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PROPERTY TAXES

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NEWS

DOES YOUR PROPERTY MANAGER CHECK YOUR PROPERTY TAXES?

One of the largest costs in owning Commercial Real Estate is our property tax bill. One of the first things we take a look at when we become property managers for our clients is the tax bill and the need to file an appeal or not.

Many of the tax appeal deadlines have passed for 2013 although there are a few states left such as Florida, CA, and CN. Tax value notices and bills will be coming out soon if they haven’t arrived already.

Values are creeping up and are being reflected in the values sent out by the assessor. It is important to make sure the process of value and tax bill review, determining whether to appeal an assessment, and then making sure the bills get paid timely.

The first day to file an appeal is July 2, 2013. Whether you are in a county that sends an assessment notice in July (Orange, Alameda, Ventura, etc.) or waits and only sends a bill (Los Angeles, San Diego, etc.) the earlier the appeal is filed the sooner it is resolved.
Appeals filed in November 2011 are being scheduled now. Appeals that were filed in July and August of 2011 are already finished and in most cases the taxpayer has received their refund.

Hearing dates are set on a first come first served basis. The sooner these are filed the better.

 

Senate Rejects Security Deposit Bills
A bill that would have unfairly penalized landlords who make honest mistakes regarding security deposits has died on the Senate floor.

Late Wednesday, Sen. Mark Leno’s SB 603 received 18 no votes, 13 yes votes and eight abstentions. Prior to the roll call, Sen. Roderick Wright, D. Los Angeles,spoke against the legislation.

SenMarkLeno.thumbnail Sen. Mark Leno

Although the bill had undergone substantial amendments, SB 603 remained bad for the rental housing industry. The original, more problematic version would have required that landlords pay interest on security deposits, a mathematically faulty provision that Leno removed .

Issues with SB 603′s penalty provisions, however, kept the bill unpalatable.

The bill would have forced a small-claims court judge to award penalties against an owner if a tenant successfully demonstrated that he or she did not receive a legally owed security deposit — regardless of the landlord’s reasoning for withholding it.

At the same time, it would have mandated high penalties for any security deposit error, even a minor mistake, such as with calculating deductions. All mistakes would be treated as if committed in bad faith.

Do you know when to hold them and when to fold them?
Change is good, or so some would say. And if you’re a real estate owner or operator, change means a number of things—including the temporary loss of rental income, turnover expense and a combination of hope and headache until the space is filled. Regardless of the property type, these things occur. But better understanding the space, state of the rental market and potential costs associated with turnover or re-renting can help you determine whether or not a change will do you good—that is, whether you should negotiate to retain your existing tenant or allow them to vacate in order to attract a more favorable option. The choice is yours.

The No Brainer

With the economy improving, albeit slowly, the calls come less frequently than they did five years ago. But let’s face it, we still get them. In fact, just the other day I received a call from a long-term tenant at an industrial complex who was looking for a 30 percent discount on his rent in order to stay. While his books showed that even with the discount his business would not turn a profit, there was not much I could do to help him. His space is only 3000 square feet and is located in an industrial park within a Los Angeles sub-market boasting over 97 percent occupancy market wide. What’s more, his rent was below market. No sooner than I received his 30-day notice did I receive an inquiry from a neighboring tenant looking to renew their lease and expand—all at market rate. This made bidding farewell to the outgoing tenant all the more easy. It’s not always so simple. Let Me Think About It I know, comparing multifamily to industrial Saving Money is Making Money properties is an apples-to-oranges comparison, but in this case it fits. Multifamily properties mirror the single-family residential market in that things slow down around the holidays. It is not uncommon for units to sit vacant from Halloween until after the new year if the price is not right. So, when I consult with a mom and pop or other owner of a smaller property, I often advise them to choose between the vacancy or the rent concession— it’s simple. You add the total turnover costs and add up the total projected rental income that you stand to lose. Amortize this over the course of a year and decide whether or not it is palatable to concede this amount to the tenant by way of a rental reduction. Is there a middle ground? Can you reach an agreement short of the break-even point? These are all things to consider. Remember, it’s not always an option and is certainly market specific, but it’s a viable option for some owners.

