Active Properties

Here, Barbara Holland, CPM, of H&L Realty & Management Co. in Las Vegas, identifies some of the biggest liability mistakes common among those who haven’t yet learned the ropes.

1. Not having a written property management agreement. Even if you’re just helping out a friend and managing the property for free, you’re walking on thin ice if something comes up—like the need to evict the tenant.

2. Using a makeshift lease agreement. These agreements are easy to find on the Internet—maybe too easy. If the agreement isn’t thorough, or if it doesn’t include sections that are required by your state law, you’re leaving yourself exposed.

3. Not depositing the security deposit in a proper trust account. The proper place for the money isn’t with the owner. In some states, the trust account money must be in a separate property management trust account and not in the broker’s general sales trust account.

4. Not having the tenant sign a move-in and move-out form. This form includes a property condition disclosure. Without it, you have little recourse if a unit is damaged beyond the usual wear and tear.

5. Trying to incorporate a lease- purchase arrangement into the lease agreement. There’s nothing wrong with doing this, but it’s complicated, and if it’s not done properly, you could invite trouble. For instance, you could have a difficult time evicting the tenant for nonpayment of rent if the court looks at the arrangement as a purchase agreement.

Real Estate News & Commentary by Jeff Adams

With the prices of conventional real estate at or near cyclical highs, there is a growing interest by investors in commercial real estate investing, which have many of the financial advantages, including predictable cash flow.

These days, money is doing a delicate dance where commercial real estate is concerned. The slowing economy has pinched many an investor, and with it, many new development plans have been scotched.

But surprisingly, real estate is weathering the storm nicely. Unlike the early-1990s depression, supply and demand have remained fairly well in check across most property types; and the free-flowing capital supply that was so prevalent then isn’t around now to exacerbate the slowdown.

Another telling sign of the times: REITs are back. The predominant perception last year was that REITs were dead, but what a difference a few quarters can make. REITs are now issuing millions in new debt for the first time in years, and their merging mentality will create new monied players in the years ahead.

And then there’s the commercial mortgage-backed securities (CMBS) market. It, too, was all but given up for lost in 2000. Things really weren’t so bad, and this year is looking a lot better.

Still, there is reason to tread carefully. Perhaps New York-based Ernst & Young sounded the note of caution best in its annual update on the CMBS market: “The most pressing issue on everyone’s mind is the imminent end of the good times in real estate, the inevitable down cycle that may finally be upon us. Excruciating diligence in underwriting commercial mortgages has never been more appropriate.”

Thomas Jaekel, managing director in charge of Chicago-based Cohen Financial’s merchant banking unit, sees plenty of volatility in both the debt and equity markets right now. “On the debt side, the traditional yield curve was inverted during the first quarter, with 10-Year Treasuries below short-term interest rates,” Jaekel said. “This inversion led to an increase in long-term, fixed-rate financing.” In fact, about 70% of Cohen Financial’s first-quarter business was fixed rate, as opposed to 40% fixed and 60% floating for 2000. Jaekel expects the recent interest-rate reductions to keep short-term rates lower, and with them, the shift back to more floating-rate transactions.

Gaylord L. Toft, managing director of investment services at Chicago-based Transwestern Commercial Services, says floating-rate debt has already started to gain popularity.

In many cases, despite the historically low cost of long-term, fixed-rate debt, borrowers have been opting for floating-rate debt since either they expect rates to continue to fall, or they hope not to be borrowers for long, Toft said.

“They opt for the flexibility of pre-payable debt, avoiding the potential for penalties with long-term, fixed-rate borrowing, due to yield maintenance requirements, often planning to return to the equity or for-sale market in the near future, with the hope that equity demand and prices will soon turn up,” Toft explained. “Or they wish to be able to convey assumable, pre-payable debt, which will grant any potential buyer flexibility, so that debt will not represent an impediment to any future equity deal.”

In the bigger picture, Kempner maintains that long term, “we may be seeing a permanent shift toward real estate-based securities, both debt and equity. Many investors and investment managers have received an expensive lesson in the benefits of well-diversified portfolios. What we may be seeing is not a transitory shift toward REITs and CMBS, but a more permanent reallocation toward real estate that should carry through for a number of years, particularly as now-chastened baby boomers facing retirement reallocate toward income-producing securities.”

The CMBS market has ridden one of the wildest roller coasters around, but after a slightly weaker 2000, the sector is poised for a significant comeback.

Going forward, nearly everyone has apartments near the top of their popularity lists. “If I were to pick one property type that was most-favored it would have to be multifamily,” said John Gough, managing director at San Franciso-based LoopLender, the online mortgage origination arm of LoopNet. “Multifamily transactions have become a staple for conduit securitizations, insurance companies and for regional banks alike. Of the 46 loans closed by LoopLender over the last 12 months, 58% have been secured by multifamily property.”

