Peer-To-Peer Lending...It's Back and will be the next big thing!

The SEC recently approved Prosper.com's application and they are returning to the lending arena. For those of you unfamiliar with Peer to Peer lending, sites like Prosper.com, LendingClub.com, Zopa.com as well as others are places where borrowers can get loans of up to $25,000 at various interest rates.

How it works is a borrower requests an amount and sets an interest rate he is willing to pay and much like eBay multiple lenders come together to bid on the same loan and input a hidden interest rate they are willing to settle for. Once the loan is fully funded, the more lenders who continue to bid, drive down the interest rate until the close of the "auction". Terms for repayment are always 3 years but at least you know there is light at the end of the tunnel unlike Credit Cards.

I've been a member of Prosper for more than a year and was disappointed when they went dark at the height of the financial crisis due to the SEC filing. Right now they are only permitted in limited states as each state must sign off on their agreement with the Feds. While you can borrow, you cannot bid in states that have not yet signed the agreement.

Why is P2P a good thing? Well for one, P2P will jump-start lending and put more pressure on banks to begin to loosen credit. While the maximum amount isn't huge, it will be enough for many small business owners and individuals to get loans they do not qualify for through the traditional lending system. One caveat that I do not like since Prosper has been back online is the minium credit score threshold of 640. I believe this is set too high, particularly for the people who need it most, those who are emerging from BK's and foreclosures. I still contend that in the new economy a credit score of 640 will be the average as credit card companies continue to squeeze consumers by canceling credit cards, lowering credit limits and increasing % rates. This effect will increase peoples DTI (Debt to Income Ratio) giving a false impression that you may not be able to handle the situation. I believe this will be the new frontier for lending and probably have a positive effect on creating new standards by which credit is used and re-paid.
My Prosper portfolio has been quite successful and when they become fully operational, they will offer a secondary market for "selling" your notes (Just as Wall Street did!). This secondary market will be much like the derivatives in which you will be able to sell both good quality notes and bad notes to others. While I don't really plan to sell, it is designed to free up capital so you can continue to invest and reduce your risk.

I believe P2P will at some point out maneuver the banking industry and grow exponentially faster. After all it is people lending to people at a rate set by the marketplace. If you already haven't done so, I recommend you visit the sites and become a lender if you are permitted at this time. While I can only speak to my own results where I've received an 11% return on my money (with no bad loans!).

I believe helping individuals in need will make us all better and allow us to get out of this recession quicker.

Note: I am not affiliated in any way with any of the companies listed above, nor do I have any vested interest in whether you choose to join.

Residential Real Estate Investing...Getting it right!

By happenstance I ran across an article by Andrew Waite, Founder and Publisher of Personal Real Estate Investor Magazine. the article is titled "Don't let a good recession pass you by". Andrew is one of the few people who I've seen who actually "get it".

Mr. Waite argues correctly that there are 3 converging data vectors that can get you to an optimal buy in a residential vacation property: Price, rent-ability/saleability and appreciation in a buy/hold strategy. We are but a handful of individuals who recognize that commercial investment strategies transcend and apply to the residential housing market when it comes to vacation/rental properties.

Mr. Waite goes further when he correctly states that new investors (and homeowners) ignored basic principles and used easy credit to defy economic gravity getting their advice from commission driven real estate agents and mortgage originators.

Mr. Waite's confirmation, as well as my own experiences and ideology, led me to form Quantum Solutions for Real Estate, LLC. I witnessed this huge hole in the marketplace where so called "property management" companies were not doing their clients any favors and in most cases misleading them when it came to their residential investment properties. (You can read more in my blogs titled "Not All Residential Property Management Companies are Alike" and "Proper Valuations for Vacation Rental Properties")

I built my company around helping people succeed in Real Estate Investing. I dig deeper and analyze what a property (and owner) need to do to allow for positive cash flow and meeting the owners objectives. When I'm hired to manage a property I almost always get questions of "what do you need this information for"? I ask for things like mortgage payments, how long have you owned the property, what was the purchase price, capital expenditures planned or exectued, monthly or annual amounts of operating expenses, rental revenue if any etc. I analyze all of the data available and build a financial model and formulate a management plan for each property. It may seem redundent and tedious, but I know it's the right thing to do and I'm helping people succeed.

Not only do I want to know whether the property is worth my time managing, but I want my clients to know every aspect of what it's going to take to make the investment work. There have been more than a few properties I have passed on and recommended the owner sell or reduce his exposure as soon as possible. I know sometimes this information doesn't sit well, but it's honest and the numbers don't lie.

