Tag Archives: CRE

GUEST POST – BY JOHN CULBERTSON, CCIM, CRE, SIOR

MAY 5th – Happy Cinco de Mayo!  Below is from John Culbertson, CCIM, CRE, SIOR of Cardinal Partners.  He can be reached at jculbertson@cardinal-partners.com.

John gave me permission to reprint this.  I totally agree with his take on this subject.  I don’t only post things I agree with – I  am open to anything that makes people think.  Of course, non-political, non-religious, no insults, et al.  I hope you find John’s thoughts of use as you hear people all over saying work from home is here to stay and office buildings are in big trouble, et al.

Stay safe.

The Mann

Dear El Cardinale,

As people get used to Zooming and working from home in their pajamas, do you think the way we work has changed forever?

– Homer

Dear Homer,

You are right in that we are likely to make some tweaks to our work habits because of the unprecedented order to work from home. However, I don’t think this will change the way we will work in the future.

To start, new habits are hard to form. Research shows it takes 21 days of conscious, enthusiastic, and consistent effort before a new habit is formed. I’m what I call a habit cultivator, and I know how difficult it is to create new ones. To some extent, the degree to which our working habits change will be tied to how long it is before the all-clear whistle blows.

There also are other factors to consider.


  • The fiefdom. The physical office is where the boss is, and he or she often likes his or her fiefdom. The person that pays your salary likes to see employees busy at work. Your employer also has a huge commitment to that fixed cost of the office that they don’t want to see wasted.



  • Long-term commitment of office space. Office leases are usually seven years long on the short end, with facility expenses usually being one of the top three expenses for any company, this represents a sunk cost that the company is going to want to use as an asset.



  • Lack of suitable infrastructure. I have an Asian client that is struggling now in part because they don’t have a lot of experience with working from home. Their residential areas do not have adequate bandwidth, and homes tend to be smaller, meaning less space for an office. I suspect they will return to working from an office setting as soon as their government allows it.



I view what’s happening now akin to when one takes a sabbatical. There are some occupations and cultures where every three years or so people are expected or offered the chance to take a month-long sabbatical. Some people study or conduct research in another country, while others may simply check out of their daily routine. When they come back, they may be refreshed or rejuvenated, and they may have new ideas. But typically the way they work hasn’t drastically changed.

By the way, Microsoft disagrees with me – here is a link to a deeper dive. But I am an Apple guy 😉

My suggestion is to enjoy this unexpected sabbatical that has been thrust upon us and to look forward to returning to a new normal with some new ideas and a fresh outlook.



 

 

MORE TIDBITS OF REAL ESTATE MARKET INFORMATION

March 26 – One of you shared this with me.  Good info and it seems to put a definitive range on expected loan losses for CRE loans.  When two different methods come up in the same general range that can provide some confidence in the forecasts.

·         Commercial real-estate loans made by banks will suffer as much as a 2.5% loss rate over the next five years, according to the analysis of 12,500 loans now on the books of banks ranging in size from small community banks to the largest banks in the country. If that were applied to the $2.3 trillion of outstanding commercial real-estate bank loans, then losses would amount to $57.5 billion, Trepp says.

·         The Fed’s own stress tests of banks capital adequacy assumes a CRE loss rate of $65.7B.

·         Loss rates last year were less than 0.1%.

·         Between 2008 and 2011, the peak default rate was 4.4%, according to Trepp. That default rate will hit a peak no higher than 2.7% in the expected Covid-19 downturn, Trepp said.

·         Defaults this time probably won’t soar so high partly because bank portfolios were in relatively strong shape leading up to 2020.

·         Hotels and shopping centers will likely be the hardest-hit property type with cumulative default rates over five years of 34.8% and 16%, respectively, according to Trepp.  Apartment buildings and industrial property will be hurt the least with respective default rates of 3.3% and 3.0%, the analysis said.

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On a different issue, I heard a nice, concise explanation of how large of a bailout is needed in the USA.  Last year, our GDP totaled $21.44 Trillion.  If 2Q GDP falls 25% to 35% (or pick the number you like), then the bailout will need to be $5.4 to $7.5 Trillion.  The various bailout Acts passed by Congress and the purchases by the Fed are heading towards that range.

What I don’t get is the backside of this decline.  As of today, annual GDP projections for 2020 are around -3.0%.  That would indicate an annual economic loss of less than a trillion dollars.  So, how is the Fed and the US Government going to get  back $4-6 Trillion they lend out?  I doubt they will get much back.  We basically increase our overall debt many fold.  Of course, even these amounts are trivial compared to the $100 Trillion+in unfunded pensions, government handouts, and so on.

