Two things to get out of the way: 1.) I’m fully aware that being highly complimentary of a competitor runs contrary to the way many prefer to operate in Real Estate. 2.) I’ll get back to our normal focus on commercial and investment Real Estate articles on my next posts.

For high end office leasing…Bill Smith and Monique Clousser of NAI Norris Beggs and Simpson do a hell of a good job…and have much to be proud of. Call: 503.273.0313.

I primarily practice investment real estate with an emphasis on working with cash buyers, but my partner needed help. He needed leave town to work on his out of state real estate assets. At the same time he was racing to lease some high end office space for a boutique CPA firm.  Stone and Associates CPA’s business focuses on high net-worth individuals and small companies…their practice is expanding rapidly and they need to be in new digs and settled well before the end of year busy season.  By the way…Mike Stone, the founder, is both a CPA and an Attorney.  That’s education’s equivalency to a royal flush.  No wonder others are looking for smaller spaces while his needs are growing.

Bill Smith, Vice-President of NAI Norris Beggs & Simpson showed us a nice space in One Centerpointe, a beautiful office in Lake Oswego’s Kruse Woods.  We negotiated a myriad of details, each of us fighting to get the best for our clients, each of us acknowledging disagreements, neither being disagreeable.  Putting this all together hours before the start of the Labor Day weekend raised the bar.  At one point Bill Smith came off his vacation and got his contractor to come off his vacation to put together tenant improvement bids. To get the TI’s fast tracked to meet our move-in deadline, another Norris Beggs & Simpson Vice-President, Monique Clousser closely coordinated the contractors, worked through insurance issues, etc.  While I wont bore you with all the details, I will say that it was a real pleasure to work with true professionals to take care of a great client.  That’s the way Real Estate should work!

Next post:  I double checked it…the IRR was 145%!

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Another great article by National Real Estate Investor!

A court decision in Arizona may provide a blueprint for special servicers across the nation as they seek to recover the value of defaulted loans rolled into commercial mortgage-backed securities (CMBS).
In a landmark case, the Arizona Superior Court allowed San Diego-based receiver Trigild Inc. to sell seven Arizona apartment complexes — over the objections of the borrower — without requiring the special servicer to foreclose on the properties.

A first for Arizona, the Aug. 2 ruling enabled buyer Standard Portfolio to assume the portfolio’s existing CMBS loan, which carries more favorable lending terms than newly issued loans in today’s turbulent debt market.

Rose City Commercial Real Estate is currently working on a multifamily project… a distressed property in Salem.  We are taking back up offers…the price is under $28K/door.  For more information contact Rick Bean: rick@rosecitycre.com.

Thanks to the buyer’s low cost of leverage, the $123 million purchase price exceeded the highest all-cash bid for the same portfolio by more than $53 million, according to Bill Hoffman, president of Trigild.

“This was unprecedented and a major victory for special servicers,” says Hoffman. “A sale by the receiver brings the properties to market much sooner than a foreclosed property, and allows the special servicer to provide assumable financing for the new owner.”

A common predicament

Special servicers know that foreclosing on a CMBS loan in today’s weakened market is a losing proposition. For one, the potential to recoup an outstanding loan balance through foreclosure and an asset sale is often slim because buyers in today’s depressed market conditions can’t, or won’t, pay high prices for an unstabilized asset.

Leveraged buyers have limited access to capital because lenders are generally offering loan-to-value ratios between 60% and 70%. And few lenders will fund a loan to buy real estate with the kind of vacancy and deferred maintenance issues that usually come with foreclosed properties.

That leaves cash buyers to dominate the market for foreclosed assets. Cash buyers tend to bid lower than leveraged buyers due to an expectation of higher annual returns to compensate for the increased risk of equity investments.

Add in the special servicer’s holding and property operations costs that come with the months it takes to foreclose, make repairs and reposition a property for sale after taking the title, and the prospects for recovering the remaining principal on a CMBS loan grow downright dismal.

Offering assumable financing gives today’s leveraged buyers access to the low cost of capital that comes with loans originated in the less austere lending environment that existed before the financial crisis, according to attorney Mark Weibel, a partner in the Dallas office of law firm Thompson & Knight.

