Pushing Dirt

With the days of 80% interest only financing long behind us, look to seller-held financing to get deals done in 2009. I’ve already concluded several transactions successfully in the last six months involving a seller held second trust. The financing in some cases is secured by a second position in the property, but lenders in the first position don’t always allow for this. In these cases a second mortgage might be guaranteed personally by the borrower or else other collateral might be offered

I’m regularly telling my clients that without some seller held financing, their buildings just won’t get sold. And sellers are opting to take the bulk of their money now, and some of it later, and facing the risk of default, rather than facing the risk of riding the market down further.

The biggest risk is of course the risk of default. On the plus side, you’ll be earning a return on your loan, and you’ll be deferring capital gains on the paper you held, paying it as the principal is paid down.

You can of course sell the note to a third party though expect to take a healthy haircut - in this climate cash is king.

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Realblogging indicates our residential brethren have been busy micro blogging - sending short tweets to their friends and clients.

I’m generally not a luddite, but I find the format lends itself at best to pure social networking, and not business communication. Not that friends can’t be clients, or vice versa.

At worst, Twitter is pure vanity and arrogance - do I really need 10 updates a day from my friend? Where they are drinking their cup of coffee or what they just read in the paper?

Telling is not selling. Stop and listen for once.

The right answer is to adapt to the communication methods your clients prefer. Some of my clients want email, some want phone. None of my clients are asking me to tweet. I’m sure more residential clients area. It shall be interesting to see what the next few years bring.

And it’s so uncool to be anti-social networking these days. If you’re not in favor of Facebook, Linkedin, Twitter, etc. you’re just yesterday’s news. My opinion is social networking is like going to a party: don’t bring your work to it, or make work the focus of your dialog there, or you look like a big tool. If you set out to use Twitter as a business tool, it’s going to blow up in your face. If you have fun, and your friends enjoy it and you don’t force it on them, do it. Don’t try to cram it into business situations.

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A correction by the New York Times raises Conan’s ire, and AMB gets an unexpected mention on this popular late night show. Probably the first and last time mentioned you will see an aerial view of a warehouse on a late night talk show.

Not exactly a commercial real estate joke, but maybe a reminder of how boring and irrelevant what we do is to 99% of the earth’s population.

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AMB just recently announced that they will lay off 22 percent of their work force. First Industrial laid off something like a third of their salaried work force. Anecdotally, I’m seeing both commissioned brokers and salaried professionals being laid off left and right - it’s ugly out there.

The only way to hang on to your job in this environment is to be a net revenue generator - not an expense. And with “desk costs” (the overhead associated with keeping someone employed) often in the six figure range, you’ve got to create a lot of revenue just to break even.

A lot of firms are trying to create that revenue by creating consulting practices, i.e., consulting on distressed property. I just don’t believe there will be enough fee income to be had there anytime soon.

I do believe that the volume of distressed sales will ramp up considerably in 2009 which will be a boon for investment sales brokers that made a lot less money than usual in 2008. I foresee capitulation from sellers that were trying to hold onto 2007 pricing levels and didn’t get their sales done. The forced selling has begun!

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We’re in a market where most owners are going to have to contend with some empty space. Here are some tips for getting your space moved, whether it be office, warehouse, retail, or multi-family:

1. Make the space presentable. That means fresh paint. In a warehouse, you might want to paint the ceiling white. In an office or retail space, replace missing or stained ceiling tiles. Open all the blinds. Vacuum carpet. Make sure all the lights come on, It’s not rocket science, but this stuff is inevitably overlooked by owner and brokers alike.
2. Market the space to prospects. Run advertisements in craigslist, in the local paper and appropriate trade papers. Use direct mail querying dun and bradstreet or other data services to create lists.
3. Market to brokers. Make sure you have a list of the brokers that are likely to bring you prospects. Mail them regularly with space details. Offer to pay them quickly for deals, or offer them gift certificates for showings. Offer them bigger commissions than your competitors. Now is the time.
4. Hire a broker. If you do it yourself, it’s time to hire a broker. Find one that’s active in the market niche that suits your product but doesn’t have too much product that directly competes. Listen to their advice but demand regular reporting from them updating on prospects. The squeaky wheel gets the grease.
5. Folllow up. When you have inquiries or showings, track them. Follow up regularly by phone or email. Be polite but persistent.

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Commercial Real Estate Lending has gotten a lot less complicated, so this won’t be too long a post.

It used to be that there were dozens of “conduit” lenders and life insurance companies battling to make loans. The loans came without personal recourse (ie default and all the lender can do is take the property, they can’t take anything else of yours). The loans ran at amounts of up to 80 percent or more of the purchase price. I saw loans with 10 years of interest only at rates down in the low 5 percent range. This kind of lending — which surprise, surprise, largely originated on Wall Street — fueled an unsustainable run-up in property values.