Another video I was watching (Hidden Secrets of Money – Part 1…the series is on YouTube.  I highly recommend viewing it.) said a researcher found 600 (!!!) fiat currencies in history that began with the letter A and was half way thru the B’s when he stopped.  All 600 currencies went to Zero.  The point being the US Dollar and all other existing currencies won’t be exceptions.

Lastly, I am seeing numerous predictions that many countries will totally disappear in the upcoming years.  That may seem surprising. But, go back to an atlas of 1900 and see how many countries no longer exist in 2020.  So, I guess I won’t be surprised to see dozens of countries get ate up by their neighbors.  That was the norm throughout history until the past 70 years.  We have lived in an anomaly that has come to an end.  I think the only good thing for us in the Western Hemisphere is that most of the changes will occur in the Eastern Hemisphere.

The 1920’s were the Roaring 20’s.  That term might apply again to these 20’s, but for a different reason.  Some aggressive countries will be roaring as they take over their neighbors.

Enough cheerful news for today.  Everyone be safe.

The Mann

ABOVE MARKET LEASES CANNOT INCREASE REAL PROPERTY VALUE

January 17, 2020 – I addressed this issue in a June 29, 2016 post.  It is sad that almost 4 years later appraisers still do not separate the value of national tenant leases (almost always significantly above market) between Real Property Value and Intangible Value.

Recent examples I have encountered have been extreme.  A proposed c-store ground lease had the land valued at $1,000,000 (based on numerous nearby land sales) and the lease valued at $4,300,000.  Therefore, Prospective Value ‘Upon Completion’ (of the sitework) was $1,000,000 and Intangible Value was $3,300,000.  Several ground leases to fast food restaurants weren’t as extreme.  But, still the Intangible Value was over 100% of the Real Property Value.

Although I care less what the market does (See Mann’s Axiom), it is a common argument appraisers like to make when they are arguing that FF&E in Apartments aren’t separately valued by market participants (find me a Balance Sheet that does not have a Short-Lived Assets category…recent purchase contract I reviewed had FF&E separately discussed and one even placed a value on these items!) or national tenant leases sell based on the contract rent, et al.  However, I came across the following standard wording in annual reports of several REITs:

Purchase Price Allocation
When we acquire real estate, we allocate the purchase price to: (i) the tangible assets acquired and liabilities assumed, consisting primarily of land, improvements (including irrigation and drainage systems), buildings, horticulture, and long-term debt, and, if applicable, (ii) any identifiable intangible assets and liabilities, which primarily consist of the values of above- and below-market leases, in-place lease values, lease origination costs, and tenant relationships, based in each case on their fair values.

 

So, that eliminates that argument:)  In fact, the market does allocate value to above market rent to intangible assets.  Case closed on this issue.

What was surprising to me was they also allocate the amount of value due to below market rent to (I assume) liabilities.  That is interesting.

My post from 2016 is below.

Happy New Year to all.  May 2020 be a great year for you.

The Mann

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Another item I have been shouting about for almost 25 years is the appraisal of drug stores, big box retailers, and other buildings leased to national tenants.  Capitalizing these leases does NOT yield Market Value of real estate only.  I may have been the only Chief Appraiser that required that the Market Value of Real Estate not exceed the Cost Approach indication with the additional value reflected by the Income and Sales Comparison Approaches having to be identified as an Intangible Asset.  I admit that even allowing the Cost Approach indication to represent real estate value is being way too generous.  These companies usually pay way above market for the land and the cost to build the improvements is absurd – I have seen costs for these basically shell buildings be more than medical office!

FIRREA and FDICIA require that 1) Market Value be of real estate only, and 2) LTV be calculated on Market Value of real estate only.  We all know a shell retail building is not worth $300 or $400/sf as most drug stores have appraised at for 20+ years.  Excluding the inflated land purchase price and using the real value of the land, these properties are lucky to be worth $100/sf in most markets.  Yet, I am sure the vast majority of financial institutions have used the incorrectly stated Market Value provided by appraisers to calculate LTV and base their loan on.  This is similar to those institutions that used, or may still use, Going Concern Value to calculate LTV.

Can we say violation of numerous federal regulations….but I digress.

All of this leads me to two recent articles that I believe finally end this absurd debate.  I highly recommend you find the following articles:

David Charles Lennhoff, CRE, MAI, ‘Valuation of Big-Box Retail for Assessment Purposes: Right Answer to the Wrong Question,’ Real Estate Issues (Volume 39, Number 3, 2014): 21-32.

Stephen D. Roach, MAI, SRA, AI-GRS, ‘Is Excess Rent Intangible?’ The Appraisal Journal (Spring 2016): 121-131.

