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Aareal Bank scales back property lending ambitions
Wednesday, February 22 2012 | 10:34 AM
James Wallace
Finance Editor,
COSTAR | Aareal Bank Group is targeting a global real estate lending haul of between €4.5bn and €5.5bn as the bank looks to scale back commitments from last year’s €8bn tally, reflecting what it calls a “continued volatile and uncertain environment”.
The German pfandbrief-funded bank lent €1.86bn globally in the final quarter of last year, down from the previous quarter’s €2.99bn, with the €8.0bn annual figure – comprised of €3bn in refinancing and €5bn in new business – up from €6.67bn in 2010.
Increasingly Aareal’s real estate lending is new business over refinancing, with the proportion of renewals down from 60% in 2010 to 38% last year. Over 2011, new business rose by 89% year on year.
This year, Aareal has warned that a combination of a deteriorating economic outlook, the uncertain cumulative effects of differing banking reforms on the real economy as well as a broader uncertain political and regulatory framework has prompted its increased cautious outlook.
Aareal added that there was increased pressure on real estate values, along with volatility and risks in the financial system which mean “further market distortions cannot be ruled out”.
A statement continued: “Aareal Bank will counter these uncertainties, amongst other things, by pursuing a very cautious liquidity and investment strategy. This strategy will lead to a burden on net interest income that will more than offset the positive effect of higher margins on new business originated last year. On these assumptions, Aareal Bank expects a considerable decline in net interest income over the year.”
Dr Wolf Schumacher, chief executive officer at Aareal Bank, said: “We are cautious business people who have to take into account the deterioration of the economic framework during the current year. Nevertheless, our great flexibility allows us to react at all times to changes in the environment and to take advantages of available opportunities.”
Aareal continues to forecast allowance for credit losses in a range of €110m to €140m, unchanged from last year.
Of the European markets which Aareal Bank is exposed to, the lender believes the countries where property values will come under greatest pressure this year are: Belgium, Czech Republic, France, Italy, Netherlands and Spain.
Last year, new interest income rose by 8.8% over 2011 to €50m, taking Aareal’s operating profit to €165m – a 52.8% rise from 2010’s €108m.
Last year’s lending levels have increased Aareal’s overall global real estate loan book by €1.1bn to €24.2bn, of which €20.09bn, or 83%, is weighted towards Europe. The balance of the real estate book is €3.39bn, or 14%, US exposure and €72.6m, or 2%, Asian. Inclive of the aggregate global real estate loan book is €200m in real estate loans which Aareal Bank manages on behalf of Deutsche Pfandbriefbank.
The LTV profile of the loan book comprised 87% of loans at an ratio of under 60%, while a further 10 percentage point of the €24.2bn global loan book between 60% and 80% LTV, with the balance, just 3%, above 80%.
The non-performing element of the loan book comprises €184m of Italian loans, at an average LTV of 59.5%, and €65m of Spanish loans at 82.1% LTV, on average.
Among the bank’s new lending last year three high profile deals: a £350m partial refinance of British Land and Schroders’ joint venture £1.6bn Hercules Unit Trust (HUT), to prepay part of the maturing securitised debt. CoStar News understands that this has been in part retained and in part syndicated.
Aareal Bank also provided €130m to finance a 17-strong German logistics portfolio for ProLogis €3bn European Properties Fund II and taking on Morgan Stanley’s a €195m senior positions in a wider €210m financing package, secured by Beacon Capital Partners and Northwood Investors’ joint venture’s refinancing of the 14-storey Défense Plaza office building in Paris.
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Cloudy Skies Ahead?
Wednesday, February 22 2012 | 09:42 AM
Michael Siteman
EVP - Data Center Solutions,
JONES LANG LASALLE, INC. | Geva Perry, author of Thinking Out Cloud. * assertion, based on research, is that generally speaking, cloud computing is happening from the bottom up. That really makes sense to me. The Cloud is answering the need of developers who may not have access to or don’t have the budgets for resources. Mr. Perry states, “Amazon understood this, and built its service so it was optimized for developers.” The same was true with SalesForce.com. The early adopters were those frustrated with their own company’s CRM offerings and sought to satisfy their need from a Cloud service.
Further, this reframes and reinforces the capital expense model and converts it to an operating expense model. That is exactly the foundation on which the Cloud is based, especially the public cloud. However, despite the fact that there is a measurably significant financial difference between the costs of public- versus private-cloud services (private-cloud being much more expensive), adoption is at a brisk pace and getting stronger.
Taking an historical look for a moment at projections of a couple of years ago from Enterprise And SMB Software Survey, North America and Europe 4th Quarter 2009 and Forrsights Software Survey 4th Quarter 2010, between 2009 and 2010 SaaS adoption increased by 20%, IaaS adoption increased by 75% and PaaS adoption increased by 80%. Momentum is growing with projections for the respective sectors (SaaS, IaaS and PaaS) between 2011 and 2012 increasing by 46%, 52% and 71%. CDW recently published its cloud Computing Tracking Poll Report** showing 37% adoption in enterprises followed by higher education (34%), healthcare (30%), federal government (29%), state and local government (23%) and SMBs (21%).**
Jumping forward to the present, this morning there appeared an article on the CCIM Institute site** addressing the fact that corporations swamped with excess office space are starting to dispose of it. One of the reasons for this is changes in the ways that employees are interacting with each other. Rather than continue using office space in traditional ways, more companies are using an open layout to create more collaboration amongst workers. Furthermore, Teknion, a furniture manufacturer, published its Workplace of the Future study showing that 46% of companies surveyed currently employ the Cloud and 90% plan to increase their investment in Cloud and other productivity-enhancing technologies by 2015. According to Johnson Controls’ recent Collaboration 2020, predicts that during the coming decade employees expect to spend less time at their desks and more time working in collaborative environments and communicating via video. As long as they are connected, most employees can work anywhere. However, being able to work anywhere also entails that in addition to bandwidth, employees must have access to their files and data, most likely via Cloud-computing.
So should CIOs feel threatened by this? I guess that really depends on the specific goals of the enterprise and its CIO. However, it seems to me that if positioned properly, utilizing the Cloud could provide an incredible advantage for the IT organization. Rather than having to focus on budgets constrained by and at the effect of the continual refresh cycle, CIOs can focus on solving real business issues and driving the growth and expansion of the enterprise. Conjecturing for a moment that there is probably no organization that hasn’t been touched by the recession of 2008, companies have been forced to do more with less. This is especially true with regard relationship between labor and IT infrastructure. Anecdotally, in addition to using less office space, it is apparent that enterprises have chosen to automate, by increasing the footprint of the IT landscape rather than hire warm bodies to do the same work. In most cases, that investment has been manifested in the purchase of more IT hardware (servers, storage, network, etc.) and infrastructure. Not that this is a bad thing, since the slightest bit of consumerism is driving the economy forward even at its current sloth-like pace.
So is adoption still being retarded because of security concerns? Over the past 2 years, the perception of security being an issue has been assuaged in the minds of most, which, I believe, is fueling the increased adoption rates. Certain business verticals are turning to the Cloud to achieve business goals and objectives. A year ago, while attending the Southern California Biomedical Conference, I listened to Steve Phillpot of Amylin Pharmaceuticals describe his company’s migration of its IT environment to the Cloud. Shortly thereafter, I heard Ed Ryan of Allergan discuss the same kind of migration that his company undertook. Both of these are success stories, but not the only ones. Based on the project-oriented nature of its business model, entertainment production companies are starting to utilize the Cloud as well.
Another contributing factor of Cloud proliferation is the increase in mobile applications and storage. Smart phone apps and storage services are supplementing the growth of the Cloud. Tangentially, just last week, Congress approved the auction of additional wireless frequencies. The motivation was to create a new revenue stream to ease budgetary concerns, but regardless of the reason, the result is a positive step in creating more needed bandwidth to support Cloud adoption.
Some worry that the growth of Cloud will have a negative impact on the continued need for more data center space. Fearing that as Cloud adoption grows, and servers become more efficient and virtualized, less data center space will be required. The best analogy that I can offer to counter this position reminds me of the one of the most congested thoroughfares in the US, the 405/San Diego Freeway (located in Southern California). Constructed in the late-1950s, and continually expanded since that time, demand for more lanes has always outpaced the supply. The more lanes that are added, the more cars seem to fill the road. The adoption of mass transit (if you can call it that in L.A.) doesn’t seem to have any effect to reduce the flow. So, applying this to the data center model, despite the fact that companies like SeaMicro (www.seamicro.com) and Calxeda (www.calxeda.com) are producing servers that use half or a quarter of the power and create much less heat than conventionally designed servers, that virtualization is becoming the standard and Cloud service offerings are gaining gigantic momentum, it will be a long time before demand subsides. CIOs fearful of how Cloud-computing will impact their worlds should be mindful of the fact that today and in the future IT will continue to drive the success of the business that it serves.
Footnotes
* (A summary of Mr. Perry’s keynote can be found at http://www.datacenterknowledge.com/archives/2012/02/16/the-bottom-up-nature-of-cloud-adoption/?utm-source=feedburner&utm-medium=feed&utm-campaign=Feed%3A+DataCenterKnowledge+%28Data+Center+Knowledge%29)
**(http://www.ccim.com/cire-magazine/articles/139111/2012/01/resizing-or-right-sizing)
***(http://www.cdw.com/shop/tools/surveys/survey.asp?SurveyKey=D808B2971F634B5A96E452FE7E6FA165)
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Cuba, Close the loop...please!, Networking, The Flying Wallendas
Friday, February 17 2012 | 10:49 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | An article this week about a new law that was passed in Cuba last November reminded me that are some things that we take for granted in the 'developed world.' One being the ability to buy and sell a house or apartment that you own. While this article described the 'hot' real estate market in Cuba, it's not what one would necessarily imagine. "While the new market dynamics may help some, many worry they will do little to solve the housing problems faced by many Cubans, whose wallets would not stretch even to buy a $3,000 one-bedroom apartment." "....an average of three buildings collapse in Havana each day, victims of neglect, overcrowding and improvised construction. Well over 100,000 people are waiting to move to government hostels." A government estimate suggests that it would cost about $3.6 billion to build the 600,000 houses Cuba needs. Independent estimates are more than double that. The creation of construction and housing cooperatives is one step being discussed: such arrangements would reduce building costs and allow groups of individuals to build, say, a small apartment block."
Of all the markets in the world, I have not heard anyone in the institutional real estate world yet utter the word "Cuba" except for those who have gone there to party. And, if you look at the yellow or red flags that might be raised when you are considering where in the world to invest, government instability is definitely one of them. So, while entering 'emerging markets' is not for the faint of heart, if I were a betting man, I would bet that somewhere, behind closed doors in a fancy high-rise office building in some city in the world, there are people, right now, talking about the real estate opportunities in Cuba. Who in our industry will be the first to dip their toe on that long-troubled island in the beautiful Caribbean?
I'm wondering if any of you is also experiencing this phenomenon: you have a conversation(s) with someone, on a rather serious subject. Or you may have several interactions, in person and on the phone. And then you never hear from the other person again, like they drop off the face of the earth but you know they didn't. As as student of people I can't for the life of me comprehend what those people are thinking (or perhaps they're not thinking). Does this type of behavior leave me with a feeling that they are really professionals? People of character? Someone I'd want to do business with? I don't think so. I believe that we all are just looking for the same thing from someone in these situations: close the loop. If it's not something that's going to move forward have the common courtesy to tell the other person. With all the talk about 'lessons learned' over the past four or five years and the word 'transparency and open, timely communications' flowing off every powerpoint slide in every presentation I've seen, as well as out of people's mouths, don't people realize, after all that's gone on, that you actually have to walk the walk and not just talk the talk? Our industry is a very small one, even on a global scale. Our reputation is everything. I'd suggest that some people look at themselves in the mirror tomorrow morning and do a self-assessment about certain things, before it catches up with them.
Someone asked me recently about how you go about networking when you're at some type of event and you don't know too many or any people? How do you approach those people? Are there any tactics or standard lines that have proven successful? It got me thinking about the times that I've been in that situation (yes, it still happens). I don't think there are any secret tactics or magical words. No one really likes approaching someone or a group that they don't know and that doesn't know them. This is especially true if body language and/or facial expressions suggest they don't want to be approached (or include you in their group).
However, I have found it easier to approach a group than certain individuals, those who make an attempt to look at your badge and if you don't resemble somebody they 'have' to meet", they'll just walk away or walk past you without even cracking a smile (and remember, these folks are at events where people are supposed to be interested in networking!). Now, there are 'Networking Rules" that I've accumulated and make my best effort to go by. But getting back to the uncomfortableness of 'cold networking:' It's all a matter of one's threshold for 'pain' in those situations. However, much as I am 'inclusive', there are sometimes when someone who has joined my group ends up being really obnoxious, or someone who is trying to hard-sell someone I'm talking with or is a glommer (der. spammer: Someone who finds a person who knows a lot of people and hangs with them or follows them around expecting to be introduced to all the people that they know. And, while, thankfully, that hasn't happened too many times, I've generally found that a smile and a "howdy-do" works in more cases than not with people you don't know. Probably worth a try.
Achieve Your Dream: Nik Wallenda, a seventh-generation circus performer, has been granted permission to cross Niagara Falls on a tightrope. Mr. Wallenda, 33, has called his ultimate professional dream. “I had a few tears, but it hasn’t sunk in,” he added. “We were told by not one, not two, but probably 50 people: ‘This is impossible, not going to happen.’ This is to prove that if you pursue your dream and never give up, you can achieve your dream.” (Note: The Flying Wallendas is the name of a circus act and daredevil stunt performers, most known for performing highwire acts without a safety net. Sadly, they may have had their most publicity as a result of tragedy. Karl Wallenda developed some of the most amazing acts like the seven-person chair pyramid. They continued performing those acts until 1962. That year, the front man on the wire faltered and the pyramid collapsed. Three men fell to the ground, killing two and leaving one paralyzed. But, for performers, the show must go on. If you want to see something that will give you goosebumps (in a happy way) watch this video.
Solutions by Steve Felix Update: Thanks to all of you who have sent me congratulations and good wishes on the launch of my new consultancy. It's off to a good start. Having operated consulting businesses before I know that the key is to get two or three 'retainer' clients to give the venture the financial foundation it needs. I have a couple of prospects in that area but, while those evolve, I am doing work for several clients. Two involve facilitating brainstorming sessions on how to raise capital in this market, how to market to investors and consultants where there is no prior existing relationship, review, discussion and reworking of presentation materials and ways to educate rather than sell. For the other client I am doing some research that will help them be more efficient in the growing of their investment management business. While my official press release is still a few weeks off, it's been heartening at the reaction I've received already: almost everyone I speak with has something they need help with and, either me or a member of my Consultants Collaborative, may be able to provide just the kind of expertise that the doctor ordered. Stay tuned!
Congratulations to my friend, Eyal Bilgrai, who is joining the consulting firm Wurts & Associates.
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Aisle of Solutions, RREEF, World Trade Center
Friday, February 10 2012 | 10:06 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | Walking the aisles of one of the large chain "pharmacy" stores this week and seeing the signs above the aisles got me thinking: wouldn't it be great if there was a place like that where we could find cures for our real estate ailments? Need a tenant to fill a long vacant space: Aisle 1. Trying to find some gap financing to close a deal: Aisle 7. Feeling under the weather because your key first close investor just told you they were going to wait a little longer: Aisle 2. You get where I'm going, right? Maybe some of you reading this are saying, "Well, there are firms that offer solutions to problems like those." And you are right, they're called "Service Providers." And while solving one of these problems doesn't happen as quickly or reliably as, say, taking aspirin for a headache or rubbing Ben-Gay on a sore shoulder or gulping down Vicks Forumula 44 to stop your cough, there are people out there who have proven to be good at delivering "a cure for what ails you." But, try as we might to find simple, quick and painless solutions, sadly, it's rare in our industry that there is one.
This week, roaming the streets of New York and speaking to a number of people from all different parts of the commercial and institutional real estate world one thing is clearer than ever before: Things are not clear by a long shot when it comes to us knowing what we'll find around the next curve in the road. We have a lot more questions about our careers, our businesses and our personal lives. There is a lot of stress out there and we can hope that things will just get better. But, remember how the hopes fans in the famous baseball poem, "Casey at the Bat." (Ernest Lawrence Thayer, 1888) were dashed in the end:
Oh, somewhere in this favored land, the sun is shining bright;
The band is playing somewhere, and somewhere hearts are light,
And somewhere men are laughing, and somewhere children shout;
But there is no joy in Mudville-the Mighty Casey has struck out.
Even if you don't know anything about baseball, the phrase 'struck out' is easy to understand. We're all trying to either 'get to first base' or 'hit singles and doubles' or 'make the big play' but success is not guaranteed, not by a long shot, no matter how hard we try and no matter now much success we've had in the past. Some firms have or have had their own "Mighty Casey" who were relied upon to make things happen, to bring home the bacon. But those folks are not magicians. So, when we're faced with situations where we've run out of brilliant ideas or we keep talking and talking and talking and coming back to the same old thing, it's sometimes helpful to bring in an objective, knowledgeable third-party to help you get 'unstuck.' In line with my policy of full disclosure, this last sentence is somewhat self-serving as I have been working with clients in this capacity for years, with good results and excellent feedback. You know why it's helpful: people that work together, just like couples in a committed relationship, sometimes have difficulty being open about things with each other and the conversation slips into a finger-pointing argument which does no one any good. When an intermediary joins the party, they bring one really important thing to the table: they are only interested in helping; they have no axe to grind, no hidden motive, no issues, no politics to play....just helping their clients find a solution to what ails them or at least bring to the surface the root of a problem. Maybe it's something to think about next time you're in a similar predicament.
One more thought on this general topic. There's someone who's website bills her as "America's #1 Female Talk Radio Host" who, after listening to one of her callers tell a story of relationship woe, told that woman, "Whatever you're doing is just not working!" None of us is happy when we admit that what we've been doing is not working but it's a very important step in finding something that will work. We need to remind ourselves from time to time that doing things the way we used to do them won't work in a world that is changing around us. More and more people are talking with me, seeking a different way to do something, particularly in the area of raising capital for real estate funds, joint ventures, etc. The appetite of the many investors has changed and you need to change your menu to give them what they want. Change is not easy but change is good and those that recognize the need for change are the ones who will be the winners. If things aren't happening for you, slow down, take a break, get away from things for a day and think. Or find a confident to brainstorm with. As Einstein said, "Insanity is doing the same thing over and over again and expecting different results."
There's lots of talk on the street about the future of RREEF. From what I can tell, the only people who really know what's going on are those people directly involved in the discussions. I'm not a rumor guy; I don't start them and I don't pass them along but society is built on them. The media is grasping at straws, hoping that something that someone told someone else has an ounce of truth in it. But, until it's a done deal (or until some 'Deep Throat" source leaks the news), we'll just have to sit and wait but, like with lots of big corporate stuff, we aren't alone as employees of companies involved in M&A deals are kept in the dark and learn about things at the same time as the rest of the world. For the sake of my friends at RREEF I hope something definitive happens soon so they can get on with business and with their lives.
You know how sometimes you'll walk by a place hundreds of times and never go it? Then one day, for some reason, you do and you say, wow, this place is great, why didn't I go in before? Well that happened to me this week when a good friend of mine invited me to join him for breakfast at Casa Lever in New York (390 Park Avenue [entrance is on 53rd St.). It's a great room and the food is really good. (Note: It gets busy for breakfast starting at 7:30 and I'm told that lunch is crazy so make a reservation).
Early in the week I was driving back to Manhattan on the New Jersey Turnpike. It was a beautifully clear night as I got to the part of the turnpike approaching the Holland Tunnel. The World Trade Center jumps up like a proud child saying "Look, here I am." It's an wonderful sight to see; construction lights blazing from bottom to top; it's the most massive and dramatic structure in the New York skyline. Yes, it's taken way too long for this building to be built and that's a sad commentary on politics. But it's now at 90 floors and it is a sight to behold.
Phrase of the week: "Brand Guardian." A strong brand identity is more crucial today than ever before.
Always the last to know: Today I became the 417,795,817th person to watch this cute video.
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Restricting Retail?
Monday, February 06 2012 | 08:55 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | A proposal is being considered in New York that will limit the ground-floor width of all new stores to 40 feet (and new banks to 25 feet) on two major streets on the Yupper West Side, Amsterdam and Columbus Avenues. "Across New York City, the proliferation of chain stores, banks, pharmacies in the past decade or so has robbed many neighborhoods of the quirky one-of-a-kind shops that give those places their distinct personalities and where customers can form a relationship with their shopkeepers." In Napa, California, there is a group called, "Napa Local" that was formed to protest against a Starbucks leasing space at the corner of First and Main (really!). They want the city to adopt an ordinance controlling "Formula Businesses," i.e. chain stores to "preserve the unique quality that is downtown Napa." Hmmm, let's see, in both cases, as a landlord, you would be restricted from who you can rent to. While tenant mix and use-clause restrictions have been used in the shopping mall industry (where one landlord controls the whole shebang), trying to stop individual landlords, who own a building, from renting their space is not a good direction to be going in. Can you imagine the lawsuits that would be filed against municipalities if they were successful in enacting this type of legislation? Also, to me it's pretty simple why the independent retailers have disappeared from the landscape: customers don't support them. People talk about having quaint shops and no chains but if you can't pay the rent, how are those specialty stores going to stay in business. It'll be interesting to see what evolves. By the way: the 'unique quality' of downtown Napa is vacant. While there have been some wonderful additions in the past years, including a new hotel and several 'celebrity chef' restaurants, if you drive down First or Second or Third Street you'll notice that there are so many vacant or 'fake' storefronts you'd scratch your head...maybe. In Napa Valley, the town that has the 'one of a kind shops' is St. Helena and those merchants have chosen to open stores there because people who spend money go there. I spent many years in the shopping center, shopping mall and outlet center industry. At one point, I developed the "Everything's Big/Everything's Small" theory of retailing. I won't bore you with it now but when reading about these cities (and how many others may be talking about it) it's like you're trying to control things a little too much and, if you look back in history, there are serious prices to be paid when that starts happening...it may be only the beginning.
I've always been a proponent of value of brainstorming. I found this comment from a piece I read this week particularly
enlightening. Early brainstorming advocates strongly recommended that the "Do Not Criticize" rule made those sessions more effective. But recent studies suggest differently: "....debate and criticism do not inhibit ideas but, rather, stimulate
them....imagination can thrive on conflict....dissent stimulates new ideas because it encourages us to engage more fully with the work of others and to reassess our viewpoints....maybe debate is going to be less pleasant, but it will always be more productive." Pretty interesting, huh? It comes down to the idea that we can't get bent out of shape when someone comments on an idea we have but rather take it as contributing to the group goal of coming up with the very best idea or solution. Sometimes easier said than done.
Wouldn't it be great if our memories only remembered happy things? But that's not the way it works. Yesterday, the weather was really nice where I live, probably about 65 degrees in the afternoon. I was driving somewhere and out of the corner of my eye saw a dad and his son throwing a baseball back and forth. What jumped into my mind was a day, a long, long time ago, when I was throwing a baseball back and forth with my older son. It was obviously a moment which I have never truly forgotten. It had been sitting in my sub-conscious all these years. Funny how the mind works isn't it?
More kids: Congratulations to my nephew and his wife on the birth of their little girl. Our family now has five cousins born within less than three years of each other! Are they going to have fun or what?
With gratitude: Thanks to all of you who sent me notes (or talked with me in person) about last week's story of my friend in Geneva. It meant a lot to me.
Final item: Angelo Dundee died on Wednesday (90). If you aren't a fan of boxing (or in my case grew up in a boxing family) you probably don't know his name. For 60 years he was a trainer and manager of professional boxers, the two most well known are Cassius Clay (Muhammad Ali) and Sugar Ray Leonard. My uncle, Barney Felix, the senior boxing ref in New York State at the time, was in the ring when Clay took the heavyweight championship from Sonny Liston in Miami Beach in 1964. Barney told us one story about that bout that never made it into the papers. One day, when we're having a drink together make sure to ask me about it.....
On the road next week...
Feb. 6-10: New York
Go Giants!
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He not busy being born is busy dying
Friday, January 27 2012 | 11:04 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | "He not busy being born is busy dying." Bob Dylan from It's Alright, Ma (I'm Only Bleeding).
In the spring of 1992, when my mother was dying of brain cancer, I watched as she used her brain to try to fool the doctors. They would ask her questions, "Good morning. Can you tell me your name?" (Her name was Lorna). And some days she got that right. But as she deteriorated, often she couldn't answer that one, or what day it was or what month or what year. Yet my mother was a very sharp cookie. When asked questions she rambled around, telling the doctors about a variety of things, most of it not making any sense depending on which electrical impulses happened to make their way through the frayed wires of the plugs in her brain that used to fit in the right sockets. It was heart-breaking.
While in London this week I took a planned side trip to Geneva to visit my old friend Deb. She was my brothers' first girlfriend when we were all in summer camp. We reconnected after many distant years in 2003 at a camp reunion. My wife and Debbie hit it off and a couple of years after that took a "Thelma & Louise" road trip through the Southwest U.S. which they documented with some incredible (and funny) photos.
As a group, we counselled each other (not the summer camp variety but the kind that good friends do for each other). Deb has always been a brilliantly talented writer (and deft Scrabble player) who for the past number of years has been living in Geneva and working for Rolex, creating and editing some of their most prominent and visible marketing materials. Before taking that job, she was free-lancing as a web music journalist and interviewed some very well-known names in rock, blues and jazz. Music has always been a strong bond amongst our camp friends and her appreciation and love of music even led her to taking up blues harmonica which she played with friends in her adopted country of Guatemala (Debbie grew up in Montreal). We've all seen each other through some of life's growing pains and soul-searching times. Deb is a breast cancer survivor which is one reason why her current condition is so sad. She is suffering from Glioblastoma, an inoperable and except in rare circumstances, incurable brain tumor. More than a year ago doctors gave her three months to live. She embarked on a series of experimental chemotherapy and while it hasn't been any fun (the side effects and what-not) she is still with us. But, her brain is messing with her too.
My wife and I call her periodically and on those calls she sounds extremely lucid and her memory seem phenomenal. She sounds up-beat and tells us of the books she is reading, the writing she is doing and other stuff that had us feeling more hopeful. But a few weeks ago, one of her sisters' told us that all Deb was telling us was fantasy. Well, I witnessed that first hand yesterday and today at her bedside. Yesterday, her 59th birthday, she remembered me as soon as I walked in the door. But this morning she didn't know who I was at first and as the time wore on, she knew me and called me by name. She drifted in and out of making sense or talking nonsense. At times, she used a word that she knew was wrong and tried desperately to correct herself. This morning, a doctor and his colleague came in to talk with her about how she wants to live the remainder of her life. The "living will" stuff. And while Deb gave some conflicting answers (I think I would have too if I was her) she did tell the doctors that her best friend was the one who knew her wishes and should be the one to have the legal authority in such circumstances. It was a heavy scene for me to observe.
The weirdest thing was that during the time I spent with her she got two phone calls and was talking as lucidly (or perhaps even more) than you or I. She remembered projects she'd worked on, the names of children and grandchildren. She said some random things which I told her I'd make into a song and send her the demo. The first line (all her) is "You can't take the sunshine with you no matter where you go." We had a great time writing those lyrics together. The brain is an unbelievable thing; how it works and how it fails to work in almost the same moment.
She is in the palliative care unit of a wonderful hospital just outside Geneva. It's for end of life care, usually very short term, but she has fooled them. There are people who have helped her draw her will for the first time and prepare for death. To some of us, death comes sudden and without warning. The rest of us don't want to admit to ourselves that Bob Dylan's lyric is totally true. And who is to say that we will be given the luxury, of sorts, to have the time to wrap things up in a tidy package and say, "There, I've done what I wanted to do and I am at peace." Deb told me that she's heard how some other patients answer the question, "What do you dream of?" One said, "To swim with dolphins." Deb's dream is simply to see another spring. I don't know that she will. Do we know how many springs we will see? Does anybody really know what time it is? Shouldn't we start caring?
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Tesco closes £450m UK supermarket CMBS
Thursday, January 26 2012 | 01:59 PM
James Wallace
Finance Editor,
COSTAR | Tesco, the world’s fourth largest retailer, has sold a 50% stake in an 11-strong portfolio of UK supermarkets financed by a 30-year dated £450m credit-linked CMBS transaction which closed this afternoon.
As part of the deal Tesco has completed one of the largest sale and leasebacks in recent years with an undisclosed, non-traditional property investor.
The bonds, with an expected maturity of 22 and-a-half years, priced today at 275 basis points over the 4.25% 2032 gilt benchmark, with the coupon set at 5.66%.
HSBC, Goldman Sachs, The Royal Bank of Scotland and Lloyds Banking Group were joint arrangers on the deal, with the bonds thought to be oversubscribed.
