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Category Archive for: ‘CRE Finance’

  • SXC User Soft Interior

    Everyone Needs a Place to Live

    Maybe you’ve noticed a proliferation of apartments being built in and around Atlanta recently.

    Maybe you’ve also noticed some articles where developers quote stabilized vacancy, rent growth, lack of supply, etc. They make all these claims about the key metrics of the market pointing to apartment development.

    While I don’t disagree with that analysis I will claim it is too broad to apply to any one project. Even if the market fundamentals of Atlanta point to a demand for new apartments, that doesn’t mean any one project will be a success.

    So making statements like “everyone needs a place to live” to support any single project is nonsense because they aren’t relevant to any given project. If I’m an investor looking to put my family’s money in a project, I would expect excellent answers to these questions:

    What makes your piece of dirt better than the other 30 that are currently building apartments in Atlanta?

    Why will a renter pony up $1.75 psf for your apartment when their current lease is at $1.10?

    What is your exit strategy? More specifically, do you think rents will grow at a rate faster than the historical 3% or that you can buy at a 6 cap and sell at a 5 cap?

    Given that there are 30 competing projects being built around the city, what amenity package or interior finish will make your new deal shinier and better than the other 29? Why would a renter chose yours when age and amenities are roughly equal for all these new properties?

    If Bernanke keeps rates low, why wouldn’t many of these renters become buyers like they did in the last cycle?

    Alternatively, WHEN the Fed raises rates, how will that affect your exit strategy? If your potential buyer pool suddenly has much more expensive debt, do you still think you can get that 5 cap?

     

    Maybe I am overly skeptical, but I think there may be two or three developers in Atlanta that could answer those questions to my satisfaction. Again, I may be jaded having seen the ugly back end of over-development in Atlanta, but I think a little skepticism in a time of exuberance never hurt anyone in a big way.

    So, Mr. Developer, I have one final thought for you:

    Just because everyone needs a place to live doesn’t mean they MUST live at your new apartment. In fact, with several shiny, sexy new apartment complexes rising in the next 24 months, I would argue that you have just an average chance of getting a lucrative share of that renter pool.

    Plan and price accordingly, please.

    Or don’t and I will buy the building out of bankruptcy in 5 years. Either way.

    – Duke

     

  • SXC User Henkster

    Conversion – Going from Broker to Owner

    Have you had a successful career as a broker? Do you spend all day, every day analyzing and evaluating commercial property? Do you have some cash to invest over-and-above stocks and bonds?

    Then perhaps it is time to put your money where your brain is. Perhaps you should become a property owner instead of a fee-earner.

    Many of the most successful owners I know were once power brokers.

    Maybe they grew weary of waking up with zero income every Jan 1. Maybe they got tired of the owners they served taking home the biggest paychecks. For one reason or another, those brokers decided that they wanted to transition from service-providers to service-users.

    Many of the most successful owners and acquisition minds in our business started off that way and I am going to project my thoughts on them a little here. I have never lived through that transition, but I have had a few business partners that have and I noticed a common theme.

    I noticed that some of these lifetime brokers had trouble adjusting to the owner side of the table because of one key difference between the broker and owner mindset.

    Brokers focus on can. Owners focus on should.

    I had a partner of mine tell me that his main focus as a broker was on finding motivated sellers. Brokers can’t waste their time on low-probability deals or they will miss opportunities on the more likely transactions. Makes sense to me, but what if you’re a buyer and you run across a highly motivated seller of a building you don’t want to own?

    Can you buy her building?

    Yeah.

    Should you?

    No.

    Can vs. Should. A broker spends his entire career figuring out which deals he CAN close and earn a commission on. I can see how it would be difficult to turn off that analysis . . . but you have to. As an owner, your analysis and vision need to start at a higher level.

    As an owner, what deals SHOULD you buy right now?

    Have your list? Great. Now start finding sellers and their intermediaries that fit into that box.

    Find a motivated seller? Great. Do the returns look attractive? No, then look elsewhere. You COULD buy her property, but you SHOULDn’t.

    I know this all sounds very obvious, but I find that very few of the brokers I have worked with do the true return analysis of a potential seller. They research market comps and get an idea of market value, but they don’t usually run through what the returns would be for the prospective buyer. Again, they are focusing on WHERE it will transact not WHY it should transact there for the buyer.

    So I know this idea is very academic and may sound condescending to brokers, but I don’t mean it to. I just want an aspiring young owner to realize that the transition from broker to owner is a very meaningful one and that you should be prepared to shift your thinking. A deal that you can close isn’t necessarily a good deal and the chasm between COULD and SHOULD is the difference between mediocre and exceptional.

    Has anyone else experienced this transition? Did you find it hard to shift your mindset? Let us know in the comments.