Now that we’re down in the dumps, your source for a commercial real estate loan is in all likelihood going to be with a bank. These loans are going to feature lower loan to value ratios, amortizations in the 20 to 25 year range, and terms of 5 to 10 years with little to no interest only periods.

The good news is that with benchmark rates so low (for instance, the 10 year treasury in mid-2s) that rates are going to be relatively inoffensive, though loan constants of between 7.5 and 9 are going to be the order of the day.

Often these banks are going to want personal recourse, and they may want to do all your banking business.

When I was first starting out as a commercial broker I earned a few fees in a down market because I had a good client that paid me to make him aware of foreclosure auctions in my area.

Generally there are no real estate commissions paid at a foreclosure auction, so if you’re a broker, you’ll have to find a generous client like this one.

The auctions are advertised in the newspapers, and generally not the largest papers in the market. You’d think these foreclosing lenders would want more investors to show up at their auctions, but instead they look for the cheapest advertisements in the most obscure newspapers

Buying commercial real estate at foreclosure auction is a gutsy move: you have to be prepared to put up a significant non-refundable deposit - often 10 percent of the loan amount - if you make the winning bid. There may be some opportunity to walk the property, kick the tires, and review what little information the lender has on the property and its rent roll before bidding starts. That said, if you learn anything about the property between the auction and settlement you’re out of luck - settle or lose that deposit. There’s certainly no financing contingency either so ideally you should be able to take the property down on a line of credit or with cash on a short term basis if necessary, especially in today’s lending environment.

In many of these auctions, particularly these days, the asset won’t trade at auction. The lender won’t see a bid they like and will make that winning bid and take the property themselves. At the auction you may have an opportunity to meet the lender or at least their attorney, but not inall cases. Regardless, once the lender takes the property and own it, you can negotiate terms with them that include a study period - only you may not be able to get as great a deal as you might have with a non-contingent bid at auction.

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If you’re new to commercial real estate investing, consider making industrial real estate a focus. I did, and I don’t regret it. Why?

1. It’s not where “the others” are focusing. It doesn’t have the glamor of downtown office product It’s dirty. So there’s less competition all around.
2. It’s much simpler to learn. You don’t have to lean what a natural break point is, or a gross rent multiplier. You’re renting four roofs and a wall and some doors. You can be up to speed very quickly on market rents because it’s much or of a commodity.
3. It’s less volatile. Rents don’t swing as dramatically up or down. Nor does vacancy. I’m not saying that there isn’t risk associated with industrial product, but you will never see the phenomenon we are seeing in retail right now hundreds of stores closing, all across the country, all at once.
4. It’s easy to underwrite. There are only two major capital items that need attention in most industrial buildings: the roof and the pavement. Once you understand their condition, you’ve got a handle on how much to set aside in a capital reserve over the next 5 to 10 years.
5. You can dress casually :). Generally whether you’re canvassing, meeting tenants or owners or brokers, you’re going to find a lot fewer people wearing suits and ties.

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Whether you’re looking to buy deals or list them, you need to “farm” for them - develop relationships with prospective sellers over time and build the necessary connection to win the business.

The best approach is to start with a product and a geographic area - a city, town, county or submarket: whatever feels manageable.

Then you need to build an owner database. If you can afford it and they are active in your market, Costar can give you a headstart on this database building process as they make an effort to track every office, industrial, flex and retail building in the markets they serve (in the Washington DC area where I am active are weaker on the retail side; I don’t know about other ares). Costar gives you the list of buildings with locations, photos, maps and basic building details, but the tracking of owners is poor.

At this point you hopefully have a list of 25 to 100 buildings or so. Learn everything you can about these buildings. Visit them in person or virtually though Google Earth Street View, Windows Live Maps birdseye view, etc. Using public record data found on smartpages.net and from your state and county records, find who owns each building. I subscribe to Lexis Nexis for access to unlisted phone numbers.

You can track the data in a three ring binder, an excel or MS Access database, or a contact management program like Act!, outlook, or one designed specially for our industry like REA or Realhound.

Then you need to make regular contact. Start with the dreaded cold call by phone. Don’t just ask them to sell; build a relationship. Find out how you can help them to make money, what they want to accomplish. Capture their email address for future use.

Regular phone contact should happen every quarter at a minimum unless the first call was a disaster and you were hung up on.

Accompany your phone contact with regular mailers: I use post card mailings or email to announce new listings and sold transaction. An investor can announce new acquisitions and the like.

It’s not rocket science, it’s the way brokers and investors have found deals for decades. We just have many more great new tools at our disposal.

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National Real Estate Investor cites a LaSalle study which sees four key opportunity plays for investors in 2009:

1. Cheap REIT shares
2. Cheap units in limited partnership interests
3. Pools of non-performing or partially performing loans, and
4. Defaulted land deals or development deals needing to be recapitalized.

I’d add to the list just about any sort of REO property with significant vacancy, most retail product (retail is significantly out of favor right now), and CMBS debt.

You can check out the article here.

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