Monday, January 31, 2011

2011 Best Places to Work Awards Finalist - South Florida Business Journal

2011 Best Places to Work Awards Finalist - South Florida Business Journal

Sharpe Properties was recently selected by the South Florida Business Journal as one of the 2011 Best Places to Work in South Florida.   Out of the many companies that were nominated for this prestigious award, the South Florida Business Journal selected Sharpe Properties as one (1) of just fifteen (15) Finalists for the Small Businesses category.

Sharpe Properties is honored to be selected as a Finalist, and prides itself on being recognized as one of the best places to work in South Florida.

Sunday, January 30, 2011

Markets Should Prepare for Higher Inflation, Interest Rates

Markets Should Prepare for Higher Inflation, Interest Rates

By Hessam Nadji

Commodity prices have been surging in recent months. In 2010, the global Commodity Price Index for fuel (energy) climbed 21%, for food 27% and for industrial inputs, including raw materials and metal, a whopping 31%. Yet headline inflation and core prices, excluding food and energy in the United States, have been tame, up just 1.1% and 0.8%, respectively. And in November the Fed was worried about deflation. So, where does the disconnect lie?

Drivers of Inflation

The answer has at least five major components: flat wages, falling to flat cost of housing, low velocity of capital, the relationship of the dollar to other currencies, and the globalization of manufacturing and its impact on pricing power. Thus far, trends in these areas have greatly offset the strong increases in commodity prices. Two of the most important drivers of inflation in the United States are the cost of housing and wages, both of which have declined or remained stagnant. The housing component is calculated by estimating an owner’s cost of renting his/her house, which has been particularly weak compared to apartment rents. In the past six months, the U.S. dollar has climbed by 14% over the Euro, reducing the domestic impact of recent global commodity price increases. In the past 12 months, productivity per hour worked among U.S. employees increased by 2.5%, enabling firms to produce more without having to hire and keeping wage pressure low due to the high unemployment rate. Year-over-year growth in total compensation costs, which includes wages and benefits, has been tepid, up a mere 1.9%. Furthermore, companies have found that they cannot increase prices, with wage growth so low and unemployment so high. Intense competition on finished goods is also keeping a lid on pricing thanks to globalization of manufacturing. Another major factor is the low velocity of capital despite massive liquidity infusion around the world and low interest rates. Weak demand for consumer and business loans has prevented inflationary pressure so far in the recovery.

Inflation Outlook

With these variables in the global marketplace, what is the outlook? Given the current resistance in the economy to price increases, we would not be surprised to see commodity prices, which are always volatile, flattening or correcting downward in some sub-sectors. The biggest vulnerability is supply shock, a risk that could send commodity prices even higher and threaten corporate profits and the economic recovery. Beyond 2011, there will be upward pressure on inflation for several reasons. There is a limit as to how much the U.S. dollar and productivity can rise, and we appear to be approaching that limit. Wage and benefit costs will climb significantly once again when unemployment drops below 8%, expected by mid 2013.  Commercial rents are near bottom, and will be climbing in 2012 and 2013. Apartment rents are already rising, and the monthly cost of home ownership will also climb once prices stabilize and/or grow again, and mortgage rates increase. The calculation for housing costs within the inflation index can turn up sharply once the reading on owners’ cost to rent their home starts to climb. Improved hiring, business and consumer confidence will result in more borrowing demand, higher velocity of capital and more pricing power in 2012.

Inflation should remain tame in 2011, increasing only1.5% to 2.5% due to the aforementioned factors, leaving the Fed flexibility and time to remain accommodating. However, starting in 2012, we expect to see inflation rise to the 3% range. This is the stage at which the Fed’s ability to mop up excess liquidity to prevent a run-up on inflation without killing the expansion will be tested.

And what does this mean for real estate investments? We will likely have another nine or so months of relatively low interest rates. However, starting toward the end of 2011 or in early 2012, interest rates appear likely to climb as inflation expectations pick up speed, demand for loans increases, and QE2 sunsets. Rents and real estate prices appear likely to start increasing significantly in 2012 and accelerating into 2013. This will be driven by an inflating dollar, probable strong growth in user and investor demand, and a dearth of construction completions projected for 2012 and early 2013. All of these factors suggest that an exceptional window of opportunity currently exists for real estate investors.

Hessam Nadji is managing director, research and advisory services, at Marcus & Millichap Real Estate Investment Services. Contact him at
or (925) 953-1700.

