CARLSBAD, Calif. – PGP Valuation Inc., the industry-leading appraisal services firm with offices worldwide, has announced that Lance W. Doré, MAI, FRICS, has been appointed to the newly created position of Vice President, Client Services. In his new corporate role, Doré will be responsible for the firm’s major client relationships benefiting from the company’s national and international service delivery platforms. Further, he will oversee personnel and quality standards associated with the delivery of valuation services to these clients.

“Lance is one of the most recognized and respected valuation industry experts of our time,” said Ken Harrison, CEO & President of PGP Valuation Inc. “His depth of knowledge – across a whole spectrum of property profiles and geographies – has a long history of generating powerful results. Now, Lance will carry his mastery across our organization for the benefit of PGP clients seeking truly integrated services across broad geographies.”

“I am extremely pleased to have the opportunity to expand PGP’s practice expertise while providing even greater levels of service to our growing and diverse range of corporate, institutional and government clients,“ said Doré. “We are uniquely suited to serve the needs of portfolio-driven clients in these especially challenging times. Our insights and specialized services are already proving themselves to be of genuine and increasing value.”

Doré, a 26 year industry veteran, holds geographic expertise across the United States as well as Asia, Central America, Mexico and Europe while supporting a range of clients and property types. His work has included the valuation of energy related properties, special purpose lands and facilities, as well as a wide variety of office, retail, industrial, and multi-family projects. He is an adjunct professor at the Russian Finance Academy and has been a guest speaker and instructor at the Pan Pacific Conference on Valuation, for the Government of Cyprus, for the Russian Federation on the Valuation of Oil and Gas and Power Plants, for the Royal Institute of Charter Surveyors on the Government and Regulatory Risk for Real Estate, and for Pepperdine University, Graziadio School of Business and Management.

Founded in 1978, PGP Valuation Inc. is the world’s largest valuation services firm and a member of the Collier’s International real estate family of companies, a First Service CRE organization. PGP and its affiliates maintain offices in over 25 major North American markets with expanded coverage in over 88 International markets. The company offers differentiated property valuation services through proprietary data, technology, analysis and delivery methods. Its depth of experience, as well as many highly specialized areas of practice, is the result of over 1200+ valuation experts providing unparalleled quality and service on a worldwide basis.

Contacts

PGP Valuation Inc.
Joe Fitzpatrick, 213-399-4999
joe.fitzpatrick@pgpinc.com

Finding The Bottom Vs. Finding Value
by Jackson Cooper, SIOR, CCIM – Managing Director
Sperry Van Ness – Boise, ID

Arriving at a decision on the best strategy for how to successfully navigate the commercial real estate market during these challenging economic times is vexing to many an investor. Do I, or don’t I??? That is the conundrum facing most commercial real estate investors in today’s market. Do I, or don’t I liquidate my portfolio (or at least my non-performing assets)? Do I, or don’t I stand on the sidelines and wait-out these turbulent times? Do I, or don’t’ I get aggressive and take advantage of the decline in property values and the spike in acquisition cap rates? In the text that follows I’ll put forth counsel based not upon the emotions of the times, but rather the forthcoming advice is based upon my years of experience in successfully advising clients in both advancing and declining commercial real estate markets.

It is often said that you can only count on two things in life: death and taxes. There is a third thing that is often overlooked…market volatility. Whether markets are moving up or down isn’t really the issue. The issue is whether or not value can be added or created in the investment being considered. What tends to happen to the non-sophisticated commercial real estate investor is that they rely on upward moving markets to create value for them. If the market happens to move in your favor that is a plus, but it should not be the sole basis upon which your investment decision is made. You need to be able to add value to an asset through operational improvements, repositioning, restructuring, recapitalizing, re-tenanting, or other proactive strategic or tactical value enhancements. This is the mark of a savvy investor.

It doesn’t really matter whether you’re looking at the equity market, commodities market, bond market, the commercial real estate market, or any other investment market, as all investment markets have certain similarities…It is my hope that the following five points will be useful in refining your investment philosophy moving forward:

1.Market Timing: Let me be very blunt right from the outset…not only is it an exercise in frivolity to try and time a market bottom, but many significant investment opportunities will simply pass you by as you stand on the sidelines waiting for that almighty market bottom to occur. I know…smart investors buy low and sell high right? Sure, but there is a difference between recognizing value and opportunity that lead to superior investment returns, and trying to wait for that ethereal moment in time that represents the exact bottom of a market. Put simply, one in a million will correctly time a market bottom, while many investors will generate significant returns by exploiting the opportunities that a declining market provides.

2.Professional vs. Amateur Investors: Tough times tend to separate the wheat from the chaff. The challenge facing most commercial real estate investors today is to become honest with themselves in determining whether they are in fact astute commercial real estate professionals, or whether they were among the masses just riding a wave while it lasted. You see professional investors are always in the market…during good times and bad. They understand that more “lasting wealth” is created in declining markets than in overheated advancing markets. You see it’s the non-professional investor (stupid money) that is both late to the market, and then overstays their welcome by holding on too long. In point number 1 above I mentioned top of the market…Whenever you reach a point in the market where everyone (even your cab driver) is a “real estate investor” you know you’ve found the top of the market.