“Because the banks today aren’t loaning money at attractive terms, we’ve had to find another way to get people to buy these assets that are in default,” says Weibel, who heads the firm’s capital markets group and worked with Trigild on behalf of the special servicer in the Arizona case. “By doing assumable financing, we’re getting a higher price.”

In the Arizona case, the borrower financed the seven multifamily projects with a $164.5 million CMBS loan at 5.7% interest in 2007, according to New York-based Trepp LLC, which closely tracks the CMBS market. Bethany Properties abandoned the seven multifamily projects and their residents in April 2009, leaving behind unpaid employees and suppliers and deferred maintenance on the 2,759 apartments.

The court appointed Trigild receiver in April 2009 and the company restored order, made repairs and increased occupancy to position the assets for a profitable sale. In the court case, the borrower insisted that the special servicer, who acts as the lender on the loan, would have to foreclose to obtain the property’s title before it could be sold.

In her Aug. 2 ruling, however, Judge Eileen Willett determined that the sale proposed by Trigild offered the “best possible recovery for the receivership property.”

The unpaid balance on the loan, which will be modified for the sale to Standard Portfolio, is more than $162 million, according to Trepp. The newest property in the Arizona portfolio is Alante at the Islands, built in 1996 in Chandler, Ariz., while the rest were built in the 1970s and 1980s.

The other assets include Laguna Village and Santana Crossing in Chandler, Whispering Meadows and Tuscany Palm in Mesa, Sienna Springs in Phoenix and Verrado Park in Glendale.

CMBS complications

If assumable financing can recover the most funds possible, why aren’t special servicers offering the collateral properties from defaulted CMBS loans for sale with assumable financing? The chief reason is that laws regulating CMBS don’t give them that option.

For special servicers and other debt holders, the very act of foreclosing in order to gain title of an asset for sale wipes out the original debt, so there is no longer a loan to assume. In other words, foreclosure removes the possibility of assumable financing.

Special servicers can’t offer seller financing by creating new debt in the CMBS pools they manage because laws regulating real estate mortgage investment conduits (REMICs) preclude the addition of new debt to completed CMBS transactions. The only way for a new owner to take advantage of the low-cost debt in an existing CMBS pool is to take the place of an existing borrower on an existing loan.

“Once a REMIC trust does a foreclosure, the debt is extinguished and you can’t have new debt in the REMIC trust,” explains Weibel. “We have to keep that (original) debt alive.”

Bringing in a new borrower to take the place of a non-performing borrower is good for CMBS bondholders because the loan continues to generate payments of principal and interest. In most states, however, laws either prevent or don’t specifically allow receivers to modify CMBS loans in order to designate a new borrower. That’s why the Arizona case couldn’t move forward without the superior court’s ruling.

That court record provides a basis for similar receivership sales in Arizona. Receivers like Trigild want other states to allow sales out of receivership, which could provide flexibility to deal more quickly and effectively with a mountain of defaulted CMBS loans.

Weibel of Thompson & Knight says his capital markets group has worked on receivership sales issues in Texas, Minnesota, California, Colorado and Utah within the past six months, and the group has at least 25 cases pending.

Hoffman estimates that about 10 states already allow receivers to modify CMBS loans for assumption when they sell properties, while most states lack clear laws regulating the process and some specifically prevent it.

The practice is growing more common, however, and Hoffman expects other states to follow Arizona’s lead. “We’ll see a tremendous increase over this next year or so, because this problem’s not going away quickly.”

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By Randyl Drummer

September 8, 2010

Multifamily property in major metro markets remains the asset of choice for many commercial real estate investors, with momentum fueled by a number of large late-summer sales transactions following a solid first half of 2010.

Public and private REITs have landed the largest deals of late, but private equity, pension funds, insurance companies, owner-developers and even private

Rose City Commercial Real Estate is forecasting a broad resurgence of capital back into multifamily.  As Investors bid cap rates down and values up.  Right now is the best time to buy Portland multifamily Investments.  Contact: Rick  Bean at: Rick@rosecitycre.com.

individuals are all getting into the action for both core and distressed multifamily projects in large metros around the country, according to CoStar Group sales data.

“Investors are continuing to hunt down deals in the apartment space,” said CoStar real estate economist Dan Egan, citing plans announced this week by apartment real estate investment trust UDR Inc. (NYSE: UDR) to acquire six apartment communities in Massachusetts, Southern California and Baltimore for $455.1 million in one of the largest portfolio deals of the year.

