Argus Training Manual

A couple weeks ago we had one of our counselors speak to the class, ostensibly about Spreadsheets. She mentioned a program called ARGUS that is worthwhile to learn. The only issue is that the classes are extremely expensive (at least $600 for a 2 day class).

Well, searching the internet, what did I find but a training manual for ARGUS at Kellogg's business school's website. It's from a company called Realogic Analytics, Inc.

In case the link doesn't work, the URL is:

http://www.kellogg.northwestern.edu/faculty/pagliari/htm/RED446/Realogic_%20ARGUS_Manual(%20Presentation).pdf.


The Table of Contents Includes:

* Overview of Lease by Lease Analysis
* Model Realogic Tower
* Assumptions & Abstracts Realogic Tower
* Argus Reports realizes Tower
* Apple Tower Assumptions & Abstracts
* Argus Reports Apple Tower

The manual even includes formulas for things like Weighted-Average Market Rent, Weighted-Average Downtime, Weighted Average Tenant Improvement Allowances, etc. It appears to be the closest thing I have seen to an "ARGUS for Dummies". Now I just need time to read it.

They also have on ARGUS's official website they have an online course (don't know how much it costs) where you can call: (866) MY-REALM for information.

Developer's High-Rise Plan Stirs Concern in the Diamond District

It seems that one major occupational hazard in commercial real estate development is people's resistance to change. One way of dealing with this might be to look towards "change management" consultants at the major consulting firms who can help developers manage the resistance that is bound to arise when their projects are revealed to the press and any affected communities.
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Developer's High-Rise Plan Stirs Concern in the Diamond District


By CHARLES V. BAGLI
Published: March 13, 2006

Gary Barnett has come a long way since he got his start as a diamond merchant two decades ago in Antwerp. He came to New York in the early 1990's, got into real estate, and runs a business that has seven major projects in Manhattan.

But now, his plans for an eighth project — a 30-story global diamond exchange in the heart of the city's diamond district — have some there charging that he is undermining their well-being and betraying his roots.

A number of the landlords and diamond sellers on West 47th Street, where brokers' pockets are filled with tissue-wrapped diamonds worth hundreds of thousands of dollars and deals are still sealed with a handshake, have taken to the barricades to stop him. They fear that Mr. Barnett's tower will steal all the best tenants and leave the rest of the 60-year-old district a "ghost town," if he is successful in lobbying the city for tax breaks and other incentives.

Mr. Barnett, known in Belgium as Gershon Barnett, has asked the city for a substantial subsidy package for a state-of-the-art building that would house retailers, wholesalers, jewelry makers, diamond cutters, mining companies, shippers, banks, their safes and a high-security garage. He says the building could help reinvigorate the dowdy, low-scale block between Fifth Avenue and Avenue of the Americas, an important international diamond center that is under siege from low-cost producers, Internet sales, suburban diamond exchanges, Wal-Mart and Costco.

With the flow of cheaper diamonds from India and now China, hundreds of the cutters and polishers who worked in the small rooms above the diamond and jewelry arcades that line 47th Street have left New York or retired over the past 20 years. New York remains a distribution center, because 90 percent of the diamonds that come into the United States — about half the diamonds sold in the world — flow through 47th Street.

But, Mr. Barnett contends, New York's diamond district will almost certainly continue to lose ground unless something is done.

"The diamond and jewelry industry needs a center," said Mr. Barnett, 50, a dark-haired man who favors white shirts sans ties. "There have been several diamond buildings. But there's nothing brand-new, modern."

He says that New York needs the kind of government-supported central diamond exchanges that have been built in Shanghai, Tel Aviv and now Dubai.

Over the past four years, Mr. Barnett has acquired 10 five-story buildings midblock, on the south side of 47th Street and the north side of 46th Street. Tenants have been notified that demolition should start in May or June.

But Mr. Barnett has run into opposition from the 47th Street Business Improvement District, local landlords and some retailers. They say that diamond manufacturing will never come back to New York from India and China. Further, they say that Mr. Barnett's tower will upset the delicate ecosystem that exists on the street if he gets municipal tax breaks that give him an unfair advantage.

"The city's not really giving abatements to anybody," said Jeffrey Levin, the chairman of the business improvement district and the owner of Firenze Jewels. "I'm afraid of the district disappearing. He's trying to rob the other buildings of their tenants. It could become a ghost town."

The block is a rare low-slung respite of mostly five-story buildings amid Midtown skyscrapers. At street level, there are more than two dozen exchanges or arcades comprising dozens of separate booths, with the best-known getting the coveted window spots. If Mr. Barnett's subsidized tower pulls in all the best tenants, critics contend that the rest will follow, at the expense of the district as a whole.

Kenneth Kahn, an owner of what is now the premier diamond building, 580 Fifth Avenue, near 47th Street, said that Mr. Barnett's representatives have already approached 170 tenants in his building, including the industry's cornerstones: the Diamond Dealers Club, a major international bourse, and the Gemological Institute of America. Basant Johari, president of Kuber Manufacturing and a director of the Diamond Club, said the club had received a very attractive offer.

"Mr. Barnett planned to build a building for the industry that would bring in business from overseas," Mr. Kahn said. "But that's just not possible. All he's done is go around poaching tenants from other buildings. If the city wants to give benefits, give them to the whole block and enable the entire industry to benefit."

Mr. Kahn has hired a lobbyist, Fran Reiter, a former deputy mayor in the Giuliani administration, to offset Mr. Barnett and his lobbyist, Suri Kasirer.

Mr. Barnett has met several times with city officials to discuss the project, and he has invited Deputy Mayor Daniel L. Doctoroff to lunch at the Diamond Dealers Club. But so far, no deal has been struck.

"We want to make sure that if we provide incentives, the project will create new jobs, not just cannibalize existing jobs," said Andrew M. Alper, president of the city's Economic Development Corporation.

There is no question that the diamond district is in a state of flux. It is one of the few remaining industrial and commercial centers that could once be found in disparate corners of Manhattan. There is little left today of the flower, fur, printer and garment districts, but the diamond district remains, although with a different focus.

Like New York itself, the diamond and jewelry district started downtown, at Nassau and Fulton Streets, before migrating up to the Bowery near Canal. By 1940, it began the leap northward to 47th Street. At the same time, Jews fleeing the diamond centers in Antwerp and Amsterdam landed in New York, bringing an entrepreneurial flair and an expertise in cutting and polishing.

Large, expensive diamonds — say, 3, 4, and 5 carats — are still cut and polished on 47th Street, but manufacturing has for the most part moved on. The number of diamond cutters has declined to about 300, from roughly 3,000 15 years ago, according to Martin Rapaport, publisher of the Rapaport Diamond Report.

The reason is simple economics. If it costs $110 to cut a one-carat diamond in New York and $65 or more in Tel Aviv, it can be done in India, where there are a million people involved in the industry, for as little as $10, Mr. Rapaport said.

"Forty-seventh Street has made a huge transition from a diamond manufacturing center to a diamond trading center," Mr. Rapaport said. "The profit is in selling the diamonds. The key now is to make the transition from a secretive diamond cutter guild to being a marketing and branding center for high-value diamonds."

Before coming to New York, Mr. Barnett worked as a diamond merchant in Antwerp in the 1980's for S. Muller & Sons, a prestigious diamond house owned by his wife's family. With the help of what he described as "European investors," he moved to New York and plunged into the real estate business.

Today, he is chairman of Extell Development Company and is running seven projects in Manhattan, including the nearly completed 60-story Orion condominium on West 42nd Street, the conversion of the Stanhope Hotel on Fifth Avenue into luxury apartments and the construction of a pair of towers called the Ariel East and West on Broadway near 100th Street. But the 47th Street project provides a connection to his roots.

He said the project was about preserving "added-value jobs" in diamond polishing, jewelry and preserving 47th Street's position as an international trading center for high-quality diamonds, not about trying to revive diamond manufacturing.

"Some of the landlords are running scared," he said, "after 30 years of neglecting properties and not dealing with their tenants' and the industry's needs. With the exception of two or three landlords, this building is good for the industry."

Manhattan Asking Rents Poised for Steep Takeoff?

