Browse Month: November 2012

Hurricane Sandy: The Commercial Property Toll

Crane Collapse on 57th Street
Crane Collapse on 57th Street (Photo credit: Sarah_Ackerman)

First, the good news. With thoughts to those on the eastern seaboard still struggling with interrupted electrical, infrastructure damage and the like, it appears that the aftermath of Hurricane Sandy is not going to seriously disrupt the wider US economy.  That’s not to minimize the very real trials of our friends out east, it’s rather to put things into perspective. Sandy’s huge impact up against the monumentally enormous, single largest economy in the world  – the $14 trillon GDP US economy – means at a big enough scale, Sandy might just be a blip on the books.

That said,  Sandy’s impact to commercial property in the northeastern seaboard is significant and still being compiled:

  • Some risk management professionals are touting disaster models that say that Sandy will top out last year’s $4.7 billion in damages left by Hurricane Irene.
  • Bloomberg reports a significant fraction of lower Manhattan’s office space is still not fit for occupation.  Reports were up to a third as of November 13th.
  • The Fed puts Sandy’s impact on industrial production at a loss of 0.4% in October.  Excluding Sandy’s impact, production at US factories, mines and utilities would have been up about 0.6 percent.
  • Due to the closure of Wall Street, delays were felt in pricing of over $7 billion worth of commercial mortgage-backed securities, including bond issues from Motel 6 and Las Vegas’s Fashion Show Mall.
  • Sandy-induced interruptions in the foreclosure pipeline ranged from courthouse closings to the GSEs announcing a 12-month freeze on New York and New Jersey foreclosures on loans held by Freddie Mac.
  • Commercial lease terms plus Sandy equals rent interruptions.  Since most commercial leases stipulate a landlord needs to provide working conditions as a stipulation for collecting rent payments, landlords are either dipping into their own pockets to find space for tenants in unaffected areas, or seeing no rent as the recovery proceeds.
  • Physical damage to structure and contents of office, industrial, retail and multifamily.
  • Business interruption caused by storm surge.
  • Losses to infrastructure and follow-on business interruptions. See: flooding of tunnels and subways.
2005’s Katrina topped $100 billion in damage; the number suggest that this time around, New York and New Jersey could have had it worse with Sandy.

NAR Member Discounts: Tech Deals From Dell, Lenovo, HP And More

NAR 2012 Realtor Benefits Partner CatalogLooking at your technology strategy in the coming year?  Commercial property professionals, take note. REALTOR Benefits® Program partners are offering special technology product pricing to NAR members.  Take a close look at the entire REALTOR Benefits® Partners catalog of offerings by downloading the 2012  catalog. 


  • Save up to 47% on Dell laptops, desktops, servers, workstations and select accessories/peripherals.
  • Buying through Dell also delivers key business benefits, including free technology consultation with an experienced small business advisor trained to recommend solutions tailored to needs, preferences and budget.
  • Dell offers REALTORS® special pricing on select business and home products, free US ground shipping,
  • To contact: click or call the dedicated NAR member phone number 1-800-757-8442. Mention the NAR Member ID# CS8569483


  • HP has offers with special pricing for NAR members on a select variety of laptops, desktops and printers.
  • Visit the HP site to shop now or call 1-800-888-8177 and mention code NAR1.
  • As always, NAR members also get free U.S. ground shipping and free assistance in choosing the right technology from a specially trained sales team, along with award-winning customer support.


  • Shop now and avoid the holiday rush. Save big on select Lenovo Thinkpad and IdeaPad laptops through Nov. 30. You’ll need to create an account in order to see the best deals. Sign-up is fast and easy. Once you’re in, use the following coupon codes:
  • Save 10-20 percent from Nov. 19-25 use coupon code “BLACKFRIDAY”
  • Enjoy more discounts from Nov. 26-30 use coupon code “CYBERMONDAY”
  • Additionally, enjoy Lenovo’s “You Pay What We Pay” employee pricing special offer, going on now through Dec. 31, 2012.