If your management company cannot explain the four principles of real estate investing and model an investment strategy that includes Cash on Cash Return, Net Present Value, Internal Rate of Return, and Value Enhancement to meet your goals, you need to run as fast as you can.

At QS4 I use this modeling as well as market data provided by local real estate agents and derive at an optimum sales/purchase price. So whether I am doing a mid-stream analysis or new purchase inquiry, I am able to create a proper valuation range for the subject property. It takes quite a bit of legwork and research, but in the end it's this analysis that protects my clients from making huge financial mistakes.

I also advise my clients when selecting a vacation home to go into high propensity markets. I tell them to use several criteria to initially narrow the process: Areas in which you frequent or visit/vacation, resort areas that attract large numbers of visitors each year, proximity to local attractions, and something unique about the subject property such as view, pool/spa, upgraded features. Remembering that you want to keep attracting those renters and offer something the competition does not.

It would be all too convenient for me to just take my clients money and be like everyone else in the market, but I plan to be around for a long time and be a leader in effecting change in the marketplace.

Follow Up to Sam Zell blog I posted 5/26

I read with amusement an article titled "No jobs for the unemployed" by Catherine Holohan in an MSN Money article posted today concerning unemployment. (you can read it here at:
http://blogs.moneycentral.msn.com/topstocks/archive/2009/07/07/no-jobs-for-the-unemployed.aspx ) The reason I find it amusing is this is exactly what I have been saying for more than 6 weeks since I started my blog. While unemployment is no laughing matter the article further strengthens my convictions that the Guru's, Corporate CEO's and elected officials just don't get it.

Ms. Holahan's closing statements while ringing true are a little late in the game. Below is the excerpt:

"Until hiring recovers sufficiently to absorb more of the unemployed, consumer spending will likely remain depressed. That, in turn, will put a severe damper on any future recovery. Consumer spending accounts for 70% of all economic activity. And, needless to say, employees without paychecks can't spend them"

So it begs the question where was everybody 2-3-4 months ago? I said then as I say now, there will be no stabilization of housing or anything else until the jobs market plays out. I wonder if billionaire Sam Zell is just now beginning to figure this out as well? I'm betting in the coming days and weeks ahead the pundits will now be changing their tune, but again what took so long? Did they not see this through their rose colored glasses or is it that hard to look down from their corner office in the Ivory Tower?

MSN Money even listed one "expert" a few weeks back (wish I could remember the article) that touted Target Stores stock over Wal-mart because as consumers were becoming more confident they viewed Target as more upscale? How rediculous is that? He was betting on Target to be the stronger buy? Laughable (unless you are the sucker that followed him).

My point is, it is the consumer who needs the bail out and stimulus. We drive the engine that is GDP not the financial institutions, auto makers, or government services.

Alternative anchors, who are they and where can you find them?

With vacancies rising and dark space becoming harder to fill, a concept that many may not be familiar with is beginning to come to the forefront. That is of using restaurants to replace anchors and draw traffic.

I first was introduced to this concept in 2005 during my time with Casto Lifestyle Properties in Florida. I had the privilege of working with/for Mr. Brett Hutchens (President) who was one of the pioneers of this concept.

Brett brought the concept into existence during a total makeover of the old Winter Park Mall, in Winter Park, FL. For those unfamiliar with the mall, this is one of the first malls in which the term "Lifestyle Center" was borne from. The old enclosed mall became what is now Winter Park Village, a collection of office, retail and residential components. Winter Park Village hosts a complimentary mix of entertainment, shopping, dining, living and grocery anchors which were way ahead of their time.

The tenant mix includes Regal Cinema's, Cheesecake Factory, Albertson's (Now Publix), The Loft's at Winter Park Village (53 loft style apartments), Brio Italian Restaurant, P.F.Chang's, Border's books, Ruth's Chris Steakhouse and other national and local retailers.

Mr. Hutchens outside the box thinking and ability to exploit opportunity where few could imagine allow this center to continue to thrive even in this economic climate.

Hutchens ability to view high end, sit down restaurants as drawing cards made people stand up and take notice. He realized then that people would pay for an "experience". A place to see and be seen in their local community.

In my view, what Hutchens did was play to certain truths based in economic reality. Regardless of economic times, people will go out to eat and they want to be entertained. He put the restaurants in position to be the anchors then in-filled around them.

While the restaurants alone may have been enough to insure survival, the addition of several other key components cannot be overlooked.

