Thursday, November 30, 2006

75 years flat lease for a Walgreen's???

I was just reviewing a package for 5 brand new Walgreen's NNN investments through the South. Flat leases for the initial 25 year term which is acceptable with such a high quality tenant. But, the remaining 50 years of 5 year options are flat too!! And the initial cap rates are between 6% and 6.2% Not very attractive. In my opinion, these deals will sell, but some buyer is not taking in to account the depressed value of these deals over the next 5 decades. And let me ask, How many retailers have survived any 75 year span?

Wednesday, November 29, 2006

The calm before the real estate storm?

Real estate markets tend to take breathers, then they come back with a vengeance. This year has been a year of transition. Higher interest rates have pulled the steam out of the local housing market. This overshadowed the very real job growth that has been continuing in Silicon Valley. Now we're in the holiday season and shopping for presents takes precedent over shopping for housing. But once we get past Superbowl Sunday, the market will start cooking again. Suggestion: if you're thinking about buying: Do it NOW!!! We just passed our inventory peak of the year and sellers are somewhat frustrated. This will change dramatically over the next two months. In the spring expect another Silicon Valley real estate run.

Monday, November 27, 2006

Sunnyvale - land of high rise offices?

The city of Sunnyvale is behind a one million square foot office towers development on former Lockheed land. Eight buildings with additional parking and common area buildings.
"If you build it, they will come..."
Being built on speculation by the developer, these buildings will fill up. Some Yahoo or Google or the like will have their gurus working there in the next few years, or will it be a biotech firm to mix it up a bit?
What will that do to Murphy Street, the Sunnyvale Towne Center, Mountain View or the other adjoining areas? Prosperity. Real estate owners and investors will benefit. There are first time investors in those markets that will be rich one day due to their belief that Silicon Valley is not dead, but actually about to rise to its next greatest peak. Believe in the valley.
Technorati Profile

Sunday, November 26, 2006

1 is better than 5

Recently I helped an investor in the South Bay increase his cash flow significantly and reduce his stress. He had acquired 4 single family homes and one duplex over the last 25 years. He was very dedicated to his investments and was able to pay off most of his debt down to less than $150,000 on approximately $3,200,000 of asset value. But he was equity rich with little cash flow to show for it. His before tax cash flow was approximately $75,000 per year. Not bad, but a low rate of return on his equity. I helped him with the purchase of a brand new Rite Aid drug store in northern Michigan for $3,000,000 through the 1031 exchange from his sold 5 properties. The new investment gave him a 7.4% cap rate, a 20 year lease and NO landlord obligations. Rite Aid will take care of the building from asphalt to roof and everything in between. His before tax cash flow increased to $220,000 per year! I see much more travel and enjoyment in his future.

Eat your 1031 cake too

A recent change in the 1031 tax law provides a significant tax play for home owners with capital gains above the $250,000/$500,000 exclusion. The change allows for a home which was a principal residence 2 out of the last 5 years to be exchanged via the 1031 deferred tax method while taking the exclusion dollars for principal residence out of the transaction. The property also has to qualify as an investment property in order for this to work.
The typical scenario would be, a couple who have significant equity and capital gains in their principal residence move out of the home and rent the property for at least 1 year (and probably more - ask your CPA). They then convert the property to an investment property on their tax filings. After sufficient time so that the IRS accepts this conversion, the owners sell the property through a 1031 tax deferred exchange.
The $500,000 exclusion of capital gains is taken upon the sale. They will get these proceeds as cash from the escrow company at closing.
The amount of gain above this and any cash proceeds goes to the 1031 intermediary to be used for a purchase of a suitable exchange property. Remember "like-kind" can be virtually any real property type with some exclusions.
This blending of the personal residence exclusion and the 1031 exchange will benefit many savvy investors who qualify to use it.

Friday, November 24, 2006

Rental houses - tough to make them work, but...

Try calculating the GRM (gross rent multiplier) on a single family rental house in the Bay Area. Staggering numbers near 30 are reached. Let's not even start with the cap rate. So it seems that buying a house to rent out is inconceivable in this market. But there is a trend that is important to consider. Over the last few years, much of the single family rental house stock has disappeared. This is due to the dramatic rise in the house values and the relatively low rents they commanded. Many long time owners of these homes decided to reap their bonus equity while the going was good. The buyers were primarily families who were to owner occupy the houses. So, the overall number of these available rentals declined dramatically. And with the financial barrier to have more rental houses so steep, those with the luxury of owning a rental house will benefit. Rent pressure is steepest in this sector of the rental market. There are many options for single or couple tenants in the apartment complexes built in the past and recently. But, the options for a family being transferred in to the Bay Area are slim. If you require a backyard and a garage, you will be paying a significantly higher rent. And your choices will be limited.
Especially in the South Bay and the Peninsula, builders are not building the SFR on a 6,000 square foot lot. Most new development is either a townhouse or a condo.
Being able to hold on to a rental house will be a very secure asset in the Bay Area for the future.