Changes In Using SEC Rule 506 For Commercial Property Investment


With lender credit to commercial property remaining shy and sluggish years after the housing bubble, it’s more important than ever to be aware of investment capital options for commercial property transaction finance.  The act of raising capital by the offering of securities for such transactions or projects is highly regulated and rightly so, but changes are afoot in key regulations and might provide ways forward for property deals that would otherwise be held up for lack of access to capital markets.

[DISCLAIMER: Remember: nothing you read at The Source is to be construed as legal advice!  Obtain experienced securities counsel before using any technique regulated hereunder.]

What is Rule 506?

Under the Securities Act of 1933, any offer to sell securities in the US must either be registered with the United States Securities and Exchange Commission (SEC) or meet certain qualifications to exempt them from such registration.  These exemptions for registration requirements are described in SEC Regulation D, or “Reg D”.  Some companies are allowed under Reg D to sell securities without having to register the offering with the SEC, which can make access to capital markets a possibility for companies not able to bear the costs of SEC registration.

A reading of the Reg D text spells out what the purpose behind the regulations are – to ensure, among other things, that offers to sell securities are limited to investors meeting certain criteria of “sophistication” and “wealth” and “accreditation”.   These and other key terms have specific meanings in the regulations and need to be very well-understood before offers of securities are made.  Further, such offerings have been historically prohibited from being “general solicitations” announced with “general advertising”.  It’s these prohibitions concerning communications and solicitations that are changing.

The JOBS Act Relaxes Regulations For The First Time In 80 Years

On April 5th, 2012, President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, which is the first relaxation in Reg D in its over eighty years as a law. In response, SEC has proposed amendments to offerings under Rule 506  that include:

To implement Section 201(a) of the JOBS Act, we are proposing to amend Rule  506 to provide that the prohibition against general solicitation contained in Rule 502(c)  shall not apply to offers and sales of securities made pursuant to Rule 506, as amended,  provided that all purchasers of the securities are accredited investors and the issuer takes  reasonable steps to verify that the purchasers are accredited investors. In addition, we are  proposing to amend Form D, which is a notice required to be filed with the Commission  by each issuer claiming a Regulation D exemption, to add a check box to indicate  whether an offering is being conducted pursuant to the proposed amendment to Rule 506 that would permit general solicitation.

Broadly speaking, private placement just got easier.  Could this relaxation of regulation open up capital markets in significant amounts? A study of SEC’s own data and that of Thompson New Issues says that in 2011, the estimated amount of capital (including both equity and debt) raised in Rule 506 offerings was $895 billion, compared to $984 billion raised in registered offerings.  The answer appears to be a qualified yes.

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Healthcare Real Estate: The Consolidation Trend

A photo of the sign out front of University Ho...

In the wake of the recent Healthcare and Real Estate Summit held in Chicago, a clearer picture is beginning to form of healthcare business trends and property dispositions going forward nationally under the Affordable Care Act (aka “Obamacare”).  The commercial property professional in most markets is a stakeholder in these trends in a few different ways.

Healthcare Property Consolidation 

The property market in the hospital and health care provider segment faces a series of changes that are at bottom designed to provide greater efficiency in delivery of healthcare services.   While the changes are not sweeping or alarming, nor do they reflect anything like a “takeover” of health care by entities other than health care providers, they are significant in property terms because of the trend of consolidation.

The already-existing national trend of hospitals establishing off-campus outpatient facilities and specialty practices is dovetailing with the business plans and exit strategies of independent practices, who are finding their profitability declining.  Owing to the rising costs of medical care provisioning –  driven by everything from very unwieldy and complex billing struggles to the wider economic picture where six out of ten US doctors reporting that their patients have difficulty paying for care – entrepreneurial physicians will increasingly see buyout offers from hospitals as attractive way to get out from a lease or to sell a building.