First are the office tenants. Those tenants allowed the restaurants and small shops to maintain balance. Having a captive audience in close proximity during lunch hour five days a week (and even dinner) boosted foot traffic throughout the week which in turn drove sales through slow periods. Second, the incorporation of a sub-market of residential units by converting the second floor of an old Dillard's store into Loft Apartments allowed not only traffic, but an ingenius use of former big box space.

While that would seem to be good enough for many, he went one step further and placed a 50,000 sf. grocery anchor within the center which further strengthened the center's ability to keep everything "in-house".

When you combine the above factors with an on-site cinema there is no real reason to "leave home".

Having experience in this concept it is my opinion that higher-end, sit down restaurants are a better option than using big box operators to fill space. Alternatively, using that same big box space to your advantage by creating something unique within the market offers incredible opportunity as well.

I think Hutchens only real risk on the project was that of Regal Cinema's. As some of you may recall, there was a time pre-2005 that movie houses were limping along and many had shut their doors. I think in this case he had hedged his bets by again using the restaurants to fuel the theater, where the two actually compliment each other. The overall "lifestyle" concept was certainly worth the risk.

My main concern with big box retail or cinema's has always been what is your alternative strategy should they fail?

Fortunately, I think Hutchens may have already given us the answer.

I'm fortunate to have learned from some of the best and brightest entrepreneurs in the real estate business. I place Brett Hutchens at the top of that list not just for his entrepreneurial ability, but he was always honest and genuine in all of his dealings as well as with me on a personal level.

So, if you are looking for viable alternatives to fill big box space or add life to your center, food and entertainment are clearly the choice to weather this economic storm.

Co-Tenancy Could Lead to Retail Bankruptcy

In a recent Globe St. article Ms. Terry Sheridan sheds light on the Co-Tenancy lease clause that was so prevalent in the last decade or so.

http://www.globest.com/news/1339_1339/florida/176671-1.html

While the article sheds light on the subject for those who were unaware, it gives no specific information as to how to combat the problem. Getting current tenants to remove those clauses from their leases in this economy is not very likely to happen without some compelling reason for them to come to the table. Retailers I'm familiar with are using that leverage as a hammer to keep up the pressure on Landlords. Most (tenants) are immune from Landlord BK's and unless a mall loses a significant number of tenants there is no reason to consider re-negotiating on their part. Even with that scenario, it probably makes more sense financially for the tenant to close its doors than to stay and anchor a declining mall.

So how do Landlords stem the flow of upcoming Co-Tenancy issues? In my opinion Landords need to begin researching how those clauses will effect the bottom line at each property BEFORE it becomes an issue. Landlords who are proactive in this approach will fare better than their conterparts.

The most significant part of the Co-Tenancy clause is the negotiated rent reduction or "alternative rent". Landlords and their Property Managers should be analyzing and projecting adjusted cash flows using a worst case scenario. Assuming the worst case as a starting point will allow for strategic planning to begin earlier and anticipate changes before they occur.

The next step would be to fully investigate cost centers to understand what makes up the operational expenses of the center. Managers need to know not only what the expenditures are currently, but need to drill down to fully comprehend what makes up those individual numbers.

Using this information as a baseline, Landlords and Managers can now work backward and formulate a management strategy to keep the property stabilized through the downturn. Using the theory for "every action there is an equally opposite reaction", a plan can be formulated to adjust expenditures accordingly to meet revenues.

While this is easier said than done, the landlords first priority is to keep the lights turned on and the mortgage paid. It may be necessary in dire circumstances to curtail all discretionary expenditures including basic upkeep such as landscaping and janitorial etc. Some of this can be

overcome through effective planning assuming you have been providing routine maintenance to this point in time.

The sooner management gets a handle on Co-Tenancy the better prepared they will be to weather the economic storm that is about to ensue.

Sam Zell and The Residential Housing Market

In a recent Reuters news article, Sam Zell head of Equity Investments proclaims an end to falling home prices by the end of the summer in a speech he gave at the recent ICSC convention in Las Vegas.

While I do not have the weight of Mr. Zell, I have been telling everyone within earshot since late 2007 that this downturn (including falling real estate prices) would begin to slow between late September 2009 and February 2010.

While economists "officially" stated the recession started in September 2007, the reality is it started in April (and when this is over, it will be adjusted and I told you so!) when gas prices began to crimp spending.