Wednesday, November 22, 2006

Commercial Condos - Should You Buy?

Is a commercial condo the right solution for you? You own a successful business and grate every month when you write that rent check to your landlord. Wasted money is the typical thought. You own your own house, so why not own your own office or flex space? But you know this is not a very simple analysis of rent vs own. For many valley firms, change is constant, whether you are growing or you are downsizing. The static solution of buying your business space may fit your needs today, but will it in the future?
Tax benefits are interesting too. Most people would image owning your own space would benefit you the most, as does owning your own home. But for a business, you can deduct all your space costs (rent and otherwise) if you lease, but are limited in what you can write off if you buy. Yes, there is depreciation (over 39 years for the building) when you buy, but that tends to have limited impact on the analysis.
The purchase of a commercial building to occupy tends to work best for a company with a relatively flat space needs requirement. Or, if you have deep reserves, a larger building would work where you can grow within it over time. Drawbacks of course are the need to manage the space you currently do not occupy. Read: you now have a new job of being a landlord as well as CEO of your company.
Difficulties to overcome are on either side of the fence. A business owner at the end of his lease if faced with quite a lot of stress. Do not expect that the landlord will always renew a lease, no matter at what rate. And if the landlord doesn't, then where shall you move to? If you have a business that is not readily accepted in most zoning areas, this may be a long and hard search for the right space. Automotive, liquor stores, restaurants, medical to name a few all have their suitability issues in regards to zoning, parking, nimby's, etc.
Limitations aside, this is a big plus for owning your own space. Just make the right decision for your company long term. And one final thought, try not to mix your need to invest with your need to guide your business. There are many ways to invest, they do not necessarily have to be paired with your business needs.

Tuesday, November 21, 2006

Local NNN investments - valuable or overpriced?

It's amazing how the vast amount of wealth in the Bay Area keeps capitalization (cap) rates so low. Everyone wants their investment property to be brand new, fully occupied and ideally within a couple miles of their home. The age of the property around here will almost never be as new as you would want. So people settle for 40 and 50 year old product. Fully occupied - not too difficult as the cost to build keeps inventory down and tenants have fewer choices. But location has always been the key (ever heard location, location, location?). And with so much capital created in Silicon Valley over the last few decades, this has made the demand for local investments huge.
Some opt for it and others look past the horizon to the East. Would you buy a $2,000,000 single tenant Burger King on El Camino in Sunnyvale for a 5.5% cap rate. A rate, mind you, less than the cost of the money you would borrow? This is called negative leverage - not something most would do with the normal investment guidelines as a model.
But the cap rate is only one part of the return on investment. Rent growth, appreciation, cash flow, cost recovery (depreciation) and the all-so-important pride of ownership play equally important roles. Land value and the use of a property are also very critical here. Talk to a company like In & Out Burger as to what it takes to open a new site, especially the difficulty of getting a drive-thru approved. So, the older, established locations are very valuable in that they face very little future competition.
It may take a large capital infusion to own a single tenant commercial property in the Bay Area, but its future value is very secure. This tends to be purchased by investors selling a well-appreciated asset and looking for better cash flow and stability. Many passive investors leaving the headaches of destructive tenants, leaky toilets and rent control ordinances find comfort in a 10 year lease with few, if any, landlord obligations.
I truly believe that opting for the better location & lower cash flow property which has great stability will keep you comfortable (and traveling for the right reasons) years in to the future.

Friendlier lenders due to rising bad loan volume

I just dealt with two separate lenders on two apartment building in the South Bay. Both were very similar in their approach to owners who were upside down on their equity positions. Very helpful to have the owner come to a payment plan solution. One of the lenders, who I have dealt with in the past few years had a marked change of attitude. Apparently with so much bleeding going on, especially in their loan portfolio, they are being nicer to their customers. Feels similar to the "new" IRS that came about in the last 5 years.
Yes, rents are rising and vacancies are dropping, but that hardly outweighs the burden of rapidly rising adjustable rate mortgages. There will definitely be a wave of debt restructuring by borrowers who are savvy and foreclosures for those who don't know how to work the system. Thought for the day: Take action NOW - all those pending items on your desk or kitchen counter, pick one up and act on it.