3.Invest in Opportunities not Asset Classes: The most successful investors are fluid in their approach…they see changes in the market as being synonymous with the creation of new opportunities. While I certainly understand the synergies that come from developing a niche focus, I don’t believe they can make-up for the increase in diversification and scale that comes by exploiting opportunities across asset classes. Are you a retail investor, or a commercial real estate investor? Are you a multifamily investor or a commercial real estate investor? You see it is my belief that the core of sound commercial real estate investing is present across asset classes. The same characteristics that make an investment attractive in one asset class are ostensibly the same in others. Location, current market dynamics, tenant mix and quality, entitlement and construction risk, absorption and vacancy (supply and demand), age and construction quality, micro and macro economics, NOI and valuation drivers, etc. are relevant regardless of whether you’re investing in industrial or office assets. Furthermore, it’s important to be flexible in the structuring of your investment opportunities. As an example as long as the risk/reward ration falls within your investment guidelines it shouldn’t matter whether you are a principal in entirety, have a limited ownership interest, where you investment falls in the capital structure or any number of other considerations. You either like the opportunity or you don’t…the rest of the issues are just details to be worked out at the negotiating table.

4.Understanding Opportunity: Rarely will you come across a static opportunity in the sense that it will stand idle and wait for you to act…Significant opportunities are not only scarce, but they typically operate on the principal of diminishing returns. The longer you wait to seize the opportunity the smaller the return typically is. In fact, more likely is the case that the opportunity will completely evaporate if you wait too long to seize it. Keep this thought in mind; when opportunity knocks…answer the door. I can’t even begin to count the number of times I watched people miss great opportunities due to a poor sense of timing. Not too surprisingly, people who possess a poor sense of timing usually don’t even understand timing is an issue. How many times have you witnessed someone holding-out for a higher price, better valuation, evolving markets, technology advances, or any number of other circumstances that either never transpires, or by the time they do, the opportunistic advantage had disappeared? I’ve observed the risk adverse take due diligence one step too far, the greedy negotiate too long, the impulsive jump the gun, and the plodders move to slow. As the saying goes “timing is everything.” The proverbial window closes on every opportunity at some point in time. As you approach each day I would challenge you to consistently evaluate the landscape and seize the opportunities that come your way. Better to be the one who catches the fish than the one who tells the story of the big one who got away…

5.Seeking Sound Counsel: The smartest commercial real estate investors surround themselves with professional advisors who extend their strengths, shore up their weakness, improve their access to market knowledge, and provide more visibility and broader access to investment opportunities. What really separates the successful investor from the average investor is that the successful investor has a broader sphere of influence and a larger network helping them to be successful than the novice investor. If you ever wonder why certain investors seem to get access to the best deals, it is usually because the professional investor simply enlists more resources working on their behalf.

My advice is this…don’t let the current market conditions intimidate you. Rather create an opportunistic approach to commercial real estate investment that will simply adapt your investment guidelines to the current market dynamics. There is every reason to get into the market and take advantage of once in a generation opportunities that exist now.

About the Author

Jackson Cooper, SIOR, CCIM is the Managing Director for Sperry Van Ness in Boise. He has served as a Senior Advisor for Sperry Van Ness for 5 years specializing in office, industrial, multifamily, hospitality, retail and land for development property transactions. With over 30 years of commercial real estate experience, his knowledge is leveraged through the innovative concepts of Sperry Van Ness. Prior to relocating to Boise, Idaho Jackson was the first Sperry Van Ness affiliate in Oregon and was honored in the Wall Street Journal as one of Sperry Van Ness’ top Advisors in 2004 & 2005.

To date Jackson has closed over 1 Billion dollars in sales transactions. Jackson is extremely active in the commercial real estate industry, holding the designations of Certified Commercial Investment Member and Society of Industrial and Office Realtors. He is a member of the National Association of REALTORS, Ada County Associations of REALTORS, Boise Metro Chamber of Commerce and Boise Chapter of BOMA. Jackson Graduated from Washington State University with a Bachelor of Arts Degree in 1970. Jackson is currently licensed in Idaho and Oregon. Through Jackson’s experience over the last 30 years he has gained local, regional and national expertise of market knowledge & trends. Along with the national platform of resources that Sperry Van Ness provides, Jackson can present each client with up-to-date analysis and state-of-the-art marketing concepts to maximize their investments.

For more information you can reach Jackson at any of the contact points listed below:
Email: cooperj@svn.com
Phone: 203.363.7000
Web: www.jacksoncooper.com
Copyright © 2009–Jackson Cooper
This Office Independently Owned and Operated
All information presented by Sperry Van Ness (SVN) has been obtained from sources deemed reliable.
SVN makes no representation with regard to the accuracy of the information contained herein.

The day of reckoning has long passed its arrival industry wide; the time to take charge of our future is now. Our challenge is three fold: how do we forget everything we have learned; yet, exploit all of the skills we have accumulated from years of experience; and, give up our mental memory of the future? We as real estate practitioners need to take charge, we need to build, we need to buy, we need to invest; so, we need to ask ourselves: What will it take to get back into the game? How we will stay relevant until that time for each of us arrives?

Real estate as an asset class always was a worthwhile investment for three reasons: we were led to believe that it was a hedge against inflation; it was an asset that you could buy with leverage; and, that the combination of safe leverage and rental increases were in some way driven by the existence of job growth across our economy.  In Q1 2009 the economy lost 1.9 million jobs and unemployment currently sits at 8.5%. Since 1939, our job growth over any 120 consecutive reporting months-a decade-has always been in excess of 12%. In January of 2010, we will acknowledge our own “lost decade” as there will be no effective job growth between January 2000 and January 2010. During the same time, we have added 13%-14% new office stock across the U.S. market place. This is clearly not good for the asset class.