In my role as GM of an asset for which I travel more than 100 miles a day to get to the office, I felt the pinch then and adjusted personal finances earlier than others. Further, as I was looking for an investment property in Nevada in December of 2007, it was already evident that home prices had fallen 10% by October of 2007 and as I did my valuations, it was clear we could easily slip another 10-20% (which we did).

What Mr. Zell said is nothing new, I guess it just needs to come from a source that's quotable or printable. However, my disagreement with Mr. Zell stem from the job situation. We still must shed another 2 percentage points in unemployment before we will begin to see a solidifying stabilization. The key benchmark for me, will be when weekly jobless claims move closer to the 300,000 level. Some will argue that weekly claims that continue to move downward for 3 or 4 consecutive weeks will trigger the first signs of stabilization. But I think those assumptions are erroneous.

My conclusions are that even though unemployment claims may be slowing, it does not account for those who are no longer counted, therefore, it gives the appearance of stabilization. What Mr. Zell (and many others) do not understand is that until job reports stabilize, there can be no stabilization in the housing market.

Further, it is unlikely that banks will be loosening credit during this period as people continue to lose jobs and personal bankruptcy protection rises. What we are likely to witness in the times ahead is class warfare. Pitting the haves vs. have-nots when it comes to purchasing real estate.

Another consideration that isn't being addressed is what will be the new acceptable credit score for home purchases? Will it be 570? 600? 630? It cannot continue to be 700 or higher. There are too many people with poor credit (or have recently filed BK) who will not qualify for 7-10 years if it remains at 700 or 720. How will they get loans? Credit of any sort?

No, housing stabilization is not coming soon and it is a fallacy to believe so given the other factors I just mentioned.

Proper Valuations for Vacation Rental Properties

About a year ago I was looking to purchase a second home/vacation rental property in Northern Nevada. The unit was a stunning 2/2 with an immaculate view and amenities that would make this an ideal double use property and provide enough income to cover the mortgage. The owner was asking $600,000.

Like most people shopping for residential property I got the usual agent comps which listed the sales price, price per square foot etc. If I was a novice or typical buyer I would have missed key information and not had tools at my disposal for properly evaluating the property.

The typical comps against the property all neatly fit the price range of the sellers asking price. Most were in the $539,000- $595,000 range. For an unsophisticated buyer, the comps would have given the impression that the property was worth every penny of the asking price.

Years in real estate teach you how to comp against the variables using basic principles of appraisals. In it's simplest form, you would use the +/- system of superior vs. inferior and adjust prices accordingly. When doing this I used four recent comps in the neighborhood and all within the last six months. Further, at the time, the market had already fallen by 10% with downward pressure still heavily weighing on real estate. Looking at a worst case scenario I decided to discount the unit based off the comp information by 20%.

Using the simplified appraisal method the comps ranged from $525,000 for a high to $450,000 for a low. Not a huge spread but, but I decided that I would discount the high and low, mostly due to market timing, and move to the middle using an average or median price. This method narrowed the gap on the spread to $510,000 - $479,000.

However, I still had to deal with an agent (sellers), who I felt was giving his client poor advice and an owner who I knew was getting squeezed but was reluctant to discount that deep.
I decided to take the process one more step and use the four fundamental principles of real estate investing. I would calculate the IRR, NPV, Cash on Cash and Enhanced Value and use this method as a comparison against the straight-line comps to see if they were indeed correct.

Using a 20 week rental period which is an accurate amount of time that a vacation rental can expected to perform, I calculated that in order to cover the mortgage, property management, insurance, taxes and operational costs, the property would break even at a rental income of $27,000. Not too far off when pricing weekly rents. This calculation figured that I was using this strictly as an investment property. The rental income wasn't necessarily my concern, finding the true value of the property was as well as insuring that the other 3 tests of investment were compatible and acceptable.

Using this methodology, the NPV of the property was $497,500. Clearly, all stand alone modeling confirmed the price of the unit to be within the price range.

I made an initial opening offer of $479,900 knowing the owner had already rejected an offer of $550,000 just 4 weeks prior, but knowing I would pay as much as $510,000 as I felt the unit was unique enough in the marketplace and since I would be using it for personal use as well making the premium worth it in my mind.

Well to make a long story short the seller rejected all of my offers and at that point I had moved on. However, he did sell the unit 3 months later, for $499,000!

So the moral of the story is stick to your beliefs, do your due diligence and prepare yourself to walk away if necessary. As president of Quantum Solutions for Real Estate, I firmly believe all of my financial models were correct and I work with my clients to make sure they receive the best information possible as well.