Sharing Of Resources Includes Square Footage

Controlling of costs and maintaining high quality of care means an increase in sharing of developed space.  The electrical, plant, IT and environmental requirements of healthcare construction represent sunk costs that need to be leveraged across a greater number of health care practitioners going forward.  Beyond that, stringent requirements for information technology updates for medical recordkeeping and the aforementioned billing will continue to be a major driver for the sharing of health care delivery facilities meaning labs, waiting rooms, exam rooms and the like.

The commercial property strategy that wins is one that finds solutions  for sellers and buyers in support of the consolidation trend.

Doctors Wondering If They Should Own

On the sell side, drivers of the consolidation trend are reflected in the position paper “Should Docs Own Office Buildings?”, by Robert Rosenthal and Barry Weinbaum of Pacific Medical Buildings. While certainly written from the point of view of advocating such ownership, the paper’s description of exit strategies for doctors looking to cash out of such investments rings like a bell for the commercial broker with experience in IRS 1031 tax-deferred exchanges.  If the prevailing trend is doctors on the way out of such properties in advance of hospitals and healthcare providers moving headlong to a distributed model driven by cost-sharing, the commercial REALTOR® would do well to watch the local market for examples and be ready to provide a key role in the business plans of doctors.


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NAR Conference & Expo: Inland’s Patricia DelRosso Talks 1031 Exchanges


Tax-deferred exchanges of commercial property can postpone and even eliminate federal taxes due on the sale of properties that qualify for tax-deferred status.  Since 1921, the IRS Section 1031 exchange rules have been in place with the intent and effect of generating capital for investment.  Tax deferment on an exchange of property in “like kind” as 1031 stipulates is effectively an interest-free loan from the federal government in the amount of the taxes that would have been due on a simple sale.

As great as that sounds, navigating the obstacle course in qualifying is a challenge for most, meaning it’s a full-time job for some. Patricia Del Rosso of Inland Private Capital has built a major practice in 1031 transactions, and came to talk about 1031 to clients trying to get their tax-deferred exchange strategies in a row.

Rise In The Investment Market Means Rise In 1031 Demand

“1031 transaction volume has increased over the last 18 months – between 50% and 100% nationwide” said Del Rosso. “The capital markets were in paralysis — potential buyers had to means to buy, which hit commercial very very hard.”. But the new commercial market had more stringent financing requirements.  “Requirements for lower loan-to-value ratios and more restrictive clauses and covenants” means that 1031s loom large as an more attractive source of capital to get a deal done.  “We see more potential exchangers coming off the sidelines and getting the prices they want.  It’s uneven – [some markets] are still very bad and will take more time, but elsehwere, you see multiple offers and some move to a new transaction form: setting up auction bid processes.”

Paid-Up Baby Boomers Looking To Sell

DelRosso described a key 1031 demographic: baby boomers, whose interest in tangible assets means they have often invested in and worked/managed commercial property, and are now looking to retire.  “[They] want to parlay their sweat equity and capital appreciation into something with more predictable income. There’s a huge population for this, growing all the time. They consider 1031 because they have held the property for so long. the rents they have received have gone to pay the mortgage… over 10-20 years, they may not have any debt. If they do, it’s probably quite small. typically they have not raised the rent according to market conditions. you often find they have very low returns and they dont even realize it.  – some as low as .5 to 2%.”

The Tax Situation

While you may not have access to a seller’s form 1040, you’d be surprised what sellers divulge when talking to a professional.  DelRosso explained “They have taken deductions that have brought them into a negative position in terms of the money they’ve invested in the property.  They forget they don’t have a zero tax basis, they have a negative tax basis. So they don’t realize when they sell, they have to come back to at least a zero tax basis on the property. They’re surprised they owe taxes on the property at sale time.”