UK accounts took 96% of the bonds, with the balance overseas. Around 78% of the investors were fund managers, 18.5% insurance companies and 3.5% others.
The sale-and-lease back of the portfolio was sold to Tesco Stores Limited, a 50:50 limited partnership comprised of a subsidiary of the supermarket giant and a third party investor.
The joint venture partners are financing its acquisition of the £440.5m-valued supermarket portfolio by issuing a single-tranche, 30-year amortising loan that will amortise by the end of 2041 from a newly-created special purpose vehicle, Tesco Property Finance 5.
The 11 occupational leases each expire on Christmas Eve 2041, after the October 13 bond maturity date of the same year. The portfolio security will also be credit linked to Tesco PLC which also acts as guarantor to Tesco Stores Limited.
The whole loan LTV is 102.2%, with the estimated £9.5m above portfolio value likely to cover transaction and arrangement costs.
The occupational leases on the underlying portfolio will finance the interest payment to bondholders, with a swap taken out to mitigate the risk that rental income could fall short of fixed interest due over the life of the 30-year securitised loan.
The portfolio is comprised of 11 UK-wide supermarkets which range in value from £13.88m to £71.69m, including stores across London, Blackburn, a 116,793 sq ft Bradford supermarket, a 101,976 sq ft Doncaster Tesco’s as well as stores in Rotherham and Great Yarmouth (see table below) with the largest five assets reflecting 61.1% of the portfolio’s total market value.
The largest single asset is the portfolio’s only supermarket still under construction, at Woolwich (artists’ impression pictured), reflecting 16.3% of the pool by market value, which is scheduled to be completed this November.
The developer, Spenhill Regeneration, a 100%-owned Tesco subsidiary, is working to a fixed price construction contract with performance and completion guaranteed by Tesco PLC. Rental payments for the supermarket will begin in December 2012 and continue thereafter until lease maturity in 2041, regardless of whether the property has completed or opens on schedule.
Around £23.8m of the issue proceeds will be retained and preserved, representing 103% of the expected costs of completing the development of the property at Woolwich including fees to developers and advisers. The development risk is entirely borne by Tesco PLC.
Once completed, the development will comprise a 179,000 sq ft Tesco Extra store, seven retail units, 613 car-parking spaces for the superstore, 259 residential apartments and 78 car spaces.
Securing property substitutions will be allowed subject to, inter alia, equivalent market rent of exchanged collateral, lease term and rental income at least equivalent as well as maintaining a broad similar geographic concentration.
This is Tesco’s fifth credit-linked CMBS, which in aggregate amount to £3.05bn since 2009, with three of the previous deals sold to Tesco’s own pension fund and the fourth sold to USS’ pension fund.
Tesco remains one of the world’s largest and property developers and managers, with global property assets worth £36bn, against a book value of just under £21bn.
From this financial year onwards, Tesco intends to deliver profits of between £250m and £350m per year, broadly achieved through around £1bn in annual supermarket sales which the retail giant argues is sustainable given a circa £2.5bn yearly investment in land and buildings. As a result, Tesco will continue to grow its net asset base, despite the disinvestment strategy.
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2012: The Year of Caution? The Corner Office. Apple's Obsession
Friday, January 20 2012 | 03:03 PM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | Resigned is not a particularly positive word. The thesaurus suggests submissive, reconciled, accepting, stoic, long-suffering, prepared to accept. Well, some of these are even less appetizing. But resigned is the word that came to my mind this week about the state of things in the commercial real estate industry (perhaps throughout the business community in general). While we were all waiting for things to revert to normal, the normal that we wanted it to be, it hasn't. It's been a while now and I believe we've all accepted that we may not see a time like the last 'normal' for a long, long time. But what's interesting to me is that there are groups, not long-time real estate investors but rather private equity firms, hedge funds, etc. who have seen the light and see that there is opportunity in that there real estate business. And, they've started building real estate investment groups within their companies. They're hiring top talent and throwing dollars at, hopefully, doing it right. Some, perhaps most, of the money these firms manage is not institutional in nature and yet, some of it is. And, at a time when many investors are staying close to those managers with whom they've had a good relationship with and who have proven trustworthy and putting new money out with them, either in the form of a separate account or a joint-venture or a club deal, there are some investment fiduciaries who have been successful in raising good-sized commingled funds. That's what makes this time in the history of our industry so fascinating to me. We are living through change and it's not a change that has been thrust upon us by an alien force, it's an organic change that develops based on the fact that any company that launches a new product or service either has to fill a need or solve a problem. And if you can bring that to the table, whether you are an investment manager, a manufacturer or a consultant or any kind of service provider, there is business to be done.
A weekly column called "The Corner Office" interviews executives and asks them a few questions. I thought this one was pretty good: "If you could ask someone only two or three questions to decide whether you would hire that person, what would those questions be? (1) What idea is driving you right now? (2) What’s on your mind about any aspect of life that you’re really excited about? (3) Tell me about that."
CBRE published its' The Global View 2012 this week. Here are the bullets from their executive summary:
-Macro-economic and political landscape uncertainty across the world suggests that a cautious outlook in local property markets is likely to persist into 2012. While 2011 is in the past, many of its challenges continue.
-Corporate occupiers in 2012 will continue to exercise caution in their decisions, and demand for space will remain moderate.
-Investors in Europe and the United States will therefore tend to adopt more defensive strategies, focusing on high-quality buildings in prime locations within the most liquid and transparent markets.
-Asia has not decoupled: Occupiers and investors are becoming more cautious in many markets across Asia due to slowing economic growth in China and concerns about the global impact of the economic slowdown in Europe and sluggish growth in the U.S.
-High-quality real estate assets in prime locations should continue to perform well compared to secondary real estate and very competitively with regard to other asset classes. From an investment point of view, secondary property will continue to underperform.
-A lack of new construction in many markets globally will boost the performance of existing prime properties.
In line with my first paragraph, note these words sprinkled about in their executive summary: uncertainty, cautious, caution, defensive strategies, cautious. It appears that we may be resigned to accept that 2012 will be The Year of Caution. But, it sure sounds to me like there is opportunity out there, ready to be mined.
I've only had a few of my friends become published authors. The latest, a long-time friend and the drummer in the first real band I played in, Ken Segall's. His book, Insanely Simple: The Obsession That Drives Apples' Success will be released on April 26th. While not suggesting that you do it, I've pre-ordered it for my Kindle. Ken is a veteran advertising guy on the creative side. He has been behind some of the most recognizable advertising campaigns over the past 30 years including some of Apple's major ads and branding stuff. He's a brilliant guy and pretty funny as well. I am sure this will be a good read and not just for core Apple fanatics.
On the road...
Jan. 23-25: London to attend the INREV Winter UK Seminar 2012 and the Thompson Reuters Global Property Outlook 2012
Jan. 30-Feb. 1: Scottsdale, AZ to attend IREI's VIP Conference
Feb. 6-7: New York
Feb. 8: Baltimore, MD to speak with students in the Accelerated Masters of Science Real Estate Program as Johns Hopkins Carey Business School about careers in commercial real estate.
Feb. 9-10: New York
Feb. 23-24: Chapel Hill, NC to attend the University of North Carolina Keenan-Flagler Real Estate Conference and be a judge at their real estate case competition.
Feb. 25-26: Asheville, NC
Feb. 27-29: Scottsdale, AZ to attend the NCREIF (National Council of Real Estate Investment Fiduciaries) Winter Conference
March 29-30: Philadelphia to be a judge at the Villanova University Real Estate Case Challenge
April 22-25: Chicago to attend the CRE Mid-Year Meetings
April 25-27: Vienna, Austria to attend the INREV Annual Meeting
May 17-20: North Palm Beach, FL to attend the Hoyt Fellows/Weimer School Annual Meeting
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Brookfield to build 5m sq ft London office portfolio
Tuesday, January 17 2012 | 10:58 AM
James Wallace
Finance Editor,
COSTAR | Brookfield Asset Management, the global real estate developer and investor, is looking to build up a 5m sq ft London office portfolio on an opportunity-driven basis over the coming years, and is currently pursuing a handful of potential City transactions.
The Canadian developer and investor’s current London portfolio is thought to be worth around £500m plus a 22% stake in the Canary Wharf estate, which is worth around £1.04bn as at the end of June 2011.
Relative to Brookfield’s $69bn global empire – across 280m sq ft which includes ownership of around 10% of downtown Manhattan – this remains modest. Brookfield believes, however, that a combination of continued bank deleveraging, wider forced sales due to restricted lending for future refinancing, as well as the likely future M&A-linked opportunities in the years ahead, will all deliver opportunities.
Martin Jepson, senior vice-president for development and investment at Brookfield, said this morning that it is looking at London offices from £60m upwards with and without joint venture partners and would like to grow the London office portfolio to between four and five million sq ft on an opportunity-driven basis.
“We are not going to play in the prime market – given the weight of money that is coming in, yields will likely stay where they are – in good secondary that we are monitoring,” he said. “You need strong balance sheets and the ability to write large equity cheques.”
Jepson, who joined from Hammerson last August, is also leading Brookfield’s interest in 100 Bishopsgate, the planned 900,000 sq ft, 40-storey tower in which it bought a 50% stake from Great Portland Estate for £42.975m. Jepson re-iterated this morning that spades would not go in the ground until pre-lets are signed, suggesting the required minimum would be somewhere in the region of 30% to 40% of the tower’s total 865,000 sq ft of office space.
The guideline threshold to kick-start the scheme for Jepson is British Land and Oxford Properties’ pre-let with Aon, the global insurance and advisory company, which is taking a third (191,000 sq ft) of the total 610,000 sq ft Leadenhall “Cheesegrater” building, at £54 per sq ft, rising to £62.50 per sq ft on the option to take a further 85,000 sq ft.
Pitching 100 Bishopsgate at the £55 to £60 per sq ft range would suggest Brookfield – which is set to become the tower’s majority equity owner when GPE concludes the sale of half its remaining 50% stake – translates in minimum annual income, based on the above figures, of around £14m to £17m before the spades go in the ground, calculated a real estate analyst. “At the top end, say a 40% letting on £60 per sq ft, it would deliver around to £22m which would be a done deal,” added the analyst.
News is unlikely to follow swiftly on the pre-letting front, with the occupier market unprotected from the wider market distress, as evidenced by yesterday’s pre-let withdrawal by CMS Cameron McKenna in Hammerson’s Principal Place scheme in the City because of wider market uncertainties.
All the big developers of the upcoming raft of London skyscrapers have the same list of 20 or so large tenants which are coming up, with everyone chasing the same companies at a time when a nervousness to move has set in.
Jepson’s cautious note, therefore, is entirely understandable. “It takes at least six months in due diligence to secure a major letting, so there will be no news imminently,” he said.
Brookfield’s first investment into the London office market came almost a decade ago when it bought its 22% stake in across 11 office properties, five retail units and a further seven developments schemes at Canary Wharf.
Back across the Atlantic, the Toronto-based global asset manager is understood to be close to a first closing in the coming weeks for its third real estate opportunity fund, which although Brookfield declined to comment due to regulatory restrictions, is reportedly targeting $3bn.
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Visualizing woodpeckers, One moment of insight, TV Dinners
Friday, January 13 2012 | 12:00 PM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | One thing that has been coming up more and more in conversations is the idea of raising capital for private equity real estate funds from smaller pension funds, endowments, foundations and family offices. There are investment managers who have been doing this for years. But, as more and more of the big boys are sitting on the sidelines, managers are looking for alternate sources of capital for their commingled funds.
Historically, if you raised money from a family office or just plain ol' rich people, the institutional investors did not relish being in the same fund. I wonder if that will still be the case as we move into a new world order in the institutional real estate investment industry.
Presentation Suggestions (There's obviously a story behind his comments but the main thrust of his suggestions are what grabbed my attention:
The unexpected will rivet audience attention. Breaking a pattern is a very basic way to grab attention. How can you break a visual or sensory pattern in your next presentation to grab attention and get your audience to take action?
Be careful with negative instructions. If you don’t want your audience to do something, don’t even put the idea into their heads. If I tell you to NOT think about woodpeckers right now, guess what you’re going to do? You’re visualizing woodpeckers right now, aren’t you? Yet, you had no intention of doing so… until I told you NOT to do it.
Take words seriously. If you want me to take your words seriously, how about making your font size huge and clearly visible? What about placing your sign (or your PowerPoint) almost smack in front of me, instead of making me peer down a gully or around a post or from the side or through someone’s head?
I've been reading some good books lately-ones that get you thinking about important things. And I was talking with someone this week who said that they'd like to make a contribution to the world and 'leave something behind.' Then yesterday I read this obituary about Dr. Mary Ellen Avery, a medical researcher who helped saved hundreds of thousands of premature infants with a single, crucial discovery about their ability to breathe. Her principal contribution to medicine was in finding out why so many babies died at birth. The answer: their lungs lacked a foamy coating that enables people to breathe. “There was one moment of insight,” she said. “And that was it.”
When Dr. Avery started her work, as many as 15,000 babies a year died from the syndrome. By 2002, fewer than 1,000 did. Estimates of lives saved exceed 800,000. One moment of insight. Such a humble statement about something that has had such an enormous and, in a way, miraculous impact. Very few of us will leave a legacy of this stature. But there is something we can each do that will make a difference. Of course, it'll involve the one thing that I feel is the most valuable thing we have in our lives: time. My proposition to you: make time to spend with an industry person (or someone not in our industry for that matter) who is out of work, or looking to get into the business for the first time or is trying to figure out how to make a career change and get future employers to see them as a whole individual rather than just labeling them by the title of their last job. Most, perhaps all of us, has been in one of those situations in our lives. Remember what it feels like? In learning about what makes me tick, I am clear about one thing: if I can help just one person every day, even in some small way, then it's been a good day for me. We all need each other lean on from time to time. We are all part of a global commercial real estate community (or as Seth Godin calls it 'a tribe.') I can almost guarantee that you will feel better about yourself when you help someone else. P.S. I've been working on a plan to create someplace where we can all gather together and help each other. Stay tuned!
San Francisco International Airport (SFO) always has a cool exhibition in Terminal 3 in the main walkway to the majority of the gates. The current one is on the history Television or TV as we know it. Not only do they have TV sets dating back to the early days, they have games that were spawned by TV shows, lunch boxes (did you have one?) and other sorts of branded stuff. It's a walk down memory lane: We had a black & white TV set. My father and I used to lay on the floor on our left elbows to watch the shows. For some reason the channel dial was funky and periodically my Dad, using his right foot, had to jiggle it a little to get the picture clear again. We lived in a simpler world. There wasn't much fear in America in the Post WWII years (except when we got frightened by who knows who and people started building bomb shelters in their basements). TV was our friend and our nemesis as people bought frozen TV dinners and either set up TV tables or rolled the set into the dining room. So that was our technology addiction. How innocent!
Note: Please feel free to tweet this column.
On the road....
Jan. 17-20: New York
Jan. 23-25: London to attend the INREV UK Winter Seminar 2012 and the Thompson Reuters Global Property Outlook 2012
Jan. 30-Feb. 1: Scottsdale, AZ to attend IREI's VIP Conference
Feb. 6-10: New York
Feb. 23: Chapel Hill, NC to attend the University of North Carolina (UNC)/Kenan-Flagler Real Estate Conference
Feb. 24: Chapel Hill, NC to be a judge at the UNC Kenan-Flagler Real Estate Case Challenge
Feb. 27-29: Scottsdale, AZ to attend the NCREIF Winter Conference
March 29-30: Philadelphia to attend and be a judge at the Villanova University Real Estate Case Challenge
April 22-25: Chicago to attend the CRE Mid-Year Meetings
April 25-27: Vienna, Austria to attend the INREV annual meeting
May 17-20: North Palm Beach, FL to attend The Hoyt Fellows/Weimer School Annual Meeting
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New Year, New Band, New ________
Monday, January 09 2012 | 09:11 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | In 1975, legendary bluesman, John Mayall, released an album called, "New Year, New Band, New Company." If you haven't heard of him, perhaps you've heard of some of the musicians that have either recorded or toured with him: Eric Clapton, Jack Bruce, Mick Taylor, John McVie, Mick Fleetwood, Dr. John & Paul Butterfield (a seriously partial list). Well, this week that title suits me pretty well also: New Year (duh), New Band (I sat in last week with a group and they've sort of asked me to join them. they're now called "Four Shotz" and are rockin' blues band) and New Company. This last category is a curious one at this exact moment in time. While I am involved in a couple of serious dialogues regarding new 'jobs', nothing is definite yet. So, as I've done for many years, I'm offering to provide fee/assignment based services as a management consultant.
In preparing to 'hit the road' I've ordered some new business cards which have this as the headline: "Solutions by Steve Felix" and my contact information. I'm trying to follow all the things I've been reading, and passing on to you guys, about keeping things short and simple. I've also sent this email to a number of my former clients and industry friends:
Dear Friend:
I am offering my consultative/solutions services to a few companies.
One of the services I could provide is to facilitate an internal senior level strategic discussion about how to grow your business. Using a knowledgeable, third-party facilitator like me helps open the conversation and take it to areas that might not be discussed when a meeting such as this is 'moderated' by someone in the firm.
I can also help you in the following areas:
1. How to make your client events more memorable and effective
2. How to improve your presentation books & marketing material
3. How to make your face2face presentations more effective
4. How to improve your communications with clients
5. How to address certain client feedback about your services and client care
6. How to expand your net of potential new clients/investors
7. Providing internal career coaching to help you retain your best people and understand what their aspirations are.
8. Providing recruiting services.
Anyway, if this has piqued your interest, perhaps we could set up a phone call to discuss.
Thanks.
Steve
So, please let me know if you or someone you know may have an interesting in talking with me. Thanks. P.S. I've received some requests to set up calls starting next week and have sent out my first proposal to facilitate an internal product strategy meeting!
Vis a vis last week's career thoughts I was reminded that one very important thing (how could I have forgotten this one) is finding the right people to work with. This involves confidence and trust. Twice in my career I was in a position where I needed a job to support my family. In those instances, I took jobs with people that I didn't trust and didn't like but thought, "Hey, maybe I'm wrong," But I wasn't and both ended in less than a year. When it comes down to it, it's all about the people, isn't it? Thanks for reminding me, Albert.
I've been putting some down time to good use updating and adding to my contact database. While doing this I found a site that has Career Advice for Real Estate Professionals from some industry heavyweights. I offer a few of them here:
-Get a Solid Education: When you enter into real estate, you may work in only one area, such as property management or brokerage, but it's important to have an educational overview of the entire business to guarantee your long-term success.
-Maintain your Education: Have a commitment to keep abreast of all the changes in the industry by attending conferences, educational programs, and by reading and writing for business and academic literature.
-Have Perseverance: One of the most important skills that you need to be successful in business is perseverance. Quite often when you start down a path, you're naive about what it takes to get there. So you can be surprised to keep running into problems. But, you just have to stay with it until you find solutions to move forward.
-Know What Matters: You must be able to look at many complicated issues and see what really matters. People often get caught up in the preciseness of the numbers and the methodologies instead of finding what really matters. And if you can simplify things, then you can make better decisions, and you can also explain things to your clients.
-Measure the Risk: Risk is an essential element in the business. So learn to manage risk. The key to risk is to do extensive research so that you can carefully consider, creatively integrate, and rigorously test information, before making a decision.
Good stuff, right? Pass it along.
Congratulations to my friend Dietrich Heidtmann who has joined Grosvenor as Managing Director of Client Services.
On the road....
Jan. 11-13: Chicago
Jan. 17-20: Laguna Beach, CA to attend IMN's Ninth Annual Winter Forum on Real Estate Opportunity and Private Fund Investing
Jan. 23-25: London to attend the INREV UK Winter Seminar 2012 and the Thompson Reuters Global Property Outlook 2012
Jan. 30-Feb. 1: Scottsdale, AZ to attend IREI's VIP Conference
Feb. 6-10: (t) New York
Feb. 23: Chapel Hill, NC to attend the 2012 University of North Carolina (UNC) Real Estate Conference
Feb. 24: Chapel Hill, NC to be a judge at the UNC Kenan-Flagler Business School Real Estate Case Challenge
Feb. 27-29: Scottsdale, AZ to attend the NCREIF Winter Conference
March 29-30: Philadelphia to attend and be a judge at the Villanova University Real Estate Case Challenge
April 25-27: Vienna, Austria to attend the INREV annual meeting
May 17-20: North Palm Beach, FL to attend The Hoyt Fellows/Weimer School Annual Meeting
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Incentives & Taxation for Data Centers
Tuesday, January 03 2012 | 05:10 PM
Michael Siteman
EVP - Data Center Solutions,
JONES LANG LASALLE, INC. | A substantially significant aspect of most data center developments revolves around income taxes, property taxes and incentives. Those involved in the decision-making process consider concessions in this classification as pivotal contributors to or reductions from the bottom-line profitability as well as the internal rate of return formula to determine the efficacy of each contemplated development. Historically, incentives have been tied to employment and for the most part, in many states, that is still the case. However the key to successfully negotiating incentives lies in having a comprehensive strategy to approach the responsible government entities.
Generally speaking, incentives can be categorized into four main areas: property tax relief; income tax credits; sales tax relief; and cash grants. In many states, as mentioned above, much of this is predicated on employment in excess of 50 full-time employees. In some states, tax relief for personal property tax is related to a gross amount of capital expenditure whether for construction or equipment. In some states, legislation has been enacted to create a discretionary fund that offers cash grants that can be used for the purchase of property, or equipment.
A plan of successful plan of attack is best organized around four steps: tax and analytic assessment to create a strategy; strategic negotiations; contract negotiations; and implementation.
In order to create a tax and analytic assessment so that a strategy can actually be created, one must first understand the tax and business fact patterns in any given region. It is essential to create a 10-year business financial operations picture. Before any strategy can be created, all statutory tax regulations and issues must be fully reviewed. Finally, the information derived is molded into a business-driven strategy.
Before contract negotiations can commence, strategic negotiations must be entered. Meeting with state and local officials to explain the business goals and objectives lays the foundation for future negotiations. Once basic information has been transmitted, proposals are usually prepared and received from the respective government agencies. An analysis of the proposals ensues that identifies key challenges and issues requiring solutions.
Contract negotiations continue this process with several rounds of proposals, revisions, analyses (both financial and subjective) and submittal of approvals.
Implementation of the incentives package relies on the preparation of reports and necessary applications, filing for the benefits that were negotiated, tracking data pertinent and precedent to the incentives, tracking of payments or offsets and further training those who will be responsible for tracking such incentives in the future.
In so many cases, the incentives received can equal the total capital invested. Since the cost of power can, over the term of the investment or lease even exceed the capital invested, the incentives package can go a long way to offset the cost of power.
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Digital Security & Compliance
Tuesday, January 03 2012 | 05:09 PM
Michael Siteman
EVP - Data Center Solutions,
JONES LANG LASALLE, INC. | I have this thing about being as informed as I can. At times it seems overwhelming and that I¡¦ve painted myself into a corner. A few years ago, I discovered web crawlers and then Google Alerts. I created alerts for everything from financial advice to Data Centers and Digital Media. Over the years, that¡¦s turned into a daily digest of 20 different email newsletters on everything related to data centers and IT. Each of those sources contains anywhere between 10 and 20 stories. Of course, I can¡¦t read all of that material, or I¡¦d have no time for work, blogging, or anything else for that matter. What has become clear of late is that much of what I¡¦m seeing right now is about digital security and compliance. This isn¡¦t so much an extension of my last blog, but a different discussion about compliance itself as opposed to the necessity for systems security.
This isn¡¦t just happening in the world of publishing, but also in the real world. Over the past twelve months, I¡¦ve received a number of requests from clients to have SAS 70 Type II audits completed. And that¡¦s just the tip of the iceberg. From what I¡¦m seeing, compliance is one of the most important contemporary issues that is being addressed and considered.
The real question is, ¡§What measures are important and how best to implement those measures?¡¨ The next important question, especially with regard to colocation contracts, is, ¡§What and how should this be addressed in a Service Level Agreement?¡¨
There are compliance guidelines and directives for every different business sector and in general including:
ħ Sarbanes-Oxley;
ħ Service Organizations Controls (formerly SAS 70);
ħ Basel II and III;
ħ PCI/DSS;
ħ HITEC & HIPAA;
ħ TIA 942;
ħ NYSE Rule 446;
ħ NASD Rule 3510;
ħ Check 21, and many others.
A Little History¡K
In December 2009, the International Auditing and Assurance Standards Board (IAASB) issued new International Standards on Assurance Engagements (ISAE) 3402 replacing the prior standard, SAS 70 and subsequently issuing SSAE Number 16 for reporting on controls at a service organization. This represented the first significant change to the AICPA standards since SAS 70 was originally issued in 1992. There are now three different Service Organization Control reports (SOC 1, 2 & 3) that have supplanted the SAS 70 and SSAE 16 (which now falls under SOC 1). Included under the SAS 70 standard was service auditor guidance, user auditor guidance for the purpose of reporting on controls for financial services audits. There seemed to be a high occurrence of misinterpreting SAS 70 reports as a means to obtain assurance regarding controls over compliance and operations. Separately offered were Trust Services Principles and Criteria that included security, availability, processing integrity, confidentiality and privacy. All of this has now been reorganized under:
ƒß The SOC 1 includes SSAE 16 (service auditor guidance), Restricted User Report (Type I or II) for the purpose of reporting on controls for financial service audits. SOC 1 reports are tailored to address controls at an organization that provides services to user entities when those controls are likely to be relevant to user entities¡¦ internal control over financial reporting;
ƒß The SOC 2 includes Attest Engagements 101 (AT 101) to assist CPAs in reporting on the effectiveness of a service organization¡¦s controls related to operations compliance. This combines Trust Services criteria with the reporting detail of SSAE 16. Also included is a generally restricted use report (Type I or II) for the purpose of reporting on controls related to compliance or operations. SOC 2 reports are meant to address security, availability, processing integrity, confidentiality and privacy. This report is perfectly applied to the SaaS or cloud provider that wishes to assuage the concerns or its customers that the service organization maintains the confidentiality of its customers¡¦ information in a secure manner and that the information will be available when it is needed; and
ħ SOC 3, which, similarly to SOC 2, includes AT 101 plus a general use report with a public seal for the purpose of reporting on controls related to compliance or operations. The SOC 3 report is designed for companies that use a business partner to perform part of its operations for selling goods via the Internet and want reassurance that such transactions occur in a private and secure environment.
As important as it is to audit processes and procedures, the implementation of security measures is where the rubber meets the road. This is exemplified in Payment Card Industry (PCI) Compliance. This standard not only relates to hardening the security perimeter, but also creating a secure interior set of requirements that prevent insider security breaches. According to recent white paper written by Sumner Blount for CA Technologies, PCI compliance can be achieved by adhering to six steps:
1) Build and maintain a secure network. This requires installing and maintaining a firewall configuration to protect data as well as creating custom system passwords and other security parameters;
2) Protect customer data. The imperative is to protect all stored data and encrypt transmission of that data and other sensitive information across public networks;
3) Maintain a vulnerability management program. This requires that anti-virus software is used and regularly updated. Development and maintenance of secure systems and applications is a must;
4) Implement strong access control measures. Access to data is restricted based on a need-to-know, unique IDs are assigned to each person with computer system access and physical access to data is restricted;
5) Regularly monitor and test networks. Without tracking, monitoring and testing access to network resources, data, systems and processes, there is no accountability model;
6) Maintain an information security policy. Your policy must address information security first and foremost.
Application to the Service Level Agreement
This will certainly be determined by the type of space or services being rendered by the provider. In the case of a powered shell, the degree of security will be limited to physical measures and facility availability while in the case of managed services, or private cloud services, those measures should be significantly extended. In many cases, service providers will not directly monitor or secure any equipment that it doesn¡¦t own or operate. Network availability and uptime of the data center can and must be protected and there should be a 100% guarantee of backbone network uptime as well as other services delivered such as power. Other measures of latency and packet loss should also have measurable standards of reliability and security procedures are certainly applicable in this case.
Conclusion
Using the PCI Compliance model as an overly and then auditing the IT landscape with the preparation of a SOC report goes a long way toward building a secure environment. Of course, other compliance requirements that are industry-specific will be a necessity, but by implementing these two aforementioned steps, the process will be considerably streamlined.
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Sports Slang, Networking Redux, Joe Robert, Necessary Endings
Friday, December 23 2011 | 11:02 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | Posted: 23 Dec 2011 05:05 AM PST
Sports slang has been used to describe business situations for years:
1. Play ball. To go along with what everyone else wants.
2. Ball park. To estimate something.
3. Step up. Short for ¡§step up to the plate.¡¨ To take responsibility
4. Level the playing field. Make things even across the board
5. Play hardball. To get mean and get tough.
6. Slam dunk. A complete and easy success.
But when I was reading a listing of upcoming concerts this morning what struck me is that there are words used to describe musicians and bands that are also adaptable to companies and people in the commercial real estate industry. While I will not commit industry suicide to applying any of these terms to any company or person in particular, wouldn't it be fun to do an anonymous survey?
