John Haney, General Manager, Higgenbotham Auctioneers, indicates that he is seeing more bank-owned properties being offered for auction. In fact, they’ve had more activity with bank-owned properties in the past 90 days than they’ve seen over the last few years.

They are seeing this nationwide, and not just in Florida where Higgenbotham is headquartered. However, in Florida, they are marketing a portfolio of 75 properties for a Florida-based bank to close by year end.

Haney is also seeing an uptick in overall activity at the auction sales. He attributes this to seller and buyer expectations becoming more aligned. In the past few years, there were few or no buyers for some properties and that is changing. During a recent auction for Wal-Mart Realty, there were between 8-10 active bidders for each property. About a year ago there may have been less than half as many bidders. In ballroom sales, where a year ago a crowd might consist of approximately 50 bidders, Higgenbotham now gets about 150 bidders. They are seeing more faces and good bidders. Sellers have finally become more realistic and have accepted current market values. They are no longer hoping for the prices they saw in 2007.

Haney indicates that sellers who also offer financing are likely to have a larger number of more serious bidders for their property(ies). He mentioned a large auction in Georgia that they are currently marketing. The seller is offering no-interest financing with a five year balloon. Buyers need to have a 20% down payment.

What does Haney forecast for the year ahead? He believes the trend that has started during the later part of 2010 will continue. He suggests that we’ll see an increase in the amount of actual transactions. Likely sellers will include sales from bankruptcy courts, banks and also from corporations that want to take advantage of the time value of money. They’re looking to take the money now and use it elsewhere in their operations. Haney counsels sellers to sell now if they have an alternative investment in mind – “what’s the difference in selling in November 2010 for $1M or waiting and selling in March 2011 for $1M? Take advantage of the time value of money and let your money work for you.”

 -Patricia Faulkner

Patricia Faulkner is a Senior Vice President and auction specialist on NAI Global’s Special Asset Solutions team.

It is hard to say which single document is the most essential to review when purchasing an income property.  However, as the prime source of property revenue, the rent roll is clearly one of the most critical.

It is important to compare the leases with the seller’s rent roll to be sure that the tenants are all in occupancy and have active leases, which correctly express the cash flow expected to be received.  Often, poorly stated rent rolls are simply reflective of sloppy accounting; however, it is always possible that the seller is purposely being deceptive.  As such, you should always have the seller certify in writing that the information contained in the rent roll (as well as the leases and operating statements) are true and correct, as of the date of closing.  If you are obtaining a loan, which will probably be the case, your lender will require such certification.

Some of the key components of the rent roll are:

1. Tenant Name – If a tenant’s name on the rent roll is not identical in every way to the lease (and the estoppel letters), be sure to look for lease amendments assigning the lessee’s rights to another party.
2. Location – Double check the square footage and location of the leased premises against the “as built” floor plans or survey.  And check the leases carefully to determine any rights the tenant or the landlord may have to re-measure the space and thereby reset the base rent and pass-throughs.
3. Commencement, Move-in & Expiration Dates – Confirm that the tenants have been paying rent from the onset, or commencement, of their leases (often the move-in dates do not coincide with the lease commencement, as in the application of “free rent” at the beginning of a lease).
4. Base Rent & Escalations – Most leases consist of a base rental payment, which may increase in stipulated amounts over the term of the lease.  Increases may be based on a fixed amount or percentage increase, a specific index (such as the Consumer Price Index), or the market rate, as determined by some formula in the lease.  Therefore, confirm that the tenants are paying the correct rental amounts.  The best way to determine this is to reconcile the estoppel letters with the leases.
5. Operating Expense Base Year or Amount – Verify the base year upon which each lease calculates its operating expense reimbursement.

By confirming these items (among others) in each lease, you will be assured of receiving the income stream from the property that you are buying.

-Jerry Monash

Gerald Monash, CCIM is Executive Vice President at NAI Global.  Jerry leads NAI’s Investment Services Group and is a loan sales specialist on NAI’s Special Asset Solutions team.

During this time, many players geared up for a repeat of RTC days with mountains of distressed debt being sold at can’t lose pricing. This is not happening though. The reality of severely hurting economies is sinking in daily. Many of the nation’s most experienced real estate players complain that business is slow and cite a dearth of good deals, persistent bid-ask pricing problems and lack of capital.  However, in contrast to this stark facade, many good brokers are busy closing deals. What are they doing differently?