Another market report from Colliers ABR. One thing that strikes me as significant is that JP Morgan Chase has snapped up a lot of office space in the past year and how this is likely helping to drive up rents for remaining office space as supply dwindles. It would be interesting to look at JP Morgan Chase and see where and why all this expansion is happening.

The document is a 2 page .pdf file that is followed by tables showing other noteworthy leases and sales and an overview of the Manhattan market. Most of the text is below along with a link to the full document.
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Asking Rents Poised for Steep Takeoff?

NEW YORK - February 2006

The Manhattan commercial real estate market bounced back from a tepid January with the class A average asking rent climbing sharply and appearing to pick up serious momentum, jumping 4.0% over the past month to $53.01/sf from $50.97/sf. Geographically, this increase was all-inclusive as strengthening occurred in all three major submarkets – Midtown, Midtown South and Downtown. This is the highest average asking rent in just over four years (dating back to the $53.23/sf in
January 2002) and the largest month-over-month increase in almost six years (since between May and June 2000 when asking rents climbed 5.0% to $56.92/sf from $54.22/sf). There is certainly room for further rent increases as the record remains 16.0% higher than the current figure (topping out at $61.48/sf in April 2001 when the class A vacancy rate was just 4.9%). The class A vacancy rate improved to 7.6% in February from 7.9% in January, though slightly higher than the 7.4% in December, prior to inventory additions. Meanwhile, sublease space fell to its lowest point since May 2001 (and below the 5-mm-sf mark for the first time since May 2001 as
well). There remain a significant number of tenants (of all sizes) in the market within various industries including finance, law, media/entertainment, not-for-profit and government, not only desirous of renewing or relocating but, more importantly, expanding.

Colliers ABR Research Reports: New York Barometer Fourth Quarter 2005 Overview

The whole document is pretty long and it's a .pdf file with lots of charts and graphs.

One thing that bothers me about this article is the way they just ignore the potential of the outer boroughs. They give this analysis of Manhattan and then skip straight to the Long Island, Westchester and Connecticut markets. Living in New York City, I would prefer to commute to somwehere in the 5 boroughs instead of trekking all the way out to the suburbs.
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Research Reports - New York Barometer Fourth Quarter 2005 Overview

The main conclusion which can be drawn from these comparisons is that the market in both years was driven by a strong national and local economy. However, in 2000 some of that growth rang false due to the enormous amount of venture capital pouring into many new media/high-tech firms that were grossly overvalued at the time. For 2005,
there has been somewhat more measured, balanced, and steady growth. But at the end of the day, it is very important to keep in mind how far the New York City economy has come since the dark days of 2001—and within such a relatively short period of time. For the immediate future in 2006, expect an essentially tighter market for all submarkets especially if a major anchor is located for 7 World Trade Center. There is also very little new space coming available until at least 2007. Consequently, there will undoubtedly be rent spikes in some areas of Midtown.

Maalot: Tel Aviv office rent rose 10% in 2005 to $12.30 per sqm

Every day, I read the Israeli press in English: The Jerusalem Post, Ha'aretzdaily and Ynetnews (Yediot Achronot). Globes is Israel's main business publication. In Israel, I knew a couple of people who worked for their English language website.

When I lived in Israel and was looking for jobs I looked into the real estate sector and what I found was that there was no established real estate development industry like in the US. Companies built buildings and brokers sold the space in it. If they needed financing maybe they went to one of the three largest banks or used their own funds. In the case of large housing developments the government was probably involved, especially in the earlier years of the state's existence. Now with the increasing liberalization of the economy more and more financial instruments are emerging in Israel. It's a great thing to see. The past couple of years has seen the establishment of what as far as I know is Israel's first REIT. The commercial real estate industry appears to finally be starting to mature.
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Maalot: Tel Aviv office rent rose 10% in 2005 to $12.30 per sqm

The occupancy rate rose 82% in Tel Aviv and 88% in Herzliya Pituah. The average office rent reached $12.60 in Herzliya, $11.30 in Petah Tikva, and $10.30 in Haifa.

Guy Yamin 19 Mar 06 12:25


A survey by Maalot the Israeli Rating Company on Israel’s office space market has found substantial improvement over the past two years, including for income-producing properties. This improvement has been driven by a business recovery, including in high tech, a drop in the interest rate last year, higher proceeds by shopping centers, and higher occupancy rates for office and high-tech space in Tel Aviv and its environs.
Maalot believes that the opportunities for establishing real estate investment trusts (REITs) since January 2006 is selectively boosting property values, especially in demand areas in central Israel, as well as properties leased to the government and tier-one tenants.

Maalot says that, in view of these factors, as well as the plunge in building starts and completions, the positive trend in the income-producing real estate market would probably continue in the near future, especially in demand areas in central Israel. Factors behind this trend are a reduction in available office space, the improved security situation, and Israel’s emergence from recession.

Maalot stresses that there is a wide rental differential between isolated office buildings and those located in high-tech parks, with rents in the latter 10-20% higher than rents for isolated office buildings.

An analysis by Maalot found that income-producing building starts fell 36.5% in January-February 2006, compared with the corresponding period of 2005. Despite this, Maalot believes the office space market improved substantially during 2005, after a four-year slump. Both occupancy rates and rent rose by about 10% last year.

The survey found that the average office space rent in Tel Aviv was $12.30 per sq.m. per month in 2005 and that the occupancy rate rose from 73% in 2004 to 82% in 2005. The average office space rent in Petah Tikva rose 12% in 2005 to $11.30. The average office space rent in Herzliya Pituah rose 13.5% in 2005 to $12.60 per sq.m. per month, and the occupancy rate rose from 77% in 2004 to 88% in 2005. The average office space rent in Rehovot was $9.70 per sq.m. per month in 2005, and the average in Haifa was $10.30.

Published by Globes [online], Israel business news - www.globes.co.il - on March 19, 2006

© Copyright of Globes Publisher Itonut (1983) Ltd. 2006

Groundbreaking Ceremony Welcomes New Shopping Center In The Bronx

I saw this story on TV and thought that I had never seen people so happy to see a mall built in their neighborhood. This is definitely part of a trend.
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Groundbreaking Ceremony Welcomes New Shopping Center In The Bronx

March 14, 2006

After three decades of debating, a new shopping center was finally welcomed to the South Bronx with a groundbreaking ceremony Tuesday.

The mayor and other elected officials took part in the symbolic groundbreaking ceremony at the construction site for the new "Hub Retail and Office Center" that stretches along Third Avenue for three long blocks between 153rd and 156th Streets.

The two-story building will serve as the main offices for the City's Department of Finance, and retail chains like Rite Aid and Staples also plan to set up shop.

"I'm very excited," says Bronx Borough President Adolfo Carrion. "Two-hundred-thousand square feet of office space in the South Bronx is great. This site was one of the casualties of the burning Bronx in the 1970s and the horrible thing that happened to inner city communities all over the country. And now this is a symbol of the new Bronx This is a new vitality we haven't seen in a long time."

Third Avenue used to be the shopping mecca for the Bronx and Upper Manhattan, but over the years it lost its appeal as big name stores like Alexander's, Thom McAnn's Lerner's and The Wiz moved or went out of business.

Plans to develop the site and revitalize the area have been in the works for three decades but always fell through. Year after year promises were made to develop the mall, but hurdles and setbacks continually kept the project from becoming a reality.

Members of the business district say the lack of development at the site has hurt them since the 1970s.

"It definitely hurt business,” said Vincent Valentino of the group Hub Third Avenue B.I.D. “They tore down stores about 35, 36 years ago and they were supposed to build housing but they didn't because there was no money in the city."

Related Companies purchased the property from the city for $1 million and will build a two story commercial building estimated to cost $57 million.

Related is the company also developing the controversial gateway mall at the Bronx terminal market not far away from Third Avenue.

The mayor says it's all a big boost for the borough.

"Whether it is Hunts Point or the Bronx Terminal Market or Yankee Stadium or the new business improvement district on Fordham Road, the Bronx really is open for business in a way it has not been for decades."

The local community board is overjoyed with the future jobs and business for the area.