    – Duke

  • Wallpaper 613372

    What You Should Know If You Work With Me

    One of the most exciting things about a young career in real estate is that you get to know yourself and your quirks as you figure out your place in this business. Learning simple things like how, when, and where you like to work is incredibly useful if you recognize and use that info.

    With that in mind, I try to be keenly aware of what conditions make me most effective and what type of environment will allow me to thrive.

    So what follows is a guide to any future business partners.

    It’s not an ultimatum. Nor is it a rule book. In fact, this is just a snapshot of what makes me most effective in business right now. It may change over time, but I doubt it. Most of these are lifelong preferences/ideas and not passing fancies.

    So, here is what you should know about me if we are going to work together . . .

     

    A. Ethics are non-negotiable

    If you and I don’t see eye to eye ethically, we shouldn’t be partners. I know that sounds preachy or moralistic, but if we are coming from different ethical perspectives we won’t get along in the long term. There are so many deals to be done and properties to see that no single deal is worth sacrificing your ethics. If there is any ethical “gray area” in a deal, kill the deal. We’ll find a better one anyway. Don’t hurt other people, don’t sabotage, don’t exact revenge, don’t trick people. You can make money being honest and upright with everyone and, to paraphrase Twain, there is less to remember when you tell the truth.

     

    B. I love helping other people make money or solve problems

    Maybe this plays to my generation’s obsession with meaning over money, but being able to help people resolve financial problems or come to mutually beneficial arrangements is fun to me. That makes me feel like I spend my day doing more than try to make boat loads of money. That is more fulfilling to me than a six-figure paycheck (some people get paid six figures right?). I’m not curing cancer or solving water shortages in Africa, but seeing my allies and adversaries walk away from the closing table with a smile is satisfying to me.

     

    C. I am honest to a fault

    This may come across as arrogant, but trust me when I tell you that my penchant for extreme honesty is not always an asset. It’s great that people know they can come to me for direct, honest answers and information. But I tend to divulge more than I should and would rather have all parties know all available information. That doesn’t mean I go out of my way to tell trade secrets to my competitors, but asymmetry of information bothers me even if it is tipped in my favor. So, if you are going to partner with me, you should know that I will always tell you the truth, but you should also know that I will tell everyone else the truth. Like I said, that is both an asset and liability.

     

    D. I would rather you make more money than me

    Let’s say that I own a company and you are the CEO. I will gladly pay you $150k to my $100k. Or $70k to my $50k. If you are my partner, I want you to know how much I value you. You should know that I appreciate you enough to compensate you beyond my level of compensation because I think you are more important to the partnership than I am. If you are ever unsatisfied with your compensation or percentages, talk to me. I want you to feel like I pay you more than you are worth. Is that a way for me to get rich? Probably not. But having happy partners who love working with me will mean more to me than the zeros in my Suntrust account. And happy partners are productive partners. Productive partners are lucrative partners. So keeping you well paid will work out fine for me in the long run anyway. Even if it doesn’t, I doubt I will regret paying a partner a bunch of money. If I recruit you, you deserve it.

     

    E. I give money to charity

    Maybe I should change this header to “I run corporate finances like I run personal finances.” We operate on 80% of our income because 10% goes to charity and 10% goes to our emergency fund. We can argue over the other 80% until we are blue in the face, but that 20% is untouchable. We can decide together which charity or charities deserve our cash. When revenue increases, I’ll probably increase our cash holdings. I don’t like debt (especially corporate debt). Having been a lender and now a successor creditor, I can tell you that the borrower truly is slave to the lender and I want to minimize that with my business partners. I am pretty conservative with my money and like my war chest to be heavy. Food for thought for anyone expecting 50% returns on their capital and maximum leverage on their portfolio. You probably aren’t a fit for me.

     

    F. I have a life

    I could throw around the cliche about “working to live instead of living to work,” but you probably already know that about me. I coach baseball. I am in two terrific men’s bible studies. I run this website. I have a personal investment portfolio I work on weekly. I work out. I run. I am crazy about my wife and dog (and one day kids, hopefully). All of that is to say that there are several things that demand my time weekly. You, as my partner, deserve my time and should demand it from me. But understand that I will draw the line. I don’t answer the phone on Sundays or during dinner with my family. If you are the kind of person who works until 10 PM every night and expects me to do the same, talk to someone else. I’m not that guy. I work my brains out when I am in the office and I strive to be the most efficient man in the business, but I do not throw hours at a problem and I will not sacrifice my family life for our financial gains. Sorry.

     

    G. I want people to love working with me

    Perhaps my first goal in creating partnerships is to structure an environment where you want to come to work every day. I want your head to pop off the pillow every morning and know you have a brother ready to go to battle with you. Sure, there will always be problem tenants, difficult deals, accounting mistakes, government delays, and a thousand other headaches that come with deal-making. But I hope you enjoy fighting those battles with me. If you don’t, talk to me about it. Let’s make an environment that you love and find fulfilling.