1. Miraculously nimble
2. Smooth and swinging
3. Heartthrob
4. Seasoned trio
5. Powerful vocalist
6. Tragic emblem
7. Enigmatic artist
8. Frequent collaborator
9. Over-caffeinated electronic art rock
10. Nightlife kingpin
Thanks to my friend, Tom, I offer you the following "Tips on Networking" previously published in the Wall Street Journal:
1. Have a Solid Introduction: First impressions count heavily. Make sure your attire, attitude and overall appearance are the best possible before introducing yourself to someone
2. Don't Confuse People with Your Pitch: No one needs to hear your entire work history upon meeting you. If someone asks you to tell them a bit about yourself, your explanation from start to finish shouldn't take more than 30 to 60 seconds
3. Don't Tell a Sob Story: No matter how tough it's been, you need to paint a positive picture when you're making new connections.
4. Spend More Time Listening Than Talking: The old adage is true: People were given two ears and one mouth, and you should use them proportionately.
5. Avoid Being Socially Inept: There's a fine line between being friendly and personable and being awkward. You do not want to be the latter
6. Don't Overstay Your Welcome: Taking up too much of someone's time is almost as bad as ignoring them entirely.
7. Hand out Your Business Card, Not Your Resume: It's not ok to pass along an unsolicited resume. Offline or online, you need to work on forming a relationship with someone before you ask them for anything at all. Many people overlook this professional courtesy, and ask brand new connections to serve as a referral when submitting a resume or application.
8. Follow Up and Through: Perhaps the "Cardinal Rule" of networking is that once you've planted the seeds of a new relationship, you must follow up to maintain it. Whether it's a business referral, job lead, or a professional connection, get in touch ¡V within 24 hours ¡V to say you enjoyed meeting them.
So true although I've allowed myself 48 hours to follow up with everyone whose card I get at any event with a simple email. At the same time I enter them in my contact database with a notation of when and where I met them and anything else that I learned (or that I can remember!) Although it's not acceptable in many Asian countries, the first thing I do when or after I meet someone is make a notation on the back of their card (except for those companies who, for some reason unknown to me, have allowed their card designer to have the back of the card be a dark color. Go figure).
Joe Robert died recently at age 59. As many of you know, Joe became visible during the RTC (Resolution Trust Corporation) days when he started managing and then buying assets from that agency that was formed to workout the Savings and Loan crisis in the late 1980's and early 1990's. He built a successful investment management business. I met him only once, at an industry event some years back where he was the keynote speaker. My first impression was that he was a good guy with a contagious positive personality, a sentiment apparently echoed by many who knew him both in business and real vs. real estate life. Anytime a thing like this happens, dying so young, to someone you either know well or know of. it is another wake-up call. We don't know how many days we will be granted the privilege to exist on earth and when I am awakened I get back to doing certain things that I may have put on, as it were, the 'back burner.' These include documenting as many stories as I can about my growing up as a personal history for my grand children. I also have been working on an autobiography for many years and have been negligent about that after a blazing start. The advice I've been given about writing is to write every day, at the same time of day, for a minimum of 30 minutes. When doing this, don't try to edit yourself but just let it flow-there's time for editing later. But it's the discipline that is the key. We all have stories to tell about a family member, friend or acquaintance dying at a young age. But we also read about people who accomplish a lot during their years. I recently interviewed for a new job and was asked, "After many years in the industry, how would you like to be remembered?" I paused as I had not ever been asked that question before. It's a good one to ask ourselves, both about how we'd like to be remembered by the people in the industry we've served and by those people who know us simply as ourselves, which can also be one in the same.
Final note: A friend recently recommended a book to me: "Necessary Endings: The employees, businesses and relationships that all of us have to give up in order to move forward." It's a good read. My summary of it is pretty extensive (it's my way of both absorbing the stuff that strikes a nerve with me and having a 'permanent record' of it that I can refer back to). Here are just a few things I'd like to share with you:
„X Getting to the next level always requires ending something, leaving it behind and moving on
„X Endings are necessary when there is no hope
„X There are three types of people on earth: The Wise, The Foolish and The Evil
„X If you are a leader sometimes you have to lead, even when no one wants to follow
„X Part of maturity is getting to the place where you can let go of one wish in order to have another
„X The longest-lasting and best relationships, as well as the best businesses, are the ones in which everyone involved sees and loves the whole picture, positive and negative.
„X For the right tomorrow to come, some parts of today may have to come to a necessary ending
Please accept my best wishes to you for a special holiday season and happy 2012. For those that are in a cold climate I hope you get snow; for me there's nothing more perfect than snow on the ground for Christmas. I will not be getting snow where I live but it is pretty chilly in the mornings (remember everything is relative!).
Steve
On the road...
Jan. 17-20: Laguna Beach, CA to attend IMN's Ninth Annual Winter Forum on Real Estate Opportunity & Private Fund Investing
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Incentives & Taxation for Data Centers
Monday, December 19 2011 | 08:56 AM
Michael Siteman
EVP - Data Center Solutions,
JONES LANG LASALLE, INC. | A substantially significant aspect of most data center developments revolves around income taxes, property taxes and incentives. Those involved in the decision-making process consider concessions in this classification as pivotal contributors to or reductions from the bottom-line profitability as well as the internal rate of return formula to determine the efficacy of each contemplated development. Historically, incentives have been tied to employment and for the most part, in many states, that is still the case. However the key to successfully negotiating incentives lies in having a comprehensive strategy to approach the responsible government entities.
Generally speaking, incentives can be categorized into four main areas: property tax relief; income tax credits; sales tax relief; and cash grants. In many states, as mentioned above, much of this is predicated on employment in excess of 50 full-time employees. In some states, tax relief for personal property tax is related to a gross amount of capital expenditure whether for construction or equipment. In some states, legislation has been enacted to create a discretionary fund that offers cash grants that can be used for the purchase of property, or equipment.
A plan of successful plan of attack is best organized around four steps: tax and analytic assessment to create a strategy; strategic negotiations; contract negotiations; and implementation.
In order to create a tax and analytic assessment so that a strategy can actually be created, one must first understand the tax and business fact patterns in any given region. It is essential to create a 10-year business financial operations picture. Before any strategy can be created, all statutory tax regulations and issues must be fully reviewed. Finally, the information derived is molded into a business-driven strategy.
Before contract negotiations can commence, strategic negotiations must be entered. Meeting with state and local officials to explain the business goals and objectives lays the foundation for future negotiations. Once basic information has been transmitted, proposals are usually prepared and received from the respective government agencies. An analysis of the proposals ensues that identifies key challenges and issues requiring solutions.
Contract negotiations continue this process with several rounds of proposals, revisions, analyses (both financial and subjective) and submittal of approvals.
Implementation of the incentives package relies on the preparation of reports and necessary applications, filing for the benefits that were negotiated, tracking data pertinent and precedent to the incentives, tracking of payments or offsets and further training those who will be responsible for tracking such incentives in the future.
In so many cases, the incentives received can equal the total capital invested. Since the cost of power can, over the term of the investment or lease even exceed the capital invested, the incentives package can go a long way to offset the cost of power.
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INREV Survey, Acronymitis, Documenting A Life
Friday, December 09 2011 | 10:57 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | Yesterday, INREV, the European Association for Investors in Non-listed Real Estate Vehicles, published the findings of its' latest survey of their 359 members. Here are some relevant highlights:
- 75% of those surveyed said that equity allocations to non-listed real estate funds should grow. The growth stems from a combination of uninvested equity already allocated but unplaced institutional capital.
- The geographical source of much of this capital is the UK, Germany, the Netherlands and France. But much of that is focused on domestic investing and less focused on value-added or opportunistic investing.
- Approximately 10 percent of fund managers have failed to secure refinancing on at least one asset due to the withdrawal of bank lenders from the market.
- Like investors, lenders have lost their appetite for risk. In rationalizing their loan books, they are focusing not merely on reducing the size of their real estate exposure, but on increasing the quality of it by focussing on high-quality underlying assets in prime capital cities and core markets.
This is very good information coming from the proverbial horses' mouth. But if we look at the 'headline news' in our industry, there's a lot going on although it may not resemble the 'business as usual' we had gotten used to (up until a few years ago). There are big deals being made. There are big hires being made. There are big plans being made. And, yes, there is some big money being invested by pension funds and their brethern. Perhaps there are more separate/segregated accounts and more joint ventures. There has been a lot of talk about interest in 'club deals' but I haven't been hearing about too many of them. Queues grow to get into large core open-end fund grow with seemingly no end to the appetite of investors. So, in some ways we could say that things are the same. But they're really not. So much is changing in our industry and if you take the time to step back, like I've been doing at this point in my career, and get off the dance floor and go up in the balcony, you'll see that a new landscape is being painted. And as most paintings of landscapes don't include people, we need to find a place for ourselves in that painting. For many, it will look the same. But for others, those who thrive on challenges, those that crave change in their careers and lives from time to time and those who see that to grow you have to embrace change, this is a very exciting time. I am extremely fortunate to have a special network of industry friends. As many of you know, my current job is ending at the end of the year and I am looking at different options for my next gig. Thanks to those friends, I have gotten to understand better than at any other time in my life who I am and what I bring to the table. No matter what I decide to do next, with a little help from those friends, I have learned to appreciate myself more. Some things take a while.
One member of our OTR community sent me a link to a recent blot post. It's titled "I Don't Understand What Anyone Is Saying Anymore." I'd recommend you take the five minutes it took me to read the whole thing but I've pasted this section below as it struck a particular nerve in me. I've written before about some research I've done about why it's not good or right to use acronyms. Here is this guy's take on the 'disease.'
Acronymitis
This is a disease of epic proportions in the world of charity. I was at a meeting just two days ago at which several well-meaning staff members of a charity were presenting to their board, and the meat of their discussion revolved around the acronyms SCEA and some other one that began with "R" that I can't recall. In the span of three minutes these acronyms must have been used eight times each. They were central to any understanding of the topic at hand, but they were never defined. So I had not the vaguest idea what the presenters were talking about. None. Could have been talking about how to make a beurre-blanc sauce for all I know.
It was reported this week that the Pearl Harbor Survivors' Association may be disbanding due to the aging of it's members. It got me thinking: My father, a WWII veteran, never talked with us about his experiences during the war. Actually, he didn't talk much about his growing up at all. But that changed in 1990, when I overcame my fear of talking about important stuff and brought a cassette recorder to my Aunt's apartment where she was making breakfast for my father and me. I pulled out the recorder and put it in the middle of the table and said that I'd like to ask them some questions and record the conversation. Neither objected. We had a great conversation which was the ice-breaker for further Q&A with my Dad on other occasions. Maybe he was just ready to talk and he was just waiting for us to ask him. So, my thought about the memories and experiences of people in any walk of life: we need to interview them and record those conversations. We need to do this stuff both in our families and in our industry....before the stories are lost....forever. We need to start doing this now!
Smile of the week: 3 minutes 34 seconds. Who knew James Cagney and Bob Hope could dance?
On the road....
Dec. 10-16: New York
Dec. 12: "Holiday Drink Thing." Russian Vodka Room, 265 West 52nd Street (Between B'way and 8th-closer to 8th). A bunch of commercial real estate industry folks will be stopping by between 6 and whenever to toast the new year (or maybe the end of this one). If you're around and have some time I'd be great to see you.
Jan. 18-21: Laguna Beach, CA to attend the IMN Winter Forum on Real Estate Opportunity & Private Fund Investing.
Jan. 24: London to attend INREV's UK Winter Seminar 2012
Jan. 25: London to moderate a panel at the Thompson Reuters Global Property Outlook 2012
Jan. 30-Feb. 1: Scottsdale, AZ to attend IREI's VIP Conference.
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Inside DTZ’s corporate debt pile
Wednesday, December 07 2011 | 10:19 AM
James Wallace
Finance Editor,
COSTAR | DTZ’s acquisition by UGL, the Australian support services group, on Sunday has left the Royal Bank of Scotland, former majority-owner Saint George Participations and HSBC out of pocket by an estimated £34m.
The troubled global property services firm had four separate drawn debt facilities amounting to £111.6m.
Alan Michael Hudson and Benjamin Cairns, the Ernst & Young partners who were appointed joint administrators of DTZ Holdings on Sunday to facilitate a pre-pack administration ahead of UGL’s acquisition, are writing a creditor’s report which will outline the sequential repayment order to DTZ’s creditors.
A creditor’s report, by Hudson and Cairns, is expected to be published the week beginning 19 December.
The most recent, and senior ranking, of DTZ’s debt facilities is the £10m revolving senior debt facility provided equally between RBS and SGP which was signed on 17 October – the day takeover talks which would have led to DTZ’s merger with BNP Paribas collapsed.
However, DTZ has only drawn down £5m of this facility, which replaced £10m in an undrawn mezzanine loan provided by SGP. It is understood that the £10m facility was only half drawn and will be repaid first.
Therefore, RBS and SGP are expected to receive £2.5m back from their joint revolving facility, leaving the remaining £72.5m from UGL to be distributed across the remaining three facilities which, together with £312m in local overdraft facilities, amounts to £106.6m.
The three remaining facilities comprise: the principal £86.5m facility with RBS; a £15.6m mezzanine loan with SGP; and a £4.2m loan with HSBC. Of the three facilities, a spokesperson for DTZ has confirmed that the SGP mezzanine loan “will get paid down”.
The euro-denominated mezzanine loan by SGP, worth £15.6m, was priced at 400bps over EURIBOR with an additional PIK coupon priced at 700bps over EURIBOR, and was due to mature on 30 April next year.
What is unclear is which ranks senior between the principal RBS £86.5m facility and the Hong Kong dollar-denominated two-tranche, worth £4.2m, with HSBC.
Therefore, the extent to which RBS has lost out on the £86.5m corporate loan lent to DTZ, is between £18.2m and £14m, assuming there are no other creditors that rank ahead of repaying the banks.
Ernst & Young’s creditor’s report will provide clarity on the final loss position to Royal Bank of Scotland, HSBC as well as SGP. UGL, which was advised by Goldman Sachs, has confirmed its £77.5m acquisition was fully debt-funded.
The acquisition has increased UGL’s own debt position by AUS$139m (£91m) to AUS$317m (£207.5m), with the company confirming yesterday in a presentation to investors that its corporate “leverage and gearing ratios [is] still maintained at conservative levels”. UGL’s net debt position, post-acquisition, is now 21.4%.
UGL’s previous debt raisings have included, inter alia, a US$250m private placement issuance in three tranches with fixed interest rates at a weighted average of 6.62%.
DTZ will not issue a customary interim management statement next week, following its delisting in the UK yesterday at a closing share price of 7p, down from an all-time high of 835p at the close of business on 29 December 2006.
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Continuing Security Threats and Security Protection Procrastination
Wednesday, November 30 2011 | 10:42 AM
Michael Siteman
EVP - Data Center Solutions,
JONES LANG LASALLE, INC. | In my last post, I mentioned a presentation given at the 7×24 Exchange International Fall Conference by Kevin Kealy, Security Architect at AT&T regarding the lack of security measures protecting control systems as well as the popularity of control systems as the new target for hacking. Two of the topics on which Kevin touched during his presentation were the Stuxnet virus and the Son of Stuxnet, DUQU.
Interestingly enough, in preparing for this posting, I did a little research to see if anything new had been discovered about the DUQU virus and found on the Symantec site (http://www.symantec.com/connect/w32-duqu_status-updates_installer-zero-day-exploit) a notification that CrySys, the group that initially discovered the original DUQU binaries, has since located an installed for the DUQU threat. Until now, no one had been able to recover the installed for the threat and, therefore, there was no understanding of how it was infecting systems. We now know that the installer file is a Microsoft Word document (.doc) that “exploits a previously unknown kernel vulnerability that allows code execution.” Symantec and Microsoft are working toward issuing a patch and an advisory.
What’s really scary here is that, similar to the Stuxnet virus, this virus was created so it definitively targets the intended recipient and its shell code ensured that it would only be installed during an eight-day window in August 2011. The virus only has a shelf life of 36 days after which it becomes almost undetectable. The installer that was identified was the only one found, but there may be other methods that were used. Fortunately, most security software vendors have already detected and are blocking the main DUQU files, somewhat preventing an attack. However, once DUQU is able to penetrate an organization, through the zero-day exploit, the attackers can command it to spread to other computers, many of which were not even connected to the Internet by using a file sharing C&C protocol with another compromised computer that had the ability to connect to the Internet.
As of November 3, 2011, six possible organizations in eight different countries were confirmed to have been contaminated.
This leads me to my next point… There’s no time like the present to secure your IT environment. While I was reading an article this morning titled, “Top 10 Dumb Computer Security Notions and Myths”, written by Fahmida Y. Rashid (http://www.eweek.com/c/a/Security/Top-10-Dumb-Computer-Security-Notions-and-Myths-740587/?kc=EWKNLEDP11282011A), it occurred to me that too many have become complacent about security issues. This article highlights a keynote speech given by Charles Pfleeger (Pfleeger Consulting Group) to a meeting that was jointly held by Kaspersky Lab and NYU Polytechnic University in New York City.
In light of virus and intrusions, whether your company utilizes the cloud, virtualized environment, or conventional assets, security is imperative. Mr. Pfleeger outlines the following ten ideas and myths that should be heeded.
#1 – We’ll do security later. Security should never be an afterthought. It should be designed in from the beginning;
#2 – We’ll do privacy later. Compliance issues should outweigh speed to market and privacy issues strike at the heart of compliance;
#3 – Encryption is enough. Encryption is certainly important as practically every data breach has been unencrypted or under-encrypted, but architecture is equally important to ensure that the network is secure;
#4 – One tool to defend them all. A one-size-fits-all approach doesn’t work. Security solutions are very specialized and should be customized to each different environment and application;
#5 – Security must be perfect. As with everything else, balance is important. In this case, even if the solution isn’t perfect, a solution must be deployed, so the discussion becomes one of the cost-benefit equation between the level of protection and the cost of the solution;
#6 – Security is easy… DIY Security. Unless you really know what you’re doing, leave the design and implementation of the tool to a professional that has experience;
#7 – Find and Patch is sufficient. Really? Of course it’s important to continually be testing your systems, but this isn’t a replacement for having security by design. As Mr. Pfleeger states, “True security is making sure the common issues are not in the application in the first place and addressing subtle, more complex problems that are discovered down the road;
#8 – We aren’t a target. Everyone is a target. If you store any kind of sensitive or propriety data, financial information, or have control systems operating your business, you are definitely a target;
#9 – No one knows about it. Some people mistakenly assume that the software their enterprise is running is obscure and, therefore, is not subject to attack. This is not true. Many attacks are easily prevented, but many times overlooked by developers and this includes the most common attack vector, cross-site scripting and SQL injection;
#10 – We just need to train the users. Despite the fact that security breaches occur when a user click on infected documents or viruses, that doesn’t address more sophisticated intrusions that we’re now seeing proliferate.
The above focuses on digital threats to the IT environment, but there are other physical security threats that exist, even in a secure data center facility. Those include:
- Power & Cooling problems or interruptions;
- Human error or malice;
- Fire, or other casualty events;
- Water leaks; or
- Air quality.
These threats are constantly being monitored, but can still cause problems and interruptions if the underlying design was not initially well-conceived. Additionally, some serious threats, which may cause problems and for which certain data centers may not have designed in adequate monitoring is poor humidity control. All of the threats mentioned can and should be monitored. Over the past year, we’ve seen some unique methods for addressing human error and malice that also address inventory control. One such solution uses fixed cameras on top of each rack that feeds to the NOC (Network Operations Center), is recorded and constantly monitored. When work is being done on that particular rack, the camera captures all of the activity.
Furthermore, all of the data that is collected from monitoring sources can be aggregated at certain points that are distributed throughout the data center. This eliminates the risks associated with single points of failure, which should be avoided at all costs.
Conclusion
Addressing digital and physical security threats should be a current and prime directive for every enterprise. Finding the right tools and solutions need to be included in strategic planning and regularly implemented
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Intesa Sanpaolo lines up shortlist for giant loan portfolio
Wednesday, November 30 2011 | 10:26 AM
James Wallace
Finance Editor,
COSTAR | Intesa Sanpaolo, Italy’s largest bank, is close to selling a multi-billion euro non-performing loan portfolio with four buyers in the final shortlist, CoStar News has learned.
Deutsche Bank, Goldman Sachs Whitehall Funds, Morgan Stanley Real Estate Investing and Fortress Investing Group are vying for the heavily-discounted portfolio, the final size of which is still understood to be decided.
The NPL portfolio first came to market back in early summer, with a portfolio size of €3bn first mooted, but this remains unconfirmed.
Intesa Sanpaolo declined to comment.
The winner of the portfolio is expected to leverage the deal with senior debt, which in the case of three of the four could be underwritten internally although the debt would be expected to be syndicated in each case.
Intesa (headquarters pictured) had €22.2bn worth of non-performing loans at the end of September, according to the bank’s third quarter results, and in April implemented a new organisational model to categorise its exposure: past due, doubtful, substandard and restructured.
Last week, Intesa appointed Allianz’s Enrico Tomaso Cucchiani as chief executive, to replace Corrado Passera who was named economic development minister the previous week in Mario Monti’s new technocratic Italian government.
Cucchiani is expected to quicken the pace of the bank’s own deleveraging ambitions at a bank which has heavy exposure to both Italian and Greek sovereign debt.
Cucchiani, who is due to take up the role on December 22, is non-executive board member of Intesa Sanpaolo’s main domestic rival, UniCredit.
It is unclear whether Cucchiani will leave UniCredit’s board of directors.
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IMN Data Center Conference 11/9 – 11/10/2011
Wednesday, November 30 2011 | 09:34 AM
Michael Siteman
EVP - Data Center Solutions,
JONES LANG LASALLE, INC. | Yesterday and today, I attended the second annual conference put on by the Information Management Network related to Data Centers, Real Estate and Investing. The event was quite well attended and draws a very interesting cross-section of professionals from the investment community, colocation providers, enterprise users, real estate developers, wholesale data center operators and others.
The opening remarks were given by Jeffrey Moerdler, Esq of Mintz Levin (www.mintz.com), who provided perspective on where the data center industry has been, the evolution of technology and what is driving the continued changing landscape in the data center environment.
Chris Crosby, formerly of Digital Realty and now leading his new firm, Compass Data Centers (www.compassdatacenters.com), presented on the various data center models in an era of convergence, how the lines between the models are blurring, how profitability and capital expense vary from model-to-model and trending that is leading many to believe that over the next 24 months there will continue to be a significant reduction of traditional IT being hosted in-house leading to more outsourcing and migration to cloud-applications.
The Presidents Panel moderated by Marty Friedman of DH Capital (www.dhcapital.com) included Todd Aaron of Sentinel Data Centers (www.sentinel datacenters.com), Avner Papouchado of Server Farm Realty, Inc. (www.serverfarmrealty.com), Pete Marin of T5-Mission Critical Facilities (www.t5-mcf.com), Jim Trout of Vantage Data Centers (www.vantagedatacenters.com) and Tony Wanger of i/o (www.io.com). Each of the CEOs had interesting comments from different perspectives. Mr. Wanger noted that the data center industry as a whole has failed to create a standardized base of analytics related to supply and demand. Mr. Aaron suggested that supply and demand is regionally based. Mr. Trout spoke about the advantages of climate and power in Eastern Washington. Mr. Marin highlighted that most enterprise users, though desirous of higher Tier rated data center space, reject the pricing associated with it and don’t really want to pay for 2N builds. Mr. Papouchado’s insight was related to the fact that the mores sophisticated the end-user, the clearer the definition of the project and the easier it is to actually close a deal. A broad discussion ensued related to geography and the benefits of one location over another, but I have to ask, isn’t identifying a data center location really a result of building a business case? Doesn’t (or shouldn’t) the business case trump everything else?
The panel titled, “What are the Coolest Parts of Cooling you need to know?” moderated by Anton Self of Bastion Host (www.bastionhost.com) and included Gary Cudmore of Deerns America (http://www.deerns.com/contact/united_states_of_america/?cid=71), Fletcher Kittredge of GWI (http://www.gwi.net/), Bruce Myatt of M+W Group (www.mwgroup.net), Tarif Abboushi of NTT America (www.nttamerica.com) and Jim Kennedy of RagingWire Data Centers (www.ragingwire.com). The first (and most controversial) question posed by Mr. Self, asked who thought that within our lifetimes we would witness the end of the use of mechanical cooling in data centers. Everyone on the panel except for Jim Kennedy agreed. Mr. Kennedy reacted that in some parts of the world, using air economization, or free air cooling, just isn’t possible. I would agree in that as long as there is a need because of latency, redundancy or otherwise, to have multiple data centers in geographically diverse locations and then current server technology either doesn’t allow for extremely high environmental temperatures or servers still generate excessive heat, additional cooling will be needed.
One of the most interesting panel presentations focused on Colocation and Service Level Agreements. The panel moderated by Shawn Mills of Greenhouse Data (http://www.greenhousedata.com/) located in Wyoming that is powered by a wind farm. The panel included Barry Novick of Blackrock, Inc. (www.blackrock.com), Jeffrey Moerdler (previously mentioned above) and Everett Thompson of Wired Real Estate Group (www.wiredre.com). The positions and perspectives varied greatly with Mr. Moerdler taking a very middle ground. Mr. Novick’s opening comment was that his top 2 requirements in a data center are keeping the lights on and cooling the data center. Mr. Thompson’s rash comment that he relies on attorneys to negotiate the SLA and that they’re worthless anyway brought some well-directed comments from Mr. Moerdler to somewhat soften the glib remark. As expected from a thoughtful expert, Mr. Moerdler offered a list of extremely important issues and distinctions to be addressed in thoroughly negotiating a colocation service level agreement. Those included security, access control, responsiveness to unscheduled access requests, delivery of additional power circuits, uptime, maintenance, testing and repair procedures and schedules, self-help, web access to the NOC for maintenance repairs, notifications/certifications, compliance, outages, termination rights and more. Listening to this man is always enlightening. The bottom line as agreed by the entire panel is that the SLA is not there to only extract credits and compensation from the operator or service provider, but rather, as Mr. Moerdler so eloquently stated, ‘to act as a guideline for building operations and as a dis-incentive to the operator to avoid and prevent outages and bad practices.’ I couldn’t agree more.
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Summer Internships, The Ones In Between, Thanksgiving
Friday, November 18 2011 | 10:05 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | Summer internships: If your firm takes on summer interns please let me know. I have been asked by a few top-notch students if I could help them connect to find one...both in the U.S. and Europe. Thanks. BTW, in preparing some years back for a tour of Graduate Real Estate Programs and speaking with those students about careers in real estate, I reached out to a number of my industry friends and asked them "What advice would you give a graduate student who is focused on the real estate industry? I've been invited to visit some of these programs again in 2012 and have pulled out that document and will be handing it out to the groups I talk with. I'd be happy to send you a copy. Just email me (steve@simplicate.com) with the word "Advice" in the subject box.
Here are a few websites I added to my "Bookmarks" this week. I hope you find one or more of interest:
1. The Domino Project
2. Songs that made you feel good
3. Meaning & Heart
4. Bondi's Blogspace
Someone sent me this years ago. I re-discovered it poking through some document folders and wanted to share it with you.
" The Ones in Between"
When the road we walk on
is sometimes rough
or is it that we suddenly
take away all what is not necessary
shoes, boots or high hills
from which we easily fall
i suddenly prefer the thrill
to walk on my bare feet
to feel each imperfection of the street
to know each things i did right or wrong
to learn from each mistake
nor to be rich nor to be strong
but just to be human again
like the first day , like the last
and all the ones in between
The U.S. will celebrate it's Thanksgiving Day next Thursday. Canada, already celebrated theirs. While it's roots (no pun intended) were about celebrating a good harvest, it's become a holiday where families and friends get together to eat, enjoy each other and in some neighborhoods, play touch football. As a holiday, it can be a time for personal reflection as well. In challenging times like these, that's not a bad thing to do once in a while and maybe, just like it's suggested that you replace the battery in your smoke detector every year on a holiday, it's important to rediscover "the things worth being, a search that many neglect while striving to obtain the things worth having." (Meyer Friedman, Type A Behavior and Your Heart). My family is spread out geographically and while we'll be together in spirit we won't be able to be physically together next week. I wish you and your family a happy Thanksgiving and just want to let you know how grateful I am to you for being part of the global community that has been created around this weekly column. Thank you.
