Archive for June, 2010
Top 20% of Leased Assets Yield Big Returns
Jun 30th
The Pareto Principle says approximately 80% of effects come from 20% of causes. Or to put it in real estate financial terms, 80% of sales/profits/savings come from 20% of properties. If you were to rank your leased locations in descending order by annual lease expense, you will find that the Pareto Principle is in effect and if you focus on the top 20% of those leases, you will see big payoffs in dollar savings. At the same time, the remaining 80% of those leases require most of your time and work.
If you focus on the top 20% of your leased locations, spending more time and effort on those transactions and properties, you will see a greater return than if you were to focus that same energy on the other 80%. Without sacrificing attention to your tenants or properties, you should create a process that deals with the high value leases to save the most money. And create a second process for the 80% that handles the larger volume of work with efficiency to maximize your productivity. More >
Recapitalizing an “Underwater” Hotel Deal
Jun 30th
The number of hotels that are “underwater” financially is substantial and growing. The challenges of today’s economic and capital market conditions has brought even solid, experienced operators to their knees. So when looking at investing in a hotel deal today, should you recapitalize the current owner or acquire the property and start over?
For starters, it’s helpful to analyze the subject hotel in comparison to its competitors. If the property is maintaining its relative pre-down-cycle position with its competitive set, you might conclude that the problem is less likely due to the operator. By interviewing ownership and key employees, reviewing property records such as quality scores and operating statements and physically inspecting the property, an experienced investor can come to a reasonable conclusion about whether or not to consider recapitalizing a current owner. More >
Global Population Outlook – How its impact is redistributing Global Economic Expansion
Jun 29th
Over the next 40 years, economic expansion will depend heavily on the growth of newly industrialized countries rather than European and North American nations due to the increasing middle class population in the developing world. Twenty-first century international security will no longer depend simply on the population of the world, but on how the global population is composed and distributed.
The UN Population Division now projects that population growth will halt by 2050 and the world’s population will stabilize at about 9.15 billion people. Barring a complete failure to recover from the current economic crisis, global economic output is expected to increase by 2-3% each year, indicating that global income will increase far more than population over the next four decades. More >
Anatomy of an Accelerated Marketing Program
Jun 29th
No two properties are alike; there are geographic as well as asset attributes, such as age, condition and market availability that come into play. Realizing that a seller’s objective is to achieve optimal asset value, accelerated marketing looks at different sale scenarios and “designs a sale” for the property or includes the asset in a sale of similar assets that have gone through an asset stratification process.
What follows is a straight forward guide to aligning with a partner and getting started with a sale to achieve maximum exposure and the highest possible return for a seller. More >
The Supreme Court’s New Sarbanes-Oxley Ruling: A Tempest in a Teapot
Jun 29th
The Supreme Court Monday issued its decision in a case involving the constitutionality of provisions of the Sarbanes-Oxley Act (SOX), and held certain provisions unconstitutional. SOX was enacted in 2002 in the wake of the Enron and WorldCom debacles to tighten up accounting, auditing and reporting requirements for public companies. Under SOX, public companies are required to implement adequate systems and controls, including a process to ensure their real estate assets and liabilities are appropriately valued and to maintain an audit trail to support those valuations.
Among the teeth in SOX were provisions that individual officers and Board Members could be held criminally responsible for the failures of a reporting company to implement appropriate systems and controls. In a 2004 letter to NAI clients and prospects I wrote: More >
Mark De Riemer Joins NAI Global New York City Office as Senior Managing Director
Jun 28th
NAI Global announces Mark De Riemer has joined its New York City office as Senior Managing Director of Investment Services.
In his new position, De Riemer’s primary focus will be investment sales and investment banking assignments for institutional and private clients across the Eastern U.S. He will also work closely with NAI Global’s Special Asset Solutions Group in the origination and disposition of distressed properties and portfolios. More >
Mexico Shows Promise as a Location for Retail Expansion
Jun 28th
While Mexico is evolving into a promising site for retail expansion by U.S. based firms, the country’s full potential cannot be realized until economic conditions improve and crime is contained.