If there is a property you are interested in, but are unsure of how to properly value it, please feel free to contact me at gmb@qs4p.com.

My goal is to help individual investors succeed and understand the processes. Educating the client is a win-win for both parties. for more information on what makes us different please visit our website at www.qs4p.com.

Joint Venture Retailing. Is it right for you?

In the new reality of commercial leasing developers and shopping center owners are creating new ways to fill vacancies. One of those alternatives is forming joint venture partnerships with tenants who are hesitant to open new locations.

I've been involved in several such deals and believe the ultimate success lies in the owner/developers ability to negotiate a well structured deal that provides for a proper exit strategy. The JV with retailers works in the following way. The property owner typically pays for most of the T/I minus tenant specific fixturing or a full turn-key build-out.

The tenant remains in full control of the premises and they function normally with no further involvement from the Landlord. In return, the owner receives a percentage of the sales volume in addition to monthly rent. Rent is typically adjusted marginally higher than market to compensate.

On the surface, this type of JV seems to have it's merits. The Landlord fills dark space, receives income that he otherwise would have missed and has a vested interest in the success of the tenant. The tenant's position is financially stronger due to lower or non-existent construction costs and he gains a limited partner who's success goals are the same.

However, problems with this type of arrangement are that the property owner loses leverage in not only collecting rents, but enforcing other areas of the typical lease agreement.

The JV agreement typically puts property management in the unenviable position of having to deal with both it's fiduciary duties to the owner and it's obligations under the lease terms. Property management is caught in a catch-22 situation whereby how does it ethically and morally meet it's obligations to all parties?

Other questions that need to be answered include; Is it really in the best interest of the landlord/owner to to have a vested interest in the tenant? How does it effect the performance of the center? What effect does the relationship have on other non-JV tenants? What legal obligations does Landlord and property management have should this tenant fail?

Even with answers to the above, having a multi-tiered exit strategy is advised.

Landlord/owners need to devise exit strategies that can remove them from the JV in a timely, systematic and orderly fashion. The divestiture needs to be well conceived and documented with the establishment of set parameters and time lines that must be adhered to in order for each party to successfully maintain it's autonomy.

It is my belief that joint venture retailing can succeed if properly vetted and executed. In the new world that is commercial leasing, this and other creative options must continue evolve in order to ensure survival.

Selecting a Property Manager or Management Company

I am often asked by clients what is the most important attribute they should look for when hiring a property manager or property management company?

Often, I ask them to give me a series of short responses as to what their perfect property manager would be like. It usually goes something like smart, educated, financial understanding, professional, poised, etc. Rarely, if ever, do they mention the single most important word, and that word is integrity.

My response is usually met with a surprised look followed by an "Ah-ha" moment. I tell my clients that integrity is the most important attribute of a property manager. Without it, their investment (whether the property or the investment in the manager or company itself) is doomed to failure.

The rules are simple. If the manager or company does not operate at a high level of service then how can your investment property?

As a property manager with nearly 20 years of experience, the one thing that people can count on is my integrity and reputation. When a property manager tells you something will be done his words must always be backed by his deeds. There is nothing more frustrating to a tenant or property owner than a manager who does not react swiftly and decisively to resolve an issue.
Continued repetition of a slow to react manager or one who does not follow through, rapidly erodes one's reputation.

Integrity is not only about monetary matters, but matters of personal principle. I've learned through the years that it's about always "doing the right thing". Even at times when budget constraints may summarily prevent the correct decision.

Property owners and managers sometimes forget that budgets are nothing more than outlines and that there are times that extenuating circumstances prevent you from meeting your targets. I'd much rather go over budget on a line item than to have a valued tenant question why I cannot meet his request. It's not just about monetary repercussions, it's about good will and establishing solid relationships. The tenant and owner need to feel that I have both of their best interests in mind. Further, going above and beyond expectations is always good business and when you have integrity these situations only enhance your reputation.

One of the best ways to know whether your new hire has integrity is by choosing one with the Institute of Real Estate Management's (IREM) elite designations of CPM or ARM. IREM designees are held to a Code of Professional Ethics. For a CPM or ARM, failure to act in an ethical manner as well as a fiduciary capacity to their clients is grounds for possible revocation of their designation.