     

    H. I trust people

    Probably too much. I love working with my friends and I love that our industry is full of so many great men and women. The problem is that I am inherently trusting and will assume that everyone I meet is a good person unless they give me a blatant reason not to. I wouldn’t say I am gullible, but I do tend to give people the benefit of the doubt and allow them to impress or disappoint me. So it would be useful to have a potential partner who has a healthy level of skepticism and pessimism to balance out my sunshine and rainbows.

     

    I. I value creativity and flexibility

    Don’t like what you’re doing? Change it. Think the market is shifting? Shift with it. Think one property type is overheated? Let’s pursue others. Wanna buy cell towers in Botswana? Cool. Let’s figure it out together. I think the days of “I’m a single tenant retail broker for 40 years” are behind us. Shift. Adapt. And have fun. I can be as flexible and creative as you like and I hope you challenge both of us with new ideas, strategies, and investment models. Bring it on, hot shot. We’ll figure it out.

     

    J. I’m a wanderer

    I may be speaking too soon, but I don’t think I would be satisfied with a career that only involved Atlanta. I love Charlotte. Nashville has impressed me. Phoenix is growing like ATL. San Antonio is under the radar. Chile is undervalued. India is ripe. While it is way to soon to expand anything oversees, it is fun to be strategic about national and international investment platforms depending on your capital. So, while I may never own apartments in Melbourne, I would be surprised if I only work on Atlanta deals for the rest of my career. Atlanta will always be home base, but there are other interesting cities and opportunities all over the world and our business is getting more and more connected globally every day.

     

    K. Answer this question:

    “I don’t know anyone who is better than me at______”. Fill in that blank and then do that blank everyday. Every minute you spend not doing that “blank” is a wasted minute. I will do my best to outsource, offshore, delegate, and automate everything else for you. If you really want to shine, you need to do that “blank” as often as possible every day. We will have to scramble and do everything ourselves for a little while, but we will be keeping an eye toward focusing on what we are best at doing.

     

    Now the real question is: Who would want to work with someone like that? I dunno. But just in case someone thought it was intriguing, I figured I would write it down.

    Do you have any special quirks or stances that make you productive? Anything unique to your ideal working situation? Let me know in the comments.

    – Duke

     

     

  • 2012

    12 Lessons I learned in 2012

    Interesting year, 2012.

    Multifamily seems to be (temporarily) made of gold and debt markets have thawed further.

    It was a great year for some, terrible year for others, and just mediocre for the rest of us. And what I missed in compensation I made up for in knowledge.

     

    Allow me to share my top 12 lessons from 2012:

     

    1. People want to talk to me when I’m in PE.

    This is actually disappointing. I remember when I was working for myself (and my dad) and there were a few people who had trouble returning my call. I know we are all busy, but, all of the sudden, those exact same people can’t wait to get in front of me and see how they can help on our billion dollars worth of assets in GA. Don’t think I don’t notice that. And don’t think I don’t notice the people who always called me and had some time for me.

     

    2. Foreclosure sucks.

    It isn’t that complicated and you can take a property back in about 45 days in Georgia. So, it is simple . . .  but it sucks. Taking title, ordering appraisals, running environmental reports, estoppels, gas stations, dry cleaners, confirmation hearings . . . it all sucks. I do it because some people make me do it, but I do everything I can NOT to foreclose.

     

    3. Litigation in general sucks.

    Only attorneys win when we decide to litigate. I wish people would just tell me the truth in our first meeting and we could save everybody thousands of dollars. Litigation is fun for 10 minutes and then it is terrible.

     

    4. Partners are essential.

    As I have started to work on my own projects, I have learned that the right partner is worth whatever he/she demands to be paid. If partnerships were an equation, one plus one wouldn’t equal two. One plus one would equal forty. Properly leveraging the skills and talents of the right partner will help a business grow exponentially (rather than linearly).

     

    5. Our legal system is disappointing.

    I had a judge rule against me in court because he felt bad about what would happen to the other party if he ruled for me. No word on the actual law or my legal claim. Just his bad feelings about the loser. It was like he projected that I could take the loss more easily than the other party (which is true) and just forgot about the law. Never mind the fact that I have been open and honest with everything in the entire case and the other party has done everything they could think of to trick us, make us stumble, and game the legal system. Disappointing, to say the least.

     

    6. The best way to learn (retain) is to write.

    Looking back at the posts this year, I am amazed at 1) how much I have learned and 2) how much I have retained. It is easy to learn something once (think cramming for a final in college), it is difficult to retain and reuse that knowledge in the future. The best way I have found to retain and reuse that info is by writing these articles. They force me to repackage and explain in my own words the difficult or foreign concepts I am learning every day. Talking about it and writing it in a Moleskine isn’t the same. Writing articles will do more to grow my tool box long term that just about anything else I do.