"We did not capitulate,” said Community Board 1 chairman George Rodriguez. “We kept going on and on until it was a reality."

More than 200 new construction jobs will be created for the project, along with about 225 full-time positions once the center opens in 2008.

– Dean Meminger

Career Switchers Add New Depth to Talent Pool in Real Estate

I am hoping to write an article about Project REAP for The Real Deal. When I saw this, I was nervous that maybe the REAP people beat me to it. I realize, however, that mention here might make it easier for the Real Deal to pick it up. Also, the article I plan to do is all about REAP and diversity in general, different from this article.
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Career Switchers Add New Depth to Talent Pool in Real Estate

By SANA SIWOLOP

Published: March 15, 2006


When John McCarthy, a treasury manager at Toys "R" Us, started looking for a new job in July 2005, he was not looking at commercial real estate per se, merely for a position in which he might be able to improve a company's business more directly — and be rewarded for the effort.

Marisa Manley, who trained as an architect, founded her own real estate firm.
At Toys "R" Us, Mr. McCarthy spent considerable time evaluating the real estate potential of the individual stores as the company was in the process of being acquired. But he felt that his credentials — which included an M.B.A. in finance and corporate accounting — were most suited to a job in investment banking.

He did get an offer in that field, but in the end opted for a job at Cushman & Wakefield of New Jersey, a commercial real estate firm, where he is now working on leasing both office and industrial properties.

Commercial brokerage teams used to consist mainly of people who had spend their entire careers in real estate, but lately they have grown to be surprisingly diverse, according to many industry executives.

At Cushman & Wakefield, for example, Mr. McCarthy joined several other recently hired brokers who started in other fields; they included two former lawyers, two certified public accountants and a former saleswoman for Microsoft, said Gualberto Medina, the executive managing director.

Mr. Medina himself started out as a lawyer and as a certified public accountant. Before joining Cushman & Wakefield in 2002, he also served as secretary of commerce for the State of New Jersey, handled business development for an Internet telecommunications company and was president of a biotech start-up.

In August, Mr. Medina took the helm of Cushman & Wakefield's New Jersey operations, and since then he has looked for both seasoned professionals and industry newcomers as a way of providing specialized experience or expertise to his company's clients. Lately, Mr. Medina has also been receiving more unsolicited résumés from other types of professionals who think commercial real estate offers both more interesting challenges and better compensation.

Executives at other companies confirm the interest. Some of it, they say, can be pegged to the greater number of universities that now offer course work in real estate, as well as the career restlessness that seemed to course through many industries after the Sept. 11 terrorist attacks.

But executives say that many job switchers also seem convinced that commercial real estate offers less drudgery and deskwork than other careers, like law, as well as the potential to earn large commissions, rather than simply bringing home a salary.

Michael Bush, the executive director of the Real Estate Associate Program, an industry-backed program that recruits and trains minority candidates for careers in commercial real estate, said that about a third of the 33 students who started the inaugural program in New York in January had come from either law firms or Wall Street firms.

The program, which already exists in Washington and Atlanta, meets for three hours a week in the evening and lasts for 24 weeks. Mr. Bush said the typical participant was 25 to 35 years old with several years of business experience.

Marisa Manley, the founder and principal of Commercial Tenant Real Estate Representation in Manhattan, said that when her company recently had an opening for a transaction manager, she interviewed four lawyers for the job, as well as an accountant who held both a law and a business school degree.

"The talent pool is stronger, and I'm seeing stronger professional backgrounds than I would have seen 10 years ago," said Ms. Manley, who was first trained as both an architect and as a lawyer.

Robert A. Knakal, co-founder of Massey Knakal Realty Services in Manhattan, agreed that the pool of applicants today had a wider range of talents. "The people coming into the field now have tremendous credentials," he said. "For about a year after Sept. 11, we found, to our great surprise, that the quality of people looking to get into the business had changed dramatically. In the 80's and 90's, it's very unlikely that people would have left other careers to go into commercial real estate."

Still, making the jump is not always easy, some real estate executives caution. Mr. Knakal said that while his company's efforts to bring in other professionals had allowed it to grow substantially over the last five years, his firm has also had to make a "substantial commitment" to training programs, which are taught by the company's current employees and generally run two or three months each.

Even with training, newcomers usually take a while to establish themselves in the field. "Commercial real estate is not a quick and easy game, and we are always stressing the long-term nature of this business," Ms. Manley said. "This is a business where lease negotiations can take 12 weeks or more and where 18 months is usually the minimum amount of time" to close projects of 20,000 square feet and more.

Still, some recent career switchers say they relish the change.

Earl L. Segal spent more than 30 years practicing real estate law before he joined the Washington office of Newmark Knight Frank in January as a business adviser. Last week, Mr. Segal said that while he was not necessarily reading fewer stacks of legal documents these days, he had "moved up the line" to working on a broader range of issues.

At Massey Knakal, John Barrett, one of the company's newest brokers, said he hoped eventually to use his love of problem-solving to generate high prices for properties that he is asked to represent. Before joining the company, Mr. Barrett, 42, spent more than 20 years running his own corporate and group travel services firm and then spent six months getting his real estate license.

He recently completed a two-month training program and planned to spend the next two months learning everything he could about the area that he would eventually cover — a sizable segment of Westchester County.

"I had done one thing since graduating from college, and I thought it was time for a new challenge," Mr. Barrett said last week.

So did Marjorie L. Torres, the founder and chief executive of Concrete Stories, a Manhattan company that offers real estate advice as well as brokerage and development services. Ms. Torres, 38, worked as an industrial engineer and then as a Wall Street investment banker before she was sent to Latin America in 1995 to turn around distressed properties.

There, she discovered that she preferred some of the more tangible rewards of commercial real estate. "In investment banking you do a lot of deals, but very rarely can you build something that you can actually touch," she said.

Questions to Ask for Any Commercial Real Estate Acquisition or Financing

This appears to be a great "cheat sheet" to refer to as I learn more about Real Estate Acquisition. This comes from Josh Stein's amazing resource: Real-Estate-Law.com.
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Questions to Ask for Any Commercial Real Estate Acquisition or Financing

By James I. Hisiger and Joshua Stein

Briefings in Real Estate Finance: An International Journal, June 2001

Copyright © 2001 James I. Hisiger and Joshua Stein
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As real estate partners in the New York office of Latham & Watkins, the authors structure, negotiate, and close substantial commercial real estate transactions throughout the United States for institutional lenders and other real estate investors. The authors can be reached at james.hisiger@lw.com and joshua.stein@lw.com. Comments and reactions regarding this article would be welcomed and appreciated. Copyright (C) 2001 James I. Hisiger and Joshua Stein.


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When a purchaser considers acquiring a commercial real estate asset, or a lender considers making a commercial mortgage loan, either of them (henceforth, "investor") needs to obtain a wide range of information about the real estate. The process of asking the right questions, obtaining the answers, and thinking about what they mean is often called "due diligence."

Due diligence serves several purposes, depending on the circumstances and the timing.

It will affect investor’s initial decision on whether to enter into a contract or loan commitment at all. Later, it will affect whether investor decides to proceed with the transaction on the terms negotiated, or tries to renegotiate those terms -- for example, if investor cannot confirm the assumptions that supported the original deal.

Due diligence will also identify matters that require representations or indemnities from the seller or borrower and, later, identify possible breaches of those representations and warranties. Finally, it will help investor control the "costs of the deal" and obtain information investor may need to operate the property after closing.

In developing any due diligence plan for an acquisition or financing, investor will identify the categories of relevant information, and then set priorities. As a starting point for developing the due diligence plan, this article identifies the usual and not so usual categories and elements of due diligence for commercial real estate. Each is summarized, with only the briefest description. Little effort is made to explain why, whether, when, or how each item might matter or how investor should analyze it or how the various issues interact. This article is simply a practical reference tool, a cross-check, for investors when they structure their due diligence.