Economists believe that unemployment will crest by the end of 2010. If history repeats itself, in 1986 and 1987 we had a valuation peak followed by financial crisis, followed by a political solution to the economic collapse. It wasn’t until 1994-eight years later-that the marketplace truly settled and began to grow. During 2006 and 2007 we had a valuation peak followed by extraordinary financial collapse and a political solution to this economic strife. If history repeats itself, we’re not back to a stabilized marketplace until 2014.

Accelerating or retarding the speed of recovery is the reality of a synchronized global recession. We have complications associated with a forecast of job loss or valuation loss due to the world’s increasingly interwoven economies and financial systems. As globalization speeds the flow of economic benefits in good times, in times of contraction, globalization transmits trouble with enormous speed and force affecting economies all over the world. Our economy shrank at a 6.3% pace at the end of 2008 which was the worst showing in more than a quarter of a century.

Unemployment rises, home values fall, and investment portfolios shrink so consumers cut back forcing companies to slash production and jobs. The U.S. consumer is 70% of U.S. GDP; the U.S. represents about 1/3 of the world’s GDP; therefore, the U.S. consumer is 20% of the world’s GDP. At the same time, we face growing protectionism sentiments across the globe verses our collective need to stay synchronized globally to get out of this recession. How do we get through the global recession that sees a great decrease in demand for all products let alone real estate space? When we emerge from recession to recovery, how do we have a sustainable path that makes good business decisions not just for one year, but for many years to come? If real estate is a “location” business, where is your business positioned to exploit the opportunities that 2009 and 2010 will bring forth?

A long period of healthy economic growth convinces people to take bigger and bigger risks. In the fall of 2008 former Chairman Greenspan insisted that the precipitating factor of the 2008 crisis was the failure to properly price risky assets. As you consider your play in this real estate cycle, consider your capacity to evaluate, analyze, identify, assess and price risk. You must consider the partners who have provided equity capital to your individual business plans as well. Without goal congruence as it relates to evaluation, analysis, identification, assessment and ultimate price of risk, the proverbial rug is likely to get pulled out from under your business plan. It’s bad enough that we stand on shifting sands vis-à-vis the regulatory ground rules that our government seems to be placing upon us. As we stabilize housing, fix the banking system, get credit flowing and re-regulate the financial markets-remember that hope and fear are inseparable. We need to ensure that those who provide the equity for America’s deleveraging are in sync with the real estate owners and operators as to how they identify, assess and price risk. We believe that investors like risk (volatility of outcome) so long as they can price it; but, what investors hate is uncertainty-not knowing how big a risk is. Markets buy and sell risk that is wanted and unwanted.

Real estate is about risk shift and the market place is where this shift (for price) takes place. Today however, capital “markets” seem to be an oxymoron. We don’t see capital flows returning to the levels we experienced in 2007. The combination of devaluation of assets, lower loan-to-value (LTVs) and decreasing velocity of transactional turnover should cover all but about $50-$70 billion of the capital needs of our industry. We don’t see securitized mortgage lending returning until there is stability in the interpretation of mark-to-market valuation as well as sale treatment by the accountants on the balance sheets of our financial institutions. Pricing of course will be critical for the “new securitized world” given the volatility (risk that must be priced) heretofore bond buyers have experienced since June of 2007. 

Today, the market doesn’t know what to expect. There is regulation uncertainty and there is a fear that regulation will change, leaving us regulation by deal. Can and will the government change the rules on the business community whimsically?

Money supply’s effectiveness depends on how quickly people spend it-that is called velocity. If people horde cash, velocity falls and more money is required to keep the economy moving. As velocity continues to fall faster than the Fed can pump up the money supply, our government must spend on goods and services. Yet Congress does not have its own stash. Every dollar it injects into our economy is taxed or borrowed out of the economy. Our economy has stalled, with insufficient aggregate demand, with a decline in demand for goods and services, sales fall. Production is cut, people are laid-off, unemployment rises and declining profits further depress demand creating a vicious circle. We have to increase demand through consumption, investment, net exports and government purchases. Cheap credit, the usual route to recovery has failed to work. Lenders have pulled back; borrowers are focused more on paying down debt and building up savings. Keynesian economists advocate increasing government spending to combat economic downturns and generate jobs.  

Motivations matter. Banks, whether they are local, regional or national interpret “troubled assets” and the use of TARP or PPIP money differently. “Toxic” to a local bank may be acquisition, development and construction loans for home builders while “toxic” for the largest banks in the globe may be mortgage securities. The motivations of banks differ from life companies (regulated by 50 different state regulators) which are different than the motivations of a securitized lender (and whether we are dealing with a trustee, a master, a primary, a sub, or a special servicer). In this market place knowledge matters, motivation matters, relationships matter.

Our future gets clearer every day. If our crisis was caused by a dramatic under pricing of risk, resulting from a combination of endless supply of capital and an insatiable appetite for leverage; then, our future is one of lower leverage, greater transparency, greater regulation and an organized marketplace where transactions are done responsibly. Regulation has the tendency to create accounting rules and capital requirements that aggravate financial retrenchment during a slowdown and financial access in a boom.

All real estate makes money; the only question is who owns it at the time.

Ariticle written by Jack M. Cohen, CRI, CMB, Chief Executive Officer of Cohen Financial

Download PDF article here

The significant turmoil in the real estate capital markets has resulted in a considerable vacuum in financing opportunities for Manufactured Home Communities. Once a favorite of the now inactive CMBS/Conduit loan industry, the MHC asset class has become increasingly reliant on Fannie Mae, life insurance company, and commercial bank loan executions. Many MHC and RV Resort operators, in addition to borrowers across every asset class, had found favor in recent years with aggressive Conduit lending programs and their high loan-to-value and low debt service coverage thresholds. With the disappearance of this segment of the capital marketplace, the availability of competitively priced, non-recourse first lien financing for MHC’s outside of Fannie Mae does exist, however with comparatively less attractive terms.