The 1031 benefit is the natural fit for that situation – but of course an exchange needs to take place, so property to exhange needs to be identified and strict timeframes for the exchange under 1031 must be met.  Del Rosso’s strategies and tactics here  are many, including a Deleware Statutory Trust, a business trust called into exchanges partially for the purpose of facilitating a 1031 exchange.

You can get a full audio recording of Patricia Del Rosso’s presentation to REALTORS Conference & Expo 2012 “Increasing Your Market Share Via 1031 Exchanges” at PlaybackNAR.


Brendan Erickson Of REI Wise: Financial Analysis for Commercial Assets

Like a lot of industries, the commercial real estate business has its own alphabet soup.  It’s laden with acronyms and jargon that practitioners need to communicate, peppering speech, documents and articles with shorthand that can make the business look a lot more complicated than it commonly is.  What’s ironic is the jargon itself is there to make communication easier and faster, even if it has the opposite effect to the newcomer.  You could say that apartment building has a 8% nonleveraged rate of return or you could say it has an 8 cap.  Either way, you’re saying the same, even longer, thing: given a set of key assumptions about tenancy and expense and rents, the net income headed to that building’s owner amounts to eight cents a year for every buck she scraped up, borrowed and handed over to buy it.  

The financial analysis jargon of commercial property valuation is in part about learning, understanding and portraying those key assumptions.  Brendan Erickson, VP of REI Wise (an NAR Commercial Benefits Partner) came to REALTORS® Conference & Expo 2012 to talk about the surprisingly simple principles in valuations lurking in the commercial property alphabet soup.

NOTE: REI Wise offers NAR members a discount on financial analysis and marketing solutions – members can click here to find out more (NAR member login required).


Expressing the benefit of commercial real estate financial analysis, Brendan spelled out CITE — Confidence, Integrity, Trust and Expertise.  Learning the basics would give you the confidence to evaluate and analyze properties in your market, to do so with the integrity that comes with your personal knowledge of the market, and will work to build trust in your evaluations as well as build your own expertise as you continue your professional development in commercial real estate.

Fundamentals And Value Indicators

Brendan spelled out that approaching a multifamily property for analysis called for the collecting and description of the Annual Property Operating Data, or APOD.  This set of information defines the building’s potential income, subtracts for vacancy, then subtracts for expenses, then subtracts for debt.  What’s left is the Net Operating Income, or NOI..  Addressing beginners in the industry wondering what timeframe is used to look at commercial property, Brendan said that valuation is a snapshot of indicators at one moment in time. These indicators, and how to calculate them:

  • Price per door/unit = the building price / total number of units
  • Price per square foot = building price / total square feet
  • GRM (Gross Rent Multiplier) = building price / gross rents
  • Cap Rate (Capitalization rate) = Net operating income / building price
  • DCR (Debt coverage ratio) = How many NOI dollars come the owner’s way for every dollar of debt the owner took on
  • Cash on cash: Yield/ invested dollars
The math behind these variables is not rocket science.  But putting the variables together in a way that values a property –  or fills gaps in the statements you find in some listings – carries great power and is a bedrock competency for commercial practitioners.
A recording of Brendan’s full presentation “Financial Analysis For Commercial Assets” at REALTORS® Conference & Expo 2012 can be obtained from PlaybackNAR.


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Xceligent: Changing The Landscape Of Commercial Real Estate

Xceligent’s CEO Doug Curry has a rough job just talking about his job.  The backstory of what Xceligent (a REALTOR® Benefits Partner) does, who it does it with, for whom it does it, why, when and where is a very complex narrative, bringing together business research, computer science, commercial real estate, mergers and acquisitions, antitrust, and philosophy.  One blog post isn’t going to cover it.  One presentation isn’t going to cover it.

Curry knows this; at the start of his presentation to a commercial real estate audience at 2012 REALTOR® Conference & Expo, he polled the group, asking in effect what they already knew, so as to best tailor the presentation.  Which in itself is fitting, given that Xceligent’s business model is so dependent upon what brokers know and are willing to share.