     

    7. People overemphasize specialization.

    Over the past twelve months I have worked on golf courses, self storage, apartments, raw land, mobile homes, office condos, retail condos, unanchored retail, single tenant retail, industrial, and a cell tower. What’s my specialty? I dunno. Maybe negotiation. When I got into this business, I was told by most people to specialize and become the go-to-guy for that property type. Horse feathers! I don’t want to get into why that isn’t necessary here, but it isn’t. At least not for my career goals.

     

    8. People also overemphasize experience.

    I don’t foreclose on 20-somethings. I don’t sue 30-somethings. It’s all the 50s, 60s, and 70s that got into trouble. Why does everyone seem to think that experience will solve all problems? Fallacy, my friends.

     

    9. 99% of our industry is technologically archaic.

    I have been shocked how few people actually use technology and software to make their days more productive and their time more efficient. If it costs money, most people aren’t interested. If it costs money and takes a little time to figure out or set up, forget it. How many CRE brokers have corporate facebook pages? How long did it take them to get one? Exactly.

     

    10. Equity is king.

    Oh, you have 5 acres in W Midtown tied up and think mixed-use is a fit? Neat. Now what? It isn’t all that hard to figure out a cool use for a property or to identify potential investments. It isn’t even that hard to find decent debt for properties now that some of the smoke has cleared and the debt market has thawed. It isn’t hard to find an average property manager. What is difficult is finding equity partners. Those with free capital who are willing to invest it in CRE are few and far between and he with the best equity investors wins.

     

    11. Big boys are bullies. (And the time of reckoning cometh)

    I have had to order a bunch of appraisals (as I mentioned above). And I have needed to place brokers as property managers and listing brokers. The biggest brokerage houses in town (and in the world) like to bid on these deals. Rarely are they the best value and rarely do they come across as the guy who is going to go the extra mile and run through a brick wall for me. Frankly, they seem to think that since they are so big and reputable they deserve my business. Not happening. I’ll take the young hustler who will call every potential buyer within 600 miles over the guy with the sexy name on the business card every day of the week. Plus, I work for a $40 Billion company. We can be a bit of a bully ourselves (to my chagrin). Be careful trying to push us around . . .

     

    12. Stress reveals character.

    I know I have said this before, but it bears repeating. When people have their back against a wall, you find out their true character. Everyone was happy and friendly when money grew on trees in 2005. When you start getting sued and foreclosed upon, I get to see what type of man (or woman) you are. It is fascinating and I take note of those people I will be calling for partnerships in 5 years, and, more importantly, who I certainly won’t be calling. Look around, listen, pay attention, and you will save yourself some headaches across the course of your career.

     

    So, those are my top 12 lessons from this year in commercial real estate. They are based upon my experience working in the private equity/distressed debt arena and shouldn’t be seen as universal. What did you learn? Think any of my lessons need revision? Let me know in the comments.

    – Duke

  • The Tale of Three Brokers

    Brokers are salesmen, my friend. Seller beware!

    Once upon a time, there was a young man working in the land of commercial real estate. This gallant lad owned several types of commercial properties around the kingdom and was charged with selling them.

    To do so, he knew that he would need the help of specialists. He began to speak to these “brokers” to determine the value of each property and the proper price for each. He called on several different brokers to provide their opinion of value on the property.

    Almost immediately our hero noticed that these Broker’s Opinions of Value, or BOVs, varied widely. At first, he assumed that the fluctuation was due to the turmoil and bifurcation in the market of property buyers. But as time progressed, he began to see patterns with these BOVs. He noticed that there were three brokers in the land:

    Broker A would be charged with valuing a property that was probably worth roughly $1,000,000. He would conduct his diligence, interview tenants, research the submarket, and return to our hero with a projected sales price of $1,500,000. “The market’s hot! Lots of buyers for this property in this market” cried Broker A.

    Broker A was quite clever. He knew the only way he made money was by selling property. The only way to sell property was to get listings. And the best way he knew to get listings was to promise his clients high prices and then shrug his shoulders when the property sits on the market for a year, unsold. “Tough market. Bad luck. Let’s drop the price and just move this bad boy!” he says to his clients. He eventually sells the property for $1,000,000.
    Broker B gives his BOV at $750,000. He claims “Tough market, sir. This one is going to be a challenge. I will need to use every trick in the book to get this one moved!” Just in case you find a sucker, he lists it at $1,250,000. All of the sudden, you have an offer at $1,000,000 and you take it! What a hero Broker B is for that miracle price! He must be a great broker!
    Finally, Broker C gives his BOV of $900,000 to $1,100,000 and he tells you that the price will eventually depend on the buyer’s access to debt. Broker C also sells the property at $1,000,000.
    So, what’s the moral of the story? Slow and steady wins the race? One in the hand is worth two in the bush?
    Nope.
    The lesson is that brokers are salesmen. They only get paid when they sell you on the listing and sell the buyer on the purchase. For the sake of argument, let’s say that all 3 brokers are equally talented at selling to buyers. Now we can distinguish how each sold you on the listing.
    Broker A over-promised, blamed unforeseen market factors, and then sold at market value.
    Broker B used the classic under-promise over-deliver technique.
    Brokers A and B would never admit they are doing this, of course. “I’m very aggressive” says A. “I want to be conservative and not over-promise to my clients” say B.