UDR’s purchase includes the $157.5 million purchase of the 583-unit Marina Pointe in Los Angeles’s posh Marina del Rey, and the $98 million purchase of 160-unit Garrison Square at the intersection of Boston’s Back Bay and South Hill neighborhoods at a stellar $612,000 per unit.

“Those are all really nice assets, and it speaks volumes about the sentiment of investors with regard to apartments,” Egan said. “We haven’t seen that kind of trading and confidence in the office market.”

The UDR sale includes three communities recently developed by The Hanover Co. and acquired at a substantial discount to their cost, including the 266-home1818 Platinum Triangle in Anaheim, acquired for $70.5 million, or $266,000 per unit; Ridge at Blue Hills in Braintree, MA, 186 units, $40 million, or $215,000 per unit; and the 180-unit Domain Brewers Hill in Baltimore, $46 million, or $255,600 per unit.

Monthly rental income for all six communities acquired by the REIT averages just under $2,000 per occupied unit. UDR said it will finance the 1,614-unit portfolio with cash, funds from its credit facility and the assumption of $92 million of first mortgages on the Marina del Rey and Braintree properties.

UDR’s entry into Boston “exemplifies our strategy of owning [properties] in markets characterized by low home affordability with superior growth prospects,” said Tom Toomey, president and chief executive officer. “Collectively, these acquisitions will further enhance the overall quality of our portfolio as measured by average monthly income per occupied home, age and home size,” Toomey said.

Other significant apartment property and portfolio sales of more than $100 million over the last several weeks include the following:

• Grubb & Ellis Apartment REIT agreed to acquire nine multifamily properties totaling 2,676 units in three states from Oakton, VA-based MR Holdings LLC, as well as all of the assets of Mission Residential Management LLC, in a $182 million deal.
• Cornerstone Real Estate Advisers LLC and Kettler sold the Metropolitan at Pentagon City, a 325-unit multifamily complex at 901 S. 15th St. in Arlington, VA, to Invesco for $125 million.
• Eagle Rock Management LLC acquired seven apartment communities totaling 1,666 units in Carle Place, Hicksville, Mineola, Nesconset and Woodbury in the Long Island market’s largest multifamily transaction this year. Fairhaven Properties Inc. sold the properties in an off-market deal for $229.75 million.

Mid-America Apartment Communities Inc. (NYSE: MAA) continued its multifamily buying spree, making at least four acquisitions over the last month. Mid America acquired the 313-unit Times Square at Craig Ranch near Dallas from the development loan lender for $31.25 million. The Memphis-based REIT in August also announced the acquisition of the Verandas at Sam Ridley, a 336-unit gated apartment community in the Nashville area, for $32 million; the Hue, a 208-unit apartment community in the Raleigh, NC area, acquired from the construction lender for $33.6 million and the 270-unit La Valencia at Starwood in the Dallas area for an undisclosed price. On Sept. 2, Mid-America completed the purchase of The Venue at Stonebridge Ranch, a 250-unit apartment community in McKinney, for an undisclosed price.

While the super-heated Washington, D.C. market had been the undisputed capital for multifamily investment earlier in the year, Boston and San Francisco are among a number of metros cited by CoStar economists as strong prospects for investors seeking to catch the next wave of value appreciation.

“Investors seeking to capitalize on the recovery in [Washington] D.C. have likely missed the boat by a few quarters, and as capital is beginning to fan out across the country, it’s time for opportunistic investors to shift their attention elsewhere,” Egan said.

CoStar studies show that sales transaction dollar volumes picked up significantly in multifamily, among other property types, during second-quarter 2010. While many investors are swooping in for core and core-plus assets, about 28% of all multifamily sales show signs of distress, eclipsed only by hotels at 35%, according to the CoStar Commercial Repeat-Sale Indices (CCRSI).

Meanwhile, an analysis of investment conditions by the Real Estate Research Corp. found that investors rated institutional-quality apartment assets a full point higher on a scale of 1 to 10 during second quarter 2010 from the previous quarter. The rating for apartment sector investment conditions increased from 6.1 in the first quarter to 7.1, the highest among the property types surveyed by RERC and the strongest multifamily rating in the survey since second-quarter 2001’s 7.4.