In each case, investor’s overall goal is to understand, value, and define (and ideally quantify) any risks and opportunities relating to the property. To the extent that any particular due diligence will substantially help investor achieve one of these goals, investor will want to emphasize that part of the process. Conversely, to the extent that the answer to a particular question cannot materially help investor understand, value, and define risks of the property -- in other words, to the extent that the outcome of such due diligence doesn’t matter -- any such due diligence is a waste of time and money.

It is always possible to identify more questions to ask, more areas to investigate, more rocks to turn over. If the decision is left strictly to the people doing the due diligence -- and if those people are instructed simply to "protect" investor -- the due diligence could go on forever. A strategic investor will instead decide, as a business matter, where its due diligence program should fall on the continuum between "pay your money and take your chances" and "find out everything there possibly is to know."

A lender may take a somewhat different approach to some of these issues. A lender may, for example, care more about confirming value and preventing unpleasant surprises than on understanding upside potential. Those differences are outside the scope of this article, as are some issues unique to lenders, such as regulatory considerations and background investigations on the borrower and its principals. Among other things, many of these issues vary widely among lenders.

In a typical transaction, investor’s principals and staff would handle many of the due diligence items listed here. Outside counsel and other real estate advisors would handle these and other matters. Defining and coordinating those responsibilities early in the process can be just as important as defining the scope of the work to be done. Planning and managing the due diligence process are just as important as completing it. Investor needs to manage and supervise its team so that investor collects, organizes, exchanges, and understands information in a timely and efficient way.

Investor will try strategically to break the process into stages, answering major threshold questions first and postponing or skipping low-value but high-cost due diligence activities, always depending on circumstances. Some information will be critical even when investor makes its initial offer or deal proposal; other information can wait. Investor will need other information at other stages.

Typically investor will not want to undertake extensive (i.e., expensive) due diligence until the basic deal terms have been resolved and, ideally, the investor has legal control of the property -- enough control to assure that if investor likes what the due diligence shows, investor cannot "lose the deal."

The goal at all stages: if the transaction dies, the due diligence bill should be as manageable and defensible as possible under the circumstances.

Although this article focuses strictly on due diligence, investors cannot treat due diligence as if it were a separate machine that grinds away in a hermetically sealed black box. The scope and nature of due diligence will depend very much on how investor negotiates the business terms of the larger transaction, and particularly on how the parties agree to allocate risks arising from lack of knowledge. The information obtained through due diligence will in turn affect the same negotiations, as well as the closing process. Thus, investors must treat due diligence, and the process of defining its scope, as a dynamic and essential part of the larger transaction.

This article reflects the expectations and practices of the New York City commercial real estate market. Expectations and practices in other markets, and even within the New York City market, will vary widely with the circumstances of any particular transaction, including its pricing, investor’s tolerance for uncertainty and risk, investor’s financial structure and participants, and seller’s reputation.

The type of property will also be crucial. Due diligence for a fully tenanted office or retail project will vary greatly from due diligence for a vacant parcel of land or a development project. Residential, commercial, office, industrial, and hotel properties each raise their own issues.

I. Development and Governmental Issues
Depending on the nature and location of the property, investor’s plans for the property, and the governmental climate, investor may want to seek answers to the following questions, as well as others driven by local issues and concerns. If the transaction contemplates any development or redevelopment at all, the matters listed here are often potential "showstoppers."

Approvals. Requirements to obtain governmental approvals, or at least make filings, under a wide range of laws. Development approvals are only the tip of the iceberg. A transaction may require approvals under laws governing such matters as antitrust, health care, housing, liquor licensing, or operating matters generally. These requirements are particularly likely for multisite quasi-operating-company transactions. They will vary widely depending on the existing and intended use of the property, as well as the size of the transaction and of the parties.

· Landmarks. Landmarks status of the property, and other similar restrictions on development or redevelopment, such as historic preservation issues and recorded development restrictions (also part of the title review process).

· Licensing. Requirements for licenses and permits, and resolution of any missing items. Any changes in such requirements that might result from the transaction. Are the licenses transferable? Operating licenses, such as those for liquor, health care facilities, gaming, and the like, may raise issues that go beyond the property to be acquired. Because they often involve some degree of governmental discretion, transfers of these licenses introduce an element of randomness, unpredictability, and hence risk that the contract must allocate between the parties.

· Miscellaneous Agreements. Any agreements with governmental authorities, whether or not recorded.

· Plaza Agreements. Public plaza agreements, particularly for issues relating to income, maintenance, operations, and repairs.

· Public Areas. To the extent that seller owns any areas that are open to the public generally, any measures that seller has taken to prevent the public from obtaining a "prescriptive easement" or other impairment of seller's title.

· Transportation. Agreements and arrangements relating to transportation, either benefiting the property or restricting its use. These might involve, for example, subway tracks and stations, rail spurs, pipelines, and tunnels.

· Zoning. Zoning analysis, including compliance, appeal rights, and availability of unused development rights, possibly culminating in a zoning opinion or advice memo. Necessity for any variance, special permit, or other dispensation. Any restrictions on the transferability of these benefits.

II. Legal Due Diligence (General)At the beginning of any transaction, investor may want to have its counsel receive and review copies of at least the following documents regarding the property.

· Brokerage. Any agreements or understandings regarding payment of brokerage commissions for the transaction now contemplated.

· Condominium or REA. If the project is structured as a condominium or under a reciprocal easement agreement structure, then copies of all relevant documents, including minutes of Board of Managers or other board meetings.

· Contracts. Service contracts (elevators, security, alarms, etc.). The level of review will vary depending on whether the contracts are cancellable, require termination payments, or are particularly important, unusual, or hard to replace.

· Employees. List of employees, length of employment, salary, fringe benefits and vacation, together with any labor union contracts and agreements with any nonunion building employees.

· Ground Leases. If the property is held as a leasehold, copies of the lease, any amendments, previously issued estoppel certificates, and any correspondence with the lessor.

· Leases. Space leases, including any leases and lease amendments under negotiation or to be signed during the closing process. Scope of review will vary depending on the size and composition of the leases and the transaction structure.

· Litigation. Pending litigation may affect seller, any of its constituent entities, or the property itself -- but the inquiry may need to go beyond those three obvious categories. For example, litigation about nearby environmental matters, entitlements, governmental disputes, Native American land claims, or other similar matters may indirectly affect a large development project being acquired. Any such litigation might not name the seller as a party and might not specifically relate to the property. Discovery of problems like this often requires local advisors at ground level.

· Management Agreement. Management agreements.

· Other Buildings. Agreements with neighboring property owners that tie this real property to any other real property for utilities, infrastructure, services, access, support, parking, roadways, operations and maintenance, or any other purpose.

· Pending Construction. Description of pending construction for both tenant improvements and any building-wide capital improvements, including contracts, budget, status, and anticipated timing.

· Telecommunications. Agreements with telecommunications or internet service providers.

· Utilities. Utilities agreements.

III. Legal Due Diligence (Lease-Related)Because rental income usually drives real estate value, and because leases and tenancies often conceal surprises, it is not enough for investor or its counsel merely to read the leases, as suggested above. One must look behind the leases, by asking for information such as the following.

· Abstracts. Abstracts of the existing leases, including any in seller’s possession or prepared by seller’s advisors.

· Antenna Leases. Antenna and other telecommunications leases, particularly to review for termination rights and nonexclusivity.

· Brokerage. Any leasing brokerage agreements that will stay in place after the closing. Amount and timing of any outstanding commission obligations for any leases previously signed or now being negotiated.

· Correspondence. Correspondence with tenants regarding defaults, administration, etc.

· Disputes. Pending disputes with tenants and eviction actions.

· Estoppel Certificates. Although primarily an issue for the closing, investor’s due diligence may help identify timing problems with obtaining estoppels and any terms of tenants’ leases that relate to or limit the delivery of estoppel certificates. When estoppel certificates are delivered for the closing, investor’s due diligence would also include review of those estoppel certificates to identify and understand any problems or issues they disclose.

· Guaranties. Existence, status, and strength of guarantors.

· Rent Roll(s). Spreadsheets showing all tenants, rents, escalations, commencement dates/expiration dates, option terms, security deposits, and tenant status.

· Security Deposits. Security deposits, including letters of credit or other forms of cash and cash equivalents. Transition arrangements.