The brokerage and service sectors to the real estate industry are an accurate barometer and indicator to the economy’s direction.  Finance firms during the downturn were the first to realize we were headed for trouble while investors and lenders hung their collective hats on their low default rates indicating everything was fine and expressed confidence that real estate fundamentals were intact. Needless to say, given the fact that loan defaults have increased by a multiple of 10 over the past two years and peaked just recently, loan defaults are a trailing indicator at best. 

What has this experience taught us? Without debt, we have nothing. No matter how good all other indicators are, if we don’t have the vital tool of debt, strength and equity disappears quickly. Where can one determine the true status of debt availability? You can find it in the strongest deal-making centers, such as brokerages and investment banks. 

Brokerages and investment banks sit atop the capitalistic pyramid and have a bird’s eye view of all that is happening.  And what will one find today? Good brokers are busy. Investment banks can’t issue enough debt. This deal making activity, however, is highly discriminate. Not all sectors are benefiting from the return of debt. Where are deals happening and where is capital being deployed? Follow the debt. The sectors with the most amount of debt now are multifamily and healthcare. As such, a lot of equity is there as well. Brokers who trade in multifamily, mobile home communities, assisted living, nursing homes, medical office buildings, hospitals and independent living properties are having some of their best years.  The third most active sectors are NNN properties that house credit and even non-rated tenants with strong balance sheets.  The spread of debt and its availability are growing. Wall Street is steadily increasing their CMBS desks. Life companies are offering construction and permanent financing. Pensions and endowments are abandoning the narrow focus of the distressed world where risk is not being adequately compensated and instead are focusing on serving the healthy sectors with quality debt and equity financing.

All of this points to an exciting immediate future for brokers and their clients who have made it through the storm. They will become stronger while the herd of weaker players continues to thin.  Those who subscribe to the most important capitalistic rule of following the debt will assure themselves that they are on the right path to increased deal making. 

-Matthew McManus

Matthew McManus is Chairman of Philadelphia-based NAI Bluestone Real Estate Capital, LLC.

Many times agents have single properties that don’t fit (because of geography or property type) into a multi-property sealed bid PowerSale or are too small for an outcry auction startup. At times, the property has been exposed to the market and while interest has been significant from potential buyers, an urgency to place a bid has not been shown. An online auction is a great way to bring together all “interested parties” and finalize a sale.

I reached out to Joe Tang, CEO at AuctionPoint, to ask him a few questions about AuctionPoint and find out a little more about the current climate for online auctions.

Patricia: How has your activity been in 2010 compared to 2009?

Joe: Activity has increased dramatically in 2010, as agents become more aware of the benefits of AuctionPoint in moving properties quickly and efficiently at market price.

Patricia: Are sales up?

Joe:  Significantly. 

Patricia: Are prices up?

Joe: We haven’t seen a major shift in pricing.  As you know, a big opportunity in today’s market is educating sellers on realistic pricing expectations for their assets.

Patricia: What types of properties garner the most interest amongst buyers?

Joe: Rather than a specific property type, we’re finding that any property with a motivated seller willing to set an aggressive starting bid and invest in marketing generates significant interest.

Patricia: On average, how long have properties been exposed to the market before a seller and agent go the route of an online auction?

Joe: That varies – the decision to auction is primarily based on how motivated the seller is to move the asset quickly and at fair market value.

Patricia: What is the advantage for agents of using AuctionPoint versus other companies offering similar technology and service?

Joe: Bottom line: agents keep their full commission.  In addition, AuctionPoint delivers a completely customized, property-specific online auction website under the agent’s name and brand, a dedicated auction advisory team and a monthly marketing event that delivers 1.8 million impressions to supplement the agent’s marketing program.

Patricia: What do you think the next year will mean for AuctionPoint and online auction platforms available to real estate agents?

Joe: The use of online auctions will continue to grow as top-performing agents are now relying on them to sell all types of assets quickly and efficiently.

-Patricia Faulkner

Patricia Faulkner is a Senior Vice President and auction specialist on NAI Global’s Special Asset Solutions team.

In order to streamline the process and ensure that you encounter no surprises, it can be helpful to have any Environmental Site Assessment, Survey, Property Condition and Title reports updated by reliable third parties, prior to entering the market. The companies performing their respective assessments frequently are willing to give a right of reliance to the potential Buyer.  With these documents in hand, the risk of the Buyer discovering (or creating) an issue which may result in re-trading is significantly reduced.