“I wouldn’t say the apartment sector is ‘recession-proof,’ but it is the sector that is regarded as most safe and also seems to garner the most demand when times are tough, whether it is in this recession or the last one,” said RERC President Ken Riggs.

CoStar’s Egan found appealing markets for opportunistic and value-add investors in looking at the increase in sales transaction dollar volume between 2009 and 2010, along with forecasted changes in property values between fourth-quarter 2010 and fourth-quarter 2014. Value appreciation of 25% and up is expected in Florida, Arizona and Texas, along with well-established coastal metros in the Northeast and the West. Investors may have to look hard, however.

“Since capital has not yet found its way to markets such as San Jose, Seattle, and Boston in 2010, investors would be wise to scour them for attractive pricing, as they will be rewarded with impressive value growth over the forecast,” Egan said. However, with a bright recovery pending in those markets, most current owners don’t want to sell at the bottom of the market unless they absolutely have to, Egan said.

Stepped-up sales activity and tighter bid-ask price gaps, however, suggest that opportunities may be more abundant in Phoenix, San Francisco, Atlanta, Orlando, Tampa and Dallas-Fort Worth. Growth markets such as Phoenix and Orlando in particular have seen transactions pick up in the first half and should also see above-average recovery in values over the next four years, Egan said.

That said, “if you’re looking to invest in these markets, you should sharpen your pencils quickly; values in many of these markets are recovering rapidly,” Egan noted.

The bullishness of investors is driven by the ongoing belief that home ownership and demographic trends will continue to drive demand for apartments and keep fundamentals strong. Lower average capitalization rates suggest that income growth potential is relatively high for multifamily versus office, industrial, regional mall and hotels, RERC’s Riggs said.

“This, along with the relatively low risk associated with this sector as compared to other property sectors, makes it a particularly attractive investment,” he said.

In other significant transactions:

• A joint venture of The Prado Group and Angelo, Gordon & Co. this week acquired four buildings in San Francisco from a holding company of lender UBS in a distressed debt deal for $30.3 million The assets were part of a 51-building portfolio owned by Lembi Group and taken back by UBS in a deed-in-lieu of foreclosure transaction early last year. The properties totaling 250 units in Lower Nob Hill/Union Square, Hayes Valley, Lower Polk, and the Civic Center neighborhoods received extensive upgrades and renovation under prior ownership and are 97% occupied. “They are quality housing properties in well-located San Francisco submarkets,” said Dan Safier, president of San Francisco-based Prado Group. “The properties fit squarely within our strategy to acquire and develop residential and mixed-use properties in vibrant, supply-constrained, 24/7 markets like San Francisco.”
• Private-equity firm The Bascom Group, LLC acquired The Retreat at Canyon Springs Apartments, a 32-acre, 360-unit luxury Class A property in San Antonio constructed in 2001, in a deal that closed Aug. 26. Bascom has been actively buying distressed multifamily properties in Arizona, California, Colorado, Georgia, Hawaii, Nevada, Texas, Utah and Washington. Terms of the deal were not disclosed.
• Jackson Square Properties purchased the 200-unit multifamily property at 3185 Garrity Way in Richmond, CA, from Prudential Real Estate Investors for $32.76 million.
• The Shoptaw Group of Atlanta sold the 336-unit Brassfield Park apartment complex in Greensboro, NC, to Bell Partners for $22.8 million.
• New York-based REIT Home Properties Inc. purchased the Annapolis Roads Apartments at 1101 Lake Heron Drive in Annapolis, MD, from Dubin Development Co. for $32.5 million.
• Chicago-based Heitman America Real Estate Trust purchased the Addison Park multifamily complex in Charlotte, NC, for $33.3 million.
• Waterton Associates acquired the Brier Creek Apartments in Raleigh, NC, from Flaherty & Collins Properties for $28.3 million.
• Hamilton Zanze & Co. of California acquired a seven-property, 1,566-unit multifamily portfolio in Arizona out of receivership for $46.5 million, or about $29,700 average per unit. Six of the properties are located in Tucson and one is in Sierra Vista.
• BRE Properties Inc. purchased the Fountains at River Oaks in San Jose, CA, from FRG Fountains LLC for $50.3 million. BRE assumed an existing secured mortgage loan of $32.5 million for the acquisition.
• Also in Silicon Valley, a private owner sold the Commons Apartments in Campbell, CA, to Essex Property Trust for $42.5 million.
• Cornerstone Real Estate Advisors acquired The Highlands at Westwood, located at 7101 Cenrose Circle in Westwood, NJ, for $59.5 million, or about $278,000 per unit.