In my opinion, both authors prove beyond a shadow of a doubt that the excess rent present in almost all drug store, and similar leases, is not indicative of the market value of real estate.  They use both theory and real data to prove their points.  Mr. Roach sums up the logic better than I have ever seen (from page 125 of his article):

  • “By definition, the real estate (a property) can produce market rent, but no more.
  • By definition, excess rent exceeds market rent.
  • By definition, excess rent is created by the contract, not the real estate.
  • By definition, a contract is an intangible asset; it’s not real estate.
  • Therefore, excess rent is intangible.

Each step in the argument is based on long-accepted definitions and concepts of the terminology.”

I challenge all of the Chief Appraisers in the country to step up and require appraisals of these properties to appropriately indicate the Market Value of REAL ESTATE ONLY with the huge additional amount above this figure being termed Intangible Value (or something similar).  It is time both appraisers and lending institutions provide the correct value and LTV.

Plus, this will make the lives of us reviewers easier – it has been frustrating to lower the values 50%-75%+ all of these years!  Of course, we could simply order these appraisals from the two authors above and have slam dunk reviews forever:)

 

SIGN UP FOR FREE CRE PUBLICATIONS

October 22, 2018 – The Counselors of Real Estate (CRE) has moved its print publications to online formats.  They removed subscription fees and anyone can subscribe for free.

I encourage you to subscribe and to let your peers know about this, too.  I am confident you will find the articles informative.

The web site is https://www.cre.org/

Click PUBLICATIONS and you will see SUBSCRIBE in the drop-down box.  Complete a few items and select one or both publications and hit subscribe and that is it.

Enjoy….

CAN WE END THE DEBATE ON VALUING NATIONAL TENANT RETAIL BUILDINGS

June 29, 2016 – Some people have bucket lists.  I guess I was born to have a list of pet peeves:)

For 25+ years, I have tried to get our industry to identify the correct interest when appraising an existing apartment complex or any property with arm’s-length leases.  It has always been Leased Fee Interest, not Fee Simple Estate.  I can say that finally the majority of appraisers have come to recognize this.  The ‘urban myth’ that we were taught (i.e. if leases are less than 12 months long and/or contract rents are at market, then the interest being appraised is Fee Simple Estate) is almost eradicated.

For 30+ years, I have identified the kitchen and laundry appliances (and any additional common area items that might be in a club house or such) in apartment complexes as FF&E.  Til this day, many appraisers still think refrigerators, stoves/ranges, dishwashers, washing machines, and dryers are real estate!  As a lady on TV many years ago said – Stop The Insanity!

Another item I have been shouting about for almost 25 years is the appraisal of drug stores, big box retailers, and other buildings leased to national tenants.  Capitalizing these leases does NOT yield Market Value of real estate only.  I may have been the only Chief Appraiser that required that the Market Value of Real Estate not exceed the Cost Approach indication with the additional value reflected by the Income and Sales Comparison Approaches having to be identified as an Intangible Asset.  I admit that even allowing the Cost Approach indication to represent real estate value is being way too generous.  These companies usually pay way above market for the land and the cost to build the improvements is absurd – I have seen costs for these basically shell buildings be more than medical office!

FIRREA and FDICIA require that 1) Market Value be of real estate only, and 2) LTV be calculated on Market Value of real estate only.  We all know a shell retail building is not worth $300 or $400/sf as most drug stores have appraised at for 20+ years.  Excluding the inflated land purchase price and using the real value of the land, these properties are lucky to be worth $100/sf in most markets.  Yet, I am sure the vast majority of financial institutions have used the incorrectly stated Market Value provided by appraisers to calculate LTV and base their loan on.  This is similar to those institutions that used, or may still use, Going Concern Value to calculate LTV.

Can we say violation of numerous federal regulations….but I digress.

All of this leads me to two recent articles that I believe finally end this absurd debate.  I highly recommend you find the following articles:

David Charles Lennhoff, CRE, MAI, ‘Valuation of Big-Box Retail for Assessment Purposes: Right Answer to the Wrong Question,’ Real Estate Issues (Volume 39, Number 3, 2014): 21-32.

Stephen D. Roach, MAI, SRA, AI-GRS, ‘Is Excess Rent Intangible?’ The Appraisal Journal (Spring 2016): 121-131.

In my opinion, both authors prove beyond a shadow of a doubt that the excess rent present in almost all drug store, and similar leases, is not indicative of the market value of real estate.  They use both theory and real data to prove their points.  Mr. Roach sums up the logic better than I have ever seen (from page 125 of his article):

  • “By definition, the real estate (a property) can produce market rent, but no more.
  • By definition, excess rent exceeds market rent.
  • By definition, excess rent is created by the contract, not the real estate.
  • By definition, a contract is an intangible asset; it’s not real estate.
  • Therefore, excess rent is intangible.

