2010 LOOKING BACK… 2011 TARGETING FORWARD OPPORTUNITIES

“Money (resources + market intelligence) Talks, BS (broker/salesman hyperbole) Walks!”

This has been one helluva year for real estate investors who have been seeking risk-adjusted returns in the net lease sector just this past week, we received a call from a seasoned NYC investor inquiring whether a particular investment grade asset with a shorter term lease priced at $5,274,000 or a 7.5% cap could be bought at an 8.25% cap, all cash/short due diligence/quick closing of escrow.  We respectfully responded, “this would have been a real conversation/negotiation with the seller, if it was taking place in Q4 2009; not Q4 2010.”   What a difference a year can make.

While we were trained in the “everything is negotiable” market psychology and real estate practice, we submit that there needs to be a practical real-time market condition rather than battling egos or some mythologies about the NNN market pricing informed by internet listings.  We have a seasoned approach combined with current market intelligence that has allowed us to outperform the market on a consistent basis for 30+ years in many major markets around the country. 

Nonetheless, in the last six months, we have tendered a number of “all cash, full asking price” offers in this new 2010 world order of cap rate compression in low-mid 6 caps only to find ourselves and our clients in an auction environment. 

This did not happen once or twice, but no less than twenty-four times in dealing with sellers’ reps, listing brokers, and direct deals with sellers.  What a sobering reality for buyers and an unanticipated windfall for sellers.

We encountered sellers and their brokers attempting to sell NNN assets in Q3 and Q4 2010 based on the NOI of 2013 with the next rental bump included.  In one case they graciously offered to provide a rental income credit of the $16,000 annual rent disparity for the three (3) years amounting to a $48,000 seller’s credit off the price.

At the very same time they were attempting to charge our investor/buyers a low 6 cap rate based on the 2013 NOI which jacked up the pricing by $320,000. “Nonsense on the face of it”, you might say. Oh no, they were sold on that basis to another retail buyer who presumably had other broker representation and able counsel. 

“Absolutely nuts” from our perspective!

So, now more than ever, a keen sense of the market and deal-making skills that calibrate where a deal can be secured on a range of terms in addition to the new pricing metrics discussed above, is how we add value.

Our net lease advisory practice is based in Los Angeles but national in scope and as is our client base.  We have spent years attempting to provide the most accurate and credible market intelligence to our prospective clients.  We do not play favorites with sellers or listing brokers. Instead we present our Best-of-NNN-Breed candidates that match our investor/buyers’ client-specific criteria and objectives.  While we are highly attuned to sellers’ objectives, our loyalty and fiduciary responsibility is with the investor/buyer, as we define it.  We disclose all known data points and fees in a transparent manner with our investor/buyers and valued net lease brokers.

As we have for many years, we recently attended Net Lease Conference in New York. This is an annual event at which the would-be Brahmans of Net Lease Sector assemble to confer and do deals. It was noteworthy to us that many retail investors had come out of the shadows if they could secure a 7% coupon on net lease assets of varying shapes and sizes.  Current yield was king as an alternate to money market accounts and bond-type investments.  Closing deals that actually require an exit strategy were very difficult to reconcile in the current market.

 

We observed that a number of net lease acquisition funds that have been prominent in the acquisition arena have been financed with short term“IO debt to achieve these 7%+/- returns due to cap rate compression and accessible debt. Other debt structures at low rates have aided the cap rate compression as well.

So, where do we go from here? What will be the impact on real estate valuations and debt availability of the Fed’s QE2?  Will there be new waves of commercial foreclosures for underperforming assets in the next year? Is it safe to come out of the shadows to acquire new assets or re-balance your portfolios?  Yes, but with sound and credible data to guide you.

Your ability to secure stable and predictable income streams that outperform alternate investments can in fact be achieved in the net lease sector.  It requires a sober and sanguine study of real time options and competitive market conditions.  Our 60,000+ data base of net leased assets allows us to add value to our clients’ investment decisions by providing common sense, tried and true real estate investment principles.

The Impact of voting on the NNN sector

What impact will today’s voting around the country have on the NNN sector of the real estate investment business?

None.

The real issues for this sector are the availability of cheap debt on reasonably acceptable terms; the access to quality net leased properties; and the emerging expectations on inflation and tax policy.

We anticipate that rates will stay relatively low in the 5.5-6.75 range for the next 4 quarters; and that with the scarcity of quality assets that the recent cap rate compression throughout the country in NNN assets will continue, as well, until this time next year.

We can add value with our 60,000+ national data base of NNN properties; combined with valued relationships have allowed us to secure the ‘best-of-breed net properties in this auction environment for our clients.

How can we be of service to help you meet your objectives at this critical time?