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CBRE instructed on Devonshire Square Estate
Tuesday, November 15 2011 | 03:02 PM
James Wallace
Finance Editor,
COSTAR | CBRE has been instructed by Rockpoint and Abu Dhabi Investment Authority (ADIA) to a strategic advisory mandate on the Devonshire Square Estate, CoStar News has learned.
The advisory mandate is part of a concurrent strategy employed by the joint venture partners to consider both a possible refinance of its recently-extended securitised debt maturity by 18 months to April 2013, while maximising value in the eight-strong City of London office estate in Aldgate ahead of a potential sale if a refinance is not viable.
CBRE beat off competition from a number of agents to the strategic brief, including Jones Lang LaSalle and Knight Frank. CoStar News first reported that agents were eyeing the mandate back in September.
Initially, the brief is thought to be limited to the further re-gearing of expiring leases as well as finding a replacement anchor tenant following insurance company Aon’s move to British Land and Oxford Properties’ Leadenhall Building on a 19-year lease in the second half of 2014.
“No one can say for sure whether they will or won’t complete a refinance during the 18 month loan extension time period – things will change so much over the period,” said a City source familiar with the situation.
City sources suggest that, subject to finding a replacement long-term tenant for Aon, the value of the estate is likely to be around the £300m mark. Aon reflects 45% of the estate’s annual £23.7m rent roll, at £10.7m.
Devonshire Square Estate (pictured) was bought at the very top of the City office market in late 2006 for £410m from JPMorgan and O’Connor Capital, financed with a £340m senior and junior loan underwritten by Morgan Stanley.
Earlier this year, debt investors in the £336.2m Devonshire Square whole loan – comprised of a £285.5m securitised loan in Morgan Stanley’s ELOC No. 26 CMBS and a £50.7m junior loan – traded out of their positions in anticipation of loan extension difficulties. Morgan Stanley, the loan servicer, has retained the securitised loan in primary servicing.
As part of the agreement with Morgan Stanley, the joint venture partners have injected £3m equity to re-gear leases – including a new 25-year lease which increases one tenant’s rental income by £300,000 pa – which is expected to deliver long-term capital appreciation at the next valuation.
The City is awash with office stock up for sale for which there appears to be polarised pricing expectations among vendors. “Those city offices ‘properly priced’ are attracting investor interest. Those which remain overpriced are just hanging around. The market knows what sensible prices are and what are not, given the wider macro context,” another source said.
All parties declined to comment.
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Presentation plea; Joe Frazier
Friday, November 11 2011 | 10:55 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | I've mentioned Reutersrealestate.com to you before but got a chance to poke around the site this week. There's a bunch of information including analytics and slides you can use in your own presentations. There are free research reports from some of the top commercial real estate industry service providers. This site is in Beta test mode for now. It's a good time to take advantage of it...and it's free!
Some stuff from The Recovery at a Crossroads piece published this week by Asieh Mansour, Head of Americas Research at CBRE:
-Recent evidence confirms our view that the U.S. will avoid a recession.
-The Canadian domestic economy is performing well. Both business and consumer spending are expected to make modest headway this year.
-The outlook for economic growth in Brazil has downshifted.
Africa. It's a word I've heard several times in the past two weeks in relation to where will the next real estate/infrastructure investing opportunities be. There are certainly some compelling reasons to take a look at Africa as a continent and more specifically certain countries. Like with everything, there will be those who are 'early', just like when any investment market emerges. Think back to when U.S. institutional investors first started going abroad (i.e. Europe). It wasn't that many years ago. But, if we want to live up to our own self-billing as a global industry we need to keep looking for those countries/markets where our capital can both make a difference and can provide a reasonable return on our investments. As many of you know, my only personal experience with Africa was my time in Liberia, now five years ago, working with needy children and experiencing a third-world country, up close and personal, for the first time. But listening to a presentation last week by a firm looking to raise capital for investment in Africa has gotten me thinking.....
An open letter to presenters of any type:
If you use statistics in your presentation/speech (and this is particularly obvious when you use PPT slides...which as you know from earlier writings I feel is the most abused technology tool known to mankind) please update your information periodically. Making any presentation today, for example, with data from 2008, 2009 is absolutely unacceptable. You owe it to your audience to have current data. Making the excuse, "I've been too busy to update the information" is an insult to the audience. And, as 2010 comes to a close, as soon after year-end as the data in your 'one size fits all' presentation becomes available, you have an obligation to update it. Whether you realize it or not, people in the audience notice it...they won't be as vocal as me, but it doesn't make you look good at all.
Joe Frazier, the former heavyweight champion of the world, died this week at 67. My father's was a boxing family (except for him). A couple of this older brothers not only fought in the streets of Brooklyn and the Lower East Side, they also fought professionally. The one who went the furthest was Harry Felix, the oldest brother, who fought for food money for the family and was at one point a middle-weight contender (before an opponent 'thumbed' his eye and ended his career). Another of my fathers' brothers, Barney, was a referee who officiated a number of major bouts including the first Liston/Clay fight when the title was transferred for the first time to Cassius Clay soon to become Muhammad Ali. My Dad liked watching boxing on TV right up to his death on November 19, 2009. But over the years things had changed in the boxing world (as in all other sports) and he more often than not referred to some of the fighters on TV as 'bums.' That term apparently referred to boxers who were brawlers and not fighters or other definitions of his own creation. During the period when Ali was banned from boxing due to his stand as a conscientious objector during the Vietnam War, he went on a college speaking tour. At that time I was the sports editor of our school weekly newspaper. When he came to our school, I was invited to the press conference held before he spoke to the general audience. I asked him, "Champ, do you think Joe Frazier could ever beat you?" Ali replied, without skipping a beat, "Son, if Frazier even dreamed of beating me, he would wake up apologizing!" Joe Frazier was no bum. Frazier, in his quiet, workmanlike way, brought some class into the ring every time he entered it. He exuded quiet confidence. He was a class act.
OTR news: There have been some people starting to follow OTR on Twitter as well as through the Linkedin.com OTR group. I am trying to increase the number of subscribers. There's a reason behind it but I can't tell you about that just yet. So, if you have had this forwarded to you and are not a subscriber please sign up. Also, if you are so inclined I'd appreciate you sending this to others and asking them to sign up as well. Thanks a lot.
Steve
Publishing from somewhere between New York and California in 'The Friendly Skies."
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Counselors of Real Estate, Tent Cities, 70 year olds talk about their lives
Monday, November 07 2011 | 09:27 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | Some takeaways from a presentation from a well-known and respected industry strategist:
"Those of us who don't live within The Beltway (Washington, DC area) don't really understand what's happening."
"Today money is basically free."
"Maybe its' time for radical answers."
"The other shoe? Forget about commercial real estate, it's state and local governments....and it's dropping."
"State and local governments had always been an engine of growth...but no more."
The more people, of all ages, that I talk with, the more two things are clear: (1) Things are changing on a daily basis globally; (2) No one really knows what is going on or what to expect. Uncertainty, about most anything in our lives, creates stress. Stress is not healthy. But now, in addition to personal stress, we have an inordinate amount of Earth-stress, challenges to our basic way of life and to the future of our planet. I've always admired the 'big thinkers', those that don't get bogged down in the day to day stuff. I haven't been hearing much from these people lately, in fact, I'm not even sure who will go down in history from this period as a truly big and forward thinker. Right now, I'm focused on the small things but I am not sweating them. However, I recall Steve Winwood's voice when he and Traffic recorded, "Who Knows What Tomorrow May Bring?" Let's put our collective mental energy together towards a better tomorrow for our selves and our children's children children (Moody Blues).
New York Times columnist, David Brooks, wrote in one of his columns this week, "If you are over 70, I’d like to ask for a gift. I’d like you to write a brief report on your life so far, an evaluation of what you did well, of what you did not so well and what you learned along the way." He got more than 200 comments submitted pretty darn quickly. I like this kind of life stuff so went through those comments and pulled out some things that I found interesting and I hope you do too:
The United States, for the past 70 years, has been a place of soaring optimism, where things always got better. So 70 year olds today, for the most part, can recall fondly their past lives (despite any foolish risks they took)--because today they are still much better off than when they were growing up. But it is now possibe to contemplate that the US has peaked, and life in the United States, today, may be the best the younger generation will ever experience.
Don't try to prove things to other people, especially your parents and friends, try to prove a few things to yourself. Try to balance being responsible with the grand adventure that life can be while also making a positive contribution. Our existence on this tiny planet is a miracle, don't waste it.
Aim high and see how far you can go. Learn from everything and everyone, all the time. Be self critical only when it can help you grow, not as a force of habit. Realize, too, that everyone before you who accomplished something grand started out with doubts, fears and doubters saying it couldn't be done. Live your dreams because, otherwise, you will have to watch while someone else does it in your stead.
I have learned that I don't know anything, don't understanding anything, and never will. Far from making me despondent, this has been a big relief. I also realize that no-one else knows anything or understands anything, especially the "experts" - a word I think should always be in quotation marks. Trust your own judgment more than you trust anyone else's. Even the honest and well-intentioned can lead you astray, and most certainly they do not have your well-being at heart as much as you do.
These are just a few. If you like this kind of stuff here is the link to the page where all the comments are posted. It's a pretty interesting read.
RCA’s 3Q2011 Europe Capital Trends report was recently published. Here are a few of their conclusions:
Despite the economic and financial market turbulence European investment activity continues to improve. Countries showing an improvement in transaction volume, notably Germany, France, Nordics and Central Europe are increasingly being driven by cross-border capital.
Prime retail continues to perform strongly, with office volume flat year-over-year. Hotels also posted robust gains, while large transactions boosted the apartment and in¬dustrial sectors.
While London and Paris still boast the larg¬est volume, many other cities now are drawing a larger percentage of cross-border investment.
The most significant changes in the sources of these global inflows have come from Asia and Can¬ada, with their investment activity in Europe reach¬ing or surpassing peak levels.
US investors, while comprising half of global capital flows into Europe, acquired just €14.7b over the past 12 months, a frac¬tion of 2007 levels.
To me, Canada is the story to watch as they have become a very aggressive investor in direct real estate in many parts of the world.
Congratulations to my friend Julian Schiller who joined Brookfield Asset Management as senior vice president at the firm’s global private funds group in London.
Cool stuff of the week: ArX Solutions. Terrific animation company. This art/technology has really evolved since I was first exposed to it at the MIPIM conference in about 2004.
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Bids in for Starwood Capital’s €800m hotel portfolio
Thursday, November 03 2011 | 01:41 PM
James Wallace
Finance Editor,
COSTAR | Starwood Capital, the global private equity real estate firm, has received bids for its predominantly French hotel portfolio from three major hotel chains, backed by sovereign investor equity, as well as its former hotel company subsidiary, CoStar News has learned.
Marriott International, Hyatt Hotels and InterContinental Hotels Group have each bid on the entire or the majority of the hotel, which was put up for sale by Starwood in September, with capital sourced from sovereign wealth investors.
The hotel chains are understood to be solely seeking to manage the hotels and incorporate the assets in their portfolios.
Bids on the full eight-strong portfolio have come in it at around €800m to €850m.
Starwood Hotels & Resorts Worldwide, the US listed global hotel company which Starwood Capital established before floating, is also understood to be one of the principal four bidders.
In addition, a number of Middle Eastern investors, including the Abu Dhabi Investment Company (ADIC) and Abu Dhabi Investment Authority (ADIA), are understood to have bid on select hotels within the portfolio.
The portfolio comprises six French hotels, including three in Paris, and one each in Germany and Switzerland. The most well-known of the bunch is the European real estate sector’s hotel of choice at MIPIM, the flagship annual industry conference – the Hotel Martinez on La Croisette in Cannes (pictured above).
The three Paris hotels are: Hotel Concorde La Fayette, the Concorde Opera Paris Hotel and the Hotel du Louvre. Also in France is Nice’s Hotel Palais de la Méditerrranée and Marseille’s Villa Massalia Hotel.
Making up the portfolio is the Hotel Concorde Berlin and the Hotel de la Paix in Geneva.
Starwood Capital declined to comment.
The global private equity real estate firm is understood to be evaluating the bids, seeking details on the equity investors behind the hotel chain bids, and the extent to which leverage will be applied to complete any deal. After which, Starwood Capital will determine a shortlist by the end of November with a view to confirming a sale by the year end.
Starwood Capital is thought to be open to both a portfolio and piecemeal sale, as it seeks to get the best price for its assets. The hotels sit across the Starwood Opportunity Fund 7 and Starwood Hotel Investors 1. Once a sale is complete, the capital is expected to, in part, repay fund debt.
Jones Lang LaSalle Hotels and UBS are jointly marketing the portfolio.
According to research from JLL, there was $14.8bn of hotel investment deals completed in the first six months of 2011, a 117% increase on the same period last year.
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IMN 2011: prolonged uncertainty to stifle debt markets
Thursday, October 27 2011 | 10:40 AM
James Wallace
Finance Editor,
COSTAR | With the world’s eyes on Europe’s politicians today after finally reaching an agreement with private investors in Greek sovereign debt to accept a 50% haircut, the consequences for European real estate debt markets are palpable.
Since the summer, market visibility has been stifled by political and macro-economic uncertainty eroding investor appetite – for buying and lending – which has reduced liquidity and, ultimately, property fundaments. If the market trips back into recession and employment levels contract, the occupier market will suffer, deepening concerns for real estate markets.
There is now no doubt as to what was at stake this last week, with many calling Greece “Europe’s Lehman Brothers” in that if it were allowed to fail, as the US Federal Reserve did for the once fourth largest investment bank in the world, the consequences would have been a financial tsunami unstitching fragile banking markets – the lifeblood of property markets.
So it was no exaggeration when Angela Merkel, the German chancellor, said earlier: “The world had its eyes on us today.”
Europe’s private equity markets real estate gathered this week for a two-day event hosted by IMN at London’s Landmark Hotel, with the talking points all around macro-economic influences on real estate regulation, lending appetite and the changing debt markets.
“The interbank lending market is almost not there,” Andreas Wuermeling, head of secondary markets at Deutsche Pfandbriefbank told delegates, “and if it is there it is only for a short period of time. As a result, banks are scared about lending long term money, supported by short term money.”
The uncertainty is polarising lending intensions to real estate, with banks understandably worried that they may lend at the wrong time, and that things might improve by the turn of the year.
As a result of this uncertainty, a number of European banks are shifting new lending plans into next year, but funding markets are unlikely to be any better, added Wuermeling. “We decided to keep going, but we wish that more lenders were still active because we need more debt.”
The last property cycle has certainly left senior lenders with differing perspectives on how to interact with junior lenders.
These range from ‘never again’ to ‘only if it is my way’ to a few who believe junior capital can genuinely be a positive contributor to the overall outcome even in the event of distress.
Michael Zerda, a director who manages LaSalle Investment Management’s two mezzanine funds, said: “Mezzanine deal flow has increased because there is more supply on the market, specifically on the secondary asset side. On the refinancing side, we are seeing senior LTV levels drop – it seems like the new normal is setting in at 60%, compared to 65% last year.
“In terms of the overall cost of debt, we don’t think the cost of mezzanine will move out, but we do think overall cost across the capital structure will as mezzanine becomes a larger component due to lower senior debt LTV levels. And as non-bank lenders come into the senior lending market, this will increase liquidity, but at a price.”
There are a number of pension funds that are expressing interest in providing senior debt, or investing into senior debt funds but at a greater margin than those currently quoted by active lenders, added Zerda.
In terms of regulation, all the talk was of the impact Basel 3, for the banking market, and Solvency 2, for the insurance sector, will have on lending intensions.
“Credit prudence is really going to dominate lenders’ approach for the next couple of years,” argued Paul Rivlin, co-founder of real estate debt investor Palatium.
He added: “There is a tension between two processes going on side by side but are actually at odds: Basel 2, Solvency 2 and, to some extent, Basel 3 all depend upon institutions making their own assessments of what their risks are. On the other hand we have major parts of Basel 3, the Vickers process in the UK and similar processes in Switzerland and for EU banks, which go back to prescribed asset value weightings which simply require higher capital and reserve requirements and extra prudency.”
Not only could banks see their capacity to lend diminish again, but also their will to do so. Capital weighting will not stop institutions from investing in alternative assets like real estate if they think they are going to get teen and higher internal rates of return, Rivlin said.
“There is a lot of expensive work being done on Solvency 2 and Basel 3, but actually I suspect at the end of the day that it will be Vickers and the equivalents that will bite on what institutions can do after the world normalises and in the meantime non-regulatory constraints, particularly internal credit policies will rule the roost.”
The extent to which insurers emerge as the saviours of the great wall of refinancing is another known unknown.
As the British Property Federation’s director of policy Peter Cosmetatos put it: “The challenge, I suspect, is that insurers will want to lend against the type of real estate assets which we don’t difficult to raise debt finance: prime property with strong underlying tenants, as opposed to secondary and tertiary shopping centres.”
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Animal Murder, Networking: Women v. Men
Friday, October 21 2011 | 11:13 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | How many of you besides me had tears flood their eyes when reading or seeing the murder of animals that had been let loose by their cowardly and warped owner in Ohio this week? The police defended their actions (Don't they always?) I know, some animal rights people said the police had no choice. Sorry. Some local police force who were completely unprepared for anything like this just reveled in being big game hunters for a few moments. Why couldn't all or at least a majority of those animals been tranquilized and saved instead of being killed? In killing those animals, aren't we killing ourselves as well-aren't we all animals, trying to survive on the same planet, bring our off-spring into this crazy world and praying that mankind will not destroy itself? How sad. Who will save our souls? And, how dare that guy that owned these animals...letting them out....dooming them.
"All about Steve:" For those that got my announcement last week or saw the article in PERE about my job situation, I appreciate your support as I received a overwhelming and heartwarming number of emails, wishing me well and offering to help in however they could. At the PREA conference as well, so many people asked me what I was going to do next. I can't tell you how that made me feel. I am thinking about what the next chapter in my career should be, looking at myself and trying, as one friend told me, "to be my own career coach." Part of that exercise is that I'm learning to appreciate myself more. Also, to sit down and make a list of what I'm good at, what I like to do and how to combine those two into making a living. There are a few very interesting conversations I'm having as we speak. But, because this is a very important time in my career and my life ("Is there any other kind," Jack Nicholson would say to me (stolen and adapted from "A Few Good Men.") I want to take my time and do the right thing. I'm looking at another 15 years of full-time work. My father was very proud of working full-time until he was "79 and a half" as he used to tell people. 15 years is still a healthy chunk of time and ideally I'd like to get into something that will take me to 2026! And, be true to myself. Anyway, stay tuned!
Within the past few months (this is all about me right :-) more and more people have been asking me, "So what's up with your music?" The answer is this: After more than two years in the making, our next CD, "Robot Mannequin" will be available before the end of the year. This is another collaboration between my sons and I and an all-star cast of Chicago-based musicians. "What kind of music is it?" Impossible to describe as all songs different!
My good friend, Barbara Fish, is a career counselor based in Toronto. Actually she and I were both summer camp counselors together years ago. Camp counselor/Career counselor. Hmmm, maybe they're connected? Oh well, last week she forward me a piece called The networking gender gap and how to bridge it. While there are few things in life that we can all agree on, I know one of them is that, well, men and women are just plain different. It's part of the attraction (I think). Anyway, here are some snippets from that piece (If you'd like the whole article just email me with the word "Networking" in the subject box).
-Networking observers say that for men, networking is largely about selling themselves or a product, or trading information. They want their conversation to lead to a tangible result, such as a business lead, a sale or an introduction. They get straight to the point.
-Women, on the other hand, will often initiate an exchange with a pleasantry or a compliment (“Love your shoes”) and will converse on a range of subjects, regardless of potential professional benefits. Rather than thinking quid pro quo, they think “How can I help her? How can I connect?” One networking commentator on Linkedin put the difference succinctly: Men “start with a statement of their status ... Women create community.”
-Another key difference is that women use networks for what psychologists call “social comparison,” a process by which we understand ourselves and learn how to behave by comparing our attitudes and behaviors with those of others.
-Sadly, women often don’t take advantage of their ability to connect. Here’s where they can take a lesson from the guys. Whereas men talk matter-of-factly about their accomplishments, women tend to undersell themselves lest they be seen as boastful. Or where a man might bluntly ask, “Could you please introduce me to ... ?” women are so nuanced about asking for assistance that a person whose help they seek might not even realize a request has been made.
Interesting stuff, right?
New: NCREIF Research Center: Jeff Havsy, Director of Research for NCREIF told me that there's a new 'button' on the top right hand side of their home page. This is a new section on the NCREIF website designed to answer a question that was posed by or to Jeff or one of the other members of the staff. One piece that's posted is called Cap Rate: Please Explain! A really good value-add service to the industry.
New Book: Real Estate Mathematics will be published next week by PEI Press. "Real Estate Mathematics is a detailed and practical guide for private real estate fund managers and investors. Edited by David Lynn and Tim Wang of Clarion Partners, this guide features contributions from over 25 leading real estate professionals in the industry today that will shed light on some of the most challenging arithmetical problems that face private real estate today." Congratulation you guys.
Restaurant of the week: Sunda, 110 W. Illinois, Chicago, IL. A multi-manager hosted cocktail party on Monday evening brought me to this place for the first time. When you walk in, the dramatic design suggests an immediate, "Wow." To call it Asian-Fusion is not fair; yes, there is a serious sushi bar but it's also a lot more than just sushi. Actually, just go there. Ask for Nicole who is the Director of Sales and Marketing and enjoy yourself. Oh, did I mention that it's one of the hippest places in Chicago?
Congratulations to my friends Bob Weaver who is joining TPG Capital and Roman Bas who joined The Carlyle Group.
My, and I know the industry's, sincere condolences, to the family of Keith Brown of Klaff Realty in Chicago who passed away recently. Too young. Too soon.
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IMN: CRE at London’s Landmark Hotel next week
Monday, October 17 2011 | 10:43 AM
James Wallace
Finance Editor,
COSTAR | There are only a handful of remaining delegate places left for next week’s premier European private equity real estate conference at London’s Landmark Hotel.
IMN, the industry leading conference organiser, is offering CoStar News readers a 10% discount on the full price cost to join the more than 400-plus delegates attending next week’s 12th annual IMN European Real Estate Opportunity & Private Fund Investing Conference over October 25 and 26th.
This year’s two-day annual event promises to be more expansive in its content and networking opportunities than ever before, with more than 75 seasoned commercial real estate experts from across the UK, Continental Europe and the US fund and investor market.
The themes, which will be covered, are timely, including:
-Are the Lessons Learned from the Financial Crisis Permanent?
-What Are Your Geographic Allocations In Uncertain Times?
-What Kind of Deals are Getting Done?
-The Balance Sheet & Conduit Lender Panel;
-How To Make The Best of Your Joint Venture Strategy.
-Fundraising from Non-Traditional Sources; Attracting Non-European Fund Capital.
-NY, London, Paris, Munich vs. Regional, Second Tier and Secondary Cities.
-Lease Renewals, Restructuring & Workouts
Delegates’ favourite sessions from last year also return, including: state of the market; large fund strategies; and fund structures and fundraising.
The two-day event will have represented some of the largest and most innovative real estate property funds, endowments, fund-of-funds and pension investors speaking.
For the full conference programme and list of speaker, please click here.
To register: telephone +1 212-224-3428 (9:00 am – 5:00 pm, US Eastern Time), or online at www.imn.org/europeanoppfunds
A limited amount of speaking and exhibiting opportunities and food & beverage event sponsorships are still available.
For more information, call Andy Melvin at 212-901-0542 or email amelvin@imn.org or Joanna Christopoulos on (212) 224-3784 or email jchristopoulos@euromoneyny.com
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Fall Conferences, Seth Godin, Tap Dancing
Monday, October 17 2011 | 10:04 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | It's interesting: This morning I sent an email out to a large group. The number of "Out of Office" automated replies was surprising in some ways but in other ways it wasn't...it's just indicative of how much traveling people are still doing (or are they?). Yes, this time of year there are all kinds of conferences and while the bean-counters in many firms have clamped down on travel expenses, when there's a "Must Attend" conference or meeting, people still should be permitted to go. Our industry manages gazillions of dollars of money invested in real estate, much of it wisely invested for the benefit of retired people who are counting on getting their monthly check (I wonder what that would be like!). Anyway, to seriously limit those folks that are managing that money from attending any/all conferences that they believe are important to them doing their job properly (and learning something along the way that may help them do their job even better) seems to me to be penny wise and pound foolish.
Some of my takeaways from one of the most stimulating sessions I've attended in quite a while given at the CBRE Americas Summit last week by Lara O¡¦Connor Hodgson:
„X What happens when what we know gets in the way of what we notice?
„X ¡§Why¡¨ is what you notice.
„X ¡§What¡¨ is what you know.
„X We stop asking ¡§Why?¡¨ because we're afraid to let people know that we don¡¦t know something.
„X Be a contrarian
„X What would I never do?
„X Defiance
„X That won¡¦t work-so how can I make it work?
„X Creative Reconstruction
„X Break down your assets/challenges and take each one away
„X Scenario-based thinking
„X Where would we never look?
„X Laughter at an idea means something is working
„X Innovation: look at a place completely differently and apply it to your industry
„X Quotes from Dr, Jonas Salk (Polio Vaccine):
„X ¡§The answer is the question.¡¨
„X ¡§Ask the right question to find the answer.¡¨
„X ¡§You don¡¦t invent the answer; you reveal the answer.¡¨
„X Fostering Innovation in Real Estate
„X To succeed consistently over time you must understand key trends and time their activities accordingly
„X Creativity: the ability to look at the same thing as everyone else but see something different
„X within 8 seconds of creating an idea, someone will tell you there¡¦s something wrong with it-often it¡¦s yourself.
„X Suggestion: Wait 8 seconds before commenting/criticizing
„X Real estate: we literally change the world (buildings, cities, etc)
„X We commoditize our projects. So, if we change our thinking.....(i.e. we think about how to get 10 cents more per square foot, etc).
„X What drives value?
„X What is unique¡¨
„X Don¡¦t commoditize your product.
„X Success vs. Significance
„X Success is finite
„X Significance is infinite
„X If you¡¦re focused on success you¡¦re not thinking big enough.
„X Innovation is driven by noticing human behavior.
„X Your greatest solutions happen when you lack resources.
„X If you quit with the first ¡§No¡¨ you may be asking the wrong question.
„X Don¡¦t be afraid of coming back with another, ¡§Why?"
„X Force your brain not to be you!
„X Your customer is not you-you have to get into their heads to understand their challenges/problems before you can come up with a solution
„X Figure out who does something well-what makes them own their industry-and apply it to your business
„X Look in places you¡¦d never look-that is where innovation is-not at your competitors.
„X In a down economy no one is talking-you can sneeze and get noticed.¡¨
„X Einstein: ¡§The world we live in today has problems that cannot be solved by old thinking
Seth Godin is a very interesting guy. I was first introduced to his writing via one of his books called, "The Purple Cow." He describes himself as a writer, speaker and agent of change. I subscribed to his blog earlier this year and have found certain of his writings resonate with me. He publishes every day and one from this week I share with you as I thought many of you would get something out of this:
Open Conversations or Close them.
„X A guy walks into a shop that sells ties. He's opened the conversation by walking in.
„X Salesman says, "can I help you?"
„X The conversation is now closed. The prospect can politely say, "no thanks, just looking."
„X Consider the alternative: "That's a [insert adjective here] tie you're wearing, sir. Where did you buy it?"
„X Conversation is now open. Attention has been paid, a rapport can be built. They can talk about ties. And good taste.
„X Or consider a patron at a fancy restaurant. He was served an old piece of fish, something hardly worth the place's reputation. On the way out, he says to the chef,
„X "It must be hard to get great fish on Mondays. I'm afraid the filet I was served had turned."
„X If the chef says, "I'm sorry you didn't enjoy your meal..." then the conversation is over. The patron has been rebuffed, the feedback considered merely whining and a matter of personal perspective.
„X What if the chef said instead, "what kind of fish was it?" What if the chef invited the patron back into the kitchen to take a look at the process and was asked for feedback?
„X Open conversations generate loyalty, sales and most of all, learning... for both sides.
On Sunday I happened to catch the last half of "Dirty Dancing" on TV. What a great movie. How sad that Patrick Swayze died so young (57) another victim of cancer. Watching that movie got me on to Youtube. Many years ago, I worked for a company where one of the administrative assistants was the daughter of the famous dancer, Honi Coles (who also had a role in Dirty Dancing). Check out this great dance routine. Sad also that tap dancing like is from an era long gone.
Congratulations to Paul Anthony DiCarlo who has joined Rockrose Development in the acquisitions group and Yokasta Baez who joined Pantheon as Vice President, Global Client Services in New York. She was most recently with AXA Private Equity.