Each step in the argument is based on long-accepted definitions and concepts of the terminology.”

I challenge all of the Chief Appraisers in the country to step up and require appraisals of these properties to appropriately indicate the Market Value of REAL ESTATE ONLY with the huge additional amount above this figure being termed Intangible Value (or something similar).  It is time both appraisers and lending institutions provide the correct value and LTV.

Plus, this will make the lives of us reviewers easier – it has been frustrating to lower the values 50%-75%+ all of these years!  Of course, we could simply order these appraisals from the two authors above and have slam dunk reviews forever:)

 

COUNSELORS OF REAL ESTATE (CRE) 2015 CONVENTION

October 24, 2015 – Last week I attended the CRE 2015 Convention in Charlotte.  As usual, the conference had a number of prominent speakers discussing significant issues affecting real estate.

If you have not heard of the CRE, I encourage you to visit their web site at www.CRE.org.  Also, the 950+ members have tremendous experience in all facets of real estate.  You should consider contacting them for your more difficult real property challenges.

Below is a list of items I took away from the presentations.  I hope you find these of interest, also.

George R. Mann, CRE

The current immigration event in Europe should add about 1.5% to the European population

This immigration event should lower the average age of Europe – which is aging fast, just like the USA and other developed countries

25%-30% of population growth is due to immigration

Europe is considering lowering the quality of real estate construction – because it cannot afford quality! ((MANN – This supports my belief that the overall decline of our generations, starting with the Millennials and going forward, will result in a long-term decline in quality, intelligence, etc.))

In the USA, the median net worth of people under 35 years old is 8.5% lower than in 2000

In the USA, 15.5% of people under 35 years old work part-time – historically, that was 5.5%

Since 2008, the fastest growing countries by population have been Australia, New Zealand, and Israel

Germany has 80 million people and that will decline by 7 million over the next 50 years

Worldwide, 2.8 Billion (with a ‘B’!) people will move to the cities by the year 2050 !!!!!!!

Currently, there are 5.7 million job openings in the USA – the highest ever

WalMart operates under 65 different names in 28 countries

SuperCenters have replaced all but 650 of the original Discount Stores

There are now 656 Walmart Neighborhood Markets – approx. 40,000 square feet

16 ‘Expresses’ are being tested in North Carolina – approx. 15,000 square feet

Also, WalMart is testing grocery home shopping…you select and purchase your groceries online and then drive to the store and someone loads them in your car

WalMart remodels stores every 5 years

Meier remodels stores every 7-8 years

WalMart and Meier indicated stores cost $80-$130/sf to build.  But, values were around $20-$30/sf !!!  They were very clear that they know their actual costs and any associated leases have NOTHING to do with the value of real estate.  ((MANN – Now, when will appraisers doing bank appraisals start appraising drug stores, auto stores, national restaurants, and so on correctly!!!))

Big Box buildings are simply a tool to sell product; they are not a real estate investment

Development is way down for big box users – e.g. Target was building 150 stores per year in 2006….only 5-10 in 2015; Walgreens was building 500 stores per year in 2006….0 in 2015

Amazon has had a huge affect on retail development

Current retail development is in the 200,000 to 300,000 sf range and are power centers with smaller large tenants than say Lowe’s or Home Depot

PetSmart is now moving towards freestanding properties

Distribution Warehouse will continue to do well due to eCommerce

A sale/leaseback is a financing transaction; nothing to do with market rent as it was not put on the market

Above market leases do NOT increase real estate value ((MANN – Per above, when will appraisers doing bank appraisals realize that the portion of value due to above market rent has to be labeled as Intangible Value or Bond Value or some such name?  Of course, Banks need to be requesting such to make this clear themselves….I have only been doing that since the 1990’s!))

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That’s it for the conference.  Many people have asked me how to pronounce Qui Tam and what the heck it is.

I pronounce it like ‘Key’…so Key Tam.  I see some dictionaries spell the sounding out as Kee Tam or Kwee Tam.

Obviously, the best way to explain what it is is to visit Wikipedia and other sites that Google comes up with.  My attorney’s website also has some information – and, as you will see, they are likely the best Whistleblower Attorneys in the nation.  I will be glad to introduce you to them.  Just give me a yell.

http://www.quitam-lawyer.com/

Lastly, for those of you considering a Qui Tam case, please purchase The Whistleblower’s Handbook by Stephen Kohn.  Like everything on Earth, it is available on Amazon.  It answers every question you might have and provides invaluable instructions on what to do while still employed.

Til next time….