Portfolio life insurance companies are still in the market and are providing non-recourse financing, however their fixed rates range from 7% to 8%, which is 1.5% to 2.0% higher than Fannie Mae fixed rates today. Commercial banks will loan up to 75% loan-to-value on MHC’s, subject to debt coverage requirements of 1.25x typically. The best bank pricing today is in the low to mid 6% range, and the borrower must sign a personal guarantee. The bright spot for MHC financing continues to be Fannie Mae, but they too are getting tighter in their underwriting and pricing. The highlight of Fannie Mae’s offerings today includes a variable rate loan program with fully indexed rates in the high 4% range and a lifetime cap between 6.75% and 7.25%.

Zachary E. Koucos

Associate Director HFF

858.812.2351 Office

858.552.7695 Fax

Securitized lending for individual properties (CMBS or conduit loans) emerged in the mid-1990s as a very popular lending option for commercial real estate including MHCs. Conduit lending was embraced by lenders as a way to generate lending profits while shifting the risk of defaults to bondholders who purchased the bonds that were collateralized by the individual loans. In some years conduit lending accounted for up to 60 percent of annual commercial lending volume. Borrowers benefited by having very attractive (interest rates and leverage) non-recourse financing available for most properties including MHCs, which had previously been viewed by many lenders as a special purpose asset. The existence of conduits also resulted in better terms being available from non-conduit or traditional balance sheet lenders as they had to compete with conduits to obtain business. However, the recent capital market turmoil brought the origination of conduit loans to a halt as the buyers of these bonds, or CMBS, exited the market. With conduit lenders gone from the market, many MHC borrowers with existing conduit loans are facing challenges in refinancing their properties.

Tony Petosa

Senior Vice President

Wells Fargo Multifamily Capital

760.438.2153 Office

760.505.9001 Cell

760.438.8710 Fax

tpetosa@wellsfargo.com

To use a Vegas analogy, we went from a “hot” craps table where everybody is winning, to the desperation of placing your last dollar into the slot machine on the way out, hoping you’ll get lucky. OK, maybe not that extreme, but close. Over the past several years, there were many options to finance your MHC; you had the CMBS/conduit lenders, the life companies, GE, commercial banks and the Fannie Mae DUS lenders, to name a few, and they all wanted a piece of the action.

Due to MHCs being a proven asset class within the finance world (high performing loans and low delinquencies), they were viewed as favorably as a Class A apartment complex in a strong Southern California market. At the peak, it was common to see 10 years interest only, 80%+ leverage and a sub-100 spread on any given community. Then, much like the economy as a whole, the bottom fell out and we went from an extremely liquid and aggressive market to a cautious, selective, downright tough market.

The good news is that we are still closing loans under the Fannie Mae DUS program. Although the terms are not quite as attractive, it is still possible, and realistic, to get a non-recourse, less than 6% fixed rate loan with a 10 year term and a 25 to 30 year amortization schedule at 75% leverage on high quality communities. Other than that, you may be able to find a local bank or a life company to consider something on a recourse basis and/or a more conservative structure.

Todd Elkins

Vice President

Grandbridge Real Estate Capital LLC

205.978.1920 Office

205.978.1852 Fax

telkins@gbrecap.com

www.gbrecap.com

With the capital market providers still on the sidelines , owners of manufactured home communities basically have two choices when it comes to financing – Fannie Mae and everything else. I divide it into two choices since Fannie Mae is the best option in the market today and Capmark is actively closing loans through its Fannie Mae platform. The main issue is having the community qualify for a Fannie Mae loan from the quality standpoint. The community generally has to be 3.5 star quality and higher, 50% of the spaces have to accommodate multi-sectional homes, very little park owned homes, 5% or less RV sites, good amenity package and has to show well. Current underwriting guidelines are 80% LTV with a 1.25x debt coverage ratio with terms ranging from 5 to 30 years. Amortization schedule of 25 to 30 years. Keep in mind that Fannie Mae has been tightening their underwriting requirements, so a deal that fit the program a year ago may not qualify today.

If the community doesn’t qualify for Fannie Mae, then it falls into what I call “everything else”, meaning Capmark works with the borrower to try and find a loan. There are several smaller banks that will lend on manufactured home communities throughout the country. The underwriting is going to be more conservative than Fannie Mae, generally LTV of 60 – 70% with 1.30 + debt coverage ratio. The terms are going to be shorter as is the amortization. Capmark also works with life insurance companies to fund loans for manufactured home communities. Some insurance companies will lend on communities that don’t qualify for Fannie Mae program ; it really comes down to deal specifics.

As a community owner who needs financing in this challenging environment, it is important to allow more time to get your loan closed and it is very important to work with lenders that know what they are doing.

Damon B. Reed

Vice President Capmark Finance Inc

205.991.6700, Ext 8191

205.991.9101 Fax

205.601.2855 Cell

Damon.Reed@capmark.com

Underwriting parameters continue to become more conservative. Fannie Mae recently announced that all-age communities (non-age restricted) will need to utilize a 25 year amortization, as opposed to the standard 30-year amortization. Fannie is taking a harder look at asset quality and only wants to lend on the highest quality communities. That being said, Fannie Mae closed on over $1 billion in manufactured housing business in 2008, which was a huge jump from the previous year. Rates are still very attractive for communities that do qualify, with 10-year loans currently pricing in the 5.75-6.25% range. With limited other financing options, we expect to continue to see a large volume of manufactured housing owners seeking Fannie Mae financing in 2009 for their communities.