San Francisco Event: Larry Souza, a very insightful guy is presenting the conclusions of his deep research project on real estate finance and capital market research, which includes monetary and fiscal policy analysis, public administration and political science, political economy and philosophical analysis. It's on Tuesday, October 18th at 5:30-6:30 pm at Golden Gate University (536 Mission Street) in San Francisco, in Room 6208. Larry says "You are all invited."
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LandSecs’ £1.5bn debt refinance talks underway
Thursday, October 13 2011 | 09:56 AM
James Wallace
Finance Editor,
COSTAR | Land Securities, the UK’s largest property company, has begun talks with banks to refinance its £1.5bn revolving credit facility by the end of the financial year, as part of a strategy to materially pare back it total debt facilities, CoStar News understands.
The real estate investment trust (REIT) has two overall pools of debt: a £1.5bn revolving debt facility, which was written at sub 30 basis points over LIBOR in August 2006 and expires on 29 July 2013, and five separate bilateral revolving facilities ranging in size between £50m and £250m, with staggered maturities between April and November 2014.
Revolving debt facilities allow borrowers to change the underlying properties, against which they lend, providing much-need flexibility for opportunistic off-market transactions.
Land Securities is planning a material reduction in its overall total £2.25bn debt facilities, with negotiations already underway between the REIT and existing banks – which include a broad mix of the UK clearing banks and overseas banks.
Negotiations between the REIT and the banks – and the margins which are agreed for the replacement principal revolving facility – will be priced on corporate terms, as opposed to asset-level pricing, and will largely be determined by the ancillary pipeline which Land Securities has to offer its relationship banks.
Banks are usually willing to offer preferential terms to the larger property companies in expectation of lucrative ancillary business – such as interest rate and currency swaps, corporate bond agency mandates, money transmission, advisory services and foreign exchange – all of which which makes up for the reduced profit from headline margins on the secured loans themselves.
This explains the gulf in pricing that the big REITs and quoted companies can achieve – base property loan margins on UK property, on asset level pricing, are now as high as 250 bps over LIBOR against UK property, while some commentators believe Land Securities could achieve less than half that margin.
Another key to negotiations is likely to be Land Securities’ own three to five year plans.
Immediately post Lehman’s collapse, the writing was on the wall that banks’ costs of capital would rise and available lending would shrink so Land Securities have had in mind for three years now that a £1.5bn facility could not directly be replaced, analysts argued.
As a consequence of all these issues, most bankers expect Land Securities to choose fewer rather than more banks, which are willing and able to commit larger pools of their balance sheet.
Revolving debt facilities tend to include staggered margin uplifts after agreed thresholds are passed – known as utilisation fees – where those thresholds are, and what the subsequent margin uplifts will be agreed will be central to negotiations – suffice to say, lower thresholds and higher uplifts are expected.
Utilisation fees naturally encourage property companies to remain reasonably leveraged.
Unlikely participants on the new ticket would be the pfandbrief-funded banks because pfandbrief funding lines require fixed, not alternating, collateral. The extent to which such banks ever do appear on revolving debt facilities is through the use of their direct balance sheet, for which funding costs are higher.
“The Germans don’t like revolvers,” as one banker put it.
In July, British Land issued an oversubscribed dollar-denominated $480m US private placement, implicit in which would be incurred cross currency swaps to price the capital back to £300m in sterling, the total liabilities of which will be dependent upon the duration of the swaps and market movements over the period. British Land’s decision to tap into the US private placement market helped it achieve 146 basis points over LIBOR.
In February, Grosvenor issued a sterling-denominated £125m, with debt investors, rather than Grosvenor, taking on the swap risk with banks.
Land Securities declined to comment.
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On the road...Asheville, Las Vegas, Steve Jobs
Friday, October 07 2011 | 11:16 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | RCA Briefing Note: As overall sales volume slowed sharply in Q3, foreign investors were bucking the trend by continuing to expand their acquisitions of US commercial real estate. With Asian and Latin American capital growing at the fastest rate, cross-border investment should top $5.0 billion in Q3 for the first time in four years and account for over 10% of market activity.
Sad news. Wayne King of The Goldstein Group in New Jersey passed away at 52, another victim of cancer. Wayne was the second employee at CREOL (Commercial Real Estate Online) which was one of those ahead of the times Internet ideas that didn't make it. I worked with Wayne. He was the architect that took Steve Oder's vision and made it real. Wayne was a bright, interesting and just plain nice guy who had a heart. I hate this cancer crap!
I spent time last weekend with my son, his wife and their two sons-yes, my grandsons, Sean (2+) and Gavin (one month) in their home in Asheville, NC. A busy house to be sure! Hanging out with Sean I was reminded about how kids find such simple ways of entertaining themselves, being entertained and entertaining us. Things we take for granted, the trees swaying in the wind, the fog that appears on a window when you breath on it, running around and diving onto a couch, banging on a drum, laughing at silly words that your Grandpa teaches you (i.e. Pizza Juice), listening to The Beatles while in the car seat of your Daddy's car. It's wonderful to see and served as a great reminder to me about how there are so many simple things in life that we just take for granted, or overlook or, don't have time for. It's these simple things, most of them with no cost involved, that can give us pleasure every day if we just take a minute to appreciate them. Btw, Asheville is very cool. It's like a time warp in some ways back to the late 60's/early 70's. It's a college town with a vibrant restaurant, shopping and music scene. There's also a lot of 'real green' (trees) in and around that beautiful part of America.
Dig This!
The world's first Heavy Equipment Playground: Where you can relive your childhood sandbox days. It's in Las Vegas, not far from the Strip and this week I had a chance to experience it for myself. It's the kind of thing that you will keep telling people about. It's fun by yourself (but more fun with a group) and it's run in a first-class and extremely safe way. Some participants were on the bulldozers and I was on an excavator (see below). It's a really cool thing to do and this is the only place in the world (for now) where you can do it. It's attracted people of all shapes, sizes, ages and genders and is the #1 attraction/thing to do in Las Vegas on Tripadvisor.com. I met a couple of guys whose wives gave it to them as a birthday present. It's also a perfect venue for 'team building.' Special Offer: Because I have a connection with the ownership of Dig This, they have authorized me to offer a 25% discount to anyone who mentions my name when they make their reservation.
Dig This site: I drove this heavy machine (there's a better picture here). Didn't do as well as the other two drivers but I had tons (140,000 pounds worth) of fun.
I heard some very good stuff this week from a very interesting speaker but I want to take some time to digest what she said before I share my takeaways with you....next week.
"A legendary hero is usually the founder of something-the founder of a new age, the founder of a new religion, the founder of a new city, the founder of a new way of life. In order to found something new, one has to leave the old and go on a quest of the seed idea, a germinal idea that will have the potential of bringing forth that new thing." Joseph Campbell, Hero with a Thousand Faces.
Steve Jobs: he had a vision that was right on as far as what the world wanted/needed and how Apple could fill that need. But identifying a customer need isn't what Jobs was all about; he created a need but having not just his fingers but his whole being on the pulse of the future. He figured out who his customers were and what they wanted. There have been some folks, in our lifetime and throughout history, who have had the same 'seventh sense' and perhaps it's because Jobs made his mark in an era of unprecedented media coverage and Internet connectivity, that he's achieved the status that society is putting on him. Originally, Mac users were a cult; going against the grain of the PC. They did 'think different' and now there are many of us who are using Mac's and other Apple products and it seems like more and more are adopting them. PC use is still in the majority...particularly as companies, for the most part, use them. But from a personal perspective, how many of us use a PC and related peripherals for work and an iPhone, iPad, Nano (is that still the current thing for music or are people just using their iPhones for everything) for everything else? At a time when the world needs more heros, Steve Jobs will go down as one of them.
Congratulations to my friends, Joan Matera who has joined JPMorgan as a Senior Credit Banker in their Real Estate Banking Group and Hugh MacDonnell who has joined Clarion Partners as a Managing Director in their Capital Raising group.
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On the road with Steve Felix
Monday, October 03 2011 | 11:55 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | As I promised to here is the Summary of Key Findings & Trends from a Compensation Survey that was recently conducted in the real estate investment industry (U.S.). 46 companies participated:
1. After two years of declining compensation, pay levels for performance year 2010 were up, but still below pre-recession levels at most companies.
2. 88% of participants raised salaries in early 201, with most increases falling in the 3-5% range. Increases were most prevalent for mid-level and junior professionals.
3. 76% of participants paid out larger bonuses for performance year 2010 than they did for performance year 2009, with amounts at or above target levels in most cases (60% of respondents)
-Executive managers fared the best: median increase of 31% and average increase of 70%
-Less than 10% of firms reduced bonuses, whereas over 40% reported doing this in last year's survey
4. Year-over-year changes in long-term incentive awards varied considerably among participants
-Roughly half of participants (52%) increased long-term incentive awards for performance year 2010, with the remaining companies split between keeping long term incentive awards flat (24%) and reducing it (24%)
5. Looking ahead, most firms expect to increase pay for performance year 2011, but at relatively modest rates due to uncertainty regarding how the rest of the year will pan out from a performance perspective
-2012 salary increases are expected to be 3-4% (on average), although a meaningful number of firms (24% of participants) expect to keep salaries flat (only 11% took this approach in 2011)
-44% of participants expect to pay out larger bonuses, most of whom expect 1-20% increases over performance year 2010 levels, while 41% of participants expect to keep bonuses flat (18% reported this in 2010)
-long-term incentive awards continue to vary by company, and eligibility parameters may broaden at some firms.
A friend and very talented artist, Shannon Corey, has announced the following shows. Unfortunately I won't be able to attend either but if you're in NY or Philly and like singer-songwriters (she's a piano player) you should check her out:
1. Mon, Oct. 3rd - NYC - Birthday Show - The Bitter End-free download and cupcakes - Amazing
2. Wed, Oct. 5th - Philly - UPenn - to get in you have to be on the 'list.' Write directly to Shannon and she'll get you on the list (shannoncorey88@gmail.com).
I got an email from a friend in Europe who got this from a friend which I pass along to you even though I have no stomach for political rhetoric but I know that a lot of folks will find these comments interesting: "Last night I attended a dinner hosted by Nigel Bolton (head of European equities at Blackrock) who on the previous night had dinner with Frau Merkel with a small number of European investors. Merkel believes the IMF is trying to force EU into leveraging the EFSF fund but this is basically a US scheme. Q. What is the EFSF? A. As part of the overall rescue package of €750 billion, EFSF is able to issue bonds guaranteed by EAMS (Euro Area Member States) for up to € 440 billion for on-lending to EAMS in difficulty, subject to conditions negotiated with the European Commission in liaison with the European Central Bank and International Monetary Fund and to be approved by the Eurogroup. Merkel says this is a non runner... It would be Unconstitutional in Germany. She is totally is against this. Her view is this crisis will take time and there is no short, easy solution. She was very negative on the US and their response. Her tone was a shock to those investors listening. She was more positive on the long term benfits of the EUR as long as the peripherial countries focused on balanced budgets.... Spain & Ireland OK. Greece - "we can only get the PM to do things if we half drown him... He didn't want want help last year but we have to force him into this life support system."
Reuters Real Estate has revamped its site and is in their Beta test period. They have made some excellent updates and there's a lot of good information and other stuff there.
Remember: There are only a few seats left for The Nick Tyrell Memorial Seminar on October 12 in London. You can register and contribute here. It'll be an educational and beautiful day honoring the memory of an industry influencer and beautiful guy.
A find in Amsterdam. I was walking down the street and walked by a very interesting window display. I couldn't figure it out right away but it looked like a place where I could buy something for my wife. I went in and realized that it was a massage place called 'doctorfeelgood.' I hadn't had a massage in ages and after studying the menu board, made an appointment for the next morning. After the massage, which was long overdue (I hadn't realized how much stress had built up), I was sitting, zone-ed out in a peaceful place and sipping water, when in front of me I noticed hanging on the wall, two large framed montages and went to take a closer look. There were a lot of backstage passes to rock concerts and a lot of hand-written notes of thanks from some very well-known rockers. They were all addressed to the owner of the salon who I learned had been a go-to massage person for rock musicians on tour for a number of years. It's a great place.
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Chalkhill expands property lending as bank debt dries up
Friday, September 30 2011 | 09:35 AM
James Wallace
Finance Editor,
COSTAR | Chalkhill Partners, the boutique investment bank, is expanding its European real estate loan origination team in London with two hires, as it seeks to take advantage of the deteriorating availability of debt finance from banking markets.
Ricky Kullar, most recently of Paul Taylor’s now defunct Three Delta, joins on Monday, while HSH Nordbank’s head of real estate origination, Andrew Sutherland, starts on November 1.
Kullar and Sutherland will be joining the existing real estate finance team as Chalkhill’s execution arm looks to work through a growing pipeline of deals.
Co-founder Stewart Booth told CoStar News the pipeline continues to grow as traditional real estate lenders are forced to continue their net disinvestment to the asset class, driven by capital adequacy requirements under Basel III.
Booth explained: “Banks will continue to cut their exposure to all kinds of balance-sheet intensive asset financing, and clearly commercial real estate is one of the bigger of those balance sheet activities. The natural solution for that is for institutions to play a bigger role in the financing of commercial real estate – which brings the two sides of our business together.
“We cover the institutions in the research, trading and sales business on a day-to-day basis and we use that intelligence and distribution to drive real estate coverage business. Recruiting Andrew and Ricky is part of the build-up of the existing origination team.”
Chalkhill’s first loan was written last December. It says its capital is sourced from insurance companies, mutual funds and private equity firms throughout Western Europe. This year, Chalkhill has closed equity, mezzanine and senior debt financings.
Booth added: “We have a list of mandates across geographies and property sectors, including offices, retail, logistics and hotels. The demand from sponsors for institutional funding continues to grow as banks’ face up to the impossible challenge of refinancing over €500bn of real estate debt over the next three years.”
Booth, former global head of credit trading at Royal Bank of Scotland, quit the bank in 2009 to set up Chalkhill Partners in July 2009 with fellow RBS colleague, Cirine El Husseini, a restructuring analyst formerly of Aviva Investors and Chander Gupta, a mortgage backed securities trader, previously of Greenwich Capital, to become one of the early boutiques set up to take advantage of what they believe is a structural change in asset financing, driven by the shrinking banking proposition. As well as structuring senior debt finance, the firm advises on restructuring is active in arranging mezzanine and equity finance.
Three years ago, the global financial crisis changed the lending landscape, with echoes of that dramatic year – predicated on banks' refusal to lend to one another on the interbank market for fear of undisclosed US subprime exposure – heard today in relation to Greek sovereign debt exposure. Such is the deepening crisis, that some banks are starting to renegotiate with borrowers on deals looking for increased margins as liquidity worries deepen.
“In the last cycle, commercial real estate debt was 85% financed by banks – through bilateral and syndicated lending. If that reduces, even by 25%, institutions are the realistic alternative capable of providing that much debt capital. Mutual funds and insurers, benefitting from favourable treatment for the asset class under Solvency II, are actively adding capability to take advantage of the opportunity.”
The circa €500m of European real estate debt to mature in the next three years, which Booth points to, underscores the need for new lenders. Last Thursday, CoStar News revealed that US investment bank Jefferies is expanding its real estate lending capability and has recently hired former Barclays Capital banker Christian Janssen, while Hatfield Philips’ former primary and special servicing director, Stewart Hotston joined AIG last week to head up the once world’s largest insurance companies push into real estate lending.
Legal & General is also close to launching its property lending platform, under Ashley Goldblatt. But it is not just the insurers, the world’s largest mutual funds, are also now starting to see the opportunities in the market given attractive margins and limited capacity of traditional lenders.
Booth added: “There are certainly a lot of real estate loans being written at the moment that look very attractive versus the securities market for investors that have the ability to invest across asset classes.
“Banks with access to the Pfandbrief market are still relatively keen to do a certain type of financing but in practice it tends to be prime assets with low-leverage and, even then, large loans tend to struggle. Many alternative asset classes are becoming orphaned.”
Fixed income managers are likely to increase their real estate lending exposure. UK institutional fixed income assets under management are around £30trn and growing steadily, says Chalkhill. With a growing pool of capital, real estate debt offers attractive margins and diversification benefits to a part of the market where they are underexposed, Booth argued.
There is an old adage that “good loans are written in bad times”. For some, at least, let the bad times roll on.
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IMN Conference: CRE experts gather in London next month
Friday, September 23 2011 | 09:59 AM
James Wallace
Finance Editor,
COSTAR | A star-studded line-up of Europe’s leading real estate bankers, investors and managers are gathering in London next month to discuss the market’s major issues from the macro to the micro.
IMN, one of the industry leading conference organisers, is hosting the 12th annual IMN’s European Real Estate Opportunity & Private Fund Investing Conference over October 25 and 26 at the Landmark Hotel in London.
More than 400 real estate professionals are expected at this year’s event which will cover themes such as how to attract non-European capital; should bankers start underwriting for a double dip and; what is worse – inflation or deflation?
Delegates’ favourite sessions return also, including: state of the market; large fund strategies and; fund structures and fundraising.
The two-day event will have more than 75 speakers representing some of the largest and most innovative real estate property funds, endowments, fund-of-funds and pension investors speaking.
For the full conference programme and list of speaker, please click here.
To register, please either: telephone +1 212-224-3428 (9:00 am – 5:00 pm, US Eastern Time), or online at www.imn.org/europeanoppfunds
A limited amount of speaking and exhibiting oppor tunities and food & beverage event sponsorships are still available. For more information, please call Andy Melvin at 212-901-0542 or email amelvin@imn.org
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Caring gets £330m funding for Project Navy
Tuesday, September 20 2011 | 02:21 PM
James Wallace
Finance Editor,
COSTAR | Billionaire restaurant tycoon turned property developer Richard Caring has finally secured a debt financing package needed to redevelop 20-21 Grosvenor Square into some of the most luxurious apartments in London, CoStar News can reveal.
Caring heads a consortium of investors, alongside long-time associate Stephen Sharp, that has agreed in principle a £330m three-year facility to complete the acquisition of the US Navy’s former headquarters in Grosvenor Square from Ireland’s NAMA.
The three-year financing package – dubbed Project Navy – includes a 12-month extension option and comprises a £230m senior debt component shared between the Royal Bank of Scotland, Deutsche Bank and United Overseas Bank, the Singaporean bank.
Two mezzanine lenders have provided £100m in junior debt: LaSalle Investment Management has written a £40m loan from its Special Situations Fund and Swiss-based Middle East high net worth and hedge fund investor SAFANAD has provided a £60m mezzanine loan.
The financing deal struck has been complicated by the dormant property having fallen into NAMA after the previous Allied Irish Bank loan securing the asset breached its covenants. Caring and Sharp are very close to finalising the discount to which the consortium buys 20 Grosvenor Square from NAMA, which part of the mix of senior and junior debt will be used to finance.
After this, staggered debt drawdowns will be used to finance construction costs before, eventually, payments from pre-sold units – which are expected to vary in value between £5m and £20m – will be used to help pay down the outstanding balance.
The cost of the senior debt is thought to be more than 400 basis points over LIBOR, staggered according to the part of the finance which is acquisition and development finance, with the package also including upfront fees. The overall facility takes the consortium through to the end of the sale period, with phased margin uplifts.
The consortium is understood to be very keen to conclude negotiations with NAMA, now that bank finance is in place, realising Caring’s long-held ambition of converting such an historic London building into one of the most coveted residential addresses in the capital.
Caring’s original conversion plans, prior to the onset of the credit crunch, were to turn the empty premises – which during the Second World War was US President Dwight Eisenhower’s military headquarters – into 41 luxury flats, but after development finance seized up the project stalled.
Planning permission to redevelop the former US Navy headquarters into luxury flats was finally won in May 2009. Development work could finally start as soon as next month.
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You may be walking around lucky and not even know it.
Friday, September 16 2011 | 11:26 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | There are very few 'life-changing' moments that I can remember experiencing but this past week I had one. It came in the unexpected form of a meeting I had with someone I had never met before. And, as our conversation evolved, it was pretty clear that we had connected at some level, finding that some of our beliefs, about people, about business and other things had similarities. But 3/4 of the way through our meeting, he told me something he had observed about me, in a very constructive way. I sat silent and motionless for a few seconds, digested what he had said, and then simply said, "You're absolutely right. That's a very helpful observation. I can't thank you enough." What he told me isn't really important (except to me :-) What is important is that once in a blue moon, you meet someone who shows interest in you, as a person. Whether this fellow and I ever end up doing business together doesn't matter. What matters is that he and I connected as people. I had the tables turned on me for the first time in I can't even remember how many years as he wanted to help me! It was huge and I woke up the next morning feeling different about myself....in a positive way. There's a line in one of my favorite movies, "Let it Ride", when Richard Dreyfuss is having, in his words, "a good day" (which was not usual for him), and he walks up to a waitress he knows at a food stand in the race track; they banter a little as he orders a hot dog; and then with a very piercing but kind stare she turns around, points a 'magical' finger at him, and says, "You may be walking around lucky and not even know it." In his case it was about betting on horses. In my case, it's about changing my life.
Too many of the conversations I had this week end up with the same theme: "What the heck is going on in the world?" And, because most of the conversations I have, at least during working hours, are about real estate that translates to "Where are we heading?" Well, as I think we all know, but may be reluctant to admit, we're either stalled or slipping backwards. In a preview of their August "Month in Review", which will be published next week, RCA has moderately lowered their 2011 transaction volume projections. An email I got from RCA Editorial Director, Peter Slatin states, "The slowing likely reflects greater unease about the broader economy as well as the recent pullback in CMBS originations and tighter credit availability from other lenders as well."
I totally agree. But I believe, in general, that it's simply a feeling of total uncertainty about so many things that have put people into a funk. The answer simply is: We just don't know. We no more know what's going happen tomorrow than we know what will happen in a month, six months, a year, five years. All we are pretty sure about is what we know that happened yesterday. And what we can do, while the world is, hopefully, sorting itself out is to focus on those things that we can change and make a positive impact on. While these are the kinds of times that try mens' souls, these are also the times when we learn more about who we really are. And, to me anyway, there is nothing more important than being true to yourself.
Update: The Nick Tyrell Memorial Seminar. October 12, 2011.
You can register here (it's free to attend) and I'll send you a link next week about how to donate to the fund set up in Nick's name. The program for the day looks great with presentations by a number of the leading industry thinkers. My colleague, John Gellatly, and Paul McNamara will deliver the eulogy. If you can, please attend.
Congratulations to my friend, Jeff Fisher, who was appointed by both ARGUS and RCA to the position of Senior Global Consultant strengthening and further aligning the partnership of the two companies.
Memorable Experience of the Week: Kitchak Cellers, Napa, CA. Many months ago, I met a couple while having dinner by myself at the bar in a Napa bistro. They offered me a taste of the wine they had brought with them. It was delicious. I learned that it was wine that they make themselves. But in another amazingly small world encounter, Peter Kitchak is a career commercial real estate consultant. So, with that as the backdrop, last weekend, after months of back and forth about trying to schedule a day for us to stop by their place, we finally made. Not having gone on their website beforehand, I truly had no idea what to expect. But if you go on their website, you will have an idea and what you see there truly exists and is even more special in person. Kitchak is a private winery with tastings by appointment only. They have a wine club with a significant membership and Patricia and Peter Kitchak are very nice, interesting and passionate people. If you are serious about wine I encourage you to contact them next time you are in the Napa area. But, if that may be a while out, I can, without reservation (no pun intended) highly recommend their wine which you can get via their wine club.
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Happy 4th Anniversary Financial Crisis
Wednesday, September 14 2011 | 11:39 AM
Patrick Blount
President / CEO,
BENEWOLF, LLC | Four short years ago (or “long” years if you are in the financial services industry) on August 17th the “sub-prime” markets crashed and began the domino effect that led to the global financial disaster of the of 2008. The anniversary date is more like a wedding anniversary than a date signifying a one-time event, like the death of Elvis, because the carnage continues. The Great Depression officially lasted 12 years so maybe I’m jumping the gun wanting to hurry up and have this problem behind me.
Over the past few weeks the American Banker headlines read:
•Investors Give Banks a Swift Kick in the Pants;
•Private equity firms and hedge funds are forcing the banks they invest in to clean up problem loans, and it's starting to show in the data;
•Buffet’s $5 Billion Lifeline Could Become B of A’s Capital Noose;
•Numerous articles regarding Banks Robo-Signing woes;
•FHFA Suing 17 of the largest U.S. banks for mortgage fraud;
•B of A is fighting major battles on multiple fronts from mortgage fraud;
•Large Banks accused of taking $6B in kickbacks from mortgage insurers;
•Lawsuits Highlight an Administration at odds on housing;
•Banks accused of fabricating foreclosure documents;
•Community banks using Small Business Loan Fund proceeds to exit TARP
And the American Banker publication is on the bank’s team. You can only imagine what the rest of the press is writing about this nation’s banks.
I was truly hoping by this point that banks would have cleared their decks of distressed balance sheet loans and we would be on to something new like the next great bubble. The FDIC recently announced that there are fewer banks in trouble in Q3 2011. I find that hard to believe since we have still not seen the great purging of distressed loans we have anticipated since 2007.
Did asset quality improve without the rest of us knowing?
Did rents and occupancy rebound on a national level while we weren’t looking?
Was there some unknown force that caused hidden massive property appreciation whereby borrowers are no longer upside down in their mortgages?
Could these same big banks that are currently being sued by AG’s offices in fifty states, the Federal government and investors of every ilk be lying about asset quality and market conditions?
Surely not.
Happy fourth anniversary indeed, unfortunately I feel confident we will see anniversary number five.
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Procida, F&G Life Form Lending Venture
Monday, September 12 2011 | 05:11 PM
William Procida
President,
PROCIDA FUNDING, LLC | Procida Funding and Fidelity & Guarantee Life Insurance Company have formed a venture to originate loans of $2-10 million in the New York tri-state area. The venture is seeking value-added, distressed and rescue capital opportunities, including properties that were partially built or require significant lease up and repositioning. “Once these transitional assets are stabilized, we would then hope to offer borrowers more conventional, longer term financing,” said Billy Procida, founder of Englewood Cliffs, N.J.-based Procida Funding. The partnership wants to originate short-term, bridge and permanent loans. It believes that its target area is underserved by most conventional lenders today. “We see a tremendous opportunity to provide financing for these kinds of situations,” Procida added. The partnership will target all sectors, including industrial, retail and office.
Procida, who has done about $100 million of new loans so far this year, expects to originate about another $50 million through year-end. Pricing on bridge loans start at 12% and pricing on permanent loans start at 6.5%. The partnership recently completed its first loan, a $3.6 million mortgage on a partially built, 28-unit condominium in Union City, N.J. Construction stopped after the borrower experienced financial distress and the loan enabled the borrower to avoid foreclosure. Construction has now started up again under a new developer, who is converting the project from a condo to a rental complex.
Procida originated the loan, which it then sold to F&G Life, and is looking to source additiona lopportunities of this kind for the partnership. The company completed a similar transaction for TAK Group on Freehold Commons in Freehold, N.J., purchasing and restructuring a $7.7 million loan and also originated a $4.25 million bridge loan to acquire debt at the Gull’s Cove Condominium in Jersey City, N.J.
Separately, Procida is preparing to launch The 100-Mile Short Duration Fund, which will originate short-term loans within a one hundred-mile radius of the company’s headquarters. The company hopes to raise about $25-50 million for the fund with the aim of deploying capital and getting it back within a short time frame.
—Samantha Rowan
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Happy 4th Anniversary Financial Crisis
Monday, September 12 2011 | 09:34 AM
Patrick Blount
President / CEO,
BENEWOLF, LLC | www.benewolf.typepad.com
http://benewolf.typepad.com/benewolf/2011/09/happy-4th-anniversary-financial-crisis.html
Four short years ago (or “long” years if you are in the financial services industry) on August 17th the “sub-prime” markets crashed and began the domino effect that led to the global financial disaster of the of 2008. The anniversary date is more like a wedding anniversary than a date signifying a one-time event, like the death of Elvis, because the carnage continues. The Great Depression officially lasted 12 years so maybe I’m jumping the gun wanting to hurry up and have this problem behind me.
Over the past few weeks the American Banker headlines read:
Investors Give Banks a Swift Kick in the Pants;
Private equity firms and hedge funds are forcing the banks they invest in to clean up problem loans, and it's starting to show in the data;
Buffet’s $5 Billion Lifeline Could Become B of A’s Capital Noose;
Numerous articles regarding Banks Robo-Signing woes;
FHFA Suing 17 of the largest U.S. banks for mortgage fraud;
B of A is fighting major battles on multiple fronts from mortgage fraud;
Large Banks accused of taking $6B in kickbacks from mortgage insurers;
Lawsuits Highlight an Administration at odds on housing;
Banks accused of fabricating foreclosure documents;
Community banks using Small Business Loan Fund proceeds to exit TARP
And the American Banker publication is on the bank’s team. You can only imagine what the rest of the press is writing about this nation’s banks.