    Broker C just tells it like it is.

     

    When I am ready to list property for sale, I want Broker C. I have access to CoStar. I speak to other brokers. I do my homework and form my own opinion of the property’s value range. I’m not always right, but I’m usually close. And when a certain broker always gives BOVs well above my estimated value, he is Broker A. When another broker consistently gives values below my value, I label him Broker B. I’m always looking for Broker C.

    Broker C is Goldilocks. Not too hot; not too cold; just right.

    So, seller beware! Brokers are some of the best salesmen in the world. They will promise you the world, then shrug about the market. They will bash the market and then get a “miracle” price. The onus falls on you, seller, to do your homework, research the market, make the phone calls and form your own opinion of value.

    Do that and you will find your Goldilocks.

    – Duke

     

     
  • Sunrise on Chattahoochee River, Atlanta

    What to Expect in 2013

    One lesson I took away from Microeconomics is that when you are presented with a tremendous amount of information you should take your time, absorb it, and then repackage it and then you will truly retain it. In that vein, I wanted to take a little time to let the flood of information from the Morris Manning event on Thursday October 4th sink in before I shared it with you.

    What follows is the series of notes I took in the Morris, Manning & Martin/France Media event on What to Expect in 2013. It was basically 6 panels that related to all things CRE in the southeast. I think it’s a testament to MMM that most of the heavy-hitters in Atlanta CRE were either in attendance or actually on one of the panels.

    As a note, my favorite panels were the first (State of the Market) and last (Development) panels. Be sure to pay special attention to Dr. Linneman’s comments in the first section. He was very good. Also, I put some disclaimer language at the bottom to delineate that none of these opinions have anything to do with MMM or France Media.

    Sunrise on Chattahoochee River, Atlanta

    A new dawn in Atlanta is just around the corner

    State of the Market: Where are we in the Cycle?

    Dean Adler (CEO/Founder Lubert-Adler Group) – Biggest single risk in the CRE business is interest rate volatility. The thirst for yield has pushed yields down. Investments are being made because rates are cheap. Real estate still has the same amount of risks and obstacles as ever, but adding IR volatility to the equation is increasing risk. Always asking the question of what type of debt to place on property depending on disposition strategy. As loan sale market winds down, buyers now have the opportunity to buy properties that have had no investments dollars or cap ex for 4 years (zombie assets). Real estate is really back to local execution and returns are going to be made through execution. Why would you go to a closing dinner when you buy something? Operate it, sell it, then celebrate it. In retail, there are winners and losers today. Unlike the past, when A, B, and C centers will all survive. C now has huge risk. There are strong submarkets and “gateway” submarkets in every major metro in the country.

    Larry Gellerstedt (CEO Cousins Properties) – Doesn’t think the election is having much of an effect on either investors or customers other than the fact that it feels like everyone is tapping the brakes. Very attractive market for sellers. Taking advantages of a good market so they can redeploy capital elsewhere. Our expertise should be picking assets and knowing how to operate those assets. We get caught up in proforma analysis and manipulating yield (“pencil whipping”). New development is going to be a much smaller part of the sector as a percentage and even apartments will cycle back down. Development opportunities are very geographically focused and urban mixed-use is very attractive.  Generally sellers of suburban office and generally buyers of urban office. Urban play is more appealing and is driven by demographic trends. “Like fish, we will eat until we blow up.” So when the market comes back, products get hot, and everyone is pitching their deal, we will overbuild. It will happen again. “The economy is better than most people think it is. “

    Mark Grinis (Head of RE North America E&Y) – As a service provider, only the new tax law is effecting their business from a governmental perspective. In isolation, our asset classes look like there is a mismatch for allocating capital. Distress has been redefined in this cycle. Europe is that part of the market that is suffering the most. Asia is having annual growth around 5 to 6%. us is still the engine of the global market place and will continue to be as such. You cannot have one particular strategy and say “I am going to do this one thing.”