Unlike other sanctioning bodies in real estate such as NARPM, NAR and others, the IREM Code of Professional Ethics extends to the tenants and business relationships not just the employer or owner. More importantly, IREM is one of the oldest and most respected professional organizations and puts teeth behind the execution of the Code of Ethics, they do not just pay lip service like others. Further, the monetary and work history investment in the acquisition of the designation's far exceed other organizations standards. IREM designee's must have a minimum of 3 years experience before they are even qualified to earn their certifications and must pass the most comprehensive test in the industry. This ensures your property manager is one of the best at his craft. Hiring an IREM Certified Property Manager insures that the overall best interest of the subject property is always followed and that the manager has the skills, experience, integrity and reputation to represent you.

Further, did you know that when using an IREM CPM you are less likely to be a party to a lawsuit? This is due to the level of professional expertise and checks and balances put in place by your manager.

So, if you are looking to hire a property manager or company for your investment property type, look for the IREM Certified Property Manager designation and be sure that the individual you hire is among the most highly skilled in the business and that his ethics, integrity and reputation are irrefutable.

The New Reality of Commercial Real Estate

As the credit crunch continues and the bears are driving the DOW, finding bright spots in retail development are hard to come-by. Lenders are adhering to and are extremely sensitive to basic lending principles in their loan packages and even the best of mortgagee-mortgagor relationships are straining under the weight the market.

Declining real estate values have put all commercial developers in an untenable position much like the residential market. Upside down loans are becoming common-place with lenders unwilling or unable to renegotiate terms. While all developers cannot be saved from foreclosure proceedings there are opportunities to fill vacant space if you are willing to go back to fundamentals.

In any down economic cycle, a renewed sense of self-preservation is borne. Consumer's re-trench and begin looking for places and items where they find value. Retailers (and developers) who create places and experiences that match those values are able to not only survive, but prosper.

We've all used terms like "One man's junk is another man's treasure" or "A bad day for stocks is a great day for bond holders".

In the current economic climate, developers should be looking to fill vacancies or jumpstart projects with retailers who match the local and/or regional demographics and core psychological needs.

There are several truth's when people are unemployed or facing financial constraints. Nearly all return to providing their families with basic needs. These needs are clearly defined as food staples, such as bread, milk, and pasta's. Entertainment staples such as movies, concerts and comedy (which are often cheap or free). Transportation to include unnecessary trips and more efficient vehicles.

Developers should also be looking to a "go back to basics" approach by building smaller more efficient projects and/or filling space with tenants who match these paradigm shifts in attitude. Retailers such as Wal-Mart (discount big box), Publix (Grocery), Regal Cinema's or Comedy/nightclub venues as well as McDonald's or comfort-style type restaurants all fill these voids.

Creating or revitalizing a strip or power center around these staples will not only attract consumers in this economic climate but position properties for the mid to long-term impact of sustainable growth.

Consumers will always have the basic psychological needs of being entertained, saving money and finding perceived value in items during economically stressful times. While this approach may not seem sexy or cutting edge, it is developers and property owners best chance for survival.

In the years ahead, property owners must be prepared for a renewed urbanism that will include inflation, higher unemployment (or underemployment), and lending terms that will not be as favorable than what we've experienced in the recent past. Owner/Investor's can exploit the current credit climate by building smaller, less expensive centers using the business principle of quantity saturation to build profits. Further, with new technologies and the ability create operational efficiencies by proximity, property owners will be able to maximize NOI.

Owner's who realize that yesterday's excesses are no longer fashionable and who are willing to define the future landscape of commercial property types will be seen as pioneers in the industry and position their companies for the future.

“Asset Recovery Teams” Lenders beware! Why they should be avoided.

In preparation of the the anticipated surge in commercial loan defaults, many large real estate companies have created “Asset Recovery Teams” in order to grow their portfolio’s.
On the surface, these ART’s appear to be just what the doctor ordered in helping lenders steer the defaulting asset through the transition and back to profitability or ultimate sale. Everyone in real estate and in the commercial lending business fully understand that lenders are ill equipped or simply have no desire to manage these assets. However, lenders need to be wary of the “wolf in sheep’s clothing”. Particularly when dealing with the larger well known real estate companies. They will ride in like a “knight in shining armor” but have intentions that are anything but admirable.

More than a fair share of these companies have under-performing assets in which they already have been managing. This can falsely give the impression that they are equipped to handle these types of assets. The questions that should be asked from lenders are, “Why are assets currently under your control under-performing”? How does that help me? “Why hasn’t your ART solved your own internal problems”? “How can they be expected to solve mine”? ”How can I be sure that your recovery team has qualified individuals looking out for me”?