For more information, visit Jeff’s site for more information, and additional real estate information at:

Ray Alcorn details the top 5 mistakes that is a good exercise to read, but perhaps not in the domain of “experienced” investors.  The mistakes include:  Lack of market knowledge – Lousy due diligence - Bad math – Over-leverage - No plan, and the article give further expansion on this line items.  The article may be viewed at:  http://www.creonline.com/articles/art-319.html

Fabulous article by Brad Feld – highlighting Heidi Roizen ’s key elements that investors are aware of or should be aware of when it comes to the CEO of a company.  You will  find the link in this article for the specific details, but I just had to cut/paste Heidi’s list on key clues that the CEO must go.  Please link to Brad’s article for all the details in context, and additional information.

http://www.feld.com/wp/archives/2005/09/signs-that-a-board-should-consider-replacing-the-ceo.html

1. I never hear from the CEO (other than at board meetings) except after I initiate the contact (or worse, when he does not respond even when I send an email or leave voicemail (i.e. avoids responding to me.))
2. All communications from the CEO are “sales pitches”. If the news is all good, I know something is wrong. If all communications are “presentations” (instead of interactions), something is wrong. The corollary to this is when any bad news comes to me from a back channel (i.e. a customer, another board member, or (most often) another employee of the company.)
3. There is odd body language / eye contact in management (board or otherwise) meetings among the direct reports. This is hard to articulate, but I can just see/hear/feel it when the management team disagrees but does not feel that they can have a dialogue about the issues.
4. The “opportunities” always turn into “learning experiences” – that is, when I am constantly told about great deals about to happen, and then it always ends up that the deal doesn’t come in as planned. This is okay if it happens occasionally, but not if it is common practice. This dynamic would be fine if the plan were being met, but it never is in this scenario.
5. There is a revolving door at the VP level. I get very suspicious when lots of people leave for “lifestyle” issues, particularly when they are hyped as heroes when they are hired, yet I am told when they are leaving that “it is actually good this person is leaving as she wasn’t very good.” A corollary to this is when the CEO constantly blames (or complains) about one of his direct reports but then hangs onto that person because confrontations are unpleasant and/or they don’t want to deal with the pain of going through the replacement process.

Following are three more that are not really signs that you should replace the CEO, but rather are signs that you should have ALREADY replaced the CEO (and that you are now likely in deep shit.)

1. Not facing fiscal reality. For example, the company is 3 months away from running out of cash, there is no clear financing in site, and the CEO is still refusing to take “survival measures” to cut staff or do whatever it takes to keep the company afloat. As my partner Rex Golding likes to say, “hope is not a strategy.” When the board has to force a plan/budget change, it is too late.
2. Doing desperate deals. The CEO starts coming up with deals that make no sense but have big names or big numbers involved. Hail Mary management – very bad.
3. Pandering to the board. The CEO takes every request or idea from every board member and acts on it as if it is a smart idea, with no thoughtfulness, discussion, and no generation of consensus. “Please, if I think you’re very smart and I am very responsive, can I just keep my job?” 

Ray Alcorn is providing another extensively detailed article on the due diligence of a commercial real estate transaction.   Key features of the article are:  assessing value of commercial, NNN leases, details of the Leases, study of the insurance policy, the quality of the tenants, and very useful, are Mr. Alcorn’s very detailed: Preliminary due diligence checklist – Financial records, to phone system, to tax returns to the Deed, and his detailed Comprehensive due diligence pre-closing list -  ALTA – Estoppel – Title search. 

To review the contents of this informative article, and the checklist, direct your browser to:  http://www.creonline.com/articles/art-148.html

Ray Alcorn does a great job in his article detailing the Capitalization CAP rate.  There is a solid example to illustrate or determine the CAP rate, and how it can or will apply to the commercial real estate investor.   The key factor of the CAP is determining the NOI (net operating income) and how this is a factor.  The Mr. Alcorn’s full article may be viewed at:  http://www.creonline.com/articles/art-216.html

Scott Meyers, CSSM, provides an article that presents ‘recession proof, and steady investments that are inexpensive and easy to maintain.  It will not come as a surprise that many of these investments are Storage Facilities.  Not glamorous, but I bet car washes my be a bit more on the maintaince, but a steady investment as well.  The article may be viewed at:  http://www.creonline.com/articles/art-380.html

10 very basic commercial real estate terms, that also apply in some cases to residential real estate.  Terms include:  appraisal, broker, build to suit, concessions, escalation clause, HVAC, Lease, Lien, Sale-Leaseback (which got a lot of residential persons in financial trouble), and sublease.  More details may be reviewed at:  http://www.allbusiness.com/business-finance/leasing-office-leasing/1409-1.html