    Tom Roberts (Head RE Investments Cole) – Election will have very little effect on Cole’s business, but they are vulnerable to the Fed raising rates. Very conservative investment strategy and generally 45 to 50% LTV. Investors are looking for monthly dividends. If they can make 20% on appreciation of that, home run. One way to deal with downsizing tenants is cutting the box into a smaller box and renting the remainder. Always want to be aware of concentration risk, to Dean’s comments about stronger or gateway submarkets in every major metro.

    Peter Linneman (Linneman Associates) – Real GDP, since 1970, has continued along the same trend line until 2008. GDP has not “bounced back” and is, in fact, falling farther behind. The between “where we should be”  and “where we are” is $2.5 Trillion (US GDP is $15 Trillion). We are growing well below our long term historical growth rate.

    Since the bottom of the recession, we have added 4.2 Million jobs, but we have lost 9 Million. Atlanta has been one of the slowest MSAa to recover, but has picked up speed over the last 6 months (more than any other major metro in the US).

    Retail sales have recovered in spots. Manufacturing has recovered to a degree. US exports have never been higher in American history (in real terms). Corporate profits are at all time highs, but have dipped in the last quarter. Productivity growth is growing at about 20% of its normal growth rate. Commercial construction is at its all time lowest rate, since ’63, with most of it in Texas, NYC, and DC.

    Monetary base: In the last 50 years, grew by $600 Billion. At QE1, it grew by $1 Trillion. QE2 it grew another $1 Trillion. QE3 is going to grow it by AT LEAST another $1 Trillion.  “The Fed’s policy is destroying the economy is two ways: 1) No one has ever seen this investment landscape. 2) money is being created like never before.”

    “When people are in a situation they have  never seen before, they do less. When government is in a situation they have never seen before, they do more.”

    “If you don’t need money, you can borrow a bunch of it at minuscule rates.”

    Loan volume in CRE has slightly ticked up over the last quarter, all due to multifamily. You are going to have to depend on not much debt being available outside of multifamily. Don’t count on debt. Count on equity as your salvation.

    Debt: Who is getting money and why?

    Michael Hartman (Managing Director Reznick Capital Markets) – Moderator

    Paige Hood (MD Prudential Mortgage) – Most mortgage companies are looking at stabilized acquisitions deals. Pru will look at ground up development, but there needs to be a proven demand for demand. Multifamily has proven demand and Pru will look at construction-perm debt on deal by deal basis. Focused on primary markets. Deals are be underwritten on untrended rents and expenses that are justifiable. Looking for 8% debt yield on MF.

    Kurt Schwarz (Client Executive JPMorgan Chase) – At the very least, assets are beginning to trade. Top located assets are going to be rewarded on the valuation side with lenders. Credit decisions are being driven be equal part optimism and pessimism. When it come to recourse, guarantors need to show liquidity much more than simple net worth. Bankers do value the cross-sold products and want the treasury management

    Matt Donnelly (SVP Cole RE) – Debt structure depends almost completely on investment strategy. Projects with lease up will go to local commercial banks and keep on floating debt to allow for flexibility in refinance. Larger, more leased properties will go to the LifeCos on a longer term. Investors are a fixed income play allocated to CRE. They look for stable investments and that means core, long-term investments.

    Dave Gahagan (SVP Walker Dunlop) – All underwriting depends on property type. Agencies will go to 80% LTV governed by 1.25x DSCR. Somewhere around 3.75% for a 10-year rate. CMBS spreads have come in dramatically over the past 45 days and p[ricing is landing in the 4.5% range. LifeCos are a little more selective of properties, but will lend around 3.75% on floor rates. Level of due diligence done on sponsors is significantly higher than 5 years ago. Sponsor quality is high on everyone’s list. How are your other assets performing? Where will our sponsor be when the deal drops?

    Joel Stephens (MD Regions) – Rally in CMBS has allowed almost all property types to obtain debt finance. MF is leading the pack and continues to go to agencies and LifeCos. Commercial properties in gateway cities and going more toward LifeCos. CMBS looks close to $50 Billion for this year. 20% of CMBS is hospitality and 33% is retail (down from 50% at peak). Retail continues to be a challenge for debt financing, but trophy and grocery-anchored can get debt placed.

    Capital – Where is it being invested? What markets and asset classes?

    Chris Marshall (MD JLL) – Moderator.

    Neill Faucett (Principal Lubert-Adler) – Invest through local operating partners. If you can maximize current yield, you can take some pressure off the exit strategy. Will consider development, but it has to be very deal specific.
    Atlanta lags behind its competitors in terms of jobs regained. Investment thesis shifts to discount to replacement cost.

    Will McIntosh (Head of Research USAA RE) – Generally, investors are conservative capital looking for core and core-plus returns. Top markets are gateway markets, but they are looking at secondary markets (especially for industrial). Looking for growth in employment and population where it is available and while it isn’t abundant, there is some. Atlanta is still on the institutional radar, but investors need to find deals that make sense. People are focusing on economies that are focused on tech, energy, or medicine.