Blame It on the Economy

As with many operational decisions, whether you offer a concession or opt for the vacant space, depends on the owner’s goals. So, if there is one thing you take from this column, remember the next two sentences: While occupancy continues to trend upward and the economy continues to improve, take the time to develop relationships with your tenants that will carry you through more difficult times. If you direct an onsite staff, encourage them to develop the level of professional comfort with tenants that will enable them to carry on conversation and possibly see the warning signs of potential vacancy before it becomes imminent. There’s never a wrong time to focus on improving tenant relations. Just think, the occupancy you save might be your own.

The THREE SECRETS OF MILLIONAIRES
Wealthy people do certain things that guarantee success. They follow three principles that the average man on the street is completely unaware of. These principles are not complicated and don’t require rocket science. No matter what your excuses may be, you can qualify to be among the elite by following these same principles.

Principle One

Wealthy people focus on what they want to achieve. They have goals and the confidence they will get what they want. For them it’s not a question of if, but when it will happen. The difference between them and the average man is that the average man focuses his attention on what he doesn’t want and consequently, gets more of it. He dwells on want all day long. That kind of focus pulls him away from achieving a desired goal. In other words, he focuses so much on lack that he consistently lets opportunities slip by.

The rich and famous don’t just hope for a better future, they know they will reach their dreams. Their self confidence overrides any negative setbacks on the way to their goals. They see and feel success well before they achieve it.

Principle Two

The wealthy take action. Once they’ve mapped out their plans, they don’t hesitate and wait for the ideal circumstances to present themselves. They know, as do millions of men and women across the globe, that failure is always a possibility, but they have an unshakable belief that their ideas can contribute to the betterment of their lives and those of mankind in general. They don’t waste time doing things that have no relevance to their goals.

Of course, patience is a virtue as no goal is ever achieved overnight. It takes effort. Unfortunately, too many people today have been trained into believing in quick fixes. That’s one of the major reasons why so many get into financial trouble, buying on credit without having the resources to pay for their purchases. They “must have today”, regardless of the future consequences.

Wealthy people take inspired action that moves them toward what they want. They have a manifest desire to do what it takes short of taking unlawful action.

The more successful they become, the more they attract like-minded people that complement their skills. In other words they create a Mastermind group as Napoleon Hill refers to in his book Think and Grow Rich.

Principle Three

Successful people are thankful for what they have. From Andrew Carnegie to Bill Gates, many millionaires have felt privileged to be granted wealth and, as a result, give away some of their fortune to charities and worthwhile causes.

Appreciation is one principle that separates the millionaire from those that engage in bribery, corruption and abuse their power. Such practices do create wealth, but such people ultimately become exposed as frauds and live short lives.

Appreciation is an important key as it dampens greed and vanity that are increasingly prevalent today. Few heads of households know what it means to be grateful for what they do have. They are forever grasping for more, but neglecting the spiritual implications of their actions.

These secrets are often overlooked. Yet taking action to achieve a specific goal and being appreciative of every breath can greatly increase the likelihood of success.

Does your property management company ask you about your strategy?
Ironically, an “exit” strategy for a multifamily real estate asset should be planned and discussed upon its purchase—not simply when the timing is thought to be right. Planning how and when to dispose of a property is critical to maximizing an investor’s profit. The old adage, “sell when the market is right,” can be difficult to determine. In fact, if an owner waits until it “feels right” to divest, the asset’s peak value may have already crested, and the owner will have to wait until the next cycle to reap the same rewards. Owners should understand the properties they’re investing in and the investment classes they intend them to be. They should set goals for the property as soon as possible; establish benchmarks that need to be reached; and be prepared to pull the trigger when the parameters of their financial plan are met. Additionally, it’s important that real estate managers recognize their owners’ investment objectives, so they can help owners meet their exit strategy goals.