· Stacking and Options. Stacking plan, now and in the future, including future interaction of all expansion, contraction, and renewal options.

· Standard Lease. Standard form of lease, on paper and in machine readable format, including all exhibits (such as alteration rules, building rules, design criteria).

· Tenant Financing. If the landlord gave any tenants financing for their tenant improvements, then copies of all loan documents and information about the status of these loans.

· Transfers. Any assignments, assumptions, and subleases.

IV. Searches and SurveyThe public records and other sources will provide a great deal of crucial information about the property. Investor or its counsel may want to investigate and review at least the following items.

· Certificate of Occupancy. Certificates of occupancy covering the entire building, or an explanation. Status and expiration dates for any temporary certificates of occupancy.

· Designated Areas. Status of property regarding "flood plain," "wetlands," other designated areas.

· Miscellaneous. Liens, judgments, bankruptcies -- both for seller and for any major tenants.

· Municipals. Searches of municipal departments for violations, fines, licensing problems, unpaid utility charges, and similar matters.

· Survey. New survey or update of existing survey, and certification to all necessary parties. Compliance with lender's survey criteria. Comparison of the survey against the appraisal or the larger transaction, if any uncertainty or difficulty exists regarding the scope of the property (such as future development parcels or a vertical subdivision).

· Title. Opening of title insurance orders, including strategic placement of title work. Title search, including obtaining and reviewing copies of all underlying documents and assessing how each will affect future use and development of the property.

· UCC. Uniform Commercial Code and similar filings against seller and potentially other parties.

V. Financial Due Diligence
To check out the financial strength of the property, investor should not only look at the leases and lease-related information as described above, but also several other categories of information, including those listed below and the tax-related issues covered later in this article.

· Appraisal. Third-party analysis and valuation reflecting the current market.

· Audit. Audit of operating and other expenses. The intensity and nature of this audit may vary with circumstances.

· Brokerage Commissions Due. Future payments of brokerage commission for existing leases already in place.

· Budgets. Operating budget for the current year. Seller’s budget for capital projects, or anticipated schedule of requirements.

· Financial Reports. Property financial statements for the last several years.

· Insurance. Analysis of future insurance coverage requirements and likely cost, including a comparison with seller’s cost of insurance.

· Operating Expense Changes. Possible changes in operating expenses after the change of ownership.

· Percentage Rent. Sales reports from percentage rent tenants.

· Receivables. Amount, composition, and implications of seller’s receivables from tenants (part of rent roll analysis).

· Service Contract Costs. Analysis of the cost of service contracts and possible alternatives after the change of ownership.

· Staffing. Employee roster and compensation. Future staffing changes for building. Impact of union contracts, if any.

· Tax Returns. Review of seller's tax returns and underlying schedules; comparison against other financial reports and information.

· Tenants. Analysis of financial condition of tenants (particularly major tenants) and their financial statements, if available.

VI. Physical Due Diligence
Investor will typically retain outside engineers and other consultants to examine the physical condition of the property, including the following characteristics.

· Archeological. Prior uses or ownership that may create archeological issues and interfere with or delay future development.

· Artwork. Existence of any murals or other built-in sculpture or artwork, triggering possible artists’ rights restrictions under applicable law. Scope of any artwork included in the transaction. Ownership of that artwork.

· Code. Compliance with building, fire, zoning, and other codes (including Americans with Disabilities Act). Particular focus on issues of parking; the possibility of new environmental or energy conservation requirements; life and fire safety systems; earthquake compliance and seismic safety; and retrofitting requirements.

· Engineering. Engineering issues, particularly for the structure and major systems of the building. Analysis of the age and condition of building systems, façade, windows, and other components.

· Environmental. Environmental and asbestos analysis, including "Phase I" report and, where indicated, "Phase II" report. Updating of any existing reports as necessary. Identification and status of any underground storage tanks. Investigation of any new environmental concerns of the moment, such as "sick building," electromagnetic fields, poisonous insulation, other "problem" building materials. Notices or claims regarding environmental matters. Application of any state-specific environmental review procedures (e.g., New York State Environmental Quality Review Act).

· Geotechnical. Soils analysis and report.

· Local neighborhood. Compatibility with nearby uses, and likelihood of objections to any future Operations at the property or potential change of use.

· Measurement. Measurement of actual usable and rentable size of the building.

· Operational Audit. Complete audit of building operations.

· Pending Construction. Identify and deal with any pending construction work (capital or tenant related). Identify status of job and cost to complete.

· Plans and Specifications. As-built plans and specifications.

· Power. Adequacy of electrical service and availability of more power and/or competitive power. Availability of space for any new equipment that may be needed.

· Telecommunications. Access to and availability of additional telecommunications services, such as fiber optics and other data links.

· Tour. Building tour, including mechanical areas.

· Upgrades. Identify any necessary building system upgrades (more telecommunications, generators, fuel tanks, rooftop facilities, etc.) and their feasibility.

· Utilities. Adequacy of utilities, availability of any desired upgrades, physical connection arrangements, and any necessary changes.

VII. Tax Issues
Like any other business transaction, any real estate transaction may require consideration of a wide range of taxes, affecting both the asset and the structuring and closing of the transaction. Those taxes and related issues may include the following.

· Local Variations. Tax issues are particularly likely to vary from place to place. Investor may require local advisors even at the earliest stages of the transaction.

· Mortgage Recording Tax Savings. Availability of existing mortgages (including from any other property) for assignment to new lender to save mortgage recording tax in any jurisdiction with such a tax.

· Real Estate Taxes, Generally. Status of real estate tax protests and any likely or built-in increases in real estate taxes during the coming years. Copies of actual real estate tax bills for the entire property for the last three years. Agreements with attorneys hired to prosecute any real estate tax protests.

· Real Estate Tax Assessments. Likelihood of upcoming reassessments.

· Subsidized Financing. Existence and terms of any tax-exempt or other government subsidized financing affecting the property; any restrictions on the proposed transaction.

· Tax Abatements. Availability (or continued availability) of any tax abatement or incentive programs, and requirements to qualify, including timing.

· Tax Lots. Alignment of tax lot lines with property lines.

· Tax Planning. Tax planning, both for acquisition and initial structuring to facilitate favorable future operation and disposition.

· Transfer Taxes. Calculate, minimize, and allocate, taking into account local law and practice.

VIII. Contract Issues
As the due diligence discloses the exact scope of the asset and any problems with it, each piece of information will affect what the larger transaction should require of other parties both before and at the closing, and investor’s negotiation of the documents that will govern the transaction. That process, and negotiations generally, will force investor to consider at least the following issues.

· Amenities. Identify any facilities or services benefiting the property, understand ownership structure.

· Attachments. Identify exhibits and schedules to be attached, both schedules to better describe the asset (lists of contracts, leases, etc.) and exhibits setting forth the form of closing documents. Develop and review all such attachments.

· Closing Arrangements. Plan ahead for closing documents, deliveries, and events, including such matters as requirements for estoppel certificates and nondisturbance agreements; termination of service contracts; satisfying lender’s closing requirements.

· Contract Issues Generally. Wide range of contract issues, including the due diligence process itself; amount of contract deposit and use of letter of credit; representations and warranties and their survival and credit support; assignment of any existing mortgages to new lender; responsibility for costs arising from the transaction (termination fees under service contracts, severance, transaction costs, etc.); allocation of transfer taxes; survival of representations and warranties; interim operations between contract and closing; responsibility for pending construction; prorations (including timing and seasonality of percentage rent); and numerous other issues, including any that arise from the due diligence process.

· Coordination. If this transaction involves other transactions, coordination of multiple simultaneous closings, exchange arrangements, or other linkages.

· Memorandum of Contract. Record memorandum of contract?

· Publicity; Etc. Publicity and confidentiality.

· Recognition. If the property is subject to any existing mortgages, possible agreements with the holders of those mortgages to protect a purchaser’s rights.

IX. Other
The specific investor’s agenda and plans for the building may produce another set of issues, many of a very practical nature.

· Approvals. Internal approval requirements and timing for each investor in the transaction, including any indirect participants. Third-party approval requirements for the proposed transaction and investor’s subsequent plans for the asset.