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By Ron Pressman
GE Capital Real Estate

To succeed in this real estate market, investors and managers need a new kind of toolbox. While financial implements are still critical, more traditional tools of the trade, a hammer, paintbrush and the number of a good plumber, for example, have joined them.

As the industry experiences one of the worst downturns in decades, real estate investors and managers are reconsidering strategies for success. Many of them have embraced a back-to-basics approach that provides a path for staying strong in a difficult economy. A key part of that approach: actively maintaining their properties.

Rick Bean:  One of the big stories of 2010 is the volume of acquisitions by Sam Zell’s Equity Group.  But almost unreported is the huge sums of money Equity is putting into upgrades.  That’s a sign that they believe strongly in the value of the upgrade play in this market.  If you’re ready to make a strong move contact me:  rick@rosecitycre.com

Gone are the days when making a profit in real estate involved a financial transaction and little else. Now, in an effort to remain viable, real estate professionals are focusing on 1) protecting and enhancing the value of their assets; 2) adapting to a changed investment climate; and 3) reallocating precious resources.

And despite the rough sledding, there is a good likelihood that these strategies, taken together, will yield success. To be sure, a meaningful recovery is not imminent. But there is a growing list of companies lining up to take advantage of the recovery when it occurs, giving perhaps the first indication that a slow turnaround may be beginning, at least in some sectors.

Generating Value through Maintenance, Management and Realigning Resources

This current approach is based, in part, on the value of the properties themselves. This cycle differs from prior ones in that a severe lack of liquidity has made it very difficult to sell. The only way to generate value, therefore, is to preserve the value of the portfolio, minimize loss and outperform on a management level.

For those reasons, savvy investors, landlords and managers are more proactive than ever, with the goal of avoiding negative absorption. Depending on the situation, managers may offer new lease terms to existing tenants, actively solicit new ones, and anticipate and address any physical issues, from lighting to elevators to cleanliness. In fact, though it may seem counter-intuitive in a time of stretched budgets, there is a renewed emphasis on capital expenditures, with tenants being attracted to buildings that can offer tenant improvements.

As it turns out, the financial pressure felt by many commercial real estate investors impacts them very differently. For example, highly leveraged organizations find it much harder to come up with the tenant improvement dollars required to attract tenants. Others, however, find that conservative decisions made in the past leaves them in a position to maintain and improve their properties, thereby retaining and even attracting tenants, even in this difficult market. And, the cash flow this eventually generates translates directly into property value.

Organizations are also adapting by becoming more flexible and realigning their resources. For example, they are shifting people from less-active areas, such as origination and deals, to asset management positions that have an immediate impact.

The Quest for Proven Partnerships

Equally important, the back-to-basics approach is being seen in a much-altered investment client. Driving the changes are both the experiences of investors – many of whom incurred losses in general real estate and private equity funds – and a critical lack of capital. Taken together, this means investors are being much more careful, opting to invest in groups rather than as single entities. Many are also more hands-on, personally evaluating and scrutinizing opportunities rather than having fund managers direct their investments. Overall, the marketplace is characterized by a more disciplined approach and stricter underwriting practices. This is in marked contrast to the past several years, when an apparent limitless supply of capital drove some investors to continue doing deals, despite dropping returns.

Another shift involves the types of partners investors are seeking. They’re now looking for partners who have the ability to protect, manage and improve an asset as the need arises. That could mean finding tenants or more effective marketing, for example. Moreover, investors are seeking partners with proven track records and deep expertise. There is a growing understanding in the industry that many financial players simply don’t have the knowledge and experience to proactively manage properties with their myriad needs.

As the market roil continues, it’s important to remember there is a way to stay strong and position one’s assets and financial profile for future success. Combining a back-to-basics approach and adapting to changed market and investment conditions can help make this cycle a catalyst for growth and create a more sound foundation for the future.