Thursday, January 27, 2011

Recovery in U.S. Warehouse Leasing Gaining Speed

Recovery in U.S. Warehouse Leasing Gaining Speed

CoStar's Positive Industrial Outlook Comes As Commerial Real Estate Market Learns of Possible Mega-Merger Between Two Largest Warehouse REITs

  By Randyl Drummer
January 26, 2011
Warehouse leasing accelerated sharply in fourth-quarter 2010, helping to drive down vacancy rates amid record-low deliveries of new industrial commercial properties last year, according to CoStar's Year-End 2010 Industrial Review and Outlook.
"We saw good, stronger demand in the fourth quarter, given the historic low levels of warehouse supply," said CoStar Senior Director of Research and Analytics Jay Spivey. "That will eventually translate into higher rents. The story here is pretty good."
Spivey, along with Hans Nordby, director of advisory services for Washington, D.C.-based CoStar, and real estate economist Shaw Lupton presented the year-end warehouse report and forecast during a Wednesday webinar for CoStar clients.

The positive market outlook comes just as two global owners and developers of warehouse and distribution space may be close to merging. In breaking news first reported late Wednesday by The Wall Street Journal on its website, Denver-based ProLogis (NYSE: PLD) and San Francisco-based AMB Property (NYSE: AMB) confirmed that they are in active discussions over a "potential merger of equals" in which the two companies would combine in an all-stock, at-market transaction in what would be one of the largest combinations of publicly traded real-estate companies. These two global industrial property giants have a combined market capitalization of nearly $14 billion.

Denver-based ProLogis, which has been working to reduce debt, pulled off the largest sale of industrial property of 2010, trading a portfolio of 182 properties in 19 states to private-equity giant Blackstone Group for $1.01 billion.


The national industrial market logged 29 million square feet of positive net absorption in the fourth quarter, a noticeable spike upward from 11 million square feet and 10 million square feet in the third and second quarters, respectively.

The three months ending Dec. 31 was the third consecutive quarter of positive absorption since occupiers gave back 17 million square feet of negative absorption in first-quarter 2010, according to CoStar data. That was the last of six straight quarters of negative absorption dating back to early 2008.

The current recovery is all the more impressive given that the Great Recession left a total of 250 million square feet of negative absorption in its wake -- nearly four times the space vacated during the previous downturn. Early in the last decade, when massive overbuilding and the simultaneous collapse of early Internet commerce dot-coms contributed to a warehouse downturn, negative absorption totaled 65 million square feet.

The market is also recovering faster this time around. In the early 2000s, it took 2 ½ years to achieve the level of 29 million square feet in positive space absorption logged at the end of 2010. Moreover, the historically low amount of new supply delivered to the market will move the demand needle upward very quickly if the broader economic recovery continues on schedule, Spivey said.

As always, results will vary by individual market. Not all metros are benefiting equally from renewed demand, Nordby said. But some large markets, notably Southern California's Inland Empire, which led the nation with 10.7 million square feet absorbed in 2010, are clearly reaping the benefits of increases in retail sales, trade and port traffic.

In fact, other markets that recorded the strongest total absorption in 2010, such as Cincinnati, Philadelphia and Northern New Jersey, are all national distribution center hubs for retailers that benefited from the rebound in sales and consumer confidence last year, Nordby said. Markets oriented to ports, and metros with strong local fundamentals, also tended to see better demand last year over 2009. Examples include energy industry based markets in Texas like Houston and Dallas, which seemed almost immune to the national housing crash and recession.

In contrast, Detroit, hit hard by tough times in the auto industry, led the nation in total negative absorption at 3.7 million square feet in 2010. The runner up, Los Angeles, saw 3.3 million square feet of negative absorption due to continuing exposure to the housing and manufacturing downturn, Nordby said.


The improvement in the national vacancy rate generally mirrors the 2004-2007 post-recession period. The U.S. industrial vacancy rate fell for the third straight quarter to 10.1% at year-end 2010, down from 10.3% in the third quarter -- the largest quarterly decline since third-quarter 2006. Over 65% of the submarkets that CoStar tracks are seeing vacancy declines.

"Given the low supply, we can expect to see the vacancy rate recovery move quickly; the recovery is pretty broad based across the country," Spivey said.

In addition to recession-resistant Houston, markets with the tightest vacancies included space-constrained metros such as L.A., Long Island, NY, and Orange County, CA. Markets with the highest vacancies include oversupplied but growing metros like Atlanta, Chicago and Dallas/Fort Worth, "still suffering from a hangover from the construction supply party," Nordby said.

Giving the absence of new supply, rents should continue to move upward as they have since the beginning of 2010. The annual increase in warehouse rents will approach 8% by 2012-13 -- a seismic shift for the warehouse market, where rents typically rise and fall very slowly.


A healthy infusion of new industrial space won't begin until 2013, CoStar forecasts. In the meantime, it's official: 2010 had the lowest amount of new industrial deliveries, measured as a percentage of total inventory, since at least 1960.

Only about 17 million square feet of warehouse space started construction in 2010, almost 90% below the 10-year annual average of about 136 million square feet of new starts, Spivey said.