· Broader Picture. Any broader trends -- not tied to the particular property -- that may indirectly affect the success of this property. Demographics, the local economy, political trends, labor problems, and other background issues that may be difficult to identify, particularly for an investor that does not team up with a local partner, advisor, or consultant. What local changes are likely in coming years? Growth restrictions? Rezoning? New development?

· Business Strategy and Flexibility. Identify purchaser's business strategy for any changes in the building - physical reconfiguration or renovation, legal structure, new amenities, circulation patterns, parking, change of use, operational, name of building, etc. Determine whether any impediments exist to those changes (see above). Analysis of cost, timing, financing, and feasibility for any changes.

· Engagement Letters. If investor hires outside contractors for due diligence or other pre-closing work, engagement letters with those contractors. Reliance letters in favor of lender.

· Insurance Recommendations. Correspondence and recommendations from insurance carriers.

· Management Files. Review of management files for possible claims, disputes, physical issues, other problems. Copies of any reports, recommendations, or projections made by management company or department.

· Management Transition. Plan for transition of management, including obtaining files and machine-readable databases and project management information. Possible retention of building management team or selected employees.

· Market. Market study, including projection of rents and vacancy, pending construction, likely future construction.

· Marketing Materials. Brochures, plans, marketing materials.

· New Entities. Naming and formation of new entities; name reservations, and availability.

· New Loan. Closing documents, deliveries, planning, and negotiation for new financing.

· New Ownership/Debt Structure. Establish, structure, and negotiate debt and equity structure for new ownership. Consider business terms, regulatory and tax structure, exit strategy, internal flexibility, agenda of multiple partners, control, ownership, management, etc. (These structuring issues and possible ways to approach them are outside the scope of this article.)

· Publicity. Press release (if any) and publicity, or prevention of same.

· Research. Research seller's acquisition cost. General research in Nexis or the Internet regarding publicity on the building and seller.

· Unique Concerns. Any special nonstandard considerations or agenda items of a particular investor ("earth friendliness," "feng shui," workforce requirements, etc.).

If investor starts from the preceding list of "due diligence" items, investor can tailor its requirements for any particular transaction to reflect that transaction’s unique circumstances and issues that are important to that particular investor. By taking this approach, investor should be reasonably comfortable that nothing should fall between the cracks, except through a deliberate decision to disregard it.

With the "due diligence" process on track and built on a sound structure, investor can also turn its attention to broader issues: identifying how to create value in the property in ways that seller and other investors may have missed; raising (or allocating) the money to close the deal on attractive terms; and negotiating the business terms of the acquisition or loan taking into account, among other things, any information that the due diligence discloses.

Top of Document

Copyright © 2001 James I. Hisiger and Joshua Stein

Manhattan Running Out of Office Space

I read this and thought, "Oh, damn!" This can be good news and bad news. On one hand, landlords can and probably will get higher prices in the short run. The danger in the long term is that businesses might not just leave Manhattan but leave New York City as a whole (especially in favor of Jersey City), deflating the market. At the same time, it presents opportunities for real estate firms to develop office space to meet growing demand.

A similar article appears in Commercial Property News where they mention that "You cannot get rents that support new construction anywhere except Midtown." This is a big problem. Investors need to make a return.

This will sound a bit sinister to some, but it would help a great deal if the construction industry unions could loosen up so as to allow more and cheaper construction and enable the development of the outer boroughs. I can easily imagine the hue and cry that will arise from workers groups that evil developers are trying to bust unions in order to build housing and office space for rich white people. A PR campaign will then have to be launched to convince people that if New York City is going to remain a vibrant place to live with the many opportunities and rich cultural life that we are used to, then development like this is necessary. That being said, as developers we must be sensitive to the impact our projects will have in surrounding communities.

Every day I ride into Manhattan on the express bus via the Bruckner Expressway. I look around me and I see a lot of unused capacity in the South Bronx and in Harlem. Buildings boarded up and not being used - I see this as money wasted. The shortage of office space as well as housing space could potentially be remedied by simply making these spaces useful. I'm sure it's more complicated than it looks. Maybe the owners don't want to sell. Maybe it is not clear who is the owner. There is guaranteed to be legal and political isues in connection to zoning and getting these communities to buy in to such development projects. In any event, it is this issue which I have observed that draws me into the commercial real estate industry. I see a lot of work to be done that it seems will be fun to do. Everyone I talk to says that commercial real estate is a great business and so it makes me excited to join the industry.

Imagine for a minute - a waterfront community consisting of residential space but also some office buildings - in the South Bronx. It could be awfully cool. It could be like what they have started doing in Long Island City. I will discuss this in more depth later in a separate post. But suffice it to say that I am not the only one with a new vision for the South Bronx. Vision like this is what real estate, especially development, is all about.
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Manhattan running out of office space: report by Julie Satow


Demand for Manhattan office space will outstrip the existing and projected supply in seven years, making development in Lower Manhattan and on the west side necessary, according to a report by CB Richard Ellis.

With office employment estimated to grow by 1.4% a year, the brokerage firm projects that vacancy rates will decline to below 5% by 2008 and to below 3% by 2009. This supply constraint will push up rents, with average asking rents reaching as high as $90 a square foot by 2010. The projections do not consider economic factors such as inflation and interest rates.

“With vacancy rates declining, rents increasing and few new construction projects on the horizon, our ability to keep pace with future business growth in the city is threatened,” said Mary Ann Tighe, the chief executive of CB Richard Ellis for the New York Tri-State region.

The brokerage said the office shortage makes development of the World Trade Center site and at the Hudson Yards on ManhattanÂ’s west side necessary. The Ground Zero project is bogged down by the rift between leaseholder Larry Silverstein and the Port Authority of New York and New Jersey, which owns the site. Commercial development on the west side awaits transportation improvements.

In Midtown, an average of 9.1 million square feet of office leases is expected to expire annually over the next 10 years, the report released Wednesday says. That means that about 500 tenants will face expiring leases and new rents that are as much as 60% higher than they currently pay. Tenants could be forced to leave New York to find cheaper office space.

The market “is strong, but that very strength could portend challenges to retaining its office employee base,” said Ms. Tighe.

While demand is expected to increase, office construction has fallen in the past six years. While an average of 4.2 million square feet was constructed every year since 1950, since 1990 that number has dropped to only 1.2 million square feet a year. The rising cost of construction materials and labor, as well as a dearth of construction sites in Midtown means the trend will continue, the report says.

Excluding the World Trade Center, there are only 8 sites in Manhattan large enough to allow as-of-right construction of a one-million-square-foot office building, according to CB Richard Ellis. Considering that some of those buildings will be residential and that only two are near transportation hubs -- the Farley Post Office and Penn Plaza -- and the number of developable plots is even scarcer, the report says.

©2006 Crain Communications Inc.

What Price Value? - further debate on the future of real estate values

A Real Estate Finance expert weighs in on the debate on whether or not we are in a real estate bubble and the subsequent inevitability of this bubble bursting. It seems mostly a study of the residential housing market, however. Commercial real estate is said to be strong, but the larger market trends Lacilla discusses have got to have an effect on commercial real estate as well.

It will probably go something like this: the slower growth, higher interest rates and higher taxes will hit all businesses. Larger businesses may just cut back on space (i.e., as they fire people to cut costs. Many smaller businesses will suffer and likely go out of business, freeing up any office space they are using. Many really small businesses nowadays operate out of peoples homes and are not using office space anyway. This then confirms the trends spoken about in the market trends article from March 4th that mid sized businesses will be squeezed out.

Anyway, a recession would obviously put a damper on commercial rents.

Hmmm. I hope I am not entering a business that is about to tank.
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WHAT PRICE VALUE? by Jeffrey Lacilla


For the last five years the U.S. real estate market has had a substantial run-up in value, despite less than stellar fundamentals, including vacancy rates that were increasing and rents that were flat or declining, which did not justify such value increases. Even though fundamentals have been improving in office rents and vacancy rates, real estate price increases are still outperforming gains in these areas. Why is this happening and what danger does this scenario present to investors?