A STRATEGY’S CORE

Real estate investors typically pursue one of two basic investment strategies—core and non-core. Core investments are typically described as institutional grade, low risk/low yield assets, whereas non-core investments involve greater risk. Core properties include “Class A” products located in quality, stable locations that require little new capital investment. A core investment is typically purchased based on replacement cost, minus discounts such as risk and market volatility. Investors are willing to accept lower returns (9 to 11 percent leveraged) in return for stable cash flows to distribute to the partnership. Core purchases are typically held for longer periods, like 10 or more years, and are called institutional grade properties. Core-plus investors are willing to take on an element of risk in order to achieve higher returns than those investing in core strategy properties. Core-plus properties are the next level below investment grade. They are likely more than 10 years old, but are situated in excellent locations. The hold period for core-plus investments is typically 7 to 10 years. Non-core investments involve medium- to high-risk strategies that target higher levered returns (14 to 18 percent) than the core strategies. Non-core investors aim to add value through capital or management improvements and then sell the asset to lock in the gains. The typical hold period for non-core investments is 3 to 7 years. The shorter hold period is indicative of the owner’s need to sell the asset immediately after the net operating income increases because extended time periods drop the yield per year.

DOING DUE DILIGENCE

Keeping in mind that investors should be thinking about selling their assets even at the time they are buying them, they need to perform due diligence to ensure potential investment properties will be able to fulfill their exit strategy goals. For all investment grade properties, the due diligence team should utilize a checklist to determine the physical condition of a property or its systems. This analysis should include areas of physical obsolescence like roof replacement, siding and carpets, as well as plumbing, HVAC and any mechanical systems. An estimated life for each item should be plotted on, at minimum, a ten-year capital project schedule. Evaluating non-core assets must be taken a step further, taking into account value-add opportunities. This type of process is a bit trickier. Investors must determine which areas or systems can be improved to achieve rent premiums or to reduce economic vacancy. This analysis might lead to enhancing common areas, amenities, landscaping, or perhaps even management systems. Improvements should be justified by achieving a higher effective gross income level following the enhancements via rent increases or reducing the vacancy and/or concessions at a property. Submarket rent studies must be completed to determine the appropriate rent positioning for a property after the improvements are complete. Ideally, newer assets in the submarket will establish a clear rent ceiling, as well as other communities of a similar vintage that achieved rent increases for similar improvements. A demographic trend analysis should be included in any value enhancement strategy. Unfortunately, determining this will be akin some what to crystal-ball gazing. An accurate, well prepared marketing plan that demonstrates what similar properties are receiving in increased rent for the aforementioned improvements can help, though. Demographic trends and the subsequent predictions of future needs should be included when interpreting the future for any marketing trends. Finally, another capital cost has recently been thrown into the mix in real estate, which entails “going green.” Although some green initiatives may have a simplepayback, most do not provide enough savings to justify the investment. Government subsidies, changes in renters’ expectations and demands, and investors’ attitudes toward green initiatives can make these investments more economically feasible.

WHEN TO LET GO

Part of the due diligence process is mapping out the right time to exit—whether that means selling or changing the strategy. Core investors should consider exiting an investment when they have achieved or outperformed their expected return levels and can lock in performance fees; the capital cost to maintain the “Class A” status is unfeasible due to functional and/or economic obsolescence at the property; and if an opportunity to convert the property to a higher and better use arises, such as converting apartment units to condominiums. Core-plus investors should consider selling or refinancingtheir investments when they have achieved or outperformed their expected return levels. They should also consider exiting if major capital projects are forthcoming but will not realize an increase in rent because of changing market conditions, like a flattening or drop in revenue projections. Because non-core assets are usually held for a short time anyway, the exit strategies for such investments are typically less about when to dispose of a property and more about how to quickly create a higher value for the property—often through conversion. Investors often consider conversion of multifamily rental apartments to condos or specialty uses like student housing, senior or assisted living, or another alternative real estate use that creates economic value. Prior to three years ago, the most successful and common exit strategy was condominium conversion, whereby investors prepare an analysis of what they can sell the apartments for, given various scenarios of upgrades; determine their expenses; and then forecast their profit. Investors must determine the projected sales price they might obtain from another investor or converter, and whether doing the conversion themselves would be most profitable or even possible, considering their skill sets. Sale velocity is one of the major risks when completing a conversion. The slower the sale velocity, the higher the carry costs or interest expenses, which decreases profits.