I was truly hoping by this point that banks would have cleared their decks of distressed balance sheet loans and we would be on to something new like the next great bubble. The FDIC recently announced that there are fewer banks in trouble in Q3 2011. I find that hard to believe since we have still not seen the great purging of distressed loans we have anticipated since 2007.
Did asset quality improve without the rest of us knowing?
Did rents and occupancy rebound on a national level while we weren’t looking?
Was there some unknown force that caused hidden massive property appreciation whereby borrowers are no longer upside down in their mortgages?
Could these same big banks that are currently being sued by AG’s offices in fifty states, the Federal government and investors of every ilk be lying about asset quality and market conditions?
Surely not.
Happy fourth anniversary indeed, unfortunately I feel confident we will see anniversary number five.
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Good Ole Days, Nick Tyrell, Dreams and ice cream
Friday, September 09 2011 | 01:26 PM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | Matt Slepin and his colleagues at Terra Search Partners publish a regular piece called Viewpoints. Yesterday their most recent issue hit my mailbox. I thought you'd find this section particularly interesting.
"At the beginning of this year, it felt like we were exiting the darkness of the recession. There seemed to be a light at the end of the tunnel, a glimpse that maybe we would indeed return, although cautiously, to the realm of the Good Ole Days. CMBS 2.0 was gaining momentum, investment sales volume seemed to be returning, and indeed our search business felt back on a roll. But the second quarter brought us back down to reality as employment remained flat, CMBS 2.0 fell apart, and the ripples of the failed debt reduction talks, the S&P downgrade, and the parallel dysfunctions in Europe sunk in. Now it feels as though the first quarter was the effect of pent-up demand and the settling into the New Normal versus a return to the Good Ole Days. Real estate in the US is saying crazy, contradictory things. Multifamily is the one sector with largely positive long term drivers. The other sectors all seem more affected by secular changes – technology, globalization, and corporate efficiencies all have deep and obvious impact on the other major real estate “food groups.” Hospitality is, as always, more volatile and the bottom in the residential sector sadly still seems to be several years out."
Special Event: The Nick Tyrrell Memorial Seminar : Applying Research Insights to Real Estate Investment Management:
Nick was a friend of mine as he was of many in the industry. This looks like a great program with some of the leading Research/Investment Strategists in the industry in attendance. Unfortunately, I will only be able to attend in spirit. The seminar will be used to raise money for the Nick Tyrrell Memorial Fund, which will present awards to papers that combine academic discipline with practical insights for the real estate profession. The event is being hosted by JPMorgan Asset Management, Nick's last employer and is being held on October 12 at 4pm to 8pm at Victoria Embankment, London. I will include more details as I get them.
This quote, sent to me yesterday by a good friend, really hits home: "We live in a moment of history where change is so speeded up that we begin to see the present only when it is already disappearing." Ronnie Laing
I don't dream all that often. I've been trying to corollate my dreaming being associated with when I eat ice cream just before going to bed...but I'm going to have to keep testing that thesis! But early this morning I woke up from a dream and just couldn't go back to sleep. I dreamed about getting up and calling my father. Just to see how he was doing. The problem is that he died in November 2009. I guess in my dream he was still reachable by phone. But, I remember what one of you guys wrote me when I was spending a lot of time with my Dad in his final months: you can talk with him anytime you want. I remembered that just now and decided to close my eyes and have a chat with him. He really didn't want to talk much about how he's doing and what type of things he's involved with...perhaps he's not allowed to divulge that kind of stuff. But he did listen to what was on my mind and these days there are a few things that should be keeping me up at night. It's been a good early morning for me, simply the ability to reach out to my Dad and also to write about this to you. Actually, the more I think about it, I'm pretty sure the dreaming is due to ice cream but maybe it's only specific flavors. More research is definitely in order.
Enjoy your weekend.
Good Ole Days, Nick Tyrell, Dreams and ice cream
Posted: 09 Sep 2011 05:28 AM PDT
Matt Slepin and his colleagues at Terra Search Partners publish a regular piece called Viewpoints. Yesterday their most recent issue hit my mailbox. I thought you'd find this section particularly interesting.
"At the beginning of this year, it felt like we were exiting the darkness of the recession. There seemed to be a light at the end of the tunnel, a glimpse that maybe we would indeed return, although cautiously, to the realm of the Good Ole Days. CMBS 2.0 was gaining momentum, investment sales volume seemed to be returning, and indeed our search business felt back on a roll. But the second quarter brought us back down to reality as employment remained flat, CMBS 2.0 fell apart, and the ripples of the failed debt reduction talks, the S&P downgrade, and the parallel dysfunctions in Europe sunk in. Now it feels as though the first quarter was the effect of pent-up demand and the settling into the New Normal versus a return to the Good Ole Days. Real estate in the US is saying crazy, contradictory things. Multifamily is the one sector with largely positive long term drivers. The other sectors all seem more affected by secular changes – technology, globalization, and corporate efficiencies all have deep and obvious impact on the other major real estate “food groups.” Hospitality is, as always, more volatile and the bottom in the residential sector sadly still seems to be several years out."
Special Event: The Nick Tyrrell Memorial Seminar : Applying Research Insights to Real Estate Investment Management:
Nick was a friend of mine as he was of many in the industry. This looks like a great program with some of the leading Research/Investment Strategists in the industry in attendance. Unfortunately, I will only be able to attend in spirit. The seminar will be used to raise money for the Nick Tyrrell Memorial Fund, which will present awards to papers that combine academic discipline with practical insights for the real estate profession. The event is being hosted by JPMorgan Asset Management, Nick's last employer and is being held on October 12 at 4pm to 8pm at Victoria Embankment, London. I will include more details as I get them.
This quote, sent to me yesterday by a good friend, really hits home: "We live in a moment of history where change is so speeded up that we begin to see the present only when it is already disappearing." Ronnie Laing
I don't dream all that often. I've been trying to corollate my dreaming being associated with when I eat ice cream just before going to bed...but I'm going to have to keep testing that thesis! But early this morning I woke up from a dream and just couldn't go back to sleep. I dreamed about getting up and calling my father. Just to see how he was doing. The problem is that he died in November 2009. I guess in my dream he was still reachable by phone. But, I remember what one of you guys wrote me when I was spending a lot of time with my Dad in his final months: you can talk with him anytime you want. I remembered that just now and decided to close my eyes and have a chat with him. He really didn't want to talk much about how he's doing and what type of things he's involved with...perhaps he's not allowed to divulge that kind of stuff. But he did listen to what was on my mind and these days there are a few things that should be keeping me up at night. It's been a good early morning for me, simply the ability to reach out to my Dad and also to write about this to you. Actually, the more I think about it, I'm pretty sure the dreaming is due to ice cream but maybe it's only specific flavors. More research is definitely in order.
Enjoy your weekend.
Steve
P.S. My cousin, Jeff Smiley, went to the Air Force Academy and flew B-52's in Vietnam. More than 20 years ago, at age 41, he died of some type of leukemia. After the funeral ceremony, attended by hundreds of people whose lives he had touched, I went back to his house and found the following poem, framed and hung on a wall. My old classmate, Peggy Noonan, drew from this for President Regan's speech after the Challenger disaster. Even though it's been adopted as a mantra by pilots, I thought it also had meaning for those who had innocently boarded those airplanes on September 11, 2001. I offer it to you in honor of their memory.
High Flight
Oh! I have slipped the surly bonds of earth
And danced the skies on laughter-silvered wings;
Sunward I've climbed, and joined the tumbling mirth
Of sun-split clouds - and done a hundred things
You have not dreamed of - wheeled and soared and swung
High in the sunlit silence. Hov'ring there
I've chased the shouting wind along, and flung
My eager craft through footless halls of air.
Up, up the long delirious, burning blue,
I've topped the windswept heights with easy grace
Where never lark, or even eagle flew -
And, while with silent lifting mind I've trod
The high untresspassed sanctity of space,
Put out my hand and touched the face of God.
Pilot Officer Gillespie Magee
No 412 squadron, RCAF
Killed 11 December 1941
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Labor Day 2011
Tuesday, September 06 2011 | 09:33 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | So, the big news this week was the announcement that The Townsend Group had sold a 70% interest in their firm to a start-up private equity group. Congrats to Townsend on what appears to be an excellent deal. Also good to read was that the remaining 30% still to be controlled by Townsend has been divided amongst a number of their current 'internal' partners. A classy move I'd say as there have been too many of these type deals, not necessarily in our industry, where a few people get really rich and the rest of the employees basically suck wind. I guess one thing that crosses my mind in reading the news is whether Townsend will continue to focus on growing their investment management business vs. their advisory business and how their advisory clients are going to react (if at all) to this deal. I guess, there's a lot more buzz amongst the consulting community who may be licking their chops feeling that Townsend's advisory client list is ripe for picking off. It could be an interesting story unfolding right before our eyes.
Well, the summer is over...can it possibly be? But, I see it in some ways as a time of renewal, or perhaps renewed energy. In some ways Europe basically shuts down as people are off on their holidays and it's difficult to either get to someone or get an answer on something. In the U.S., from where I sit, it was a confusing summer and perhaps we all should have taken the summer off as well. But with the crisp mornings and clear skies (at least in Napa) it's energizing. Those who are looking for new jobs are hoping that the fall brings with it more clarity; those that are looking to raise capital hope that the uncertainty that has constrained some institutional investors from making commitments, is over completely, that it's understood or accepted enough to allow them to move forward; those of us who attend fall conferences are finalizing our travel schedules and those who need to be 'on the road' to get their job done are looking at how to arrange everything they want to accomplish without going nuts. There's a lot going on!
I guess that by next week virtually all public school systems in the U.S. will be back in session. I remember those years, going shopping for school supplies which included loose leaf binders, dividers, pencil cases (I know, sounds nerdy but we all had them), book straps (dangerous elastic things that allowed us to carry a number of textbooks to and from school; book bags have made that easier). It all sounds antique now. But other than during the years that I went to summer camp and the end of the summer (for those of us teenagers and older) meant teary good-byes, I don't remember ever feeling bad about going back to school. In fact, I wouldn't mind going back now but perhaps as a teacher (although aren't we always students? A friend recently told me, "When a student is ready, a teacher will appear"). I've approached my local community college about teaching some classes on improving presentation skills (aka how to live without PowerPoint slides), networking skills and managing a contact database, public speaking skills, you get the idea. I don't think too much of this is actually taught these days although I do know that some schools do offer interview skills classes. Anyway, I wrote to the President of the school this week and I'll let you know if anything transpires.
My life is people. I love learning about people, not just what they do but who they are, where they grew up, went to high school, etc. . And what's great is that people love sharing stuff about themselves; all you have to do is ask them. It really brings us closer together. When I was running an RTC contractor office and had hired 55 people in short order to work out hundreds of troubled loans and assets, I started a Friday morning "Bagels and..." session. At these, each week, three people would tell the group about themselves; stuff we might not know and also about their background in the real estate industry and skills they'd developed. Not only did we learn more about each other as people we also learned who had specialized experience in this, that or the other thing so that when something came up regarding one of our assets, we knew who the 'go-to' person was. It's the true value-add. Do you know who in your shop knows more than they may be asked to do on a day-to-day basis? It might be interesting finding out, don't you think?
"Labor Day, the first Monday in September, is a creation of the labor movement and is dedicated to the social and economic achievements of American workers. It constitutes a yearly national tribute to the contributions workers have made to the strength, prosperity, and well-being of our country. The first Labor Day holiday was celebrated on Tuesday, September 5, 1882, in New York City. The form that the observance and celebration of Labor Day should take were outlined in the first proposal of the holiday — a street parade to exhibit to the public "the strength and esprit de corps of the trade and labor organizations" of the community, followed by a festival for the recreation and amusement of the workers and their families. The vital force of labor added materially to the highest standard of living and the greatest production the world has ever known and has brought us closer to the realization of our traditional ideals of economic and political democracy. It is appropriate, therefore, that the nation pay tribute on Labor Day to the creator of so much of the nation's strength, freedom, and leadership — the American worker."
The preceding is from the U.S. Government website. It seems a little self-serving, perhaps typically American. Another way to look at it might be simply that it's time to give each other a little pat on the back because, when you come down to it, all of us who work for a living are connected. Perhaps it's time to revisit the definition of Labor Day and use it as a way to bring America together again.
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Are you getting OTR into your inbox?
Monday, August 29 2011 | 10:38 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | Hi. Two people wrote me to say they wondered if I had stopped publishing as they hadn't heard from me in the past two weeks.
Could you please reply and let me know 'yes' or 'no' if you've received OTR the past two weeks?
Thanks a lot.
Steve
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Deustche Annington to outline plans for Europe's largest CMBS refi
Monday, August 22 2011 | 03:41 PM
James Wallace
Finance Editor,
COSTAR | Terra Firma-owned Deustche Annington hopes to implement its “amend and extend” strategy for the €4.7bn GRAND securitisation by the end of the year.
An outline of Deustche Annington’s proposed strategy to refinance Europe’s largest CMBS will be delivered by early October which will enable the “full refinancing of the GRAND securitisation over time… to deliver noteholders a full recovery over the extended term,” the issuer said in a statement.
The proposals by Deustche Annington, which is being advised by Blackstone and Allen & Overy, seek to tackle the massive refinancing risk through a phased refinancing strategy involving staggered new loan and bond maturity dates at a pace and volume of new debt that banking markets can accommodate.
Currently, the securitised loans are set to mature in July 2013, while the bonds’ legal maturity is three years thereafter. But any loan extension is likely to necessitate pushing out the final legal maturity so as to avoid a possible downgrading in the notes’ ratings.
Speculating on the maturity extension of the final maturity of the bond, Krishna Prasad, CMBS analyst at RBS wrote in a note today: “Given the difficulty of refinancing bonds in the current, we would expect that an extension of three to five years will be necessary at the minimum.”
The original €5.8bn GRAND CMBS transaction was secured against more than 180,000 multi-family units predominantly consisting of residential properties spread across Germany. The structure of the GRAND securitisation is complex, consisting of separate loans to 29 Real Estate Funding (REF) issuers. “It is possible and even likely that each of these REFs will be refinanced separately,” writes Prasad.
Any proposed maturity extension will require a vote by noteholders at an EGM, with each class of noteholders required to vote for the decision to be passed.
Furthermore, any proposal that constitutes an amendment to the REF notes will also require the consent of the servicer, which suggests that Capita’s role will be undiminished by the appointment of Rothschild and Freshfields by the Ad-Hoc noteholder group on July 15. At which time, the group represented 64% by value of the outstanding notes, and 50% by value in all but one of the junior classes of the outstanding notes.
But before any vote can take place, the documentation must be amended so a threshold is set at which a decision will be carried. This documentation “defect” has been cited as a major obstacle date over the resolution of the mammoth refinancing.
Typically, the highest threshold in CMBS trust deed documentation to pass resolutions is 75%, but the absence of any stated figure has caused unease among particularly the junior bondholders who are worried that their voices will be unheard.
A new valuation has been commissioned, and is expected to be published soon, which will enable all parties to form a view as to the most logical direction to take next. A third possible string to the strategy is a more concerted sales strategy – which so far has been slow with only 1,679 units sold this year – of the underlying German residential properties.
But the borrower has intimated in the past that it considers a disposal strategy would undercut the inherent value in the performing portfolio, which makes the refinancing critical for the future of the transaction.
Prasad continues in today’s note: “While we recognise that some form of refinancing is necessary, the impact of the proposal on the valuation of the bonds will depend on the details, which remain sketchy. Whether the impact is positive for the transaction as a whole will depend on whether the sponsor will put cash into the transaction. If it does not, then any reduction in LTV is due to an increase in valuation or natural amortisation, which we view as largely optical. Even so, a formal refinancing or extension will take away the uncertainty and should be considered a positive.”
In a separate note this morning, Chalkhill Partners wrote: “We would highlight that the ramifications of the solvent ‘scheme of arrangement route’ is unclear to us at this stage. Particularly, the wording around ‘the equal treatment of each class of noteholders’ raises some questions as to the preservation of waterfalls / seniority that constitute the cornerstone of structured finance transactions.”
So, what happens next? A lot more specifics are needed on the refinance strategy, together with commissioned but unpublished updated valuation. And also, while Deustche Annington may propose a solution, and noteholders may vote on it, Capita Asset Services also have a fiduciary duty to uphold in what is not only the largest European CMBS refinance – it is also the most convoluted. Deustche Annington, the Ad-Hoc noteholder group and Capita each have a financial adviser and a legal adviser.
As one source put it: “The pitch is a bit crowded and people are grappling for position.”
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CalPERS; organizing your email; concert stage collapse
Monday, August 22 2011 | 09:11 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | CalPERS has often been looked at as one of the leaders that many other pension funds follow. just this past week they announced plans to launch a new emerging manager program. in a world that likes labels, the definition of 'emerging manager' has been somewhat of a moving target but the CalPERs definition is one that i personally subscribe to: "managers with (a) less than $1Bn of assets under management and (b) no more than three prior commingled funds or separate account investment vehicles." like with anything, there will be objection to this definition from some managers who think of themselves as still emerging. as stated in the public record of the recent investment committee meeting, the proposed five-year program will not exceed $200MM and will focus on investment in managers and assets located in urban California markets. CalPERS retained Crosswater Realty Advisors (aka ted leary and his posse) to present a report to the investment committee on this subject. while a number of public pension funds already have an emerging manager program in place, it'll be interesting to see if others follow.
i apologize for overloading your inbox with three OTRs this week. without boring you, after two weeks of failing to deliver OTR to you, i finally found out what the problem was (i hope).
update on my new email management system. a few months ago i wrote you about a new way to manage emails that i read about. i decided to implement it immediately. i'm here to tell you that it is working for me. simply, it's the same idea that was suggested years ago when all we had was paper. when something lands on your desk or in your in box, do one of three things with it: act on it, delegate it or toss it. this email system is similar but with a couple of extra wrinkles. yes, every day, i do use that system (although i don't have many situations where i can delegate stuff) but i also created email folders with the following labels: tickler (which i check first thing every day and which contains items that need attention soon); reference (for stuff that i want to 'file' that could be research stuff or things i feel i will be able to use somewhere down the line); waiting for (as it says, for things that i'm waiting for from somebody); future meetings (where i want to remember to schedule a meeting with someone at a future date); someday/maybe (needs no explanation). i also have labels for each month where i do save a number of emails from that month but then, at the end of each month, i purge those files wondering, "why the heck did i save this one or that one?" anyway, it's working for me although we all have different ways of keeping our lives organized and, it's whatever works for you that counts, right?
as the media tends to behave, when one disaster, natural or otherwise happens, they scour the world looking for other things that resemble the first disaster. but, i can't let this week pass without mentioning the horrible stage collapse at the music venue in indiana. watching the one video on you-tube which captured the horrific scene brought tears to my eyes and chills to my body. i haven't read anything in the past couple of days but as you would expect, there is finger pointing and stuff that comes along with it, looking to place blame. and, just from going by what has been reported, some are suggesting that there were advance warnings of very high winds approaching. should they have been heeded immediately? were they even communicated to the stage manager and audience?
looking at the size and elaborateness of the stage/sound/lighting and everything that goes along with producing a big, live music event, i was thinking about how it's all grown, so big, from the good old days when the beatles played shea stadium in ny with their vox amplifiers and simple stage arrangement (of course, no one could hear them due to all the screaming!). and, as ticket prices for live shows have soared, promoters and the bands themselves have escalated the elaborateness of the delivery (i saw the stones in germany a few years ago when their stage recreated an ocean liner and U2 and bon jovi and pink floyd which also had huge set ups). this tragedy won't change things but i think that given the great advances of technology, especially in sound engineering, music can be delivered to certain size crowds with less gigantic structures (although a lot of what's on those structures is lighting related). i remember when MTV first launched. my reaction was, "this is music, it's an audio sensory thing, not a visual sensory thing." of course, history has shown that that has all changed. but in my simple way of looking at things, it's still all about the music, the sound, the human beings performing rather than the ancillary entertainment that almost serves as a distraction from the music. but (big sigh), i'm probably exposing the fact that i yearn for some of the simpler things and yet, i know that they will most likely never return. those killed and hurt in indiana could have (and may actually be) our sons or daughters or our friends who had just gone there to groove on the music. what happened is just so, so sad but just like lots of things. it seemed like it was mother nature, once again flexing her muscles, perhaps warning us in some ways that she's concerned about the direction society is moving. who knows?
who said “size matters”? there are two published pieces i receive that are in an interesting format (is it a trend?). they’re about half the size of an 8 ½ x 11 piece of paper and are very cute. one, called the decisive eye is published by Internos Real Investors and the other called the property perspective is published by Frogmore. I like the “kindle” size as it makes it easy to take with you. Nice to see some people thinking differently.
restaurants of the week (first time at both):
1. fig & olive, several manhattan locations. i ate at the one on 52nd street between madison and fifth. thanks zoe.
2. fresco by scotto, also on 52nd between park and madison. thanks jerry (my accountant for longer than we both want to admit) who published a periodic blog called, achieve great things!
OTR was listed as #7 in the best real estate/finance blogs in a just published survey in The Institutional Real Estate Letter-North America. thanks for all your support and encouragement over the years.
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what's going on?; coulda, shoulda, woulda
Monday, August 22 2011 | 09:07 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | this morning, for the first time in a long, long time, i sat down to write this little story to you, stared at the blank page, and wondered what i could write that would be of interest to you.
i’m not qualified to write about the craziness of the stock market (although my opinion is that, just like so many things, over-reaction is rampant in the world).
as you know, with an occasional slip-up, i’ve stayed away from politics (also not qualified to comment).
and, as many of my european real estate industry friends are off on ‘real’ holidays (i.e. at least two weeks during the summer and when you get a ‘gone fishing’ email reply, saying they will not be checking email, you know they mean it.
but, the commercial real estate business chugs along, just like the little engine that could, working it’s way up a steep hill and trying to find itself again.
RCA published a release this week on the subject of Development Land deals.
• Sales of developable land increased by 64% year-over-year in H1'11 to $3.2 billion. Though that's still below growth for other property sectors, increasing volume in this sector indicates some loosening of what has seemed a near moratorium on development.
• As in the broader market, investors have focused on multifamily and CBD sites in primary markets. Prices for land have fallen farther than for all other property types, and lenders are still achieving lower recovery rates on average for land than in other sectors. Nonetheless, well-located land has achieved close to peak-era pricing as well as recovery rates that are closer to the average rates for other property types.
to me, this is not unexpected. developers have always been the real risk takers in our industry. through exhaustive market research (sometimes) they determine that a piece of property has potential. when they’re right, it’s a big win. when they’re wrong, well, it’s a problem. real estate has always been a game of deep pockets, deep enough to ride out the storms that affect absorption of houses, apartments, office, retail and industrial space, what have you. and with a renewed optimism about things, it’s not surprising that development sites are hot again. and, if you were trained, like i was, that the upside is made on the buy, prices like these are probably very tempting. who is lending money for development sites i’m not sure about but there are more pockets of money these days than the traditional sources, deep or otherwise, which have a higher threshold of risk (although there will come a day of reckoning when they’ll have to face their investors…either with a check, a bill or the news that they had to give the property back).
there is one thing that i would like to share with you today: in the summer of 2008, when i was thinking about the next step in my career, i read a bunch and summarized of books. these days i've been thinking about me waking up one day, just after my 106th birthday, and feeling, ‘i shoulda done this or i shoulda done that or i shoulda…..’ i’m sure some of you know those feelings. so here are a few things from some of the stuff i've read (and in some cases been re-reading) that have struck me this week:
• it’s human nature for people to take precisely as much interest in you as they believe you’re taking in them. there is no stronger way to build relationships than taking a genuine interest in other human beings and allowing them to share their stories.
• everyone should start at ground zero. they should ask, ‘is this viable anymore? is this what the world wants?”
• having a vision is not enough; if you fail to envision the potential of your creation, it will be left for others to exploit. what you need is a vision and the ability to develop a strategy to achieve it.
• “if a man has a talent and cannot use it, he has failed.” thomas wolfe
• “what you can do or think you can do, begin it. for boldness has magic, power and genius in it.” goethe
• "if you let them, things just happen in the right way, at the right time. at least they do when you let them, when you work with circumstances instead of saying, “this isn’t supposed to be happening this way, “ and trying hard to make it happen some other way. if you’re in tune with The Way Things Work, then they work the way they need to, no matter what you may think about it at the time. later on, you can look back and say, “oh, now I understand. that had to happen so those could happen and those had to happen in order for this to happen….” then you realize that even if you’d tried to make it all turn out perfectly, you couldn’t have done better and if you’d really tried, you would have made a mess of the whole thing.” the tao of pooh
here are the tour dates for a good friend (and the guitarist in my ‘band’) ernie hendrickson. if he is coming to a place near you i encourage you to check him out. i also guarantee that you will enjoy it. ernie is the real deal!
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ceo's and bono, industry events, networking
Thursday, August 18 2011 | 02:50 PM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | in a harvard business school case, “bono and U2”, professor nancy koehn discusses business lessons to be earned from the famous band.
key concepts include:
· take stock of how you are using your funds, your authority and your people.
· a leader’s mission and purpose isn’t static; it evolves.
· the mission of the ceo should be related to the organizations performance.
· who you are and what you stand for as an organization have great relevance to the people who buy your product (or service)
“in the bigger picture, U2’s journey reflects our own moment here in the early 21st century. U2’s appeal has always been about our common humanity and the yearning we all experience to follow a higher path. people are looking for the light and U2’s music has spoken to that since the band started.”
“any ceo who thinks his or her job is primarily about maximizing shareholder value is living in the past. the game of what kind of capitalism will define this century has changed very quickly and dramatically. creative capitalism, conscious capitalism, stakeholder capitalism, call it what you will. the larger social footprint and role of business are here to stay.”
it’s a very interesting piece which i’ll be happy to send you. and, while it’s written towards ceo’s of companies, when you think about it, we are all our own ceo’s of ourselves and the way we choose to live our lives matters to us, if to nobody else. we have those choices to make. i have made it my mission to try to bring the world closer together, one person at a time. one of the wonderful byproducts of all the travel I’ve done is getting to meet people and understanding them better and hopefully leaving them with a little better understanding of americans. we're talking about people here, not countries, not religions as we are all the same....human beings. from the time very early one morning that I talked with a paris policeman who was guarding the palace of the president of france right after we invaded iraq and americans were ‘personna non gratt’ in france and we agreed that we did not hate each other, we just hated what america had done to meeting people in liberia and bringing back the challenges that they face, these experiences have been really meaningful to me.
like many of you, i’ve been planning what industry events to attend this fall and winter. and as you can see by my schedule below, i’ve made some decisions already. but it got me thinking: what are my expectations from attending a conference? are they met? exceeded? what is it that you’re not getting that you’d like to? after all, attending almost any conference (and some in particular) is expensive and time consuming and when you combine those you’d like to leave a conference feeling that not only was it worth spending your time and money but that you would recommend it to a friend.
if you have some time, i’d really appreciate you sending me your thoughts, perhaps wish list, when you say, “ I wish there was an event which provided this (whatever this is to you).” thanks.
thanks to drew genova of cbre in washington, dc who sent me an article called “secrets to better networking.” the suggestions come from a book called “never make the first offer” by donald dell, founder of the proserv sports agency.
1. make friends. create opportunities to get to know people out of the office, out of the normal parameters of the business relationship and outside mutual comfort zones.
2. make friends of their friends.
· 3. find mentors.
· 4. give advice (carefully)
· 5. don’t keep score.
· 6. massage your network. send personal notes.
· 7. show no fear.
· 8. do good works. charitable endeavors
i’ve built a wonderful network of people which is now global. this column is read (or at least received J by people all over the world. i consider it both a privilege and a responsibility and have always treated the people i know with respect and consideration. my connectivity has never been calculated. i just love people and love helping people. i realized, not all that long ago, when I was trying to identify what made a good day for me, it was when i was able to help someone, not necessarily in a big way. it feels good. i endorse some of the points that dell makes above but a couple of things i’d add is ‘be yourself’, ‘be natural’, 'don't take people for granted' and 'don't abuse your network.'
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Breaking It Down by Borough
Thursday, August 18 2011 | 02:48 PM
Robert Knakal
Chairman,
MASSEY KNAKAL | In last week’s column, we took a look at the overall New York City building sales market and compared its recent performance with past periods. This week, we will take a similar look at the first half of 2011 (1H11) but will analyze the performance of each individual geographic submarket.
As I have written for some time, we fully expected the Manhattan market to lead the entire marketplace out of the downturn and are indeed seeing this happen. Sales volume picked up in Manhattan before it did in other submarkets, and we are starting to see value appreciation in Manhattan.