The scant few new projects that got under way were mostly build-to-suit rather than speculative projects. One example is the 1.8 million-square-foot project being built for Skechers USA footwear in Moreno Valley's Highland Fairview Corporate Park in the Inland Empire market, Nordby said. Delivery of the massive distribution center is expected this spring.

"Almost nothing [speculative] is breaking ground now. Given that you need about a year's lead time in the industrial market, we're not going to see much built over the next year or so," Spivey said.

While a bust for developers, there's an upside for existing owners. With little new product expected in the pipeline for two years, demand for warehouses should continue to rise very quickly.

Wednesday, January 26, 2011

Taxing Condos as Apartments Results in Property Tax Savings

Taxing Condos as Apartments Results in Property Tax Savings

  Property Tax Appeal GroupVarious properties have changed to condominiums during the “condo conversion boom” a few years ago.  Since then, many property owners have regretted their decision.  The Property Tax Appeal Group, LLC (“P-TAG”), may have found a way for those property owners to at least reclaim some financial benefit from doing so.

Property Tax Appeals
Recently, P-TAG’s Barry Sharpe successfully obtained a sizeable property tax assessment reduction of $573,890 (representing a 28% drop) for one of its clients in Miami-Dade.  The former property owner had converted a motel into separate condominium units.  Despite the conversion, Sharpe argued to the Value Adjustment Board that the property should be taxed as if it were an apartment building…instead of as a condo, in order to obtain a reduction in real estate property taxes.

Property Tax Classification
P-TAG was able to argue in front of the County’s Valuation Adjustment Board (VAB) that the former motel property did not have much value as a condominium.  Thus, its highest and best use was definitely not a condominium.  In fact, there was only one condominium unit sold in the complex.

Condos vs. Apartments
Because the motel was not completely retrofitted and ready for its new use as a condo, Sharpe argued that it was unfair for the County to use comparable sales (“Comps”) of nearby condos to determine the property’s assessed value.  As apartments are generally taxed at a lower dollar per square foot basis than condominiums, Sharpe filed a property tax appeal petition on behalf of its client, to demonstrate that the building should either be demolished or taxed as rental units.

This condo conversion project may have been a victim of bad timing, but at least the property owner obtained the benefit of a significant property tax reduction.
Source:  The Property Tax Appeal Group
By:  Barry Sharpe

The Shadow Effect

The Shadow Effect

A backlog of unforeclosed properties haunts today’s market

One of the mysteries of today’s commercial real estate market is the current dearth of foreclosed properties on the market. After the credit meltdown of 2007–2008, industry professionals expected foreclosed properties to flood the market, but few ever did. Today, brokers and investors alike question why more foreclosures are not occurring. The economic climate is not that much better: Unemployment is almost in double digits, discretionary spending is almost zero, and banks are failing across the country. Many more institutions are conspicuously on life support.

Even solvent companies have downsized, giving space back to the market. Rising vacancies in most market segments across the nation are putting downward pressure on rents, squeezing property owners who are unable to cover their debt service. Owners should be in default and banks should be foreclosing.

At least that was the traditional process. Obviously other factors are at play in this “new normal” commercial real estate market. Determining what is happening with defaulted properties and how it is affecting the real estate market in general may give some insight into the opportunities that will be available in the next 18 to 24 months. This article attempts to define the shadow inventory that exists through broad analysis as applied to commercial mortgage-backed securities statistics.

Defining the Shadow Inventory

To find the answer to the lack of foreclosures, we must rewind time to Oct. 30, 2009. The bank regulators have just issued “Guidance to Prudent Loan Workouts,” allowing lenders to classify commercial real estate loans in technical default as performing and thus avoid foreclosure. This came to be known as “kicking the can down the road” or “extend and pretend.” The purpose was to allow banks to return to solvency and strengthen their balance sheets before being required to “dump” these assets and absorb large losses, thus shifting the wealth to the private-sector investors.

An unintended consequence of the loan workout guidance was the creation of a shadow inventory in the commercial real estate market: property that should be on the market but is withheld due to loan workouts and is thus perpetuating a large bid-ask spread.

Figure 1 shows the workout strategies for delinquent CMBS loans. Adding up the loans that are in modified, resolved, or other categories (we assume they are not going to market) indicates approximately 66 percent of delinquent loans are not making it to market. This is our shadow inventory.

Figure 2 shows CMBS delinquencies by category. Of special note is the 90+ day delinquency, which has seen a hefty rise over the past 12 months; most notably in January 2010, when it spiked at more than a 43 percent increase month over month. This comes as no surprise: Loans entering 30-day delinquencies, which would have otherwise been foreclosed, now make their way to the 90+ delinquency category because of the new guidance.

