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.
Tuesday, May 26, 2009
Thursday, May 21, 2009
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.
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.
Wednesday, May 20, 2009
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.
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.
Tuesday, May 19, 2009
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.
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.
Monday, May 18, 2009
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.
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.
Saturday, May 16, 2009
“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.
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.
Friday, May 15, 2009
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.
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.
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.
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!)
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!)
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