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Having completed over $6 Billion in real estate deals makes Robert Knakal someone to listen to and learn from.  I subscribed: Robert Knakal’s Streetwise.

Welcome back old friend! Yes, we have seen a re-emergence of the blessed 1031 tax-deferred exchange in recent weeks, and what a welcome sight it is.

The opportunity to protect hard earned equity in the sale of an investment has been available to investors since 1921. However, this part of the tax code was so complex that only a small segment of the investment community took advantage of this mechanism.  In 1990, the Omnibus Budget Act provided more widespread access to a broader set of investors as this option was clarified and simplified. Section 1031 exchanges are often mischaracterized as “tax free” when they are actually “tax deferred”.

Contact the team at Rose City Commercial Real Estate to begin investing in Portland’s future…and your own:  rick@rosecitycre.com or 503.577.1034.

The theory behind this mechanism is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay taxes. Only the form of investment has changed, therefore, it would be unfair to collect a tax on a “paper” gain.  When an investor utilizes this mechanism, the deferred gain is payable when the replacement property is sold and is not part of yet another exchange. At that point, the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

1031 exchanges in the investment property market have been growing in popularity since the mid-90s and fueled a majority of transactions in the mid to late 2000s. With falling property values and transaction volumes beginning in late 2007, we saw a significant reduction in 1031 transactions.

In previous StreetWise columns, I have gone into detail about the supply / demand imbalance and the fact that the volume of sales was so low due, mainly, to lack of supply as opposed to waning demand. The supply of available properties for sale is generally fed by discretionary sellers. When value falls, as it has done since 2007, discretionary sellers withdraw from the market and the supply is then fed by distressed sellers. Distressed sellers have not fed the supply in numbers which were expected because everything that has occurred from a regulatory perspective has allowed these sellers to avoid dealing with their distressed assets.

Recently, we have seen the flow of distressed assets begin to loosen as banks and special servicers are beginning to clean up their balance sheets and portfolios. Simultaneously, we have seen discretionary sellers returning to the market. The tangible evidence that this is actually happening can be seen in the 1031 activity we have seen recently. Distressed sellers are rarely left with any equity to reinvest in the form of a 1031 exchange. Discretionary sellers, on the other hand, often have significant equity to redeploy via this tax-deferred vehicle. We are, once again, seeing sellers ask for flexibility in closing periods to provide them with better chances of being able to effectuate an exchange.

During the past 4 weeks alone, we have signed 12 contracts with purchasers who are investing 1031 funds. Moreover, we are receiving multiple calls each day from investors who are looking for properties to complete exchange transactions. This is certainly reminiscent of 2006 and 2007 when so many transactions were motivated by tax-deferment. The demand side has been very strong for quite a while as institutional capital has returned to the market, joining the high-net-worth individuals and families which have dominated the horizon for the past couple of years. Foreign high-net-worth investors are present in rapidly growing numbers and the re-emergence of 1031 capital adds more pressure to already overwhelming demand for investment properties.

Don’t mistake my perspective as I am not suggesting that market conditions are back to the go-go, bubble inflating, years of 2005 to 2007. I am, merely, passing along a trend that we are seeing which has, for the most part, been absent for quite a while. It is yet another sign that the recovery is upon us.

From an intermediary’s point of view, or anyone’s, who is reliant upon transaction volume for their livelihood, it is positive to see this type of activity returning to the market. To the extent that distressed sellers continue to dispose of assets and discretionary sellers return to the market, transaction volume has no choice but to increase. As sellers with real equity sell, each transaction is likely to stimulate another transaction as a 1031 is contemplated.

This trend certainly bodes well for our projection that transaction volume will increase by about 40% this year over last year. Welcome back old friend, indeed!

Mr. Knakal is the Chairman and Founding Partner of Massey Knakal Realty Services in New York City and has brokered the sale of over 1,050 properties in his career having a market value in excess of $6.2 billion.

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Senior reporter Patty Tascarella covers banking, finance, legal, marketing and advertising and foundations at the Pittsburgh Business Times.
Contact her at ptascarella@bizjournals.com or (412) 208-3832.

Read more: SEC proposes rules to curb market mayhem – Pittsburgh Business Times

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