In the outer boroughs (including northern Manhattan), sales volume has been lagging and, in some cases, has only recently started to recover. Value in these areas remains uneven with some product types experiencing continued slides in the price-per-square-foot metric.
A detailed look at each of these submarkets will highlight how each is performing.
Manhattan
In the Manhattan submarket (defined as south of 96th Street on the East Side and south of 110th Street on the West Side), there was approximately $11 billion worth of investment sales in 1H11. This activity reflects a 124 percent increase over the same period last year, when $4.9 billion traded. In 2Q11 alone, there was $7.9 billion in sales volume, the highest quarterly total going back to 4Q07.
If 1H11 activity is annualized, the Manhattan submarket should experience a near doubling of last year’s $12 billion sales volume. This year’s total will likely be five times the $4.2 billion in 2009. At the peak of the market in 2007, there was $52.5 billion in sales volume.
Regarding the number of properties sold in the Manhattan submarket, 277 properties traded in 1H11, which, if annualized, is up 17 percent from the 473 properties sold in 2010. At the peak of the market in 2007, 999 properties sold. Clearly, we still have a long way to go before hitting the activity levels seen at the peak.
Value in Manhattan is trending upward in almost all property segments. There is still some downward pressure exerted on development-site sales, but this has less to do with actual value and more to do with the number of transactions. Value of land on a price-per-buildable-square-foot basis is improving, notwithstanding what comparable sales data indicate. With the number of sales increasing significantly, it is not surprising to have averages fall as we come off periods during which only those sites obtaining top values were trading. All other property types are experiencing nice appreciation.
Overall, value is up almost 11 percent, on a price-per-square-foot basis, in 2011 versus 2010. Hindsight will show us that 2010 was the bottom of the Manhattan submarket in terms of value.
Northern Manhattan
In the northern Manhattan submarket, in 1H11 there was $167.4 million in sales, significantly less than the $335 million in 1H10. If we annualize the dollar volume in 1H11, the market is running about 34 percent below the $509 million in sales in 2010. At the peak of the market in 2007, there was about $1.5 billion in dollar volume in this submarket.
In terms of number of properties sold, 69 properties traded in 1H11 as compared to 66 in 1H10, an increase of 4.5 percent. Annualizing the 1H11 total would lead to an estimated 138 sales for the year, an anticipated increase of 9 percent for over 2010’s 127 sales. At the peak of the market, in 2007, 327 properties sold.
Values in northern Manhattan remain uneven, with some property types showing increases in value per square foot with others continuing to show decreases.
The Bronx
In the Bronx submarket, there was $282 million in sales volume in 1H11, a total significantly higher than the $194 million in 1H10. If we annualize the 1H11 totals, the $565 million result will show an increase of about 16.5 percent over the $485 million of sales last year. At the peak of the market in 2007, there was about $2.2 billion in sales in this submarket.
In terms of number of properties sold, there were 114 properties sold in 1H11, up 21 percent from the 94 in 1H10. Annualizing the 1H11 total would yield 228 sales, which would be up 19 percent from the 191 total last year. At the peak of the market in 2007, 701 properties sold.
Value in the Bronx remains very mixed, with half the product types seeing slight increases in value and the other half seeing values continuing to slide.
Brooklyn
In the Brooklyn submarket, there was $699 million in sales volume in 1H11, up 37 percent from the $509 million in 1H10. If we annualize the 1H11 totals, the $1.4 billion in activity would be up 45 percent from the $963 million 2010 total. At the peak of the market in 2007, Brooklyn saw $3.8 billion in sales.
In terms of number of properties sold, this submarket saw 336 sales, up 23 percent from the 274 in 1H10. On an annualized basis, the 672 sales would show an increase of 18 percent over the 569 properties in the borough last year. At the peak of the market in 2006, 1,916 properties were traded in this submarket.
As in other outer-borough submarkets, Brooklyn has been seeing mixed value performance with five product types showing continued reductions in average prices per square foot and three product types increasing in value.
Queens
Lastly, in the Queens submarket in 1H11, there was $452 million in sales volume, up 73 percent from the $260 million in 1H10. If we annualize the 1H11 totals, the $904 million worth of expected activity would be up 62 percent from the $558 million last year. At the peak of the market in 2006, there was $2.6 billion in sales activity in Queens.
In terms of number of sales, 164 properties sold in 1H11, down slightly from the 171 in 1H10. If we annualize the 1H11 totals, the 328 sales would be up 7 percent from the total of 307 sold in 2010. At the peak of the market in 2006, 1,191 properties sold in this submarket.
In the Queens submarket, most product types are still experiencing value reductions in average price per square foot. Within five product types here, values dipped in 1H11 from 2010 totals, while within three segments, values increased.
ALL OF THIS DATA lead to conclusions that are not necessarily unexpected. The Manhattan submarket is clearly leading the recovery and should help pull the other submarkets along with it. What is somewhat surprising is that value per square foot is not recovering as quickly outside Manhattan as we would have expected.
It appears that our real estate recovery is following the sluggish economic recovery that the nation is facing. We are lucky that we are in the New York City marketplace, which is doing relatively well compared with other locales. Notwithstanding how well we are doing here, things are still not all blue sky ahead. In June, the state unemployment rate rose to 8 percent from 7.8 percent in May. In New York City, the jobless rate increased from 8.6 percent to 8.7 percent. This is a troubling sign for the market given how impactful jobs are on our underlying fundamentals.
Even with a pace of activity that’s slower than we would like, and the outer boroughs on a difficult footing value-wise, we expect the second half of 2011 to firm up. We believe we are still on pace to see very healthy volume increases and values appreciating in Manhattan and stabilizing in the other submarkets.
COURTESY OF THE NEW YORK OBSERVER
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What’s Driving Investment Sales Right Now
Wednesday, August 03 2011 | 10:48 AM
Robert Knakal
Chairman,
MASSEY KNAKAL | During the first half of 2011 (1H11), the dollar volume of investment sales transactions in the New York City market was $12.6 billion. On an annualized basis, activity is on pace to increase by 73 percent over the 2010 total of $14.6 billion.
At face value, this number leads to an extremely optimistic perspective regarding the market’s performance. However, it is important to take a much closer look at the data, and realize that the market, while trending positively, remains uneven.
In the first quarter of 2011 (1Q11), there was approximately $4 billion of investment sales activity. We were pleasantly surprised by this number, having expected it to be more muted given the extraordinary activity in the fourth quarter of 2010.
Transactions that normally would have closed in 1Q11 were accelerated into 4Q10 based on lenders wanting to clean up balance sheets by year-end and a significant number of discretionary sellers who pulled the trigger last year in anticipation of a rise in the capital gains tax.
In 2Q11, there was a whopping $8.6 billion worth of transactions closed. This was the best quarter in 15, going back to the fourth quarter of 2007. Annualizing the 1H11 total shows $25.22 billion of expected activity for the year, which, as stated earlier, would be up significantly from the $14.6 billion in 2010.
A sector that has had a significant impact on the market’s performance is the larger transaction segment and, specifically, the number of $100 million-and-larger sales.
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concrete thoughts
What’s Driving Investment Sales Right Now
By Robert Knakal 7/21 12:26pm
During the first half of 2011 (1H11), the dollar volume of investment sales transactions in the New York City market was $12.6 billion. On an annualized basis, activity is on pace to increase by 73 percent over the 2010 total of $14.6 billion.
At face value, this number leads to an extremely optimistic perspective regarding the market’s performance. However, it is important to take a much closer look at the data, and realize that the market, while trending positively, remains uneven.
In the first quarter of 2011 (1Q11), there was approximately $4 billion of investment sales activity. We were pleasantly surprised by this number, having expected it to be more muted given the extraordinary activity in the fourth quarter of 2010.
Transactions that normally would have closed in 1Q11 were accelerated into 4Q10 based on lenders wanting to clean up balance sheets by year-end and a significant number of discretionary sellers who pulled the trigger last year in anticipation of a rise in the capital gains tax.
In 2Q11, there was a whopping $8.6 billion worth of transactions closed. This was the best quarter in 15, going back to the fourth quarter of 2007. Annualizing the 1H11 total shows $25.22 billion of expected activity for the year, which, as stated earlier, would be up significantly from the $14.6 billion in 2010.
A sector that has had a significant impact on the market’s performance is the larger transaction segment and, specifically, the number of $100 million-and-larger sales.
If you’re a frequent reader of Concrete Thoughts and you read my quarterly market overviews, you know that we look much more closely at the number of properties sold than to the dollar volume to get a true feel for market activity. This is due to the fact that the dollar volume of sales can be skewed very significantly by a few large transactions. If an asset like Stuyvesant Town/Peter Cooper Village sells for $5.4 billion, it can have a very significant impact on the marketplace. Similarly, last year’s $1.8 billion sale of 111 Eighth Avenue to Google represented over 12 percent of 2010’s annual city total.
If we consider the number of properties sold, we see that in 1H11, 960 properties were sold, which, if annualized, would yield only about a 15 percent increase over the 1,667 properties sold in 2010.
Comparing the two volume metrics, we see a projected increase of 73 percent in dollar volume, while on a number-of–properties-sold basis the increase is only 15 percent. Larger transactions account for this disparity.
If we look at the number of transactions that took place in excess of $100 million, we see that in 2009 there were only seven. In 2010, there were 29 of these sales and in the first two quarters of this year there have been 31, already eclipsing last year’s total. If we consider that these 31 transactions totaled $8.5 billion in sales activity, this represents about two-thirds of the $12.6 billion total of all 1H11 dollar volume.
Simultaneously, these 31 transactions, out of the 960 total, represent only about 3.2 percent of all properties sold. The activity in the over-$100 million market is also on pace to more than double last year’s total of $8.2 billion, as annualizing 1H11 activity results in a projection of approximately $17 billion for this year.
While the over-$100 million market is booming, with a projected increase in the number of sales on pace for a 114 percent annual increase, the under-$100 million market is not nearly keeping pace. In 1H11, the pace of sales under $100 million was set to produce an increase of just 13 percent and, if we look at the under-$50 million market, the contraction is even more severe.
Properties selling for less than $50 million saw 237 sales in 1H11 compared with 507 in 2010. Annualizing the 1H11 total, we extrapolate 474 sales for the year, a decrease of 7 percent from last year’s totals. This result was unforeseen and has been an eye-opener.
Additional data reinforce the trend of larger transactions gaining traction. In fact, in 1H11, the average property sold in New York City had a price of $13.125 million, shockingly exceeding the $12.4 million average in 2007, and setting a new all-time record for this statistic! (This average property price had dropped as low as $4.4 million in 2009.)
Clearly, dollar volume is increasing rapidly based upon the pace of mega-deals, while the number of properties sold is simply limping along, seemingly shadowing the molasseslike growth in our national economy. Notwithstanding the lackluster growth in properties sold, overall market activity, whether we look at dollar volume or number of properties sold, clearly demonstrates that 2Q09 was the bottom of the market in terms of the volume of sales.
If we turn our attention to property values, we see that the unevenness within the market remains, particularly in the outer boroughs and northern Manhattan.
In past articles, we have discussed the divergence between the fundamentals within the Manhattan submarket (south of 96th Street on the East Side and south of 110th Street on the West) and the other submarkets of New York City. These trends, while generally improving, continue.
In Manhattan, capitalization rates compressed for all product types in 1H11 versus 2010; however, if we look at average prices per square foot, we see that seven product types have experienced increases over 2010 levels and three product types have seen decreases. It seems counterintuitive to see cap rates falling and price per square foot falling simultaneously, but this dynamic can be explained by reductions in net operating incomes.
If rents are falling or stagnant (or even rising slightly as they are in some sectors) value per square foot can drop, especially with the increases in operating costs that we have seen on a year-over-year basis. These market conditions can easily produce these seemingly strange results.
In northern Manhattan and the outer boroughs, cap rates are mixed, compressing on some property types, while increasing on others. On a price-per-square-foot basis, cumulatively we see that 15 product types in the outer boroughs are up and 14 are down, demonstrating that these submarkets are still having difficulty finding a consistent recovery.
At the beginning of the year, we projected a 12 percent appreciation rate on a blended basis within the Manhattan submarket and expected to see values stabilize, i.e., to stop falling in the outer boroughs. We believe that what we are seeing from the market thus far in 2011 demonstrates that we remain on pace for these projections to hold.
In terms of number of properties sold, the Queens submarket demonstrated the most improvement in 1H11, with 164 properties sold, representing a 21 percent increase versus the 136 sales in 2H10. The northern Manhattan market improved the least, with 69 properties sold, representing just a 13 percent increase versus the 61 sales in 2H10.
By dollar volume, the Manhattan submarket improved the most, given the overwhelming number of $100 million-plus transactions here, with a 56 percent increase in activity in 1H11 versus 2H10 and a 124 percent increase versus 1H10. Northern Manhattan, again, improved the least, showing a 4 percent decrease in the dollar volume of sales in 1H11 versus 2H10 and a whopping 50 percent decrease versus 1H10.
As I have stated for several quarters now, the biggest potential land mine within the investment sales market is a potential increase in interest rates. The extraordinarily low interest-rate environment that has benefited us for quite some time has allowed for an orderly deleveraging of the market.
Properties that have significant negative equity positions have, in many cases, been able to maintain positive cash flow, thus treading water as owners and lenders hope for a viable exit strategy. Mortgage maturity is currently the biggest challenge for these assets as refinancing in today’s market cannot produce the same proceeds that were available in 2006 and 2007. Additionally, rates were so low at that time, mainly due to minuscule spreads over LIBOR, that extending these loans at anywhere near the old rate is not palatable for lenders today.
To the extent interest rates rise sharply, it could have a devastating impact on these properties, which are hanging on by a fingernail. We have seen distressed-asset sales continue but at a slower pace than last year. Through 1H11, in the note sale market, we estimate that there has been about $2.2 billion in activity, which would result, if annualized, in $4.4 billion for the year, well below the $6 to 7 billion that we believe occurred in New York City last year.
At the time of this writing, Congress has yet to approve a debt ceiling increase and the implications of a possible default on the country’s credit rating are significant. If interest rates are to remain at, or near, their historically low levels, it is important that Congress demonstrate leadership and an ability to control itself fiscally.
Now that the Fed has ended its QE2 asset-buying program, it will be very interesting to see the performance of upcoming Treasury auctions. At several of the last auctions, the Fed purchased as much as 70 percent of all Treasuries sold. If it doesn’t show up at the table, it could be mean significant reductions in the price of these bonds, which would exert significant upward pressure on rates.
We remain pessimistically hopeful that our interest-rate environment will stay low, buoying the marketplace for investment properties. If it doesn’t, it will create even more issues for those who took advantage of all the leverage the market had to offer.
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Westfield Closes in on £550m Stratford City Bank Financing
Wednesday, August 03 2011 | 08:47 AM
James Wallace
Finance Editor,
COSTAR | Westfield, the Australian property developer, is expected to close a circa £550m five-year senior debt finance package for its Stratford City shopping centre with a consortium of three banks by the end of August.
Eurohypo, HSBC and Credit Agricole CIB are the joint lead arrangers on the finance and will underwrite a third of the deal each, at around £180m.
Pricing on the debt is thought to be around 225bps to 250bps over LIBOR, with either an increased provisional margin during tail end of construction and until near full occupancy is reached or alternatively Westfield will not draw down the debt until construction is finished and full occupancy is achieved.
The club deal is expected to reflect a leverage in the low 50s LTV. Savills has been appointed by Westfield to carry out a valuation of the shopping centre, assuming full occupancy at desired rental levels. The gross development value of the east London shopping centre is £1.45bn.
The bankers are “locked in rooms with lawyers as we speak with everyone aiming to close the deal within the next three, maybe four, weeks”, said a person familiar with the deal.
The total cost of the financing for Westfield, assuming it is fixed against the five-year swap rate, which as at yesterday was 2.05%, will be around 4.3% to 4.55%.
The three banks are expected to hold a final hold of around £50m to £75m.
The remainder will be distributed through a co-ordinated sell down into the syndication markets, with the German pfandbrief-funded banks and real estate debt funds the likely partners. Possible syndication partners include Deutsche Pfandbriefbank, DekaBank and Heleba as well as funds like AXA Real Estate Investment Managers’ Commercial Real Estate Senior 1 fund.
This process is already under way with around a dozen potential debt investors having approached or been approached by the three banks’ syndication teams, with preference for between four and five investors which are able to take close to a £75m-sized position.
The interest in the shopping centre debt finance has been considerable, because of its near full occupancy even at prelet status in a major geographical location for London in a part of the capital which is benefiting from huge regeneration.
The 1.9m sq ft shopping centre is adjacent to the Olympics site and is due to open in mid-September and as at May was 79% prelet to tenants including anchors John Lewis with Waitrose, as well as Marks & Spencer, New Look, Reiss and Hugo Boss.
Westfield sold a 50% stake in the Stratford City shopping centre to two pension funds in December of last year - Algemene Pensioen Groep and the Canada Pension Plan Investment Board - for a combined £871m. The two pension funds we advised by Henderson Global Investors.
Westfield and all banks declined to comment.
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Loan Sale Market Update Q-3 2011
Tuesday, August 02 2011 | 01:54 PM
Patrick Blount
President / CEO,
BENEWOLF, LLC | I wrote in early 2011 that the loan sale market appeared to be strengthening, that bid prices were steadily increasing and sellers were finally pulling the trigger on select transactions. It appeared that the much maligned extend and pretend, pray and delay, modify and pacify tactics employed by most banks since 2007 had worked in their favor and we were about to finally see significant reductions of non-performing loans purged from balance sheets. Not so much.
From what I am seeing today the market is in the “Junior High Phase,” where everyone is talking big about what they are “going” to do… but no one has “actually” done it.
I have personally heard numerous banks talk about their intent to offer billion dollar plus portfolios of distressed loan assets in 2011 and I have physically reviewed a significant number of very large portfolios but I have not seen anyone actually coming to the market with these assets much less pulling the trigger on a sale.
The CMBS markets appear to be a closed shop limited to very few buyers mostly consisting of Special Servicers exercising their first right of refusal to purchase. The prices I see quoted on reports from groups such as Realpoint or Trepp are sub 50% of the unpaid loan balance and appear to be much lower that what I see and hear "banks" are receiving on similar credits which leads me to believe that if they “were” marketed in a “competitive bid” situation it was only to justify the Special Servicer’s low bid.
The super regional and money center banks appear to be selling off select or easy to sell assets like multifamily or actual income producing loans themselves at reasonable prices but are leaving themselves with the “ugly,” more difficult loans in their held portfolio which will likely eat up any upside they received on the early “easy” sales when they finally do reach the market.
The unhealthy regional banks and the vast majority of community banks are still out of the market because insufficient capital prohibits them from taking the necessary market discount to sell non-performing assets in bulk.
There are definitely a huge number of buyers waiting for a wave. Most are extremely frustrated by the continued calm seas. It will be interesting to see if the fourth quarter produces the typical wave action and if any lenders will graduate junior high and actually prove up their boasts. My prediction is; that if the numbers of loans actually show up on the market as touted, that prices will “fall” significantly from those seen in the first three quarters of 2011.
The delay and pray ploy certainly got us from 30% to 65% bid levels since late 2007 however I don’t think we can expect to see the same type jump from 65% plus. Sellers, you may have missed your window.
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RCA mid-year reports; “above all, be true to yourself, and if you cannot put your heart in it, take yourself out of it.”
Monday, August 01 2011 | 09:20 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | one of you guys wrote me last week asking why i hadn’t mentioned RCA’s Mid-Year Reviews. i think it was because i can’t believe we are this far into 2011 already. but now that i’ve overcome that, here are some take-aways from the RCA reports:
Sales Surge at Mid-Year: Extend and Pretend Kicked Down the Road
Investment volume surged to $55.6b in Q2, a 117% increase from a year earlier
and totaling just shy of the year-end spike in transactions recorded in Q4’10. The acceleration in sales cut across all property types but was led by retail property sales of $15.2b. Prices were generally stable or improved over the quarter, but the dichotomy in pricing between the favored major markets and all others persisted, with some closing of the gap noted in the apartment and retail sectors.
New offerings also surged in Q2 and totaled $76.2b as improving prices have encouraged many more investors to list properties for sale. The volume of offerings in Q2 jumped 79% from a year earlier, the highest yoy gain since 2005, a point marking the end of the previous post recessionary period and the beginning of the pre-crisis property boom. Most property types should readily absorb this new supply of offerings, except the industrial sector, where offerings exceed closings by more than 2:1.
before sharing more of RCA’s mid-year commentary i have one comment to make:
the FDIC is doing a disservice to the industry, the American economy and the American people by allowing banks to extend loan maturities. they are trying to do something different than the RTC did and for which the RTC came under significant criticism. but, if the hope, and i can’t see it as anything more than hope, is that they’ll continue to allow this until the real estate market ‘picks up’, well, i’d like to know when in their crystal ball they see that coming. oh, wait a minute, i seem to recall reading somewhere : it’s going to be march 24th 2012. sorry, but these assets should be cleared now. will banks take losses? sure. but the positive contribution that this will make to the industry will be a good thing. i know from talking with people on this that there is a lot of dissenting opinion and i fall back on ‘who knows?’ just a thought…now on with the RCA stuff:
1. Hotels: the hotel market continues to move smartly forward, with sales in Q2 of $4.7b providing the fifth consecutive quarter where volume increased by more than 150% year-over-year (yoy).
2. Industrial: with $6.6b of significant sales in Q2, the industrial property market had its second most active quarter since Q4’10, and enjoyed a 64% gain year-over-year (yoy) from the same quarter last year. the growth was fairly even across both sub-types, with flex boosted by the big-ticket sale of huge showrooms in Las Vegas and North Carolina.
3. Retail: the second quarter marked a breakout point for retail properties, with $15.2b in sales volume bending the growth curve skyward to 337% year-over-year (yoy), the highest of any property type. More strip centers changed hand in Q2 than in all of 2010 in the wake of the Blackstone/Centro deal. even excluding that benchmark transaction, yoy gain in Q2 was a respectable 75%, an acceleration from Q1. volume in the mall & other subtype rose 66% in Q2 from the year-earlier quarter. cap rates overall were relatively unchanged in Q2 and are at slightly lower levels than at the beginning of the year.
4. Apartments: with nearly $14.0b in volume, the sales trajectory for apartments was phenomenal, turning in the most active quarter since Q4’10. transaction volume surged 132% on a year-over-year (yoy) basis, a strong acceleration over Q1’s 72% increase. pricing has been stable, with average cap rates steady in Q2 and down only slightly from the beginning of 2011, while average pricing has remained near $100,000 per unit.
5. Office: with sales of significant properties reaching $14.0b in Q2’11, the office sector enjoyed its second best quarter since the financial crisis. Q2 office volume was up 50% year-over-year (yoy), a slower increase than the overall market, yet the sector was the first to witness a spike in activity beginning this time last year. sales of CBD properties, at $7.8b in Q2, were up 66% yoy buoyed by DC and Manhattan, which accounted for more than half of total volume. cap rates fell slightly nationwide but are only marginally below levels recorded at the beginning of the year.
i was interviewed this week for the 2012 edition of a well-known industry report. i knew that i had left my own crystal ball somewhere in my house (or maybe the FDIC had borrowed it) but try as i might i couldn’t find it so i had to wing it. actually, the questions i was asked got me thinking about what i’ve seen, what i’ve heard and what i believe....about the overall economy, about capital markets, about property types, about debt, about whether the situation with the banks (i refuse to write E&P) will end up being good or not, etc. this was no ‘puffy’ interview. and i too will have to wait to see what some of my industry colleagues had to say and what they were thinking in the middle of the summer of 2011 about our vision for 2012. fortunately, the interviews are confidential and there are no attributable quotes....that’s a relief!
have you ever wondered why someone comes into your life at a certain time? or why you hear a song that means so much to you just at the time you needed to hear it. or when something arrives in your mailbox and it says things that you’ve been thinking or that you read at another time in your life but the day it appears is the day that you needed reinforcement? well, that happened to me this week when an email called “Zen Habits” arrived.
a guy named scott dinsmore of Liveyourlegend.com wrote this special guest post on Zen Habits. maybe some of it has meaning for you too.
1. surround yourself with passionate people.
2. create space. If you don’t give big ideas room, they’ll never show up.
3. help someone in a way only you can.
4. keep a journal of what inspires and excites you.
5. challenge the norm.
6. scare yourself – live outside your comfort zone.
7. find the right reasons. you can’t control what happens but you can control your reaction to it. what challenges have come up today? How could you reframe them? the juiciest possibilities often have the best disguises. notice them.
8. learn something new.
9. the point is to constantly fuel something that interests you.
“above all, be true to yourself, and if you cannot put your heart in it, take yourself out of it.” Hardy D. Jackson
enjoy your weekend.
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Edinburgh House Completes €450m Refi
Thursday, July 28 2011 | 04:15 PM
James Wallace
Finance Editor,
COSTAR | Edinburgh House Estates’ near €450m of real estate debt has been extended by up to four years after passing its maturity deadline this week, CoStar News can reveal. The arrangement is one of the biggest securitised debt extensions since the credit crunch.
Property asset manager Edinburgh House Estates has negotiated a refinancing of the outstanding balance of €442m comprising €388.2m in senior debt and €53.7m in a junior loan at its interest payment date (IPD) this week.
The value of the 42-strong German commercial real estate portfolio was €318m, according to a July independent valuation, compared to the €442m remaining debt. As a result, the overall LTV ratio at the July IPD was 138.9%, while the senior portion was 122%.
EHE was advised by Andrew Haines and Sam Mellor, part of the team which recently moved to Chenavari Investment Managers, the investment and advisory asset manager.
The underlying portfolio of over 42 properties will continue to be managed by Estama GmbH, the German asset management company with over €3bn under management.
The initial debt extension is until October 2013 with a clause for two additional one-year extensions, which can be exercised in October 2014 and 2015, respectively, subject to repayment conditions.
The weighted average remaining lease term was five years while the occupancy level was 96%.
The loan was part of the circa €1bn Natixis-lead Infiniti SoPrano CMBS issuance in 2007. Natixis also hold subordinate debt in the transaction along with Blackrock both of whom were understood to have been involved in the negotiations.
Haines, partner at Chenavari, said “We are delighted with the successful conclusion of this loan restructuring. Transactions such as this with multiple investors and advisors are difficult to execute, but with a strong, respected borrower and sensible business plan, we were able to get all the lending parties on board.”
Bobby Sheehan, director of EHE, said “In a challenging time for refinancing, we are pleased to have agreed these terms with our lenders and continue our strong relationship with them. This is testament to the strength of our asset management team and an endorsement of our ability to deliver maximum returns over the longer term”.
Special servicer, Capita Asset Services, said in a statement: “Given the high LTV, the underlying real estate fundamentals, the impending maturity date and Edinburgh House Estates being unwilling or unable to contribute capital, the opinion of the servicer was that there was no reasonable prospect of repayment.”
“In the circumstances, the realistic alternatives were therefore to either negotiate and agree restructuring terms with the multiple loan and securitisation counterparties or enforce the security on the maturity date and engage in the process of selling the Reference Properties Pool through the German law insolvency procedures."
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CoStar Exclusive: Chenavari poaches Etesian trio for debt venture
Tuesday, July 26 2011 | 10:18 AM
James Wallace
Finance Editor,
COSTAR | London-based hedge fund Chenavari Investment Managers has poached Andrew Haines, Sam Mellor and Duncan Elley from Etesian Capital Partners to expand their activities in real estate debt investment and advisory.
Haines, Mellor and Elley, who joined this week, have worked together for seven years, including a stint at Capmark, since rebranded Capita Asset Services, before setting up Etesian Capital Partners in 2008.
They subsequently entered into partnership with property company Levanter. Together the team have sourced and executed more than €5bn of transactions.
At Chenavari, Haines and Mellor, who join as partners, and Elley, who joins as a director, will be responsible for sourcing and investing in real estate debt, including CMBS bonds as well as mezzanine and preferred equity positions throughout Europe.
Chenavari, headquartered at 1 Grosvenor Place (pictured above), already has committed capital of $1.8bn, with the team’s target to invest around $350m in year one. The team has already closed its first investment: the purchase of a €7m mezzanine loan secured by retail and multi-family commercial real estate in Germany.
Haines, Mellor and Elley built up a portfolio of debt restructuring and raising mandates at Etesian, including acting as debt advisor on Edinburgh House Estates’ €500m German loan portfolio, for which the team has retained the brief.
In a joint statement, Haines and Mellor, said: “Chenavari’s reputation and success will provide an extremely strong platform to enable us to continue to invest in real estate transactions alongside the many property companies and partners we have worked closely with over the last 15 years. The ability to make significant investments across the capital structure without arbitrarily restrictive criteria allows us to add scale to the successful investment strategy we have been running previously.”