ACROSS THE BOARD

Regardless of investment class, investors contemplating an exit of the market always need to be cognizant of the economy, particularly in their region, and how it might influence their profit margin. They should consider having a backup plan in case economic factors like new supply; interest rate spikes; or a recession hurt their net income. Empirical data, along with experience and gut instinct, should be used to accomplish a profitable exit strategy. Divesting real estate is similar to knowing when to get out of the stock market:

There are no absolutes but you can make logical conclusions.

June 2013 Commercial Real Estate Update
(Source: NAR) – With vacancy rates modestly falling and rents moderately rising in commercial real estate sectors, market fundamentals have improved, but financing remains a challenge for small business, according to the National Association of Realtors® quarterly commercial real estate forecast.

Lawrence Yun, NAR chief economist, said the market is showing an uneven recovery. “The wheels appear to be greased for the big players, but not so much for small business,” he said. “Overall, the commercial sectors are firming nicely, with multifamily continuing to show the best performance.”

National vacancy rates over the coming year are expected to decline 0.1 percentage point in the office market, 0.5 point in industrial, and 0.3 point for retail; however, the average multifamily vacancy rate is forecast to rise 0.2 percentage point, with that sector still showing the tightest availability and biggest rent increases.

A companion report, the Commercial Real Estate 2013 Lending Survey, 1 shows widely varying availability of lending capital depending on property size, with a significant disadvantage for buyers of smaller properties.

Commercial sales volume of major properties valued at $2.5 million and above increased 24 percent in 2012 to $294 billion. The uptrend continued during the first quarter of 2013, with a $72.8 billion volume that is 35 percent above the first quarter of 2012. Sixteen markets in the first quarter experienced triple digit gains.

Commercial mortgage-backed securities regained market share in 2012, accounting for 22 percent of lending for major commercial properties. A comparable source was government agencies, followed by national banks, insurance companies and regional banks.

Realtor® commercial members report 85 percent of their clients’ transactions are for purchases under $2 million – generally small businesses. These transactions are financed largely by private investors, along with local and regional banks, marking a bifurcation in capital availability based on property value.

“Despite the improvement for major commercial properties, 52 percent of Realtors® report they had a commercial transaction fail in the past year due to a lack of financing,” Yun said. “In addition, 42 percent of respondents said clients failed to complete a refinancing. Credit for small business remains unnecessarily tight.”

Commercial members report that new and proposed U.S. legislative and regulatory initiatives, and regulatory uncertainty for financial institutions, account for the lack of capital in commercial lending for smaller properties.

NAR’s latest Commercial Real Estate Outlook2 offers overall projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS, Inc., 3 a source of commercial real estate performance information.

Office Markets

Vacancy rates in the office sector should decline from a projected 15.7 percent in the second quarter to 15.6 percent in the second quarter of 2014.

The markets with the lowest office vacancy rates presently (in the second quarter) are Washington, D.C., with a vacancy rate of 9.4 percent; New York City, at 9.9 percent; Little Rock, Ark., 12.0 percent; and Birmingham, Ala., 12.3 percent.

Office rents are likely to increase 2.6 percent this year and 2.8 percent in 2014. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, will probably total 31.7 million square feet this year and 42.0 million in 2014.

Industrial Markets

Industrial vacancy rates are expected to slide from 9.4 percent in the second quarter of this year to 8.9 percent in the second quarter of 2014.

The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.9 percent; Los Angeles, 4.1 percent; Miami, 5.8 percent; and Seattle at 6.3 percent.

Annual industrial rents are seen to rise 2.4 percent this year and 2.6 percent in 2014. Net absorption of industrial space nationally is forecast to total 107.1 million square feet in 2013 and 100.3 million next year.

Retail Markets

Retail vacancy rates are estimated to ease from 10.5 percent in the second quarter of this year to 10.2 percent in the second quarter of 2014.