The dramatic evolution of the retail landscape over the past 20 years has been driven by a number of factors such as education, the shift in the age composition of the population, and the emergence of the middle class. The main catalyst behind the emergence of the Mexican retail landscape has been the significant growth of the middle class, with a substantial demographic shift from a “have and have not” socio-economic composition to a more socially tiered structure. The middle class continues to grow both in numbers and in disposable income due primarily to a stable financial industry that has reintroduced the availability of credit (car loans, Visa/Master Card and now mortgages). More >
Rumblings of Brazilian Protectionism?
Jun 28th
The Agrarian Minister for Brazil, Guilherme Cassel, announced Friday that he and his governmental peers are extremely concerned that foreign entities are entering Brazil and acquiring too many tracts of rural farm land. He claims that Brazil’s strategic interest – that of being able to provide food for its citizens in the future – is being threatened. No doubt he envisions that as the world’s population continues to grow and as income levels increase across the globe, the consumption level of food will also increase significantly, thus perhaps putting a strain “on Brazil being able to provide food, natural resources and water for its own people in the future. The Brazil government’s strategic need to provide and to plan for that provision of sufficient foodstuffs is paramount.” Minister Cassel’s quote provided by the newspaper Valor Economico is, “We do not need foreigners to produce food in Brazil. This is the policy of President Luiz Inacio Lula da Silva. Because of food security, Brazilian lands must remain in Brazilian hands.” The minister’s spokesperson, Denise Mantovani, stated that 4 million hectares (10 million acres) had been registered as purchased by foreigners or foreign owned business entities since 2008. The upshot is, he announced that an amendment will shortly be debated wherein foreign farmland ownership will be strictly controlled and limited.
The news hit the press just before the weekend so there has not yet been any recorded public reaction. However, in light of the booming agricultural industry and its investment (Brazil enjoyed a US$60 billion positive trade balance in 2008) and the large proportion of FDI in Brazil dedicated to the agricultural sector, I know that many global businesses and experts will react negatively to this effort and I can guess what they will say. First, they will no doubt state that this is just an excuse to practice another form of protectionism and that it is another example of Brazil’s chauvinistic economic and bureaucratic policies that have plagued the country and its development for decades, just like the Daedalian bureaucracy that the government refuses to straighten out and streamline. They will add that Brazil has a larger land surface area than the continental USA, has generally more fertile soil and it does not have the vast stretches of deserts and mountains where agricultural exploitation is limited. Thus, the feeling will be that the current Brazilian administration’s claim that they need to protect the natural patrimony of their fellow citizens is a nationalistic reaction to Brazil’s entrance into the global market (much like how some US citizens reacted in the 1980’s when many Japanese investors acquired several landmark properties). The comment will be that Brazil’s government wants to reap the benefits of a globally connected economy, but that it does not wish to play on an open or a fully accessible playing field. More >
New Measures in Europe Stimulate Economies
Jun 25th
The UK had its first budget under its new coalition government on June 22. The chancellor balanced cuts with tax rises; he has also focused on making the UK more competitive in the business arena. He has reduced corporation tax by 1% per year through the term of the Parliament whilst introducing incentives to start new businesses and add employees. The public sector has, in line with other EU economies, frozen public sector pay for two years for those paid over £21,000 per year and cuts will be introduced to budgets across the sector. After January 4, VAT will increase to 20%.
Spain has also introduced new measures to promote youth employment and cut the cost of firing workers. Spending cuts were introduced last month in a bid to cut the large budget deficit. More >
CMBS Observations
Jun 25th
According to Trepp, the number of loans transferring to special servicing is growing exponentially. As of May 31, 2010, there was $81.3 billion (4,558 loans) in special servicing, compared with $12.5 billion (1,276 loans) at the end of January 2009. And, Fitch Ratings expects the number of loans transferred to special servicing will be approximately 20% of outstanding CMBS by 2012.
Fitch also notes that on a more positive note, during 2009, over 75% of the loans transferred out of special servicing were either returned to the master servicer as corrected or paid in full with almost no loss. This transfer percentage fluctuated from 60% in 2006 to 90% in 2009. The 2009 recovery rate for these loans was consistent with the results dating back to 2006. Many of the loans that returned to the master servicers were modified; it remains to be seen how well those modifications will prevent the loans from returning to special servicing. More >