Andrew Tapley

Senior Vice President Multifamily Finance

301.215.5578 Office

301.634.2151 Fax

atapley@walkerdunlop.com

www.walkerdunlop.com

In the next 12 to 24 months do you foresee any new financing sources or options that are not currently available for MHC owners?

I have been lending on manufactured home communities since 1995 and it’s hard for me to imagine that the capital market providers will stay on the sidelines forever. I think we are several months away before any of the Wall Street firms dip their toe in the securitization market. I do think by 2010, we will see some “conduit’ lending for manufactured home communities, albeit on much more conservative terms that what was done in 2007. Manufactured home communities as an asset class are holding up well compared to other commercial property types. If that trend continues, you may have more life insurance companies and even pension funds start to lend on communities. Overall, I am optimistic that the worse days are behind us and that we may start to see “normal” lending emerge in the near future.

Damon B. Reed

Vice President Capmark Finance Inc.

205.991.6700, Ext 8191

205.991.9101 Fax

205.601.2855 Cell

Damon.Reed@capmark.com

Yes, we are seeing the marketplace gradually deepen for MHC financing as more lenders have taken note that Manufactured Home Communities as an asset class provide a reliable, low-risk investment. Life insurance companies as well as commercial and regional banks that historically have not transacted in the MHC sector are beginning to realize the inherent value of including this product type in their investment portfolios. The word is out – low loan delinquency ratios, high occupancy rates, and consistent cash flow make MHC’s one of the most attractive options for the deployment of capital in these uncertain times.

We are also seeing many public and private capital sources raising debt and equity funds for the origination of first lien, mezzanine, bridge, and structured finance transactions. More and more of these capital sources have MHC’s on their list of preferred product types. The ability to navigate the capital landscape left standing after the implosion of the MBS/Conduit marketplace is crucial today for MHC operators who are finding that their go-to lenders are no longer active or existent. The good news is that there will be capital available and looking for opportunities, albeit with a tighter strike zone on underwriting, pricing, and terms.

Zachary E. Koucos

Associate Director HFF

858.812.2351 Office

858.552.7695 Fax

zkoucos@hfflp.com

For the near future, we see Fannie Mae as the best financing source for MHCs. Fannie Mae offers long-term fixed rate, non-recourse financing to qualified MHC’s (10-year fixed rates are currently under 6%), and this has helped fill the some of the void left by the conduit market. For properties that do not qualify for Fannie Mae financing, portfolio lending programs would be the next option. Borrowers will find, however, that portfolio lending programs often require full recourse (personal guarantees) and the terms and rates are not as attractive as what can be found with Fannie Mae currently. Beyond that, seller financing may be an option if a borrower is acquiring a property. In that instance, the financing terms will be the result of what the buyer is able to negotiate with the seller. Will conduit lending return? Ultimately we believe it will, but not for the foreseeable future and likely in a more regulated environment with tighter credit standards.

Nick Bertino

Vice President Wells Fargo Multifamily Capital

760.438.2629 Office

858.336.0782 Cell

760.438.8710 Fax

nick.bertino@wellsfargo.com

With the single-family market struggling, how do you think this will affect the manufactured home community industry?

Simply put, the struggling single family market presents terrific challenges and great potential. The potential is to design creative and sustaining programs that enable companies like ours to provide quality, affordable shelter to families who have challenging balance sheets and credit histories because they are moving from housing they can’t afford to factory-built homes in community neighborhoods that present a lifestyle and a value proposition that they can embrace. The real challenge for our company is developing programs to take advantage of the baby-boomer population wanting to downsize, but not being able to sell and capture their perceived equity in the current home they have occupied for decades.

James A. Reitzner

President & Director Asset Development Group, Inc

414.507.8057

jim.reitzner@assetdevelopment.com

In the near term, on the 55+ side, the inability of our prospects to sell their homes has been affecting us for a while now. New home sales in age restricted communities have dramatically slowed given the difficulties these prospective residents face in selling their permanent homes. When houses do start to sell, and there is evidence the inventory of foreclosures and short sales is starting to move in the Sunbelt states, we’re going to be competing with some relatively cheap stick-built product. I think this will force us to revisit the floor plans and models we’re spec’ing. For a while, when the market was hot, the homes we were selling kept getting bigger and more expensive (triples, two-car garages, granite and stainless steel, etc.). This worked because the cost of alternative housing was increasing so rapidly and our customers were pulling out large amounts of equity from their homes in the north. That is obviously not the case at this point and we are going to be selling in a much more “normal” market when the ship turns.

The good news is, I think the housing correction has readjusted the market for the different types of housing. Many of those folks, and there are millions of them, that could previously have qualified for a high leverage mortgage to buy a stick built-house, are renters now. This has translated to fantastic sales results within our all-age portfolio in all regions of the country. As long as we remain focused on the overall value proposition this industry is based on, we expect this success to continue.

William Glascott

CFA Vice President Hometown America, LLC

312.604.7503 Office

312.604.3103 Fax

312.523.7584 Cell

bglascott@hometownamerica.net

www.hometownamerica.com

The manufactured home industry is able to offer individuals and families an alternative affordable housing option during an economic transition.

Manufactured home communities offer an atmosphere and amenities that a typical apartment complex does not have. These include homes with a larger living area than a typical 2 bedroom apartment unit, individual yards in which pets and children can play safely, and a similar neighborhood atmosphere to that of a single-family subdivision.