Multifamily Distress Leads to Dispositions

PLAINFIELD, NJ-The economic aftermath of over-leveraged multifamily properties continues to yield a number of bankruptcy sales throughout Northern New Jersey, including two recent local portfolio dispositions for more than $22.1 million involving a total of 409 units. Gebroe-Hammer Associates, a leading commercial real estate brokerage firm specializing in the sale of apartment-rental buildings as well as office and retail properties, orchestrated the complex bankruptcy sales as the exclusive court-approved brokerage firm.
The larger portfolio package, acquired for $16.082 million by a private investor who is a longtime Gebroe-Hammer client, includes 108 units at Netherwood Village (825 E. Front St.); 102 units at Watchung Gardens (802 E. Front St.); and 58 units at Greenbrook Village (733 E. Front St.). Offering a mix of one-, two- and three-bedroom units, the garden-apartment complexes are well situated in the heart of the city. As the US Bankruptcy Court-approved broker, Gebroe-Hammer’s Steven Tenenbaum, assistant vice president and Plainfield market specialist, identified the buyer who owns several apartment-rental buildings in the surrounding area.
Nearby, executive vice president Joel Schwartz was retained by the owner, who was in Chapter 11 Bankruptcy, to market a three-property portfolio, Cornell Apartments, Pingry Arms and Executive Arms, comprised of 141 units. Again, as the US Bankruptcy Court-approved exclusive broker, Schwartz conducted a Section 363 sale in accordance with the court’s order. After receiving several non-contingent bids with non-refundable deposits, the Gebroe-Hammer veteran broker closed the sale in 35 days with the winning bidder.
The buyer, Plainfield Park LLC, had previously owned the two mid-rise buildings and single garden-apartment complex located at 735 Park Ave., 606 Crescent Ave. and 315 W. 8th St., respectively, several years ago. The all-cash transaction required the cooperation and approvals of numerous involved parties, including the existing lender and other unsecured creditors and their respective attorneys.
“Both buyers seized the opportunity to acquire these distressed assets and add value in order to bring them up to competitive market standards through substantial exterior and interior upgrades,” says Ken Uranowitz, managing director of Gebroe-Hammer. “The use of 363 Bankruptcy Sales has become more prevalent because it streamlines the sale transfer process free and clear of liens, claims and other encumbrances associated with a Chapter 11 Bankruptcy.” Gebroe-Hammer closed these Plainfield bankruptcy transactions within a few weeks of finalizing the $10.5-million bankruptcy sale of an East Orange multifamily portfolio comprised of four buildings with 270 total units.
Legal counsel for the Netherwood Village, Watchung Gardens and Greenbrook Village portfolio was provided by Edward Bortz, Esq. of Englewood Cliffs, NJ on behalf of the buyer. Representation for the Cornell, Pingry and Executive Arms sale was provided by Allen Popowitz, Esq. of Brach Eichler LLC on behalf of the seller/debtor; Timothy Duggan, Esq. of Stark & Stark on behalf of the buyer; and Thomas Walsh, Esq. of Trenk, DiPasquale, Webster, Della Fera & Sodono, PC, who represented the seller’s bankruptcy interests.
 http://www.globest.com/news/1780_1780/newjersey/303913-1.html

FASB 13…Transparency good; Accounting upheaval Bad… “a wait ‘n’ see” approach is operative strategy

FASB 13…….is not just for Accounting Professionals…we all need to pay attention.  What are the practical implications for real estate investors?

We have come through a number of years of synthetic leases and off-the-balance-sheet corporate strategies and some abuses.  The IASB and the Federal Accounting Standards Board (FASB) have proposed a working paper draft which essentially will provide more accounting transparency for corporate liabilities.  As drafted, “operating leases” which have often been off the balance sheets, after 2012, if adopted, will be characterized as “capital leases”, whose rental obligations and term will have to be capitalized.  The impact will be significant.  In simple laymen’s language, a rental obligation of $100,000 per year on a modest five (5) year base lease term would have to be accounted as a $500,000 corporate liability on their balance sheet and disclosures.  The same commercial occupancy, same tenant, same location, for a $100,000 rental stream with a twenty (20) year base term would translate into a $2,000,000 liability.  Further, a $100,000 per year lease for five (5) years with three (3) five year renewal options would, also, be accounted as a $2,000,000 liability.  i.e. ($100,000 x 5 = $500,000; plus 3 x 5 years or 15 years x $100,000, producing the same $2,000,000 liability since option periods, if reasonably anticipated, must be included per the current draft.  Looks like shorter term leases will be the order of the day in this Brave New World of Real Estate Lease Accounting.

The Rent vs. Own debate will be back in full force.

What’s going on with these Cap rates?

What’s going on with these Cap rates?  Scarcity premiums; cap rate compression….what is anything really worth?

        We have made it our business to track cap rates; tenant credit and real estate intrinsic for years to assist the investment decisions of our valued clients.  Many have viewed these investment grade assets as a bond diversification alternate with the tax benefit of real estate and as a hedge against inflation.  What are the implications of deflation on the current market uptick? What does the current debt market allow to secure any credible returns?  Where are the spreads?