There is a confluence of economic and capital markets variables, which many in the industry point to as reasons for a paradigm shift in pricing. Although much has been written about these, including an expanding economy, low interest rates and the poor performance of stocks and bonds, it would be more profitable here to broadly examine the economic environment that has contributed to the favored asset status of real estate and whether current conditions validate the paradigm shift philosophy or suggest that the shift is temporary.

During the past year or so, the U.S. economy has improved in large measure because of consumer spending, which has been fueled by tax cuts and even more so by home owners refinancing their mortgages and monetizing the substantial appreciation in their homes. The Federal Reserve estimates that $600 billion has been pumped into the economy as a result of home mortgage refinancing. Stocks and bonds for the past five years have fallen out of favor and are less desirable investments than real estate assets. Capital is always searching for a home, and lately real estate seems to have the most attractive prospects. There has been a huge inflow of capital into real estate that has not been seen since the tax shelter days that predated 1986 tax reform. At the time, that reform cut the legs out from under the apparatus that had fueled the flow of capital into real estate during the S&L tax shelter years. Will there be a corresponding event that proves the undoing of this boom?

Optimists abound. Norman Berger of Menlo Park, Calif., writes to The Slatin Report with this question:

"What housing bubble? The San Francisco Chronicle today (02-19-06) posted some Bay Area housing stats. From December 1987 to December 2005 the median house price grew at 7.7% per year; its resultant mortgage payments grew by 5.6% per year (mortgage rates down); Nominal GDP grew at 5.5% per year. Looks like housing in this the most desirable of areas is cheap!"

Nice point, Norman. So from 1987 to 2005, housing values went up an aggregate of 280%. Did income for people buying housing grow at the same annual rate of 7.7% per year? Probably not, but the crazy mortgage products coupled with the low interest rates makes them feel as if that has happened and thus to buy anyway.

Are the paradigm-shift believers correct or will their nescience be their undoing? I believe that the disconnect between pricing and fundamentals is unsustainable, and that the flow of capital into real estate will subside as interest rates rise and stocks and bonds once again become the investment choice of investors.

Despite sustained economic growth over the last 13 quarters, we have been running huge federal budget and trade deficits that will ultimately impact our economy. According to Anthony Downs, a senior fellow at the Brookings Institution, our GDP grew by almost 4% in 2004 to $11 trillion, but our trade deficit was more than 6% of GDP. Our growing trade deficit is also increasing faster than national income. It is expected that in 2005 the government's expenditures will have exceeded receipts by some $500 billion, or 3.5% of GDP. Our total federal debt will approach $8 trillion, or 72% of our GDP, up from 55% in 1990. Interpretation: this country on a domestic and international basis is living beyond its current means while our savings rate continues to be nil. Nonetheless, despite these deficits, our balance of payments is still in the black. That's because countries that export their goods to us are sending that capital right back to the U.S. to invest in our Treasuries, offsetting the effects of the accumulated deficits. This is a perilous fulcrum on which to continue to balance future prosperity; growth likely cannot last with a federal government that cannot control spending, and it seems as though neither political party has the will to force a course correction.. Certainly we can expect increases in entitlement programs like Social Security and Medicare as our population continues to age and we can also expect discretionary spending (i.e. defense) to increase as we fight the war on terrorism. This means that our expenditures will continue to outpace our receipts unless we raise taxes or cut spending. No other options here.

How much longer will our balance of payments be in the black? How much longer will countries send us their goods in exchange for our paper with low interest rates when the dollar value of the Treasuries they are buying is subject to value erosion because of higher interest rates?

Mr. Downs expects a further decline in the dollar, which will raise the cost of imports and lower the price of U.S. goods exported abroad. If that hypothesis proves true, the Fed will likely have to raise interest rates to protect and stabilize the dollar from declining too much even if inflation is in check. That could in turn cause the economy to slow down or possibly enter a recession. A further decline in the dollar may also cause buyers of Treasuries to shy away from such investments because their dollar denominated Treasury purchases would decline in value. Translation: our federal budget deficits will cost more because of higher interest rates, and it will slow the economy. Congress will be forced to act through tax hikes and budget cuts, neither of which they excel at, and both of which they have shown a lack of political will to undertake.

Slower growth, higher interest rates, higher taxes and spending cuts do not sound like underlying fundamentals that can sustain a real estate boom. More importantly, these fundamentals certainly do not sound like the stuff paradigm shifts are made of. This does not mean sell and stay away from real estate. Rather, it means the unbelievably low cap rates at which properties have been trading cannot be sustained.

Real estate prognosticators have become fond of calling the current market, especially for condo converters and TIC investors, a game of musical chairs. Well, whatever song is playing "Up, Up and Away My Beautiful, Beautiful Balloon" or "Oops! I Did It Again," expect a serious chair shortage.



Jeffrey Lacilla teaches real estate finance at New York University.

Balance of Trade Shift at 7 WTC?

Ah, now you see they alluded to things like this this in the "Macro Trends..." article I posted on March 4th. I was talking about this with a guy from Jones Lang LaSalle the other day. I asked him if the Chinese companies come to New York looking for where to lease space or do the building owners court the Chinese companies proactively. He said that many Chinese companies are already here and can look into the local commercial real estate market whenever they need office space. What is significant about this deal is that the Chinese government is involved, has given it its stamp of approval, and is opening up the possibility of yet more, perhaps larger scale investment. Exciting stuff.
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SPACE | NYC 01 24 06
BALANCE OF TRADE SHIFT AT 7 WTC? by Peter Slatin


The shimmering clear glass of SOM's design for 7WTC nearly disappears into the skyline. A lease for the top five floors is approaching reality.
For the politicians, bureaucrats and Larry Silverstein, it was a banner day.

Surrounded by the former, the latter signed a letter of intent with Beijing Vantone Real Estate Co. Ltd. to lease 200,000 square feet in the top five floors of Silverstein's gleaming 1.7 million-square-foot 7 World Trade Center. Although Silverstein has signed two much smaller leases, with Ameriprise and the New York Academy of Sciences, the preliminary deal announced Jan. 24 was the first serious indication that the developer's Liberty Bond gamble will pay off in the long run.

It's also quite fitting that the first major commercial deal in the World Trade Center redevelopment should go to a company representing the country that is rebalancing the scales of global trade. In addition, rather than being a part of downtown's traditional Old World tenant base, Vantone represents a creative and entrepreneurial bent to China's nascent, supercharged capitalism that is reminiscent of but far more likely to persist than the technology tenants that flourished in and fled Silicon Alley five years ago. The landlord's need to reach beyond a traditional tenant base, and to rely heavily on financial incentives and political pressures from government officials indicate that enormous hurdles remain in downtown's struggle to move beyond a boom-and-bust economy. On the other hand, the out-of-the-box nature of the tenancy could presage a healthy changing of the guard in the makeup of downtown Manhattan's commercial base.

Vantone's eventual program is still emerging, though those close to the deal say it will most likely act as a facilitator and executive-suite purveyor for Chinese businesses, and that the buildout could include a club or even sleeping quarters on the top floor. The ultimate scale of its tenancy at Ground Zero is another unknown: Vantone first emerged as a potential tenant for Freedom Tower, and sources say it remains interested in that possibility as well as in additional space at 7 WTC.

While the deal is a true source of relief in the long, dry slog to heal the downtown office market, it thrusts a host of critical questions to the fore: first, is this the first wave in a surge? Silverstein spokesman Dara McQuillan thinks so, and tells The Slatin Report that the next deal is "not far off." Since the developer obtained a temporary certificate of occupancy late last year, he says, interest from potential tenants willing to accept the construction site sprawling around and in the building has grown rapidly. McQuillan declined to say whether the next deal would be for a small or large user, but said that Silverstein is targeting advertising agencies and design firms in an effort to get creative juices flowing in the building (and maybe to bring in tenants who will appreciate the huge Jenny Holzer sculpture in the lobby).

The Vantone deal also coincides with increasing talk, on this page and many others, about the tightening Midtown Manhattan market. Will the scarcity there lead tenants downtown? More to the point, it remains to be seen whether the lease, enabled by heavy lifting from all those politicians and bureaucrats, cements Silverstein's now-in, now-out, now-in role in the Ground Zero firmament.

