY who is in commercial real estate or wants to learn about commercial real estate.  This goes for brokers, principals, lenders, developers, business operators (tenants)....you will benefit from the education and networking and can use the knowledge in everyday practice.  I love t-bars and my HP10bii (maybe time to progress up to a HP platinum) (see below) !!!  -Thomas Morgan, CCIM  (those four letters, not the other four!)

PS- Deyl-  checkout the sushi bar at the Marriott Newport Beach Resort and Spa.  Best I have had in while.

High Remarks: Confessions of a Real Estate Entrepreneur

I recently devoured Confessions of a Real Estate Entrepreneur by James Randel and I have to say I rate it as the best commercial real estate book available today.  Although, he does not get into the technical aspects of investment real estate, his stories and points, are the most realistic of any other commercial real estate book in my library (and yes, my commercial real estate library is quite large).

My clients and partners who are multi-millionaires through real estate investment, play the game very similarly to the way Mr. Randel outlines.  They add value in their purchase, operation and sale of investment real estate to create a disproportionate return on equity invested and share of the upside.  In other words, they are earning north of 30% annual return on every dollar in the investment; while mitigating and managing risk a the same time.

If you are looking for ways to get into the real estate game, this is a good primer.  He discusses finding and adding value to deals, how to work with lenders and attorneys, the basics of ownership and contracts; and touches on brokerage and development among other interesting real estate topics.  As compared to other similar books written by experienced investors, this one is somewhat low on ego (still high on non-real estate people's ego scale) and even has a chapter devoted to his mistakes where he lost millions.

Overall this is a great conceptual read full of seasoned advice and fun stories. He touches on some technical aspects of financial analysis such as Net Present Value and Discounted Cash Flow Analysis and how investors use the techniques. But readers should turn elsewhere for detailed methods and how to of such techniques.  The CCIM Institute has several classes devoted to the nuts and bolts of investment and market analysis, which I highly recommend.

To learn how you can earn 30% annual returns on you dollars, simply contact me and we can discuss your needs and objectives.

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 

GTD....Getting Things Done while Mind Like Water

This post is not really about commercial investment real estate or real estate development but about personal productivity. I have always been able to stay on top of my deals and important dates and next "to-dos" but a system like this (in beta testing for me) may help me deliver a higher level of service to my investment clients.  90% of my investment brokerage business is online and through e-mail across different time zones, 10% is phone and in-person; in a world where I receive 150-250 e-mails any given day I need to keep them organized and let nothing get lost.  And of course I can't spend all day checking, reading and sending e-mail; I have to make room for doing financial analysis, market research, property searches for 1031 replacement property, phone calls, writing contracts etc. and this GTD system seems to be helping.

A few weeks ago while planning to re-arrange my office and desk layout as well as adjust work flow, I went searching Google for something like "desk inbox" actually looking for a physical in box (paper tray) to put on my desk to collect all the stuff that piles up from day to day. A few results returned actual paper trays but more so blogs and pages about the "inbox" as described by the GTD (Getting Things Done) junkies. It caught my attention and 2-3 hours later of reading blogs and posts from GTD fanatics I bought the book: Getting Things Done by David Allen.

Now a few weeks later, my e-mail inbox (which usually consisted of 100 or so un-processed or "to-act on" messages) is emptied almost everyday. My desk paper inbox is not as empty but more so than when I went searching for a "inbox". My desk is organized everyday and all my files and projects are organized and I know where they are. Having a clear desk, organized file drawers, less stuff in the physical inbox and nothing backing up in the e-inbox is a truly amazing feeling and that alone was worth the read. Maybe this is "beginners mind".

I have always been pretty good at getting things done when they need to be done but never had had a system that worked consistently, from paper to do lists to outlook and keeping everything in my brain; my brain telling me to do things as needed, sometimes as they came up, sometimes because I wanted to do them, sometimes because it was simply time to get them done. Now however, I am using Outlook as David describes in the book and in a separate report ( best $10 spent) to collect everything and make decisions based on looking at everything I could be doing at that moment based on "context". If I want to make a call, I need to be near a phone. If I want to do a blog entry, I need to be at the computer. Sounds simple….but if it was so simple before... what call did you try to make while brushing your teeth last night? When it comes to you write it down, collect it, then do it when you actually can….pretty hard to close a deal via phone while brushing your teeth. Sitting on a beach with a cell phone…..maybe.

Bottom line is I am still getting things done….advising clients, negotiating deals, renovating a 1889 mixed use building, working on a 5 acre riverfront development, spending time with my wife and family etc etc but it seems to be easier to do as much as I can with less stress and anxiety with this system. I do the things that need to be done when I can….no worrying about what I am "not" doing at that time….. The things that get put off are things that can wait….to be done….and captured in a reliable system that I can always refer to… "if I need something to do".

For me a clear desk, clean inbox (desk and e-box) and feeling good about what I am doing at the moment is one step closer to "Mind Like Water".