More importantly, how are they going to manage your asset from their “ivory towers”?
The larger companies may indeed fit into the ideals of the large commercial lenders like JP Morgan, Merrill Lynch etc. but they do nothing for the smaller, local lenders. It is these lenders that need to consider whether national companies are worth the premium price you will pay for their services and whether they can deliver efficiently and cost effectively.
Smaller regional and local lenders should be focusing on “buying local” first. There are more than enough qualified smaller companies in the local marketplace with the capabilities to handle these assets. More so, using local companies vs. the nationals has several distinct advantages.

Locals know the marketplace, have connections within the community, are more apt to care about the asset performance and how their company and managed asset is perceived. Local companies have less red tape, are more adaptable, nimble and have the ability to immediately keep client’s abreast of recent activities. Further, lenders who use local business’ are in fact stimulating their local economy. It’s an obvious win-win situation.

Further, local companies with an IREM Certified Property Manager should be the lenders first and only choice. IREM Certified Property Managers have the level of experience, expertise and network infrastructure in place to effectively manage these assets. In fact, even in good times, manager’s who hold the CPM designation have already been predisposed in the principles of increasing NOI and meeting the owners goals.

So lenders, please keep this in mind when selecting a company to manage your distressed asset.

Cascade Failures in Mixed-Use Design

The proliferation of mixed -use projects has brought developers into the market who have little understanding of how each component inter-relates and reacts to one another. Worse, there is not an abundance of highly skilled managers in the marketplace that truly understand how these centers operate.

The old "build it and they will come" mentality must be brushed aside and thoughtful consideration needs to be given to each component of the project and how it relates to the other.

During my formative years in property management, I managed all property types including Office, High Rise Office, Critical Data Centers, Retail, Industrial, Flex, Warehouse and Condominiums as well as Single Family Homes.

Each offered unique challenges and each property type differs in some very fundamental ways. An office user's expectations are far different from that of a retailer's. Retailer's differ from that of a condominium owner or apartment dweller. Each has basic needs that must be met through thoughtful design and consideration in order for them to co-exist in a single project.

My experience in each of the sub-types has given me a competitive advantage over others in the business of managing and consulting on mixed-use design and development. I live it and breath it everyday and have learned from mistakes that I have made as well as those I have witnessed first hand.

All to common and far too often, architects and developers bring property manager's into the equation only after critical decisions have been made. Flaws in design, which could have easily but more importantly, been corrected at substantial savings become magnified once the project is vertical.

For example, the location of trash containers and their effect on each component of the project. A second floor condominium owner does not want to look out his window and see containers or trash piling up. The same restaurant or tenant below wants the containers to be located close by for convenience and optimizing labor efficiencies. Did the architect take this into consideration? Did the developer?

Another example is surface parking. An office users expectations differ from a retailer's, but each come together under the theme of entitlement. Often these users are vying for the same space after design flaws are put in practical use. Office users want close proximity and reserved spaces for staff and clients. Retailer's often need those same spaces in order to drive sales. There is nothing worse than a retailer losing a sale to a customer due to lack of parking in front of the store. Nor is it permissible to allow a disabled user to go a measurable distance to get to the office tenant.

I managed my first mixed-use project in 2005 putting me at the forefront of the mixed-use/outdoor center expansion. It has given me far more actual hands-on experience than many of my colleagues in the profession who pawn themselves off as experts or consultants in the mixed-use domain. Many are paid exorbitant fees for their so called expertise when they've never actually been in the trenches as I have. Using the phrase, "Until you've walked a mile in my shoes..." it's best that these consultants put a stop to the dog and pony show and stick with what they know, single use projects. It's the critical little details that these people miss and fail to understand. That's what makes for a great project.

In conclusion, a failure in any component of the design leads to a fatalistic cascading breakdown of the entire project. The resulting cascade effect can be anything from affecting operational efficiencies to having to offer reduced rents. In either case, it ultimately effects the bottom line.

So the next time you are considering a consultant for a mixed-use project, ask them if they've actually managed one from the ground up. Chances are they have not.

For more information on my company and services, please call or visit my website at www.qs4p.com.

"Not ALL Residential Property Management Companies are Alike"

Exposing the Residential Property Management Business

Many companies try to fly under the banner of "Property Management" in the residential arena. Most do not have even a basic level of knowledge of property management, let alone a single certification or license in which to hang their hat on. Exposed are two such types and the solution.

First, you have national known residential real estate sales companies who some time ago decided that in order to increase their profitability formed "property services" divisions.

