LA-CRE Alliance

The Cruise Web, Atkins NA Sign Leases at Calverton Corporate Center in PG Co.

2011-06-22T12:49:00.000-07:00

http://dcrealestate.citybizlist.com/5/2011/6/20/The-Cruise-Web-Atkins-NA-Sign-Leases-at-Calverton-Corporate-Center-in-PG-Co.aspx

Manditory Energy Disclosure in California

2009-11-01T19:44:00.000-08:00

California has long been known as the leader with environmental laws. Now the state is again leading by requiring mandatory energy disclosure for nonresidential buildings with Assembly Bill 1103 and Assembly Bill 531.

The governor signed AB 1103 in 2007 which among other things requires Energy Disclosure for nonresidential buildings when they are sold, leased, or financed. The bill requires that building owners enter their buildings’ energy related data into EPA’s Portfolio Manager database and get an Energy Star rating. Building’s energy consumption is rated against similar buildings, then assigns a score from 1-100, with 100 being the best most energy efficient score. The bill originally required that energy disclosures begin in January of 2010. In October of 2009 the Gov. Schwarzenegger signed AB 531 which deleted the January 1, 2010 deadline and replaced it with a disclosure schedule developed by the California Energy Commission (CEC).

Even though the energy disclosure requirements will not hit the unprepared real estate industry in January of 2010, building owners would still be well advised to get ready for the world of energy disclosure.

In anticipation the need to disclose their buildings’ energy rating, what should real estate owners do now? Building owners should consider ordering Energy Audits or energy bench marking reports from an energy engineering company. Energy Audits can tell them not only what their energy expenditure is, but also how to lower it. Incidentally, this also solves the problem with Portfolio Manager’s operational rating system, since an energy audit is essentially asset-based and will paint a more complete picture for prospective buyers and tenants.

Let’s face it – the future is green. Being environmentally friendly is not only politically correct, it is also fiscally responsible. Despite the delay, it seems inevitable that a better building energy rating is going to become synonymous with better business.

Probable Maximum Loss Reports for Lenders

2009-11-01T18:52:00.000-08:00

In today’s market lenders must actively manage all type of risk to their portfolio, including seismic risk. The lender’s tool of choice of managing seismic risk is Probable Maximum Loss (PML) reports. The PML predicts the amount of damage a building will experience with the 475-year earthquake happens. The damage is expressed as a percentage of the replacement cost. Most lenders consider a 20% PML an unacceptable risk without some other sort of mitigation such as insurance.

PMLs are a tricky product for lenders and real estate investors as there is more than one way to calculate a PML. Methods employed to calculate the PMLs vary significantly. Recently, ASTM has published two standards ASTM 2026-2007 and ASTM 2557-2007 to address this issue. By following these standards a more consistent product will be delivered, but the ASTM Standards do not go far enough. ASTM 2026-2007 is very flexible—it is more or less a set of definitions and a tool box so that engineers can at least use terms consistently. ASTM 2557-2007 provides specific recommendations for lenders.

Lenders should insist that their engineers provide PML Reports transparent, understandable, and consistent with others in the standards of the financial industry. One way to achieve transparency is by requiring engineers to show the math. Giving a PML result without showing how it was derived makes conducting a peer review difficult.

The last piece of advice for lenders is to work with an engineering firm with a registered engineer. Ordering engineering report like a PML from an environmental consulting firm is generally a mistake. The practice of structural assessment and PML modeling is clearly in the domain of the engineering profession.

Probable Maximum Loss Reports are a great tool to manage your seismic risk; however, be careful with this product as PMLs are not as standardized as other due diligence products such as Phase I Environmental Site Assessments and Property Condition Assessments.

SBA 504 Loan Program for Energy Efficiency

2009-06-03T17:36:00.001-07:00

The Small Business Administration has a plan to stimulate commercial real estate and fund energy upgrades to buildings. SBA 504 Lenders normally benefit from up to a $2 million loan guaranty, now under the new SBA 504 Loan Program for Energy Efficiency Projects, SBA Lenders will enjoy as much as a $4 million loan guaranty. As SBA Loans allow for up to 90% leverage and currently offer rates below 6% these loan types are great opportunities for qualifying borrowers.

To qualify for the additional loan amount the borrower will need to show a detailed plan on how they will increase their energy efficiency by 10% or install a renewable energy source. To accomplish the former, the borrower will need an energy audit of their current building and a plan projecting future energy usage. The energy audit and the action plan are provided by firms such as Partner Energy and do not cost much more than a Phase I ESA.