    Tom Coakley (Director MetLife) – Met has roughly $7 Billion out in debt and almost all of it was in gateway markets. Invests for general account and doesn’t have interest in venturing out on risk spectrum. Atlanta is an opportunistic market.

     Loretta Cockrum (CEO Foram Group) – Diversification is an absolute mandate for clients because all are from outside of the U.S. substantial amount of capital is coming from outside of the country and all of the gateway cities are experiencing that same trend. With no natural barriers, there is nothing to stop people from moving out. With 60 year investment horizons, you need to look at where the long term value will hold.

    Chip Davidson (CEO Brookdale Group) – Had success in Dallas and in Texas because of the demand driver of the energy industry. Primary investment target is suburban office with identifiable demand drivers. Looking primarily for value-add assets. Investors have become considerably more cautious and more informed. Can’t count on cap rate compression in a couple years because the fed will adjust 10-year rates. Atlanta has become a big city with a great airport. Public schools is a big problem and will not attract corporate relocations. Tech and energy are the main demand drivers in larger markets and Atlanta is behind other markets in those games.

    To Fund or Not to Fund? And What to do when you do.

    Brad Lenox (Morris, Manning, & Martin) – Moderator

    Thomas Boytinck (Founder Allegro Advisors) – 600 funds in the market right now. The big guys are taking maybe 80% of the available capital. When you start a fund, you are becoming an investment manager. You are going to be judged against Fidelity. Track record has become more and more of a focus. Take on a full time staff member whose sole responsibility is raising debt and equity capital.

    Mit Shah (Principal Noble Investment Group) – There is nothing more frustrating than finding opportunities and then having to patch together capital. shifting from a deal by deal promote to a fund level promote, hasn’t made investors shy away in the past. Today, finding investors at the fund level has become much more of a challenge. Blackstone has become the index for the private CRE investor industry. There has become a hard hurdle you must hit in order to get to the preferred return.

    Amachie Ackah (MP Argosy Capital) – There is capital for individual deals. You might be better off doing deal by deal raising right now because of the scarcity of fund-level capital.  Most first time funds lose money.

    Pike Aloian (Partner Almanac Realty Advisors) – Fund structure can provide speed. If the marketplace is dynamic, you may need speed to close. Raising capital deal by deal is very time consuming. Deal by deal is the best way to structure the deal currently. Trying to put together programmatic JV with institutional capital is another way to slice it but funding is not guaranteed. Limited partners are concerned with governance, reporting, and stability.

    Michael Reiter (SVP American Realty Capital) – Capital is predominantly raised through the independent broker-dealer channels.  Investors look at team, theme, and track record.

    Real Estate Tax: Facing the Fiscal Cliff

    Michael Frankel (Global Head RE Tax E&Y) – Moderator

    Chuck Beaudrot (Partner Morris, Manning) – We have 3 types of federal income tax on our income. If we head into a higher tax environment, the ability to defer and transfer tax burden becomes paramount. Basing selling decisions on the tax benefits is a distorted economic activity.

    Robert Rozen (Partner E&Y) – Powerpoint = The Fiscal Cliff. This year we have a deficit of $1.2 Trillion. Beware of Buch tax cuts that are going to cease in Jan 2013. Accelerated depreciation, carried interest, and 1031 exchanges will all be affected.

    Ricky Novak (President Strategic 1031 XC Advisors) – People are beginning to plan for being forced to become active investors vs passive investors. Many clients are attempting to close this year due to the uncertainty of next year. They will be sitting on that liquidity until the dust settles and they can decide how to deploy it.

    Development: What? Where? By Whom?

    Mike McDonald (MD Eastdil Secured) – Moderator

    Reid Freeman (President Regent Partners) -Underwrote to 9.8% constant on Sovereign. Had to allocate between office and condos. when construction started, LIBOR was at 5%. Currently developing hospitality project in Charleston. 4.5 acres with 200 unit apartment project and 2.3 acres on upper King Street. 304 room hotel with 30k sf retail/office. Leveraged IRR at 60% LTC is 24%. Partnered with Bay North from Boston.

    Charlie Tickle (CEO Daniel Corp) – Daniel came to Atlanta about 10 years ago. Decided to partner with Selig and started to assemble large portfolio and decided Midtown was the market of choice. Multifamily was underwritten to 7.5% development constant. Hotel and office were underwritten separately and hotel underwrites better today. Reynolds Plantation is a long term investment. Probably going to add 100 rooms to Ritz Carlton. Potential for seniors housing and multifamily and golf amenity.

    Chad Weaver  (VP Camden) – Great time to be in the apartment business. Mid 2010, finally saw improving occupancy and rent and therefore began to start developing. Leasing has been around 50 units per month and rents have been 10% better than proforma. People are, perhaps, finally getting more comfortable that they are not going to be losing their jobs. So they are moving back into apartments.