Collaboration: The Rare Commodity

Xceligent provides business intelligence to the commercial real estate industry.  It’s a publisher of original information. It researches, surveys, geocodes, creates, verifies, compares, cleans, refreshes, and presents information about commercial property from lease comps to parking spaces and everything within and beyond.   Curry pointed out that commercial real estate information can be assembled in a lot of different ways, with different results and quality levels.  Curry’s company long ago settled on one defining principle: partnering with brokers to provide the highest quality market information.

Xceligent pioneered the successful working concept of broker collaboration in verifying that transactions had actually taken place in a market. The positive impact on data quality and increased transparency made for undeniable value.  It’s part of why online commercial real estate information giant LoopNet bought an equity stake in them 2007.

Desired, But Not Acquired

When LoopNet became the target itself of a buyout by CoStar in 2011, Curry said Xceligent “went to the Federal Trade Commission, who agreed that Xceligent should be sold to somebody else”.  The premise was about preserving competition in the space.  The CoStar deal as originally conceived would have left the commercial real estate industry with too little competition in listings and business information.  Xceligent found that buyer – dmg::information, the internationally-focused division of the UK’s Daily Mail newspaper, but then faced a new wrinkle.

Go Big Or Stay Home

Curry says the FTC’s involvement evolved after their buyer was found.  It wasn’t enough to preserve Xceligent’s separation from the CoStar/LoopNet deal, but Xceligent would “need to build an alternative to LoopNet” and do so with enough resources to reach all the national markets that CoStar did. To that end, Xceligent acquired ePropertyData  from NAR  / Second Century Ventures in 2012,  providing access to markets across the country including more than 200,000 active lease and sales listings. ePD’s research tools are being enhanced and incorporated into Xceligent’s research center today.

An epic tale of commercial real estate indeed.  And that’s just how Doug Curry says “Hello”.


Redeveloping And Repurposing Buildings: Due Diligence

Picture of (formerly of ) located at 23rd and ...

Using existing building stock is a compelling property strategy often enough that specialists in redevelopment and repurpose of buildings have arisen.  Bill Robsons (Gabriel Consultants) and Steven Arthur (ECS Mid-Atlantic) are two leading consultants in the generation of due diligence on redeveloping and repurposing buildings.

In a fascinating NAR Conference & Expo session covering the history and application of principles in zoning, construction techniques, remediation techniques and economic development principles, Bill and Steven outlined the concepts of due diligence — the investigation of a business or a person or property prior to signing a contract with a certain standard of care.

Is A Property Condition Assessment Due Diligence?

As defined by ASTM (American Society For Testing And Materials) a Property Condition Assessment (PCA) is not  the same as due diligence.  DD is about maintenance and performance of a building. A PCA can be part of due diligence,  but DD is broader.

The “when” is just as important as the “what” – the time to have a due diligence report in hand is before a buyer/broker agreement is signed.

Bringing Science Into The Mix

The area called “building science” is concerned with separating the interior, controlled environment from the exterior, uncontrolled environment.  Modern construction technologies are completely different from those of a hundred years ago.  As such, a non-specialist doing analysis of a structure that went up before the era of steel construction, or even in its early stages, can overlook too much to give a reliable assessment of the building’s performance.  That’s why specialists use modern tools to survey properties and find problems in due diligence projects.  Steven Arthur showed a wide range of slides with pictures using infra-red photography to isolate moisture, air movement and cracks in walls not easily visible to the naked eye.  Other  building science tools include ground radars and spectrographic analysis of masonry samples – the field can get downright CSI-like when it wants to.

And it wants to: structural problems in structures can too easily be hidden from the visual once-over even if the property is just a couple of decades old.  When it was built a hundred years ago, due diligence and building science are inextricably intertwined.