In the end, the borrower must follow through with the plan, but 10% energy efficiency improvement is easily achievable in most instances. The Energy Audit will likely reveal several relatively inexpensive ways to improve energy usage and the subsequent investments will likely have payback periods of less than 5 years.

The bottom line is that the borrower gets a great loan in terms of leverage and rate and is required to make a no-brainer investment to qualify.

National Office Market Report 4Q08

2009-03-03T18:09:00.000-08:00

It's safe to say that the commercial real estate world has changed dramatically in a very short period of time. If you happen to have a viable business that is capable of executing leases or purchasing facilities, what a great time to be in the market. Landlords are giving concessions on leases we have not seen for years and submitting proposals to tenant brokers before the tenant has even toured their location! As for purchasing facilities, you still need approximately forty percent of the purchase price in cash to get any decent financing and the banks still want full recourse loans. This should change in the near future and I certainly hope it does sooner than later. The following report will give you an idea of where office rents around the country are headed: http://www.newmarkkf.com/Uploads/FileManager/Market%20Reports/national_office.pdf

Phase I Environmental Reports for Foreclosures

2009-01-30T10:06:00.000-08:00

Given today’s economy, foreclosure transactions are becoming the transaction type of 2009. How is pre-foreclosure environmental due diligence different from new loan due diligence? First, we must consider the difference to our client’s exposure to environmental risk.

In lending on real estate, the lender is generally more concerned with the quality of the collateral rather than with the management of any environmental liabilities associated with the property. As the bank has no direct ties to the tenants/occupants of the property, tenant health issues are a distant concern.

In a foreclosure transaction, the lender will generally take title of the property, and despite the potential protections for the Secured Creditor Exemption, potentially expose the bank to environmental liabilities associated with the property. The once distant concerns are now the direct responsibility of the bank. As such, it would be in the lender’s best interest to be more cautious with any environmental concerns, especially when grey areas arise. In a new loan, when the Phase I Environmental Site Assessment identifies a marginal issue, the lender can occasionally write off potential environmental risks knowing tha that the problem is not theirs. But once the lender assumes title of the property, these risks and expenses often fall on the lender and/or the eventual buyer of the asset.

In addition to the ASTM E1527 standards, pre-foreclosure Phase I ESAs may include non-ASTM scope issues such as asbestos, lead, radon, mold, and vapor intrusion as a lender taking title is very concerned with the property being used safely by occupancy.

In the world of SBA, the consultant and lenders should follow scope requirements dictated by SBA SOP 50-51. Note these rules are set to change with an updated version of SOP 50-51 scheduled for 2009, and the new version will be much more prescriptive.

Finally, site access is always a potential problem on foreclosure transactions. Oftentimes, site contacts for a property are the borrowers who defaulted on the loan. Therefore, it doesn’t come as much of a surprise when the site contacts are uncooperative.

Though, at times, a difficult and challenging task, the Phase I ESA assessor must ensure that the appropriate measures are taken to protect the interest of the client as the potential for liability for the lender is much greater.

The Third Economy and Commercial Real Estate

2009-01-10T12:08:00.000-08:00

I think all of us involved in commcercial real estate industry are very concerned about the CMBS market and how it is going to effect our clients. The recent news of Vornado and other signifcant landlords looking to the government for relief through TARP certainly raised the level of concern and the recent news of Hines taking control of Cabi's 33 properties in Southern California just proves that we are in the beginning stages.

In reading this insightful article by Irving Fisher, "The Debt-Deflation of Great Depressions," our current economic environment may be a reprint from the combination of excess debt and the utilization of risk.

http://www.newmarkkf.com/research/whitepapers/library/third_economy.pdf

Update on TARP: Kashkari's speech

2008-12-18T11:55:00.000-08:00

Neel Kashkari's recent testimony explaining why he and Secretary Paulson believe the TARP Capital Purchase Program is working, and how it should lead to more lending soon is discussed at http://www.seyfarth.com/sertalert/, which is my firm's Strategic Economic Response Team website. This website provides an overview of the TARP legislation as well as periodic updates about recent developments in the area.

Foreclosing Lender: Understand the Condition of the Property

2008-12-08T13:07:00.000-08:00

In a foreclosure, a workout, or a short sale a clear understanding of the condition of the building in question is typically more central to the transaction than in a normal real estate sale.

For the past fifteen years I have done Property Condition Assessments (PCA) on commercial real estate for lenders and buyers. In these transactions my mission was to find all of the property’s physical deficiencies and to project the capital improvement budget for the next 12 years. However, these transactions were typically a done deal by the time the principals hired me. Of course, every so often I would find a structural problem or a major water intrusion problem that might derail the deal, but in most instances my PCA report was used to justify the decision that was already made.