The Buyer’s Due Diligence period usually begins upon acceptance of an offer and the complete negotiation and signing of a final Purchase and Sale Agreement.  However, it may be possible to deliver some of the Due Diligence materials during the Purchase and Sale Agreement negotiation and have the Buyer agree to begin its review.  This is especially effective when there are potential back-up Purchasers and may enable the Seller to eliminate or shorten the study period for specific issues.

-Jerry Monash

Gerald Monash, CCIM is Executive Vice President at NAI Global.  Jerry leads NAI’s Investment Services Group and is a loan sales specialist on NAI’s Special Asset Solutions team.

1. Tenants may be incented to sign shorter leases;
2. Tenants will be less likely to sign renewal and expansion options into their leases; and
3. Corporate users may find it more favorable to buy than to rent properties they wholly occupy.

What is the goal of this effort?  FASB is hoping to eliminate off-balance sheet financing and to bring their treatment of leases into alignment with IASB, or the International Accounting Standards Board. Corporate analysts and investors claim that re-categorizing operating leases will give a more accurate assessment of a company’s liabilities, and provide greater transparency globally when comparing financial statements. 

The new guidelines will eliminate operating leases, as they were defined by FASB in Statement 13 in 1976, and treat all property leases as a form of financing, i.e., ensure that all leases show up on the lessors and lessee’s balance sheets.   Whether on the lessor or lessee balance sheet, the asset / liability will be valued at the PV of the minimum lease payments, discounted at the lessee’s borrowing rate (cost of capital).    

Why is this so significant?  FASB claims that leasing activity in 2008 was valued at $640 million, but industry experts claim that the current volume of operating leases is over double that amount for U.S. companies alone, and almost $1 billion of that is real estate related. 

FASB is expected to issue an “Exposure Draft” of their proposed rules by early 2011.   There will be a comment period, and then FASB is expected to issue their final rules in late 2011, for an effective date of 2012 or 2013.  Existing operating leases will not be grandfathered, so the immediate impact for space users is that their balance sheets could be negatively impacted in a big way through higher debt-to-equity ratios, and lower interest-coverage ratios. 

With shorter leases and diminished balance sheet strength among many tenants, lenders will find it difficult to underwrite properties to the same levels they would have before the accounting changes.  Real property loan underwriting is only now starting to recover from the 2007-2009 meltdown cycle, so another hiccup in the system will be disruptive, even if only for an adjustment period of a year or two. Consequently, property values will experience a continued phase of bid-ask uncertainty as investors and lenders recalibrate to the new accounting paradigm. The increased uncertainty over valuations will put a bit of a damper on property trading velocity between investors, just as it did during the financial crisis of 2008-09, but not anywhere near the same degree .   If some corporations find it beneficial to buy their net leased facilities, it could provide an initial boost to one sector of the investment market, but over the long term it will make net lease property investors less active buyers, since they will not see as many of the long-term credits their investors require.

-Mark De Riemer

Mark T. De Riemer is Senior Managing Director of Investment Services at NAI Global New York City, and is a member of the Investment Services Group.

• A long term lease mitigates vacancy & lease-up risk
• An absolute net lease eliminates operational risks
• The credit worthiness of the tenant may overshadow underlying property value risk
• If expansions take place, the investor is in an excellent position to benefit

In a market where financing is difficult to obtain, the sale leaseback transaction is ideal, particularly when the tenant has a strong balance sheet.  Lenders can underwrite their loans utilizing both the underlying real estate and the tenant’s balance sheet, generally resulting in better terms and conditions for the investor.  As we slowly work our way out of the current real estate trough, sale leasebacks should contribute a significant part of transaction volume and serve as a bellwether that property markets are starting to trade again.

-Paul Reitz

Paul Reitz, CCIM is Senior Vice President of Investment Services at NAI Global and is a hospitality specialist in NAI Global’s Special Asset Solutions and Investment Services groups.

NAI Global completes over $45 billion in transactions in a typical year, including over $10 billion in investment sales. These transactions range from large institutional-quality assets and portfolios to mid-size and smaller properties suitable for regional and local private investors. To best serve its institutional and sophisticated private clients, we created our Investment Services Group (the “ISG”), which is composed of NAI’s most senior investment advisors throughout the U.S.

ISG team members, on average, have more than 20 years of commercial real estate experience and an average tenure of at least 12 years at NAI. These top professionals are supported by NAI’s global platform – 5,000 professionals and 325 offices in 55 countries – to deliver unparalleled local market expertise and top-tier, institutionally oriented solutions and execution.