Real Estate Valuation in Business Plan Preparation

One thing that strikes me about the three methods of valuation they describe here is the greater presence of soft factors compared to the classical valuation techniques (like CAPM) for other assets (stocks, companies, bonds) as taught in MBA programs. It leads me to think that real estate values as we know them today are inexact in a way that makes me a little uncomfortable, but also, I suppose, reflect the human element inherent in real estate and its use.

I once had this disastrous temp job in the office of a mortgage broker. For every loan we did we had to print out a 20 page stack of disclosures mandated by the State and Federal Governments that had mostly to do with discrimination and financial shenanigans. It taught me that residential real estate was in the not so distant past a rather dirty business and so they were slapped with a lot of onerous government regulation in about the '70s. The paperwork was a nightmare. This is what happens to industries that behave badly. I have to admit that the relative lack of regulation is what drew me to commercial real estate.

In any event, the consideration of "soft" factors like the type of tenants and level of landlord involvement into cap rates, IF cap rates like this are used in residential real estate, could be the financial underpinnings of housing discrimination in the past, when people moved out of neighborhoods as minorities moved in for fear for their real estate values. That being said, it seems to me at first glance to be inexact. We (in Project REAP) haven't learned about cap rates yet (though I have an idea as to how to calculate it from my own readings), but it would be interesting how the cap rate formula takes into account other tenants and landlord involvement.

With this being said, I would lean towards the cost approach to valuation. I am sure all three methods have their merits and I wonder if different valuation techniques are used for different types of properties or transactions. I suppose I will find this out later when we get to the unit on finance.
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Real Estate Valuation in Business Plan Preparation

By Gary N. Chabot

Two of the major cash flow components of small business operations are the start-up capital requirements for commercial real estate and the ongoing expense of renting and operating the space which the business is located.

Whether a company leases space or invests in its own land and building, the value for the real estate is of concern to several parties. These parties include potential lenders, other partners or shareholders, the small business owners themselves and the landlords who rent space to the business. Part one of this series deals with some of the ownership value considerations of real estate, while the second part will explore some of the important areas of leasing the business location.

Ownership value considerations

Beyond the "common sense" criteria of investing in real estate for the business (price and value, location, size and utility), the business owner also must consider that determining real estate value is important when preparing business plans for financing purposes.

Regardless of how valuable the location may be perceived by a business owner, the amount of the real estate financing is directly linked to the property's appraised value from an independent third party's point of view. Typically, a conventional lender will lend up to approximately 75 to 80 percent of the appraised value of the property. This means that the business owner must have the financial capability to finance the remaining 20 to 25 percent plus the required closing costs and other out of pocket expenses involved in financing the transaction.

In preparing business plans and required cash flow projections, many small businesses fail to consider the additional working capital required for financing or buying commercial real estate.

In addition to good faith deposits and down payments, these additional costs may include bank fees and points (one point equals 1 percent of the loan amount), legal fees, appraisal costs, environmental studies, additional fit-up or construction costs, brokerage fees and deed transfer taxes and recording fees.

Determining Value

Appraisers consider real estate value from three points of view and determine an estimated of value based upon weighing the three valuation methods. These three methods are comparable sales method, income approach, and cost approach.

Quite simply, the comparable sales method determines an approx. value based upon sales of similar properties within a reasonable recent period of time. Similarities include type of property, age, location, size and other tangible criteria. Value adjustments are made (either positive or negative) for the subject property relative to the sold property. For example, if a sold property was in better condition, or newer, than the subject property, then the adjustment would be made to lower the sold property's actual value to make it more comparable to the property being appraised.

The income approach determines an estimate of total real estate value based upon the rate of return from potential net operating income from the property (assuming it was leased to a third party). In this method, an appraiser would estimate an annual income rate for the property based upon similar rated for similar users. For example, the appraiser might determine that a retail store might rent for a rate of $9 per square foot per year. This rate should be comparable to other retail spaces in the vicinity (which should be documented in the appraisal document).

Once this lease rate is determined, the property's value is estimated using a type if multiplier known as a capitalization rate, or cap rate. Historically, cap rates are subject to several factors including the strength of the type of tenant, the level of landlord involvement, economic conditions and type of industry. However, for illustrative purposes, a property with a good tenant in a good location might command a cap rate of 12 percent in a good market.

The value of the real estate is determines by multiplying the net rental rate by the reciprocal of the cap rate. In the example given, the value would be calculated by multiplying $9 per square foot by 8.3 (100 percent divided by a 12 percent cap rate). This would mean that the investment value of the real estate would be equal to $74.40 per square foot.

Often, these figures are further adjusted to consider other variables such as vacancy rates, property management costs and other investor related factors.

The cost approach evaluates the replacement value of the property by analyzing the cost component of the specific land and building. The variables involved in estimating value are contingent upon location, geographic region of the country, labor and material costs.

Factors that are considered include costs for land acquisitions, site preparation, utilities, types of building materials, tenant improvements and soft costs (architectural and engineering costs, legal and brokerage fees and other similar related costs).


Reconciliation of the three methods

All methods are then summarized, reconciled and compared to each other to evaluate their relative values.

In a perfect business environment, the three variations of value would likely produce relatively similar results. Quite often, however, each method may produce somewhat different values from one another. This occurs because all real estate is unique, general economic conditions may vary by region and time and good market information is not readily available to buyers, sellers, landlords and tenants in the real estate market (as compared to stock markets).

Because of these general principles, the valuation of commercial real estate is an educated estimate based upon several factors. These include the collective experience and expertise of the appraiser, available and relevant information in the market, the willingness of the lender to accept the estimates and the ultimate agreement of the buyer and the seller on the property's price and terms in an independent, arm's length transaction.

© 2002 NHSBDC
This article may be reproduced with copyright information intact.

Macro Trends Affecting Commercial Real Estate Worldwide: 2006-2015

I have discovered a great information source, ResearchWorldwide.com, a worldwide Commercial Real Estate information portal. I have come across an article: Macro Trends Affecting Commercial Real Estate Worldwide 2006 - 2015

The major points are somewhat obvious to anyone following the business world over the last 5 years or so, that business activity is shifting to Asia, and with it, the need for office buildings and retail space. It also forecasts a deterioration of Western economies and standards of living, as the populations there age and demand more tax money to take care of this burgeoning population of elders, but businesses move to more tax friendly countries (with younger, more energetic populations), exacerbating Western fiscal problems.

One interesting they say is this:

Conversely, with this shift eastwards, existing commercial buildings experiencing reduced demand may require remodelling, possibly including for other uses, in order to remain financially viable.

I have been playing with the idea of learning a little Chinese.

I also have been thinking about the possibility of office space being used for other purposes. At the office equipment company I worked for near Grand Central Station, I was calling companies within our building and I found law offices listed as residences. Could ordinary people be living in an office building? It turned out that these were purely offices leased to people who were sole proprietors and doing business under their own names and social security numbers. Such a solution could have an impact on the residential market. The only issue would be pricing. Ordinary people would not be able to pay the prices that start at $40 per square foot all the way up to along the lines of $100 per square foot for many office building spaces. A new model would have to evolve to price office space and residential space in the same building. Very messy.

Lastly, they mention a squeeze of mid-sized companies that would also squeeze the demand for commercial real estate.

The article concludes with:

"These changing trends of global realignment of economic activity, aging populations requiring increases in taxation, changing consumer spending, new technologies replacing the need for expensive commercial space, scarcity of knowledge workers limiting office demand in developed economies and growing office demand in developing countries, the looming un-sustainability of the environment to cope with global economic growth, redefining corporate structures and the need for increasing sophistication to be economically competitive all have consequences for the demand and supply of commercial real estate space worldwide during the next decade"

It's a rather downbeat prognosis for status quo commercial real estate business. It is time for creativity combined with decisive action in order to "avert the evil decree."

Greenfield

Let's start from the very beginning, a very good place to start. Right now I begin with REAP.

As in Project REAP, the Real Estate Associate Program here in New York.

For more info, see: http://www.projectreap.org