The RHP Properties portfolio (70 communities, 15 states) continues to experience an increase in occupancy due to our strong hands -on management approach during these tough economic times.

Joshua Mermell

Director of Acquisitions RHP Properties, Inc

248.626.0737

jmermell@rhp-properties.com

Many owners have indicated that one of the biggest challenges of owning MHCs is having to carry notes of community-owned homes on the balance sheet. With the lack of chattel/manufactured home financing, how are you dealing with home financing issues?

As a company, we recognized years ago that we could not “get around” the necessity of financing homes in our communities. Our business model necessitates the three critical components of our asset class: retail sales of homes, retail financing of homes and quality communities in which to place those homes all for the purpose of creating the value proposition for the customer. We purchased a finance company with an on-going book of business and solid income stream, and expanded that company’s ability to grow and service our buyers. This approach keeps our balance sheet on the properties side focused on the traditional method of valuing properties which is the Net Operating Income tied to the real estate and not blurred by the necessity to evaluate the “home inventory”, however it is represented on the balance sheet.

James A. Reitzner

President & Director Asset Development Group, Inc

414.507.8057

jim.reitzner@assetdevelopment.com

We’re doing it ourselves. You are correct though that this is a big challenge as the capital requirement associated with home sales has increased. It has worked out for us as we’ve been able to manage delinquencies and turnover because we’re in the communities every day. From a capital preservation standpoint, it has worked out as we’re well capitalized, long term investors with the critical mass that supplies geographic and demographic diversity in our loan portfolio.

We do have good relationships with the national lenders that are still out there lending and work to establish partnerships with regional and local banks when possible. We are also always looking at creative ways to add liquidity to this market through industry initiatives and working with national organizations like the MHI. I think as investors come back to the market for asset backed securities (with help from Uncle Sam) and we as an industry can demonstrate transparent and stable loan performance, more chattel financing sources will surface. However, that means that we need to be very disciplined in our lending practices and underwriting so that we ensure these notes are marketable assets when that time does come.

William Glascott

CFA Vice President Hometown America, LLC

312.604.7503 Office

312.604.3103 Fax

312.523.7584 Cell

bglascott@hometownamerica.net

www.hometownamerica.com

As I finished off my bear claw and thought things were finally wrapping up, a banker asked a question related to appraisals. My ears perked as the gentleman asked if appraisals were indeed contributing to the downward spiral in values. It seemed like a fair question; prices are negotiated based on other recent prices, which are affirmed and often modified after appraisers declare market value. The problem lends itself to the old complaint that appraisers are sitting backwards on a forward moving horse.

Gratefully, Dr. Hoenig accurately assessed that such a relationship between declining sale prices and declining appraisal values is usually a symptom rather than a cause. Appraisal report what is happening in the market. But, because the issue hits so close to home, I thought I would treat of what causes property values to decline from an appraiser’s perspective.

What causes declines in Market value?

 First let me preface my comments: Purchase price is not always equivalent to Market Value. For a myriad of reasons a seller or buyer may be willing to give or take on a purchase price for reasons unique to them. Market value is a theoretical value that assumes what a sale price should be between two very typical parties, each with equal skill sets and full knowledge of the property.

Consider this example: Royce the appraiser concluded that the Market Value for JoJo’s office building was $2,000,000 in 2006. Later, when asked to do the same assignment in 2009, he concluded Market Value to be $1,600,000. Only two things could have lead Royce to conclude a lower market value in 2009: the Net Operating Income (NOI) was significantly less in 2009 and/or market capitalization rates were significantly higher in 2009.  

Capitalization rates represent the ratio between annual net income and sales price. While the NOI may be falling at many properties (due to increased vacancy rates and/or more competitive rental rates), it almost certainly does not account for the entire value decline in this market. Major value declines also come from the changing status quo between buyers and sellers. Buyers have become much more patient and are expecting a much more favorable ratio between their NOI and purchase price. In other words, when there are fewer buyers (as often is the case in a down market) capitalization rates move upward.

In situations where there are recent comparable sales, anyone valuing a property can easily extract and apply very current and realistic capitalization rates to estimate Market Value. This is because during times of appreciation, the market is usually active. Extracting supportable capitalization rates is easy. However, when transactions are scarce finding market capitalization rates can be significantly harder. When this happens, oftentimes sellers have an unrealistic opinion of value because they are relying on dated capitalization rate sources.

Finding Market Capitalization Rates without Recent Transactions

When comparable transactions are not available, the appraiser’s best option is to look at the most recent transactions, assess how much economic conditions have declined since that time, and appropriately apply some type of upward adjustment to the dated capitalization rates.

How do you make that adjustment? How do you capture the subjective impacts of tighter lending standards and lower market confidence in a quantifiable manner? There are multiple ways to do this. Interviewing active brokers or other market participants for both general information and details on listings and failed transactions is a good place to start. Another option is the Underwriter’s Method. This method can give an appraiser a rough guideline of what a reasonable capitalization rate would be in the current lending and investing environment. Other ideas include going to other markets where recent transactions may have occurred. National surveys of investors provide yet another source that may be applicable to some property types. Explaining these methods and the pros and cons of each one will have to be saved for another article. However, I will say that each of these has strengths and weaknesses. In reality, a good appraiser should incorporate all of these into their capitalization rate analysis where appropriate.

When attempting to conclude a market capitalization rate in a down market, it is important to remember that these other methods take a hefty amount of market knowledge, reliable data, and astute judgment.

Bankers, brokers, appraisers, investors, and developers are all looking forward to when the bleeding stops and confidence again returns to the market. While in the past appraising was sometimes viewed as a necessary evil, market participants are now leaning heavily upon our work. More than ever an appraiser’s un-biased opinion combined with expertise of these complex issues can help buyers, sellers, lenders, and brokers make realistic informed decisions during a tough economic period. 