As the government’s policy took effect, increases in the 90+ category normalized and has hovered around a 2 percent monthly increase since January 2010. While foreclosures have been increasing, real estate-owned inventory has remained relatively flat, suggesting many loans are worked out during the foreclosure process. The large delinquent categories (30/60/90+) also indicate the shadow inventory, and Figure 2 shows it is growing faster than the actual inventory is allowed to clear the market through conventional sales methods.


The Effect on Market Pricing

The unpaid balance of the commercial real estate mortgage market is estimated at approximately $3.5 trillion. Currently, the total unpaid balance of the CMBS market is approximately $773 billion, or about 22 percent of the total commercial real estate mortgage market. (Assume that the market value is the unpaid balance.) Of this, the delinquency rate is about 8 percent, translating to an unpaid CMBS delinquent balance of $61.8 billion. Apply the extended modification number of 66 percent and we are left with $40.8 billion in loans as CMBS shadow inventory (roughly 5.3 percent of the CMBS universe). If we assume this data is consistent with the market at large, when applied, we arrive at a shadow inventory of $184.8 billion.

This has a profound effect on market pricing. The CMBS market has experienced liquidated loan loss severities of about 51 percent, according to the Realpoint Delinquency Report. When applied to the entire commercial real estate mortgage market, the new unpaid balance is approximately $1.7 trillion and, as a result of the denominator effect, the shadow inventory is now 10.8 percent. Figure 3 shows the effects of the loss severities on the commercial market value in the aggregate. If we assume all borrowers borrowed at a 75 percent loan to value, the total market value for commercial property would be $4.6 trillion. When loss severities of 51 percent are applied, we see a 63.3 percent decrease in the total commercial market value. The shadow inventory has been priced into this process, within the loss severity number.

If we remove the 10.8 percent from this pricing equation, thereby eliminating the shadow inventory, the loss severity drops to just above 40 percent. At a 75 percent LTV, the percentage change decreases to 55.3 percent.

What this analysis has not taken into account is the principal paid down by owners, which is less prevalent for the 2005–2007 loan vintages but more of a factor for the 2000–2004 vintages. Therefore, the percentage changes in commercial real estate value with or without the shadow inventory will be overstated. It is impossible to gather accurate data as to how much principal has been paid down on loans while most equity positions are being severely eroded.
With or without the shadow inventory in the calculation, the decrease in commercial real estate values indicates a bid-ask spread in excess of 40 percent, consistent with what we are seeing in the market. The spread is perpetuated in both property value declines and, further, the shadow inventory. The shadow inventory will continue to increase, as another $1.2 trillion in loans are set to mature in the next few years. This will drag down bid prices until financial institutions are solvent enough to absorb the requisite losses.
If history is to repeat itself, as it has in all previous cycles, the market eventually will find a price at which actual inventory will clear. We are seeing an increase in foreclosure activity — though a less-marked increase in REO properties. This suggests lenders are posting property for foreclosure as an intimidation tactic and are still choosing a workout rather than foreclosure. In addition, many states’ required foreclosure procedures would dissuade lenders from foreclosing.

What Are the Opportunities?

When the proverbial floodgates finally open, opportunities for well-capitalized investors and investment firms, with strong banking relationships, will permeate the market. Thus, the favorable redistribution of wealth may occur, at least initially to the institution’s favored depositors and directors. A saner, truer value-oriented, reality-priced market can be addressed by the well-educated brokerage community.
However, where will the product be? A large percentage will be held by special servicers with little incentive to liquidate. Individual investors and small funds will see very few, if any, well-priced, sound investment opportunities. Where will they go?

To find out, we looked at the special servicers and their parent capital. The majority of the special servicers are in poor financial condition, as they have been in first-loss positions on many CMBS deals that are now toxic, making them prime targets for takeover by large investment funds and investment banks. We already have seen a round of special servicer mergers and acquisitions: Island Capital Group purchased Centerline Holding Co.’s servicing, and Berkshire Hathaway and Luecadia National Corp. acquired Capmark Financial Group servicing, creating Berkadia Commercial Mortgage. LNR Property Corp., owned by Cerebrus Capital Management, is in the process of recapitalizing some $1.7 trillion in debt from Goldman Sachs and Bank of America. Orix Capital Markets has a real estate investing wing as well, providing sound financial backing to its special servicing arm.
This creates opportunity when assets are released by the servicers. The best will be given as priority to the investment banks and capital funds who own the servicers and their clients.
Furthermore, they will be sold in portfolio volume. This is great for the market as the property will clear faster and reasonable pricing will allow transactions to resume. Unfortunately, for smaller funds and individual investors, the best deals will be gone and they will continue to find the poorly priced, low-quality deals they are seeing today.