Presently, markets with the lowest retail vacancy rates include San Francisco, 3.6 percent; Fairfield County, Conn., at 4.1 percent; and Long Island, N.Y., and Orange County, Calif., each at 5.3 percent.

Average retail rents are projected to rise 1.4 percent in 2013 and 2.2 percent next year. Net absorption of retail space is anticipated to be 12.5 million square feet in 2013 and 17.4 million next year.

Multifamily Markets

The apartment rental market – multifamily housing – should see vacancy rates edge up from 3.9 percent in the second quarter to 4.1 percent in the second quarter of 2014; vacancy rates at less than 5 percent are described as a landlord’s market, with demand justifying higher rents.

Areas with the lowest multifamily vacancy rates currently are New Haven, Conn., at 2.0 percent; New York City, 2.2 percent; and Minneapolis and San Diego, each at 2.3 percent.

Average apartment rents are likely to increase 4.6 percent this year and another 4.6 percent in 2014. Multifamily net absorption is expected to total 276,300 units in 2013 and 243,800 next year.

Commercial Real Estate Update: Sam Zell “Comes Clean”
In an interview in the February 2012 issue of National Real Estate Investor, Sam Zell, chairman of Equity Group Investments, stated that the commercial real estate industry needs to “come clean” with expectations. Zell said, “It’s strictly that we have a lot of stuff in the system that is mispriced and not realistically held.”

The cover story, also available online at nreionline.com provides Zell’s candid views on the 2012 election, public versus private commercial real estate investment and construction trends.

Some of Zell’s views include:

“The good news is that with the exception of apartments, there is little or no new supply. And I don’t think we’ll see much new construction in 2012.”

“Overall, real estate is about supply and demand. I am concerned about the demand, but I’m comforted by the lack of supply.”

“Going forward, access to capital is going to be the governor of the real estate business. Given that, in the current climate it’s likely that being public with that kind of debt-to-equity ratio is likely to be more successful going forward than the ‘leverage it up and take it private’ model.”

“After sitting down with Mr. Zell, I understood that he is not the person that most people want to believe he is,” explained NREI’s Editorial Director, David Bodamer. “He is a hard worker, knows the business from front to back and doesn’t regret the decisions he’s made.”

“This exceptional article proves once again how National Real Estate Investor continually maintains its leadership as the number one news and information source in the industry,” said Jonathan A. Schein- Practice Leader of Penton’s Commercial Real Estate Group.

Why Property Management is the Key to Success
05/17/2013

Professional property management is an important component when considering any property deal structure. And yet, occasionally investors that think they will save money by managing the property themselves and thus eliminate professional management form the deal analysis as a way to save money and increase profits.

Big mistake. Professional property management will actually add to the bottom line as it allows the investor to focus on the original investment strategy, have a property that performs at it’s peak (income high, expenses low), and is ensured the property is always marketable and attractive for sale.

Professional property managers allow the owner to focus on the big picture and not get bogged down in the day-to-day grind of property management. Owner’s who self-manage quickly run out of energy and don’t have the capacity to handle the small stuff not to mention the time for what’s next.

Believe me, you want your property to operate at peak performance. A good property manager has access to essential market knowledge and experience to maximize rents, minimize vacancy, get competitive quotes (this process goes way beyond a Google search for vendors or a peak at Angie’s List) for properly maintaining the investment.

Professionally managed properties consistently perform better by generating more cash flow, being properly maintained and having the appropriate paperwork necessary always available.

Don’t skimp by doing it yourself; it will cost you dearly in the long run.

Where are we going in Commercial Real Estate
The giant that was the commercial real estate market has fallen. The old saying goes, “the bigger they are, the harder they fall,” but this adage is usually used for examples that don’t have the chance to recover. The commercial real estate market is pushing to repossession itself for a positive 2011, and so far the efforts seem to be working.