    Jay Jacobson (Director Wood Partners) – One of the largest MF developers in the country. Actively developing in 22 markets. Currently building 4,000 – 5,000 units. Best apartment development market in career. Will build to a 5 cap if they think they can sell to a 3 cap. Equity has been flooding to super core product in urban infill markets.   Everyone seems to be getting filled up with MF deals. May hit 220k units in starts this year.

    Jim Jacoby (CEO Jacoby Development) – Atlantic Station site worked for retail. Leased and sold office at sub-6 cap rate. Always looking for smart growth type projects. Ford Motor Plant and Porsche project are creating hundreds of jobs on the south side. Trying to bring a little gentrification to that area.

    The information presented (above/below) is provided by The Atlanta Property Journal and was taken, in whole or in part, from the October 4, 2012 “What to Expect in 2013?” Commercial Real Estate Development and Finance Conference, sponsored by InterFace Conference Group and Morris, Manning & Martin, LLP (“MMM”).  The above is general information and not intended to constitute legal advice.  Any opinion expressed at the conference by a speaker is solely the opinion of the individual and may not reflect the opinion(s) of MMM, its individual attorneys, personnel or the opinions of MMM clients.  It should not be distributed or repurposed without the approval of MMM by contacting rleplattenier@mmmlaw.com

  • ICSC Next Gen

    Below are notes from Sarah Williams of SRS on the news at the ICSC Next gen Conference. A big thank you to Sarah for the great notes! Enjoy!

     

    Notes from ICSC Next Gen Conference
    Atlanta, GA
    July 29-31, 2012

    “The Evolution of Retail Real Estate Development: Where Are We Now?”

    As the recession begins to fade, development starts to gain traction. However, because of lessons
    learned from the recession, development looks differently than it did in the past. At the ICSC Next
    Gen Conference in Atlanta last month, we heard from top developers who are at the forefront of
    revolutionizing Retail real estate development. This article is dedicated to those developers and their
    current projects. At the end of each section, I will summarize key words and phrases that highlight each
    project’s influence on the Evolution of Retail Real Estate Development today.

     
    I.Ponce City Market

    "POnce City Market"

    Have you heard of Chelsea Market in NYC? Ponce City Market will be its
    Southern counterpart. Jamestown Properties, developer of the renowned Chelsea Market,
    has acquired a 2.1 million SF historic building in Midtown Atlanta that is being transformed
    into 330,000 SF of retail, 400 residential units, some offices, and who knows, maybe even
    some Food Network studios like they have done at Chelsea. Jamestown’s Vice President of
    Development, Jim Irwin, told a room full of ICSC’s Next Generation that one secret to success
    in Retail is, “It’s what you don’t see, and what you can create out of it.”
    Beyond the creative vision of Jamestown’s success, they also had to get creative in terms of financing the mammoth
    project. The majority of the capital dedicated to Ponce City Market is coming from a pool of
    German private equity, which Jamestown manages. Additional funding has been secured from
    two federal grants with the Beltline Partnership. While this historic redevelopment is still under
    construction, the pedestrian and bike paths around the building are opening this month. If you
    haven’t visited the Ponce City Market area in a while, you might be surprised to see construction
    underway, as well as all of the new green space that has blossomed around it.

    Some keywords that summarize Ponce City Market’s influence on the Evolution of Retail
    Real Estate today: Non-traditional financing, in-town redevelopment, creative thinking, non-
    traditional retailers, captured public, tourism.

     
    II. Emory Point.

    Cousins Properties, Inc., an Atlanta-based company, has learned that some of
    the most vibrant and successful, recession-proof retail is near universities. Pair that wisdom
    with the ability to secure a multi-acre tract of land across from Emory University and the world
    headquarters of the Centers for Disease Control, and you’ve got Cousins’ newest project under
    construction: Emory Point. 80,000 SF of Retail Space beneath 443 residential units (thank you
    Gables Residential for providing extra capital), paired with the surrounding demographics with
    some of the highest densities and education levels in the Southeast, and you’ve got a healthy
    new retail development that leased up quickly, even during the recession. Retailers that will
    open stores at Emory Point over the next 60-90 days include BurgerFi, Fresh To Order, Marlow’s
    Tavern, Which Wich, The General Muir, La Tagliatella, Paradise Biryani Pointe, Tin Lizzy’s,

    American Threads, Jos. A. Bank, Lizard Thicket, Loft, and Fab’Rik. CVS will anchor the project,
    taking a prominent corner position at the traffic light.

    Some keywords that summarize Emory Point’s influence on the Evolution of Retail Real Estate
    today: Non-traditional financing, capital partner, density and education, proximity to a major
    university.

     

     

    III. Lake Point.