However, not all REO properties will lend themselves to bulk sales. This presents multiple opportunities for the smaller players. To be well positioned to take advantage of the coming 18 months, smaller players should establish and maintain relationships with as many lenders as possible. This is where the bulk of business will originate. To restore lending ratios, lenders will need to shed their portfolios of commercial mortgage notes and REO property, or seek substantial new capital, which, considering their current anemic condition, will be all but impossible.
These challenging deals will require hard work and creative analysis by the CCIM community. But, as we are learning, they will be salable and offer opportunity when the market is allowed to clear and some semblance of sane, non-artificial pricing returns. Institutional owners will possess a large number of non-core assets priced either below their minimum guidelines or of a non-performing use within those same guidelines. While such owners are adept with many valuable skills, marketing and selling such assets demands the skill of well-qualified brokers who most frequently can provide results far in excess of the seller’s ability and his cost to the process.

For brokers to succeed over the next few years, they must possess exceptional local demographic and product knowledge, complete competency in the capital markets, contracting and closing structures, and the ability to demonstrate their talents to the asset owners.

Figure 1: CMBS Loans by Workout Strategy

Bankruptcy 2%
Deed in Lieu 2%
Note Sale 1%
DPO 2%
REO 9%
Modification 12%
Other/TBD 38%
Resolved 16%
Foreclosure 18%
Source: Investcap Advisors


Figure 3: LTV Assumptions

$ trillions
Market LTV CRE unpaid balance CRE value Loss severity Adjusted debt value % change in CRE value
75% 3.5 4.67 51.00% 1.715 –63.25%
80% 3.5 4.38 51.00% 1.715 –60.809%
85% 3.5 4.12 51.00% 1.715 –58.35%


Figure 4: Loan to Value Assumptions Without Shadow Inventory

$ trillions
Market LTV CRE unpaid balance CRE value Loss severity Adjusted debt value % change in CRE value
75% 3.5 4.67 40.36% 2.087 –55.27%
80% 3.5 4.38 40.36% 2.087 –52.29%
85% 3.5 4.12 40.36% 2.087 –49.31%
Reprint from Commercial Investment Real Estate magazine
published by CCIM
by Rowan Sbaiti and Robert Grunnah, CCIM

Monday, January 24, 2011

Thieves target tax documents – watch your mail

WASHINGTON – Jan. 24, 2011 – Tax season is here, which means you need to take some extra caution when receiving your important tax documents in the mail and ensure they don’t fall into the wrong hands, identity theft experts warn.

Year-end credit card summaries, W-2s, 1099 income tax forms, and brokerage statements contain critical information about you, such as your full name, Social Security number, and account numbers. In the wrong hands, that type of personal information can put you at risk for identity theft.

“People don’t understand that ‘walkers’ follow mail carriers and look through your mail for any bonanza they can find,” says Linda Foley, chairman of the Identity Theft Resource Center. “Mail thieves know the prime time is between 9 a.m. and 3 p.m. Others take advantage of the dark of night and/or consumers’ tendencies of not checking mailboxes each day.”

Some experts warn that some thieves are even opening envelopes and making copies of documents and then resealing your mail and placing it back in the mailbox – so you never suspect a thing.

Here are some suggestions from experts on how to better protect your mail:

• Purchase a secure, locked mailbox for your home or get a post office box to prevent others from accessing your mail.
• Get your mail soon after it arrives and avoid having mail left in your mailbox for long periods of time. Put a vacation stop on your mail if you are going to be out of town.
• If you think your mail has been stolen, contact your creditors or bank about your bills and the U.S. Postal Inspection Service to investigate any missing mail or mail theft. You can file a mail theft complaint online here, or call 1-877-876-2455.

Source: “Mail Thieves Are Waiting for Your Tax Documents,” The Dallas Morning News (Jan. 17, 2011)
© Copyright 2011 INFORMATION, INC. Bethesda, MD (301) 215-4688

Saturday, January 22, 2011

Commercial Real Estate Markets


Commercial Real Estate Markets

Commercial real estate markets across the U.S. have shown either moderate improvement or were stable during the fourth quarter, according to a Moody's Investors Service study.
The ratings agency said six of the seven property types in U.S. commercial mortgage-backed securities had 'yellow' scores last quarter--which indicates middling strength. Six of those showed some improvement, while only the multifamily sector had a strong score, which was unchanged.
Moody's said the limited-service hotel and suburban office sectors showed the most improvement during the latest quarter. The five best markets in the U.S. were Honolulu, New York City, Los Angeles, the District of Columbia and California's Orange County.