Taxes are a big reason for a possible optimistic outlook in the near future for commercial investors and their properties. In previous years, the federal government has tried to spur the growth in the residential housing market by using tax incentives. This act, called the Community Recovery and Enhancement Act, is meant to jump start investment and could help prevent job losses, stop foreclosures and strengthen banks. Investors would be able to deduct losses from their taxes and put more capital into new projects

This act is not the only thing helping out the market. A slew of billion dollar investments have significantly improved the economic conditions past where they once were. These ventures have not only slowly increased many banks’ confidence in beginning the lending process again, but it also decreased the amount of outstanding commercial mortgage debt. Now that commercial real estate is showing signs of turning around, the signs are looking good for potential buyers. Now commercial real estate and residential real estate are pretty different when you take an outside look at the definitions: commercial real estate is for businesses that want to turn a profit while most residential real estate is for personal use. The two markets, though separated by trade, are both connected through the market that drives housing prices to fluctuate. The market mainly varies because of the amount of cash flows available to the public and the rates that banks are willing to charge. During this recessions (still ongoing but starting to free up in some areas) cash flows from home and business owners dried up and forced foreclosures that put owners and renters in dire consequences.

James Antoyan, at JLA Real Estate group is finding that due to factors previously stated, the tables are starting to turn in favor of buyers. Losing a major tenant is a painful and potentially harmful financial event for a real estate owner and that is why rent and housing prices are starting to come down in many areas. Even though housing prices may be getting cheaper, possible buyers may not have the credentials to purchase them. In the past three years, the Inland Empire has had the highest amount of foreclosed houses on the market with a staggering 62% of residential houses sold coming from distressed sellers. All of these families who were foreclosed upon will need to take five to seven years to try and rebuild their credit scores in order to get a bank to trust them again with another loan. Owners are realizing that buying property can be a fickle negotiation right now and are offering many reduced renting prices because they need the revenues just as badly as the tenants need a place to live.

Three years after one of the biggest market collapses ever, the market is slowly being rebuilt from the ground up with the customer in mind.

Joint Ventures in Commercial Real Estate Developments for the Year Ahead: 2011
Let’s be realistic: project funding since the collapse of Lehman Brother’s (28 months ago) has been nearly impossible to attain. Developers have come to the painful conclusion that the old guard banking institutions are not funding and will not be any time soon. The only viable funding sources are found in the private sector. It is a new world for everyone – developers, lenders, realtors and consumers.

Unfortunately, there have been a rash of unscrupulous lenders, brokers and con artists that have preyed upon desperate developers. These criminals typically charge high upfront fees, are adept at telling developers exactly what they want to hear…. and never deliver. What remains in the market is a plethora of great projects with substantial equity that simply have not had access to the capital to complete their projects.

Because getting institutional funding is as likely as having an elf deliver you cash, developers are braving the waters of joint venture (JV) financing. JV programs are available and a seriously viable option for project funding in 2011. Unfortunately, many developers think they are entitled to more than what the market is willing to offer in financing their project.

In any JV relationship, the JV funder expects the developer to bring more to the table than just a good idea. In 2011, all JV funding partners want to see that the developer has some of the proverbial “skin in the game”. To be taken seriously, the developer needs to show at least 5% (of the funding amount) of equity into the project. Those with little or no equity can be funded, but will likely be in a management position with a small equity position.

Those that have no equity (real, train-ridin’ dollars) in their project are most prone to be taken by upfront fee scams and joker brokers that have no idea what the market will realistically offer. Remember, the projects are competing in a global market where most developers have 25% or more equity in the project and have a predictably profitable project. It is a huge risk for a JV funder to jump into a project that has no existing equity. The market is flooded with great projects that simply ran out of funds when institutional banking collapsed. That being said, to compete in the JV market, I have the following advice:

  1. Have at least 5% equity (your own capital or equity) into the project or find an equity partner to be taken seriously!
  2. Be aware of other projects competing for the same JV dollars. Is your internal rate of return competitive?
  3. Stay away from brokers and lenders with exotic funding products that have high upfront fees. Does your funder have the capital (good) or does he have to create it (bad)?
  4. Remember,these criminals are great at telling you exactly what you want to hear. (No one is going to give you 50% of the project if you have no equity and bring only an idea to the JV funder).
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