Foreclosures are different. First, foreclosure assets are far more likely to have significant deferred maintenance issues or even just out right waste. My clients have to deal with a lot of issues on the way into a transaction that my PCA illuminates. Lenders must mark to market and most agree that the cost of immediate repairs and necessary capital improvements must be accounted for. Also, lenders must immediately try to sell the asset, often for a loss. For a special assets officer to sell an asset for a loss he or she must justify the transaction internally and the condition of the asset is primary to that decision.

Finally, the pre-foreclosure PCA typically doubles as a pre-sale PCA once the lender takes the asset to market. Buyers of foreclosure will negotiate hard and try to get the asset for rock bottom prices. An accurate PCA protects a lender against an overly aggressive buyer, exaggerating the physical deficiencies.

Overall the foreclosure and eventual sale of an asset is a far more complicated set of transactions than a new loan and a clear understanding of the asset will pay.

"Poverty Effect": what do latest grim home foreclosure figures do to retail sales?

2008-12-04T16:13:00.000-08:00

According to the Wall Street Journal’s December 2 article, Trans Union predictions, TransUnion LLC analyzed about 27,000,000 consumer records in its database and predicted that 7.17% of consumers will have mortgages that are 60 days or more past due in the fourth quarter of 2009 – the highest level since TransUnion started tracking these statistics in 1992. (By contrast, TransUnion expects a delinquency rate of 4.67% at the end of 2008.) More adjustable rate loans are due to reset from 2009 through 2011.

Locally, Reuters reported that the volume of Los Angeles County home foreclosure auctions rose again in November (to 3,685, up 51% year over year and up 54% from October). This happened despite the implementation of a new California state law passed last summer which requires lenders to contact homeowners to explore foreclosure avoidance options during a 30 day waiting period, according to RE research firm PropertyShark.com. Click here to read the Reuters article.

Even Bernanke is worried. He’s been quoted (in Forbes, among others) as saying that the U.S. foreclosure rate remains “too high,” creating “substantial social costs” as the subprime mortgage mess and ensuing financial crisis wreaks havoc on the economy. The Fed chief said "more needs to be done" to avoid further “unnecessary” bank repossessions – a departure from his earlier position opposing a bill that would allow bankruptcy judges to modify mortgages to save homes.

It’s hard to tell yet what the “poverty effect” will actually do to retail sales this year. Bloomberg focuses on the report that November retail sales reflect the worst monthly drop in four decades in its December 4 update; but CNN Money says the drop was not as bad as expected here. Most reports indicate the deep promotional cuts made by retailers are generating some traffic and sales; the question seems open as to how profitable these tactics will be.

Then the next question for commercial real estate will be: what’s the effect on retail stores, their leases and their landlords? And, in turn, their lenders? Your thoughts?

Current Trends in Real Estate

2008-12-04T15:39:00.000-08:00

Bob Gardner, Managing Director of Robert Charles Lesser & Co., recently gave a very interesting presentation about the current trends in commercial real estate to the ULI Los Angeles District Council.

Among other trends including what areas/types of real estate are being hit hardest in the current recession and confirming the perception that credit is very tight, his presentation includes some charts showing the number of building permits applied for before, during and after several recent recessions. The trend lines don't seem to have a typical pattern from recession to recession, so are not much of a guide in themselves to how deep/long a recession will be.

Other charts show the likely effect of demographic trends (particularly the huge drop in numbers from the Baby Boom generation -- aged 43 - 62 -- which is 27% of the population, to Generation X -- aged 27 - 43 -- which is only 18% of the population, which will be succeeded by Generation Y -- now 8 - 27 -- which is 27% of the population).

Bob suggests that these demographics favor smaller (and greener) units and urban development close to transit or walkable neighborhoods, both for newly formed households seeking their first apartment/condo, and for empty nesters seeking to move down from larger houses to lifestyle product.

If you are interested, you can view Bob's presentation on his website by clicking here to see a copy. Feel free to add your comments and opinions.

Welcome to the LA CRE Alliance blog!

2008-12-02T17:56:00.000-08:00

Our goal is to provide an electronic "watering hole" to discuss Southern California commercial real estate and related topics. We don't plan to talk about specific deals here, though.

We hope you will give us the benefit of what you know and your opinions about relevant issues affecting commercial real estate right now. We hope that you will find this blog useful and opinionated -- and we look forward to your comments.