Commercial Real Estate Market Recovery

"The commercial real estate markets are continuing down the road to recovery, though the fact that most markets remain yellow indicates that a comfortable point of stability has not yet been reached," said Moody's Vice President Keith Banhazl.
Moody's said 55% of all U.S. markets were in the 'yellow' territory during both the third and fourth quarters. However, in the third quarter 18% were in the red and 27% were green, while in the fourth quarter 12% were red and 33% were green.
More stability in those metrics comes after commercial real estate was pummeled during the recession as reduced occupancy rates and rents put pressure on property owners, often causing them to fall behind on interest payments.
Moody's red-yellow-green report scores markets on a scale of 0 to 100, with the higher numbers indicating strength, and describing each portion of the scale in traffic light colors. Scores 0-33 are red, 34-66 are yellow and 67-100 are green.
-By John Kell, Dow Jones Newswires;

Thursday, January 20, 2011

Warehouses In Hialeah For Lease

Industrial Warehouse Locations For Lease

Location:  Miami-Dade
Atlantic Warehouse
Atlantic Warehouse
3121 East 11th Avenue
Hialeah, Florida 33013
Approx. Sq.Ft.:  15,000
Ceiling Height:     16'5"
Floor Level:          dock

Palmetto Warehouses
Palmetto Warehouses
4656 SW 75th Avenue
Miami, Florida 33144
Approx. Sq.Ft.:    1,000
Ceiling Height:     16'0"
Floor Level:         street

Paragon Warehouse
Paragon Warehouse
1025 East 29th Street
Hialeah, Florida 33013
Approx. Sq.Ft.:    4,800
Ceiling Height:     16'0"
Floor Level:         street

Premier Warehouse
885 West 18th Street
Hialeah, Florida 33010
Approx. SF:             11,515
Ceiling Height:           35'0"
Floor Level:              street

Sharpe - 17th Street
Sharpe - 17th Street
1024 East 17th Street
Hialeah, Florida 33010
Approx. SF:             3,000
Ceiling Height:         14'0"
Floor Level:            street

Tower Warehouse
51 East 10th Avenue
Hialeah, Florida 33010
Approx. SF:             8,000
Ceiling Height:         17'0"
Floor Level:             street

Sharpe Properties
1060 East 33rd Street
Phone: 305.693.3500

Wednesday, January 19, 2011

‘Bad Boy’ Guarantees Snarl Billions in Real Estate Debt

Bad-Boy Guarantees

The commercial real estate market is being hobbled by billions of dollars in distressed debt, and some experts are pointing to a provision in many loans — a so-called bad-boy guarantee — that they say is to blame for a large part of the backlog.
In previous down cycles, when the market was readjusting after a boom, real estate companies would declare bankruptcy to extricate themselves from troubled deals. This time around, many commercial mortgages included provisions that held developers personally liable for the loan if their companies filed for bankruptcy. As a result, foreclosures, in which the competing interests of many parties often play out in lengthy court battles, are now typical.
“Because of the bad-boy guarantees, we have unquestionably had far fewer bankruptcies then we would have had, and than we saw in the 1990s,” said David M. Neff, a co-chairman of the hotels and leisure practice at the law firm Perkins Coie, who is based in Chicago.