Working as an elite collaborative business unit, the ISG team employs uniform analytic and transaction processes, offering materials and reporting capabilities specifically designed to meet our clients’ unique disposition and acquisition needs.

The ISG team is managed by me, your humble servant and former head of national dispositions for MassMutual Life Insurance Co., and ISG Senior Directors within each property sector, in markets throughout the nation.

The ISG team meets regularly to discuss capital market trends, current funding sources and relationships with active investors throughout the country. We openly share information and work together with one goal in mind: maximizing value of each transaction for our clients through unsurpassed knowledge, commitment and client service. Your goals and objectives come first – we are 100% focused on this priority – nothing else.

So, if you have a situation that requires the level of services the ISG can provide, please call me at 404.812-4061.  To learn more about the ISG, visit our website at www.naiglobal.com/isg.  I’m confident we can meet and exceed your needs.

-Jerry Monash

Gerald Monash, CCIM is Executive Vice President at NAI Global.  Jerry leads NAI’s Investment Services Group and is a loan sales specialist on NAI’s Special Asset Solutions team.

Comparing the 2^nd Qtr 2009 with the 2^nd Qtr 2010, mortgage origination activity by property type provides the following:

Industrial:          Increased 183%

Office:              Increased 180%

Hotel:               Increased 18%

Retail:               Decreased 9%

Multifamily:       Decreased 25%

Healthcare:        Decreased 76%

“Borrowing remains light as few commercial property owners are selling or refinancing their properties unless they have to,” said Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research. “Life insurers, CMBS conduits and others are back in the market and lending, and rates are at extremely attractive levels. However, low volumes of property sales, depressed property values, stressed cash flows and modest loan maturities are all keeping borrowing to a minimum.”

Comparing 1^st and 2^nd Qtr quarter 2010 mortgage origination activity by property type provides the following:

Hotel:               Increased 405%

Industrial:          Increased 114%

Office:              Increased 56%

Multifamily:       Increased 38%

Retail:               Decreased 11%

Although increases in the industrial and office sectors are encouraging signs of some renewed activity, overall mortgage origination rates are still only roughly 20% of what they were at their height in 2007.

According to a recent article in The Wall Street Journal, with commercial lending restrictions extremely tight at many of the nation’s traditional banks, some new non-traditional financial service companies are originating commercial mortgages for eventual bond sales. The Journal reported that demand for these new funds is likely to be quite substantial.

Between 2010 and 2014, roughly $1.4 trillion in commercial real estate mortgages will reach the end of their terms. It’s estimated that roughly half of these properties are “underwater,” whereby the borrowers owe the bank more than what the property is worth. With the state of many of these mortgages in flux, with unemployment figures still high, and with a plethora of legislative and macroeconomic factors that could affect future commercial property values yet to be flushed out, it seems to me that it’s tough to estimate when the bottom of the market has been reached. Some believe that commercial property values have stabilized, and investor demand has increased, thus investments in commercial properties are less risky than they have been in the last two years. This appears to be the logic of the new non-traditional financial service firms that are seeking to fill the mortgage origination void.

With local US markets experiencing vastly differing degrees of instability, and with demand for the various property types varying substantially, value stabilization will likely occur at different times in different locations.

-Jonathan Fischer, MAI

Jonathan Fischer, MAI, is a Managing Director in NAI Global’s New York City office and works with investors and financial institutions as a member of NAI’s Special Asset Solutions group.

There’s still a big spread between the asking and bidding price, but servicers and lenders are starting to become more realistic in negotiating the terms of debt as cap rates continue to compress forcing a slight price increase.

We’re starting to see more momentum and more traction with on the transaction side as people come to the realization that it makes more sense to execute rather than delay as situation in the marketplace continues to evolve. Trends indicate we could see large increases in transactions as we head into September, October and November with numbers accelerating near the end of the fourth quarter. We should start seeing real signs of stabilization, price recognition of real values beyond the market bottom.

We’re also seeing traditional opportunity funds that were sitting on the sidelines starting to come into the market thinking that the bottom was hit and we’re now entering a rebound. Multifamily tends to be the most popular find for investors, as existing properties with cash-flow are more predictable than other investments in the market.

Developers are starting to surface in some areas, like Manhattan, looking for undeveloped properties where they can build new residential rental and condo projects. 

-Larry Selevan

Lawrence Selevan is Chairman and CEO of NAI Chesterfield Capital Advisers, a joint venture with NAI Global providing borrowers with restructuring advisory services.