Typically, the scenario goes something like this. "Well Mr. Jones now that you've purchased a second home from me, did you know our company also has a property management division"? We'd love to take care of your second home while you are away. If you're interested in renting it we can handle that too"! Sound familiar? Eureka! Your wonderful real estate agent just went cha-ching! (again) as he/she knows that there is another commission check coming for getting you on board! Admit it, you thought he/she was looking out for you, didn't you?

Second, are the "Property Maintenance" companies which perform maintenance services such as lawn & landscape, pool service, lot sweeping, janitorial etc. These types of companies are always trying to up-sell you on services you do not need or want. They will often come in with lowball offers for their services and nickle and dime you to death on extra services. This tactic is pretty common in the industry and the national companies are not immune from such tactics as well. Some of these companies will also offer to collect rents, provide house sitting etc, but again do not have the qualifications to properly manage the property.

While you may think you are saving money using either of the above company types, in fact you could be costing yourself hundreds or even thousands of dollars a year! Worse yet, how would you even know? Neither of these companies places the client’s best interest ahead of their own and consistently up-sell additional services which do not add value to the asset.


The solution? Find a company that has your best interest in mind at all times. You should be looking for a company or property manager that is licensed and certified by the Institute of Real Estate Management as a CPM (Certified Property Manager) or ARM (Accredited Residential Manager).

One such company is Quantum Solutions for Real Estate, LLC (QS4 Real Estate). As an IREM Certified Property Manager, I am bound by ethics and fiduciary responsibilities to my clients! I created QS4 Real Estate in order to help smaller individual investors succeed in their real estate ventures.

Our business model is based on creating value for our clients using the IREM methodology of "managing by plan" and proprietary business optimization modules. We ensure cost centers are always competitive, rents (if any) are priced properly and the asset achieves its highest and best use. We do not up-sell, nor do we have any vested interest in our service providers. We consistently re-bid services for you in order to control costs and often find creative ways to generate more revenues for our clients.

Whether you choose us, or another company, you can leave here with the knowledge that you are armed with the proper information into their tactics. So, caveat emptor if they offer you a great deal.

"The Right Mix" Article in Shopping Center Business

I love the so called "consultants" (and I use that term loosely) who blow their own horn and promote "projects" they are involved in. In the recent edition of Shopping Center Business, Jeff Green a California based consultant gives us these wonderful examples of how tenant mix effects project viability and how location and market demographics matter...well DUH! Mr Green uses projects in which he (or his company) were involved and in my mind shamelessly promotes.

If these projects are so well executed as he suggests, then there would be no need for self promotion. He also confuses the terms "lifestyle center" and "Mixed-Use" development as two distinctly separate entities when they are in fact one and the same. The terms are interchangeable.

Mr. Green is not alone when it comes to self promotion and trying to create buzzwords and catchphrases in areas in which they are not experts. They hide behind facade's, speak double talk, and use fancy cliche's to speak the obvious. Unfortunately these types gather readily gullible followers which drives there business model.

Further, I have an issue with Mr. Green's closing argument's titled "Avoid Easy Mistakes" in which he chastises leasing representatives efforts in this market and uses the term "opportunistic leasing".

It's executive stuffed shirts like him that cannot think outside the box and hide behind terms like "prestige" and "high-end" using them as excuses for not solving vacancy issues. Well Mr. Green, the last time I looked this market is contracting at an accelerated pace and your so called "high end-prestigious" tenants are dropping like flies. Your suggestion of not going after lesser tenants (in your view) is just flat out wrong.

Guru's like yourself are often too slow to react in markets like this. Where is it written that lease terms have to be 5 years or more? Particularly on second generation space? I'd be derelict in my fiduciary duties to my owners if I followed your advice. My job is to create revenue and increase the NOI.

While I tend to agree with your assessment that you must be careful about tenant selection, to totally categorize interested prospects into the "haves and have-nots" and it's effect on the perceived prestige of your center is extremely short sighted.

In my opinion, there is absolutely nothing wrong with bringing in a tenant that you may have not considered before. Sign them to a short term lease of 3 years which allows you to reassess the market conditions near the end of the term. There is nothing that says one must re-sign them or give them long term option periods.

Further, when you put this into context of current market climate, second generation space requirements, and filling space, these are optimal conditions for experimenting. You never know, you may just have signed the next big thing and it costs you practically nothing.

I hope that you and others like you continue to waste your time writing articles and blowing your own horns. I'll just continue to make money for my ownership, after all that is what we do, right? (Or at least that's what I do!)