The entire presentation on Due Diligence in Redeveloping And Repurposing Buildings can be downloaded from Playback NAR

NAR Commercial Leadership Forum: The Ace Awards

Accredited Commercial Excellence Award 2012
Congrats to Commercial Association of REALTORS ® Wisconsin and five others for winning the 2012 ACE Award

Of the 200 commercial REALTOR® Associations, Boards and organizations across the country, each meets benchmarks and works hard to maintain a level of professional excellence through accreditation milestones.  A few rise above the fray to earn special recognition, so NAR Commercial’s Jean Maday took the podium at the 2012 NAR Conference & Expo to recognize six commercial REALTOR® associations with the 2012 ACE Award – that’s Accredited Commercial Excellence.

Presenting the 2012 ACE Winners:

Congratulations ACE Award winners!

For more information about commercial excellence through accreditation and the 2012 winners, watch The Source blog.  And for more information about the ACE Award program, contact Jean Maday at jmaday [at]

Mark Dotzour At NAR Commercial Caffeinated Breakfast

Picture of NAR's Jan Hope and Texas A&M Dr. Mark Dotzour
NAR Commercial Division VP Jan Hope Welcomes Dr. Mark Dotzour

The eggs were scrambled, but may as well have been sunny-side up.  Dr. Mark Dotzour, Chief Economist at Texas A&M University’s Real Estate Center opened more than a few eyes Saturday morning at the NAR Commercial Caffeinated Breakfast with some bold, optimistic statements and solid one-liners in equal measure.

Sponsored by Inland Real Estate Group, REALTORS® Federal Credit Union, the Florida Association of REALTORS® and Xceligent, the Commercial Caffeinated Breakfast kicked off with Dotzour bullish on commercial real estate, bearish on gold and ready to separate the real economic recovery indicators from the fake ones.

Tax credits to buy houses or cars?  Signs of a fake economic recovery, according to Dr. Dotzour.  “When people buy these things because they want to,” is the true mark of recovery, which he believes we are in now.  “For the first time in years, I’m more optimistic than you are,” announced the deadpan-hilarious Texan before spelling out the reasons for the bright outlook.

The housing crisis, which he characterized as a “social experiment that failed miserably” has led to the current state of five years of pent-up demand.  The resistance caused by years of postponing key life events due to the economic downturn – buying, selling, retiring, has come to an end, and most importantly, “Americans have credit capacity again.”

Dotzour took a little time to scoff at commodities and promote real estate.  “Commodities are hedging instruments, not investments,” he said before cautioning that anybody heavily invested in gold should be terrified of the day they read the newspaper headline “Congress balances budget”, suggesting a fit of fiscal responsibility akin to the 1981 Congress would send gold prices tumbling sharply to a multi-year stay at low levels as they did that year.

When Is Credit Coming Back To Commercial Real Estate?

Dotzour addressed the question of lenders having left commercial real estate markets high and dry by raising the structural and technical issues of loan loss guarantees.  After taking care to point out there are “plenty of working, solvent banks”, he reminded that the banking system was widely insolvent, and that portfolios of bad CRE loans are still buried in the system.  Toward the question of when these loans would get flushed out, Doutzur quipped “when is the RTC coming back?”  This reference to the Resolution Trust Corporation, the federal government-owned corporation created to unwind the Savings and Loan crisis in the 1980s, was a way of describing the systemic need for backstop beyond what the FDIC can provide, not unlike that crisis.  While no such organization appears to be in the cards,  Dotzur’s apparent timeframe for this unwinding: “5-8 years”, counting from when the crisis began.

The Deleveraging At Home

A slide showing a chart with a sharp drop at the tail end was ironically Dotzur’s favorite.  Its showed that household debt service payments as a percentage of disposable income had plummeted and was in the 11% range, a value not seen since the 1980.  Dotzour expected this to bottom even further, suggesting the credit capacity of Americans was not only back, it is about to be in better shape than when the 1980s kicked off.

The good doctor had much more to say about the systemic challenges and opportunities coming up in 2013 and beyond.  To get an audio copy of his entire presentation, click over to PlaybackNAR.


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