The Creation of the Bad-Boy Guarantees

The bad-boy guarantees, also known as springing guarantees, began appearing in the 1980s, but it was not until the early 1990s that they became conspicuous. “In the last down cycle in the 1990s, lenders would go to foreclose on a property, and the day before, the borrower would suddenly file for Chapter 11,” said Raymond N. Hannigan, a partner in the New York law firm Herrick, Feinstein.
Lenders began insisting on the provisions to prevent Chapter 11 filings, which they disliked for, among other reasons, the protections they afforded borrowers, the costly litigation involved and the fact that decisions were often up to the whims of a judge.
But while foreclosures — in which the developer typically hands over a property’s keys and walks away — have been considered preferable to bankruptcies, many borrowers and even some lenders are now having second thoughts. This is because many commercial loans that originated in the recent boom involved a multitude of lenders with competing interests. Getting these parties to agree in a foreclosure process has been difficult.
In a bankruptcy, on the other hand, distressed properties can be sold without the lenders agreeing unanimously. “Thus you avoid the holdout problem and individual creditors engaging in brinkmanship trying to get the best deal for themselves,” said Gregg L. Weiner, a partner in the law firm Fried, Frank, Harris, Shriver & Jacobson who represents many borrowers.
In December, $61.5 billion in commercial mortgage bonds were delinquent, the highest amount ever recorded, according to the research firm Trepp. With billions of dollars in troubled loans that must be resolved through restructurings, bankruptcies or foreclosure actions, some commercial real estate experts say that borrowers are likely to mount pressure to overturn bad-boy guarantees to pave the way for additional Chapter 11 filings.
“If lenders are logical and would rather resolve issues instead of litigate, then they will consider ways to modify the constraints that their borrowers may have originally agreed to,” said Michael Pomeranc, a developer and a partner in the Thompson Hotel Group, who has signed several loan documents that included bad-boy guarantees.
Since the market crash, some lenders have engaged in a game of “extend and pretend” with troubled developers, where they extend their loan agreements past the maturity dates to keep them from defaulting in the hope that the economy will improve and the loans will be repaid. As a consequence, the loans are not recorded as distressed though they may be in fact.
Starting this year, many extensions will expire and “lenders are going to have to finally work out these loans and as a result, bad-boy guarantees are going to come under much more scrutiny,” said William M. O’Connor, a partner in the law firm Crowell & Moring, who represents borrowers.
Critics of the guarantees say lenders have handcuffed borrowers by expanding the provisions beyond their original intent. “While the bad-boy guarantees were originally intended to focus on truly bad-boy acts, over time lenders couldn’t help themselves,” Mr. Weiner said.
In one recent case, ING Real Estate Finance and Swedbank sued the developers of a stalled Midtown hotel and condominium project over a $145 million loan. The developers, Aby Rosen and Michael Fuchs, whose RFR Holding owns Lever House and the Seagram Building, took out the loan with their partners in 2007 to build a 64-story Shangri-La Hotel at 610 Lexington Avenue.
By 2009, the hotel project had stalled and they were late paying a $278 million real estate tax bill. They paid the lien 19 days later, but the lenders asserted that the delay had activated the bad-boy guarantee and that they had to pay millions of dollars in penalties from their personal accounts.
The judge, who expressed incredulity at the terms of the guarantee, dismissed the claim.
In the vast majority of cases involving guarantees, the judges have ruled that they can be enforced. Perhaps the most visible case involved the Blue Hills Office Park in Canton, Mass. The developer was accused of transferring $2 million into an account and failing to notify the lender of the funds. The lender successfully sued the company’s principals for $10.77 million under the bad-boy guarantee.
These court cases are nothing more than “borrowers trying to change the rules of the game in midstream,” said Mark Weibel, a partner in the law firm Thompson & Knight who is based in Dallas and represents lenders. “It is borrowers who are not complying with their loan documents — this is what is causing the mire.”
Still, a growing number of market players say that something must be done to allow bankruptcies to go forward.
“These guarantees can be an impediment to getting a sensible restructuring of commercial real estate loans,” said Andrew A. Lance, a partner in the law firm Gibson, Dunn & Crutcher who represents both borrowers and lenders. “We either need an alternative way to properly incentivize borrowers or get clarity that servicers can waive guarantees without risk of being sued.”
Source:  The New York Times
Written by:  Julie Satow

Saturday, January 15, 2011



Social media continues to evolve. It is transforming from a technology that it is hard to calculate returns on investment to one that can more clearly drive traffic to brick-and-mortar stores.

In November, Facebook launched Facebook Deals, a location-based service that allows retailers to reward shoppers who check into Facebook Places from participating stores. (Facebook Places is a geo-spatial application similar to FourSquare that lets users share their locations with friends.) Chains that have signed up for the partnership include JCPenney, Macy’s, REI, the Gap, Starbucks and McDonalds, among others.
There are also at least two retail centers that are participating in Facebook Deals—Forest City-owned Short Pump Town Center in Richmond, Va. and the Mall at Robinson in Pittsburgh, Pa.
Facebook Deals works by allowing shoppers to sign into Facebook Places via their smartphones from inside participating stores or shopping centers. The shopper can then get a reward. As such, Facebook Deals taps into several trends currently playing out in the retail space—the widespread use of social media to connect with consumers, retailers’ increased attention to the mobile sales channel and consumers’ preference for value shopping. It also is similar to Shopkick, a tool that’s currently being used by Simon Property Group and several major retailers.

For example, starting Nov. 5, REI promised to donate $1 to a community-based non-profit for every customer who checked into its stores, up to a limit of $100,000. Also on Nov. 5, The Gap ran a promotion giving free pairs of jeans to the first 10,000 people to check into its stores via Facebook Places. (Where it ran out of jeans, Gap awarded 40 percent discounts.) In November, American Eagle Outfitters awarded 20 percent discounts on customers’ entire purchases after they checked in to American Eagle, aerie or 77kids stores. Over the past two weeks, the chain has also offered $10 off any pair of jeans.
Forest City, which partnered with marketing services developer Mallfinder Network LLC to bring Facebook Deals to its properties, over a four-day period in mid-November offered $10 mall gift cards to the first 50 customers to check in at its 1.2-million-square-foot Short Pump Town Center. Forest City used Short Pump as a trial run for Facebook Deals because of its loyal customer base and strong customer Facebook participation .(The center has more than 6,300 Facebook fans.) Subsequently, Forest City began offering another 50 gift cards on December 14 at its 880,000-square-foot Mall at Robinson. The Mall at Robinson has more than 3,100 Facebook fans.