Introduction

There is broad sweeping change in the mindset of the World economy caused by the credit crisis, economic downturn and long-term uncertainty, which is having a profound impact on the real estate market. Our job as appraisers is to interpret what is occurring in the economy including supply/demand conditions, unavailability of financing, rising unemployment and alternative investment vehicles in order to credibly estimate the value of real property. The following information provides an introduction to the commercial real estate appraisal process, and summary statements with regard to how we are adapting our analysis to the changing economic conditions.

Appraisal: (noun) the act or process of developing an opinion of value; an opinion of value.  (adjective) of or pertaining to appraising and related functions such as an appraisal practice or appraisal service.

Appraiser: one who is expected to perform valuation services competently and in a manner that is independent, impartial, and objective.

Appraisal Process

1) Define the problem

• Identify the real estate
• Identify the rights to be valued
• Establish the intended user of the appraisal
• Determine the definition of value
• Determine the effective date of the appraisal
• Identify the scope of the appraisal
• Establish any assumptions and limiting conditions

2) Preliminary Analysis and Data Collection

3) Highest and Best Use Analysis

4) Land Value Estimate

5) Apply the Appropriate Valuation Techniques (Cost, Income, and Sales)

6) Reconciliation of Value and Final Value Conclusion

7) Report the Defined Value

Scope of Work: the type and extent of research and analysis in an assignment.

The scope of work is defined by the appraiser and the client.  However, the appraiser can not limit the scope of work to such a degree that is jeopardizes the reliability of the value conclusion.

The most common value scenario requested is the As Is Market Value.  Market Value is defined below:

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgeably, and assuming that the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

1.     Buyer and seller are typically motivated;

2.     Both parties are well informed or well advised, and acting in what they consider their own best interests;

3.     A reasonable time is allowed for exposure in the open market;

4.     Payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and

5.     The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

Office of Comptroller of the Currency (OCC), Title 12 of the Code of Federal Regulation, Part 34, Subpart C – Appraisals, 34.42 (g); Office of Thrift Supervision (OTS), 12 CFR 564.2 (g); This is also compatible with the RTC, FDIC, FRS and NCUA definitions of market value.

The scope of work may be defined by the appraiser, however, the scope of work must meet or exceed 1) the expectations of parties who are regularly intended users for similar assignments; and 2) what an appraiser’s peers’ actions would be in performing the same or similar assignment.

Appraisal Reporting Options

An appraiser has 3 options for written reports:

Self Contained

Summary

Restricted Use

Three Approaches to Value

• Cost Approach
• Income Approach
• Sales Comparison Approach

Cost Approach

The cost approach is based upon the principle that the value of the property is significantly related to its physical characteristics, and that no one would pay more for a facility than it would cost to build a like facility in today’s market on a comparable site. In this approach, the market value of the site is estimated and added to the estimated depreciated value of the improvements.

Or

Replace Cost of Improvements w/ profit – Depreciation + site value = Cost Approach Value

Replacement Cost New

All costs to construct

• -Direct Cost (materials, labor, contractor overhead)
• -Indirect Cost (perm. financing, marketing, professional reports)

Sources for Data: Developer’s Budget, Cost Comparables, Marshal Valuation, Bids

(+) Profit

Sufficient entrepreneurial incentive to compensate risk

• -Varies based on market sector

Developers (10-20%)

Users (5%)

Sources: Market survey, alternative investments

(-) Depreciation

Three Types

• -Physical (typical wear & tear)
• -Functional (obsolescence due to design)
• -Economical (surrounding influences)

(+) Land Value

Cost of equivalent substitute site

• -Valuation techniques

Sales comparison (most typical)

Residual analysis

= Cost Approach Value

Most Applicable for:

• New or proposed construction
• Owner/user properties
• Special purpose properties

Limited Application for:

• Investment properties

-mostly to test financial feasibility

• Older construction

-difficult to measure accrued depreciation

Cost Approach in a Declining Market

Many new projects are not financially feasible.  The lease-up or absorption/sell-out of a project becomes extended.  Many projects appraised 18 months ago that are nearing completion are no longer profitable due to extended marketing periods.

Replacement cost becomes a less reliable indicator of market value.

Land value assumptions change. In an active construction market, land is purchased for immediate development. If a development parcel is purchased now, the buyer’s assumption would be to hold until development is feasible.  Additional holding costs may require a downward adjustment to the land sales that sold in 2007.

Income Approach

In the Income Approach a property’s capacity to generate income is analyzed, which is in turn capitalized into an indication of present value. Two fundamental methods are used in this approach, Direct Capitalization and Yield Capitalization, which are described below:

• Direct Capitalization Method – The advantages of direct capitalization are that it is simple to use, easy to explain, often expresses market thinking, and provides strong market evidence of value when adequate sales are available. Direct capitalization is most commonly applied by applying an overall capitalization rate to relate value to the entire property income (i.e., net operating income).
• Yield Capitalization Method – This method is typically referred to as a Discounted Cash Flow Analysis. Market supported assumptions and projections are made for future changes in occupancy, rents, income, and expenses to arrive at periodic cash flow. The property’s eventual reversion is also estimated, incorporating anticipated changes in the property and market conditions. The resulting cash flows are discounted to a present value indication using an appropriate market supported yield rate.

Direct Capitalization – Most Commonly Used

The following steps create a basic outline of the income approach:

• Estimate income
• Estimate Vacancy and Expenses
• Derive an estimate of Net Operating Income (NOI)
• Derive a capitalization rate from a) market sales, b) band of investment analysis
• Divide the NOI by the Capitalization rate to estimate the value

The fundamental principle in this approach if anticipation.  The anticipated risk associated with the income stream is implicit in the cap rate.

A basic Income Approach is:

Potential Income – Vacancy = Effective Gross Income

Effective Gross Income – Expenses = NOI

NOI /Capitalization Rate = Value

Limitations - The limitations of this approach include:

• Lack of recent, directly comparable rental rates
• Lack of market transactions from which to derive a reliable capitalization rate

Common Mistakes - Common mistakes made by market participants include:

• Understanding the difference between current income and potential income and between fee simple and leased fee value
• Estimating appropriate expenses
• Understanding the structure of the leases in order to measure appropriate expense reimbursements when applicable
• Deriving an appropriate capitalization rate based upon the risk factors of the property

Income Approach in a Declining Market

The Income Capitalization Approach is the best measure of value for income-producing investment properties. One challenging task in the current economy is accurately estimating market rents, which requires the appraiser to measure the impacts that softer market conditions are having on rents.

Without a doubt, the most difficult and important modifications to our appraisals are occurring in the capitalization and discount rate analysis. Due to the drastic decline in investment sales over the past year, it takes a lot of creative analysis to reasonably estimate current capitalization rates. We look in the rearview mirror on past transactions, consider current listing and review national trends in order to provide the most reasonable estimate.

Sales Comparison Approach

The Sales Comparison (Market) Approach is based on the principle of substitution, which asserts that no one would pay more for a property than the value of similar property in the market. In this approach, the subject property is compared directly with other recent sales of similar properties in the marketplace. This comparison is typically accomplished by extracting “units of comparison,” for example, price per square foot, and then adjusting these units of comparison for the comparable sales for differences between the subject and each comparable.

The reliability of an indication found by this method depends on the quality and quantity of the comparable data found and the ability of the appraiser to make reasonable and supportable adjustments. In active markets with a large number of sales that are physically similar comparables, this approach is generally a good indicator of value.

Sources of Comparable Data

• Buyer
• Seller
• Brokers
• Public records
• Professional data companies
• Multiple listing services
• Other appraisers

Typical Units of Comparison

• Price/SF of gross building area
• Price/SF of net building area
• Price per unit (apartments, self storage, hotels, health care)
• Price per seat (restaurants and theaters)
• Price per door (truck terminals and distribution centers)
• Price per boat slip (marinas)
• Price per parking space (parking decks)
• Price per hole (golf courses)
• Price per lane (bowling alleys)
• Price per lot or pad (subdivisions, mobile home parks, RV parks)

Most Applicable for:

• Owner/user properties
• Special purpose properties
• Any property (retail, office, etc.) where sufficient data is available

Sales Comparison Approach in a Declining Market

Limited sales activity is making the sales approach more difficult. Investment sales are off 60% to 80%.  As much as 50% of those sales now include assumed debt.

The factors affecting value and pricing have changed. This includes buyer’s assumption on the future. For example, capitalization rates at 6% and investors IRR of 15% imply substantial increases in income over a holding period. With flat rents, higher vacancy costs to ownership, difficulty financing, the conditions in which sales took place in 2007 are much different that they are today.

Appraiser now need to do a better job interviewing brokers, analyzing active listings, and drawing a conclusion from possibly older sales prior to 2007.

W. Grant Norling & Jeff Grose, MAI presented the previous discussion with Perkins Coie LLP on Thursday March 19th of 2009. If you would like to meet with them to discuss anything further feel free to get in contact with W. Grant Norling at grant.norling@pgpinc.com

You can view and/or download a PDF version of the above presentation in the iPaper document displayed below.

Figure 1 “You can see we are in trouble, right?”

The answer appears to be yes. Costar talked with a few national shopping center landlords in a recent article by Sasha Pardy. The article discusses a laundry list of national retailers and how they are dealing with the economic downturn. However, there was a good deal of discussion on how landlords are dealing with rent reduction requests. It appears that tenants being granted relief are a drop in the bucket compared to those asking. Particularly interesting viewpoints came from Regency Centers and Kimco; their viewpoints are presented in the article are below:

REGENCY CENTERS
Mary Lou Fiala, president and COO of Regency Centers, said in the company’s Feb. 5th quarterly conference call, “Regency is receiving requests for rental assistance from a great number of tenants. There is a few people that we’ve made exceptions for.” The decision is made tenant-by-tenant, explained Fiala, adding that Regency requests three years of sales information, income statements, and credit applications from tenants, as well as a recovery plan.
In the case that rent reduction is granted, Fiala said, “any reduced rent is deferred and not forgiven.” She said that only 37 of Regency’s 9,000 tenants had been granted such reductions in the last month, “and in 28 of these cases, we were able to extend term of the lease.”

KIMCO REALTY CORPORATION
David Lukes, EVP at Kimco Realty Corp., said in the company’s Feb. 5th quarterly conference call, “We are preparing for a continued difficult time for our tenants and are forecasting continued weakness and uncertainty. The ability of a tenant to prosper is partly due to their cost of occupying their real estate.”
“We have a detailed concession request package that we’ve developed that’s required…and are using occupancy costs, financial help and sales history to separate the tenants that truly need help from those that are merely following the saying, ‘you don’t get it if you don’t ask,” explained Lukes. To date, the number of requests Kimco has granted are “minimal” compared to the number of requests it has received, said Lukes.

Read more of Sasha Pardy’s article on Costar