Social Media Helps Promote Businesses

During the promotion at Short Pump, the center’s Facebook page ended up with 85 new fans, says Stephanie Shriver-Engdahl, director of advertising with Forest City. Though it took a while to spread the word about Facebook Deals to the shoppers (Forest City had 50 gift cards available, but only 25 were claimed), the number of check-ins since the promotion ended has increased to about 200, Shriver-Engdahl notes. Forest City considered the program enough of a success to plan a portfolio-wide roll-out by the end of the year.
“I think what makes this extremely interesting is that our centers and our merchants can provide these deals to our customers and it doesn’t cost them anything [extra] to do it,” says Shriver-Engdahl. “Some of the other services, like Groupon, require that the discount be at least 50 percent, and then they take 50 percent, so it’s a huge margin of loss and in some cases it’s worth it. But as Facebook Deals catches on, I think it has the promise of the same viral nature without the overhead to the merchant.”
Going forward, Forest City plans to offer its tenants the opportunity to test Facebook Deals through its centers without having a pre-existing partnership with Facebook. For example, in some cases, instead of offering a mall gift card, Forest City might offer customers checking into its centers a gift card for a specific store.
“We see a lot of interesting movement in location-based service, not just with Facebook Places, but with Google Places and Yelp, and we will be actively encouraging our merchants to begin to claim their places [on these sites] because we think it’s the most efficient way for them to go forward,” Shriver-Engdahl notes. “This knits together the social experience and the shopping experience through the things that consumers are most interested in now, which is deals and special promotions.”

Future Use of Social Media

In the future, Forest City also plans to offer more sophisticated promotions to shoppers using Facebook Deals. There will likely be loyalty-based rewards—for example, customers checking into the center for the fifth or 10th time will get $20 gift cards instead of $10 ones. There will also be rewards for bringing friends to the center or a participating store.
Forest City’s investment in setting up Facebook Places for its retail centers has been minimal, according to Shriver-Engdahl—the real cost comes down to the manpower needed to keep the promotions fresh and enticing for shoppers, she says. As of now, Mallfinder Network handles the set-up and management of the Deals for Forest City centers as part of the Social Media Pack services it offers the landlord.
Source: Retail Traffic
By: Elaine Misonzhnik


Vacancy Rates at Shopping Centers and Malls

Real estate research firm Reis Inc.’s preliminary data for the fourth quarter of 2010 shows that fundamentals continue to stabilize at neighborhood and community centers and regional malls.
Vacancies at malls declined and at shopping centers remained flat from the third quarter. For shopping centers, it is the second straight quarter where vacancies have been stable and the second straight quarter of improvement for malls.

Neighborhood and shopping centers appear to be “meandering around a bit after the temporary reprieve from deterioration in fundamentals for retail properties last quarter,” according to Reis economist Ryan Severino.

Vacancy levels remain at 10.9 percent, just a shade lower than the all-time high of 11 percent hit in 1991. Reis expects that the broader economic challenges mean that the vacancy rate could continue to tick upward in 2011, despite the recent stability. In addition, asking and effective rents declined by 0.1 percent, which Severino described as “a slight resumption of the downward trend in rents that began in mid‐2008 and persisted until last quarter.”

The vacancy rate for neighborhood and community centers remained flat or declined in 45 of the primary 80 metropolitan areas Reis monitors and effective rents remained flat or increased in 35 out of 80 markets.

Although a slight majority of markets Reis covers posted flat or even improving fundamentals last quarter, a minority of markets posted flat or improving effective rents this quarter. “This provides further evidence that retail is not yet on the road to recovery and any apparent optimism from last quarter about a recovery beginning to take hold and spread to a larger number of markets has clearly been squelched,” according to Severino. Looking forward, the market will remain choppy.

Developers brought just 594,000 square feet of neighborhood and community center space online, reflecting both the tight credit conditions and still weak fundamentals for retail real estate. This represents the lowest level of completions on record since Reis began tracking quarterly data in 1999.

Brighter outlook for malls

While the outlook for neighborhood and community centers remains muddy, the regional mall sector is showing clearer signs of recovery. Vacancies declined by 10 basis points, from 8.8 percent to 8.7 percent during the fourth quarter. This is the second consecutive quarter that vacancy for regional mall figures has declined after rising from the third quarter of 2007 and peaking in the second quarter of 2010 at 9.0 percent.

In addition, asking rents increased for the first time since the third quarter of 2008. According to Severino, “It is not entirely surprising to observe regional malls performing relatively better than neighborhood and community centers as the economy recovers. Regional malls did not experience massive supply increases like neighborhood and community centers during the last decade.”

Still, regional mall asking rents are still at a level last observed in the second quarter of 2006, which is providing an incentive for former tenants of smaller strip malls to consider leasing space in malls. What this means is that, to some extent, the success of regional malls is coming at the expense of neighborhood and shopping centers. This view is bolstered by the fact that the blended vacancy rate for both sectors sits at 10.4 percent and has been flat for three quarters.
Source:  Retail Traffic
By:  David Bodamer