Loic Fery, managing partner at Chenavari said: “Our investment philosophy is to be focused on complex credit market opportunities where specific asset collateral expertise allows to generate a specific alpha. Beefing up our capabilities in real estate debt investment is a logical and complementary step in the continuation of our existing activities in European structured finance.”
Frederic Couderc, managing director of Chenavari, added: “We are pleased to welcome Andrew, Sam and Duncan as senior members of the Chenavari investment teams. We intend to deploy significant capital in the real estate space as we see it offering an attractive risk/return profile."
Chenavari set-up in London in 2008, and now has more than 40 staff with expertise in corporate, high yield and structured finance debt markets. Chenavari’s Toro 1A fund – which invests in European RMBS, CMBS, CDOs and balance sheet CLOs – has delivered a return of 27.8% over the first six months of 2011 and 338.7% since the fund was launched just over two years ago in June 2009.
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Why the Bloods, Crips and Latin Kings are the key to solving the budget deficit
Monday, July 25 2011 | 12:40 PM
William Procida
President,
PROCIDA FUNDING, LLC | Got your attention? Yes, it's true: America's gangs hold the key to solving the budget deficit and curing many of our country's other problems.
But let's focus on the deficit. It's no secret that other than military spending and over-supporting foreign countries, the biggest drain on our country is all that comes with the despair and poverty in the inner cities. Downtrodden neighborhoods cost more to police to maintain than thriving neighborhoods, and they produce no tax revenue. The expense is staggering.
Back in the 1980s, I was privileged to have been selected by then-Mayor Ed Koch to redevelop the Fort Apache section of the South Bronx - one of, if not the single most dangerous places in the country. Thus, it was one of the most expensive for the city to maintain, produced no tax revenues and was home to plenty of human despair. We built over 2,000 homes, as well as several retail centers.
As a result, the neighborhood became safe, cost less to maintain and started to produce revenues from property and sales taxes. Last but definitely not least, the kids - who grew up in the new South Bronx with clean streets, seeing people going to work and maintaining their homes - have become doctors, lawyers and teachers. For many, it changed the direction of their lives and they now produce tax revenues, as opposed to being jobless and draining the government purses.
I think most folks would agree with the basic premise that if you turn dangerous blighted neighborhoods into thriving ones, it's a net positive economically and sociologically. So where do the Bloods, Crips, Latin Kinds and other gangs fit in, and how can they help?
Since the 1970s when our inner cities became blighted, the government has proven that it can't solve the problem. New York outer-borough rebirth was a result of communities coming together in a massive way, initially with some financial support from the government. There is so much more to do and the government simply does not have the money or human resources to accomplish it all. So who does? All of the aforementioned gangs, of course.
It's a pretty simple premise, convince gang leadership that there is more money to be made redeveloping real estate than from any other gang activity, and you get a hug from people for doing it, versus going to jail. Get rich and hugged, respect and no jail? It's an easy sell. And it's true.
The fact is that gangs have their boots on the ground and they possess the money to renovate these neighborhoods and keep them safe. If we convince them to do it, these neighborhoods will produce increased property taxes and cost less to maintain, not to mention increase the income taxes and produce kids who will hopefully go to college and become productive taxpayers themselves.
Data shows that kids join gangs to be part of a family, not simply to do illegal activities. So all we need to do is redirect that energy. These are smart businessmen who are very organized and everywhere we need them. If you convince the guys at the top they can press a button and turn the worst hood into the safest overnight.
Training them to be real estate developers, contractors, and agents is the easy part. How to let them use their money to revitalize their neighborhoods might be a little trickier, but a simple tax amnesty program might be worth a try. They're not paying their taxes now, so if we let them use their money to renovate a bad neighborhood and pay property and income taxes after, a tax amnesty program it's a no brainier. Especially if they reduce crime and change the entire purpose of the gang culture. Can you imagine gang members 10 years from now being the most respected members of their communities, versus the most loathed and feared? It is possible.
Today's gangs need to learn from gangsters of the past: the original Mafia. The Mafia 1) never called themselves gangs, and instead they were families; 2) they made sure their neighborhoods were safe and clean; 3) they invested in real estate, which is why there are no third-generation gangsters. By that time, they're all businessmen. If you don't believe that crime families can produce productive citizens, just look at the Kennedys.
Leadership on the government's part would be required, but can be done at no cost to the tax payer. The good thing is there are probably only a few dozen gang leaders who are at the highest level, known as the ruling committees. If they buy in, they can press a button and make it happen for everyone.
Imagine if President Obama or Governor Christie would reach out to these leaders personally and say " your country needs you and I can't do it with out you " cost to tax payers ... zero. The gang problem is one of the biggest problems our country faces and substantially contributes to the deficit. If our leaders took this proposal seriously I would work for free forever to try to make it happen. 1) it's doable 2) one day when I'm (hopefully) a grandfather I don't want my grandkids to say "grandpa the country's bankrupt....Why didn't you do something to prevent it?" Words I hope to never have to hear! But the way this country is going I probably will.
Gang summit ... cost to taxpayers ...zero . If we get a few to buy in " home run " !!!!!
If you agree pass it on .
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Deustche Pfandbriefbank to Lend Up to £2.7bn Against UK Property By End 2013
Monday, July 25 2011 | 09:55 AM
James Wallace
Finance Editor,
COSTAR | Deutsche Pfandbriefbank has said it will lend around €18.5bn to €20.5bn against European real estate over the full three years to the end of 2013.
It is expected that DPB will increase its current 9% UK loan book weighting to up to 15% over the full three years to the end of 2013, which would see the German bank lend as much €3.1bn, or around £2.7bn, against UK property. DPF’s “good bank” European loan book is currently €25bn.
"This is an ambitious but potentially do-able target," an expert commentator said.
The lending target disclosure came in an analyst call today following the European Commission’s approval of the conditions attached to the state aid the government-owned bank received at the height of the financial crisis.
As part of a strict series of conditions attached to the aid, Hypo Real Estate, the group out of which the “good bank” Deutsche Pfandbriefbank was formed, was ordered to withdraw from public finance lending.
As a result, DPB’s aggregated lending targets for the next three years need to be reduced by 20%, which reflects the expected proportion of its previously planned public finance lending. On this basis, DPF’s lending target this year is €6.5bn, followed by between €6bn and €8bn in 2012 and a further €6bn in 2013.
An agreed timetable for DPB’s return to the private sector has also been confirmed with the EC but remains undisclosed.
Manuela Better, CEO of Hypo Real Estate Holding AG and Deutsche PfandbriefbankAG, said: “Although the conditions imposed are very extensive, they offer sufficient potential for the success of the realigned pbb Deutsche Pfandbriefbank on the credit and capital markets. The bank has been profitable since the third quarter of 2010, and we also posted a profit for the second quarter of 2011 – as expected.
“Our goal is to prepare pbb Deutsche Pfandbriefbank for reprivatisation – which is also a requirement stipulated by the EU Commission.”
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food for thought and building your own digital cookbook....
Monday, July 25 2011 | 09:07 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | it¡¦s a sweltering summer throughout most of the country (it'll be 101 in new york today!) but business goes on. years ago, many saw the summer as slow-down time, people are on vacations, leaving early (at least on fridays) and so it became sort of a self-fulfilling prophecy. but i firmly believe that business is almost as intense during the summer as it is during the rest of the year. yes, people take vacations when you¡¦d really like them to be waiting for your call or answering your email. but that doesn¡¦t mean that things come to a standstill....it¡¦s that things require more patience, which, is truly a virtue.
a very interesting report was published this week by egon zehnder international and mckinsey & company. the title: return on leadership. a few morsels:
„X nothing matters more than customer impact
„X understanding the evolving needs of customers in detail
„X customer orientation is a key leadership competency necessary for improvement (along with people development and change leadership)
„X there is no standard skill for success but...
„X the organic revenue growth a company achieves by capitalizing on market growth of existing segments requires
„X outstanding, consistent execution across the organization and, often, across the globe which is driven by...
„X a strong cadre of senior managers (e.g. not the top team) who excel at business and people leadership
„X the senior management of companies with top-quartile portfolio momentum growth excelled in three key leadership competencies...
„X developing organizational capability
„X a systematic focus on developing critical skills throughout the organization
„X team leadership
„X the ability to focus, align and build high-performing teams
„X change leadership
„X the ability to drive large-scale, coordinated change across the entire organization
„X to summarize:
„X competencies for successful growth strategies require:
„X customer impact: continually takes action to add value to the customer
„X market insight: looks beyond current context
„X results orientation: drives uncompromisingly for higher performance
„X change leadership: advocates change
„X team leadership: actively involves team
„X collaboration and influencing: motivates others to work with self
„X strategic orientation: defines strategy for own area
perfect for a busy friday travel day: top 10 pet peeves of usa today's frequent business travelers (i¡¦ve added some of my own comments in bold type). btw, don¡¦t most of these relate to simple common courtesy and common sense?
1. loud cell phone conversations. (i put earplugs in as soon as i board to try to control my own environment as much as possible).
2. people who disobey the rules and try to carry on too many bags or carry too much liquid through security.
3. people who play music so loudly, even with earplugs or headphones, that others can hear it.
4. disrespect that passengers show to flight attendants and gate personnel.
5. parents who don't try to control their children. (rampant problem. neither flight attendants, nor teachers for that matter, are responsible for either teaching their children manners or disciplining them. that¡¦s a parental job).
6. people who think the "turn-off-all-electronics" message is not for them. (these people did things behind the teachers¡¦ back as well).
7. passengers who carry on and eat messy or smelly food. (smelly is the problem).
8. people who board with multiple or oversize bags and fill the bins in the front of the cabin when they're seated in the rear. (just plain rude but i know many flight attendants watch for this).
9. reclining a seat in a tight coach cabin. (these people are just plain scum.)
10. Leaving a window shade open when everyone else has closed theirs and is trying to sleep.
build your own a la carte digital cookbook! on tuesday, cookstr launched its first collection of ibooks recipes on apple's ibookstore, presenting renowned chef and cookbook author rozanne gold's 1-2-3 collection. fifteen years ago, gold started a revolution around the idea of simplicity in cooking. today, her exciting three-ingredient recipes, available for the first time digitally, are breaking new ground in a format designed for in-kitchen use. each recipe is 140 words or less. there are 250 recipes ($9.99), which can also be purchased separately by theme ($3.99 for 50 recipes) or chapter ($0.99 for 10 recipes). this is extremely cool and, in the spirit of full transparency, I know rozanne and her husband, the highly sought after international restaurant consultant, michael whiteman. but this is just one great use of technology and could even get me to start cooking!
and, just a little more food for thought for the weekend. a friend suggested I read the book ¡§how life imitates chess.¡¨ i went through the book last saturday and pulled some stuff out that i¡¦d like to share with you:
„X you need to be able to identify your mistakes and analyze why you made them.
„X ¡§the man who knows how will always have a job. the man who also knows why will always be his boss.¡¦ ralph waldo emerson
„X having a vision is not enough; if you fail to envision the potential of your creation, it will be left for others to exploit. what you need is a vision and the ability to develop a strategy to achieve it.
„X don¡¦t spend so much time worrying about the other guy that you lose sight of your own goals and your own performance.
„X how much more affective would you become if, at the end of each day, you asked yourself what lessons you had taken away for tomorrow?
„X ¡§if a man has a talent and cannot use it, he has failed.¡¨ thomas wolfe
„X dedicate yourself to making the time, finding a space in which you can think and learn and finding new ideas with which to shock your adversaries. (note: i was out to lunch this week with a good friend at a chinese restaurant in new york that has really smartly priced lunch specials in a very nice setting. the fortune in his cookie was, ¡§always do right-this will gratify some and astonish the rest.¡¨ pretty heavy for lunch i¡¦d say).
„X ¡§what you can do or think you can do, begin it. for boldness has magic, power and genius in it.¡¨ goethe (i first saw this quote when i was a consultant to herb kohler at kohler company. i think it¡¦s one of the most powerful things i¡¦ve ever read. the challenge is to do it!).
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Upcoming Distressed Loan Workout Events
Wednesday, July 20 2011 | 11:17 AM
Patrick Blount
President / CEO,
BENEWOLF, LLC | After thirty-five (35) years in the commercial real estate business, the past twenty (20) in distressed loan sales, it is fair to say that I have been to a few conferences. I have been on the board of directors for a number of years of both the Risk Management Association (RMA) and of the Turnaround Management Association (TMA) serving as President of the TMA Oklahoma Chapter for 2010 and as such produced and hosted many distressed asset events.
Many of the distressed asset events I attend have a large number of "service providers" and small number of "lenders" represented and typically very few "qualified" bankers in attendance. I attended my first IMN event in February 2011 in Ft. Lauderdale and my next in March in New York. At both events I was pleasantly surprised at the number of executive level bankers in attendance and even more surprised at their interaction.
Although the agenda was quite packed, with most panels sitting less than an hour, the message was on point and the interactivity between the panelists and attendees was not just informative but immediately useful. I could see where an attending seller or a buyer of distressed assets could go back to the office the following day and successfully implement many of the ideas and best practices.
I was impressed enough to commit both Benewolf and my partner Sperry Van Ness to attend, speak and sponsor three (3) more events in 2011. I heard it said at the February IMN event that 2011 is "the year of the loan sale." I began believe it then, I definitely believe it now. Come join us in September in Chicago and Los Angeles and in Dallas in December, you will not be disappointed.
www.imn.org
Bank & Financial Institutions Special Assets Executive Forum on Real Estate Workouts
Chicago, IL - September 12-13
Los Angeles, CA - September 23-27
Dallas, TX - December 5-6
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Anglo’s $10bn US Loan Sell-off is A Question of The Time Value of Money
Tuesday, July 19 2011 | 03:09 PM
James Wallace
Finance Editor,
COSTAR | It is a busy summer ahead for Anglo Irish. Or more acutely, investment bank Eastdil, who four weeks ago was appointed as sales agent for the disposal of Anglo’s mammoth $10bn US commercial property loan portfolio.
Anglo’s decision, of course, will not have been its own. Fully nationalised, the Irish government is the bank’s sole shareholder. A shareholder that is beset by much deeper financial crisis than have the luxury of time to work with the borrowers and manage out the bulk of the 248-strong loan portfolios until maturity.
It is a question of the time value of money. Read all about it here. Contrast this to the strategy employed by the UK semi-nationalised banks, who appear to have time much more on their side.
It took RBS a very long time – somewhere between 12 and 15 months – To sell-off £1.4bn, Eastdil are attempting to sell $10bn for Anglo within 90 days. Of course the massive difference is the two markets in which the product is pitched to.
In Europe, the market so far has been to leverage up debt sales in fund structures – wrapping up loans in special purpose vehicles loaded with new vintage debt to reach the IRR demands, the private equity product-buyers demand. These “Isobel-like” debt fund structures have precedent dating back quite far.
Credit Suisse arranged two such joint ventures in its great €10bn European real estate look book sell-off in recent years: a €2bn loan portfolio sold to Lone Star in September 2009 and a €900m loan portfolio sold to Apollo. Credit Suisse packaged the loans into special purpose vehicles, financed both funds with senior debt, and retained a 49% equity stake in the joint ventures.
Last week, CoStar News revealed that the two of Credit Suisse own bankers are off to Forum Partners, the real estate adviser mandates to manage the equity positions on behalf of the Suiss investment bank.
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Rent Regulations: the Good, the Bad and the Endlessly Ugly
Monday, July 18 2011 | 10:28 AM
Robert Knakal
Chairman,
MASSEY KNAKAL | While the recent extension of New York’s rent-regulation system came as no surprise to the vast majority of participants in our multifamily market, the results were still disappointing and have left many owners concerned that if this is the result obtained with a Republican-controlled Senate, what would occur with Democrats in power? Yes, the renewal terms could have been much worse, but that doesn’t diminish the negative implications this has on our housing market.
Let’s take a look at the terms of Chapter 97 of the Laws of 2011 and their potential impact.
RECENTLY, LEGISLATORS VOTED to extend New York’s rent-regulation system until June 15, 2015. Let me begin by saying that I am an advocate for affordable housing in New York. The diversity of our population is a key ingredient to the vibe of the city, and quality housing for those occupying the full range of the socioeconomic spectrum is critical.
Unfortunately, this piece of legislation is perhaps the most ill-conceived and inefficient public subsidy program Albany has ever enacted. Rent regulation is just that, a public subsidy akin to welfare or food stamps that allows some residents to receive benefits randomly. Distribution of the benefit is based on inertia (and often luck) rather than economic need, as people staying put the longest are the most likely to receive benefits. This system leads to a gross misallocation of our housing stock.
In past Concrete Thoughts columns, I have used the analogy of having the city hand out food stamps randomly to everyone walking out of Grand Central as a better-conceived program for distributing public assistance. The subsidy handed out under rent regulation is, in some cases, enormous and may be given to those who have absolutely no need for it.
Price controls of any type create problems for a marketplace. With regard to rent regulation, the misallocation of housing occurs because, with rent levels artificially depressed, the real estate taxes collected on properties with these controls are artificially less than they should be, creating artificially higher real estate tax burdens on all New York residents who are not rent-regulated.
Additionally, while there are about 3.3 million dwelling units in New York City, about one million are regulated, essentially leaving 2.3 million options for someone looking to move into the city. This constrained supply leads to free-market rents being artificially higher than they would be otherwise. Rent-regulated tenants are reluctant to move, often leaving a family of five cramped in a small two-bedroom apartment and an individual tenant occupying a six-room apartment. In the absence of controls, it would be much easier for these tenants to find appropriately sized units, priced appropriately.
THE MOST SIGNIFICANT changes to the recently renewed law include making it much more difficult to remove units from the subsidy program under both types of luxury decontrol (high rent and high income).
The high-rent decontrol threshold was raised from $2,000 per month to $2,500. Under this rule, vacant apartments with legal rents in excess of $2,500 per month are no longer subject to rent regulation. Notably, any units that were deregulated due to rents being above the old guideline of $2,000 per month are not reregulated if they are currently renting for less than $2,500. This change took effect on June 24 and the threshold will apply even if the next tenant, or any subsequent tenant, pays a rent under $2,500.
With respect to the other form of luxury decontrol, the high-income threshold was increased from $175,000 to $200,000. This threshold applies if that income level is achieved by the tenant for two consecutive years and the legal rent exceeds the $2,500-per-month hurdle. This element of the law is completely backward.
Consider this: Any nonregulated resident of New York is effectively subsidizing all regulated tenants. If an apartment has a free market value of $2,700 per month and a rent-stabilized tenant is paying $2,450 per month, upon lease renewal this tenant’s rent will exceed the $2,500 threshold. If that tenant has earned more than $200,000 for the past two years, that unit will become deregulated. However, the subsidy that all nonregulated residents are paying is about $200 per month.
If, however, a tenant earning over $200,000 per year is paying only $700 per month, the subsidy all nonregulated residents are contributing toward is $2,000 per month, a much more burdensome figure. This is why if a tenant is making over $200,000 per year (and some may be making millions per year) he or she should be deregulated if his or her rent is under $2,500 per month, not over $2,500 per month. Does anyone really need public assistance if they are making over $200,000 per year?
Additionally, manipulation of income to skirt this aspect of the law is quite easy and is the reason why a three-year income-averaging approach should be used. I had a client once who sold over $7 million of investment properties in one year and delayed the closing of an additional $5 million of properties the following year until after Jan. 1 simply to protect his $1,200 three-bedroom on 74th Street off Park Avenue. Obviously, this is an extreme example, but you get the point.
This new high-income threshold kicked in on July 1. The old hurdles of $2,000 per month and $175,000 of income will still apply for all proceedings commenced prior to July 1 of this year.
Why shouldn’t all rent-regulated tenants be required to prove eligibility to receive this public subsidy? After all, I don’t think anyone wants to see a protected tenant with modest income get displaced, or to see grandma on fixed income get kicked to the curb by Mr. Potter. Means testing would eliminate many of the inefficiencies within the system and eliminate much of the litigation that regularly occurs between owners and tenants, making for a more harmonious relationship between the two.
Tenant advocates claim that means testing is “too cumbersome” to implement. That’s crazy. Any tenants receiving Section 8 benefits must prove their eligibility. So, too, must residents within the 20 percent component of 80/20 buildings. Most residents file New York State tax returns, making this process relatively easy. Placing the burden of proof on the tenant would eliminate much of the alleged “harassment” that occurs when an owner initiates litigation to determine the tenant’s income. While advocates see this as harassment, there is really no other way for an owner to determine a tenant’s income.
AN ADDITIONAL TANGIBLE change to the law impacts the mechanism related to Individual Apartment Improvements. For buildings containing fewer than 35 units, the I.A.I. guideline remains at 1/40th of the improvement cost as a monthly adjustment to the rent. In buildings with more than 35 units, the passthrough has been lowered to 1/60th. This change takes effect on Sept. 24, 2011, but the language in the law is unclear and will undoubtedly be subject to interpretation by the state Division of Housing and Community Renewal or, perhaps, the courts.
The timing of the change is linked to the Sept. 24 date “where such adjustment takes effect.” Presumably, this means a time no sooner than the date of completion of the work, but does it mean when the work is indeed completed? The date the lease is signed? The date the tenant moves in?
The biggest problem with the new 1/60th rule is that it erodes an underlying incentive to encourage the private sector to upgrade the quality of the housing stock. After hundreds of buildings were abandoned or burned during the 1970s, I.A.I. and the Major Capital Improvements increases motivated private owners to pump billions of their dollars into multifamily properties, which led to the generally excellent quality of today’s housing stock.
Fortunately, the M.C.I. passthrough was not altered as proposed by a bill passed by the New York State Assembly, which would have reduced the M.C.I. increase to a subsidy that would evaporate after repayment. That would have been devastating for the market.
THE RENT GUIDELINES BOARD recently passed a 3.75 percent one-year increase and a 7.25 percent two-year increase for leases beginning in September. The sublet allowance was maintained at 10 percent. Additionally, the vacancy allowance remained at 20 percent; however, it can be used only once in any calendar year. It is unclear whether any other increases are possible within that calendar year if the vacancy bonus is utilized.
The rules regarding preferential rents remained unchanged as it was confirmed that preferential rents are only for the period of the lease in question.
Two other items the industry was hoping would be part of this extension would address the 421-a and J-51 programs. The 421-a was extended, with certain limitations, provided that any eligible development must apply to the city for a Preliminary Certificate of Eligibility before June 23, 2012. Unfortunately, the uncertainty regarding the fate of J-51 buildings was not addressed. This would have been a perfect time for a legislative solution to the quagmire created by the Roberts decision. A judicial solution will likely take years, leaving the fate of thousands of units unclear.
OUR RENT-REGULATION system provides protections for hundreds of thousands of people who need and deserve the protection. Unfortunately, there are probably hundreds of thousands of others who do not need this subsidy, and that leads to adverse conditions for all nonregulated New Yorkers. Why not ask that recipients of this subsidy demonstrate that they qualify for this benefit?
A combination of higher rents and higher taxes burdens the system unnecessarily. As property values dropped during this recession, real estate taxes continued to increase substantially each year, leaving an increasing percentage of multifamily property owners feeling like they are working a lot harder for a lot less.
The adverse components of rent-regulation renewal add to the frustration felt by owners. A combination of these dynamics had resulted in a growing number of investors with substantial holdings here looking to purchase properties outside of New York. This is not a good trend for our marketplace or our city.
COURTESY OF THE NEW YORK OBSERVER
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Investing, Suggesting, WTC, Hiring, Interviewing, Meditating
Monday, July 18 2011 | 09:16 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | Some real estate tidbits I’ve recently heard about investing in commercial real estate today:
- Things have bottomed.
- Occupancy is increasing.
- Net effective rents increasing.
- More clarity in the market.
- Lenders forcing borrowers into action.
- Best opportunities may be outside the U.S.
- Banks dumping assets.
- Retail just doesn’t jump off the page.
- There aren’t good or bad assets; there are good or bad prices.
- We’re not underwriting to price perfection, we’re underwriting to value.
- What is the price for liquidity?
As we rapidly approach the 10th Anniversary of the World Trade Center, Pentagon and Shanksville, PA terrorist attacks, my friend, and real estate columnist for The New York Post, Lois Weiss, wrote this in her column this week:
The World Trade Center site is humming with activity. On Monday, we walked across the site and rode the construction hoist up at Silverstein Properties' 4 World Trade Center as the north Memorial pool was being tested.The nearly one-acre square pools have water that cascades down the sides and flows into another dark square. Each pool is rimmed with the names of the victims, which will glow at night.
All the plaza's white swamp oaks are growing in nicely, with more being added all the time. The Greenwich Street cut through the site is just starting to be filled in as an actual road, slicing off 2 WTC, the Calatrava PATH station, 3 WTC and 4 WTC from the western half of the site with the Memorial area and 1 WTC.
Four WTC has asking rents in the $80s a foot. New York City and the Port Authority have already leased space there. The lobby area feels cocooned from the outside, yet its polished black granite walls will reflect the area through its 65-foot-tall windows.
The largest of the buildings, 1 World Trade Center, where Condé Nast just signed its 1.1 million-square-foot lease, is only halfway to its 1,776 feet but is starting to become visible from all over.
I’ve picked out some of the responses from an interview with Jack Dangermond, founder and president of Esri, which offers geographic information systems, that I thought you might find compelling:
- I have four priorities.
- The first one is to focus on what customers need and want.
- And, second, make my company a really great place to work. So when we hire somebody, we have in mind finding a person who really fits so well that they realize their life’s work with us.
- The third is to make sure we’re a very strong business that supports the first two priorities.
- Interviews? I’ll ask provocative questions that help me quickly get a sense of someone, like, “What’s the worst thing that’s ever happened to you?” In their professional life, the issues they bring up are often associated with challenges like laying people off. I learn a lot about people’s values and their judgment about things based on how they act in those situations. I’m just trying to figure out who they are.
- Other questions? “What do you like to do?” It’s an open-ended question. A lot of people start off saying. “I like to go skiing” or “I like to go on vacations.” This is always nice, but I’m interested in people who have a passion for the work I want them to do.
- I am hunting for people who would be a good colleague or a teammate, not someone who works for me.
- I like to hire responsible people who really see their life’s work meshing with the goals of our business.
- Writing is a key skill. That’s usually another question I ask: “How good of a writer are you on a scale of 1 to 10?” I also actually ask a lot of skill-related questions like, “How good of a software engineer are you?” or “How good are you at public presentations?
“If I talk a lot, it must mean I’m smart.” I learned that this is a style of some students in graduate school programs. But I also witnessed it recently first hand where one guy in particular in a group setting continually rambled on and on, trying to impress the group with how much he knew. But in taking a pulse of the body language of many of the group members, I don’t think this guy was winning any points with them.
Friend and fellow blogger, Ann Oliveri, offers something very interesting in her post this week:
How do you vet candidates for key positions?
The New York Times reported this week on a method being deployed in medical school admissions processes that test for people skills, the multiple mini interview or MMI. It's "the admissions equivalent of speed-dating: nine brief interviews that forced candidates to show they had the social skills to navigate a health care system in which good communication has become critical." Each round is eight minutes and features a different ethical dilemma. "The most important part of the interviews are not a candidate's initial responses--there are no right or wrong answers--but how well they respond when someone disagrees with them... Candidates, who jump to improper conclusions, fail to listen or are overly opinionated fare poorly because such behavior undermines teams. Those who respond appropriately to the emotional tenor of the interviewer or ask for more information do well..." The goal is to find those with the ability to work collaboratively with colleagues and establish trust with patients. And, "candidate scores on multiple mini interviews have proved highly predictive of scores on medical licensing exams three to five years later that test doctors' decision-making, patient interactions and cultural competency."
I find this approach fascinating.
After meditating twice a day for about two years I stopped doing it but not because I didn't see that it made a difference-it did. So why did I stop? Beats me but my brother has been encouraging me to start again and I am going to. Interestingly there's an article in the Spring 2011 issue of Ode magazine called, "Management as meditation." It presents a compelling argument for meditation, in the workplace:
- How you deal with your emotions and thoughts as a leader has a direct effect on employees and organization.
- By meditating, you learn how to deal with stress and take your mind off things. It has to do with discovering consciousness and performing activities, such as meetings or listening, with more attention, whereby you function less on automatic pilot.
- A Detroit chemical manufacturer instituted regular meditation sessions in 1983. Within three years, absenteeism fell by 85%, productivity rose by 120%, injuries dropped by 70%, sick days fell by 16%-and profit soared by 250 percent! "People enjoyed their work; they were more creative and more productive. If you do this you'll get a return on your investment in one year."
- Before a meeting, if managers first take a couple of minutes to be still and focus on what is most important to them, they will get results faster."
- The entire effect of meditation relies on willingness and openness. To relax, we need patience, trust and time. Whoever thinks that meditation is a waste of time will never have patience for it.
I am going to start meditating again tomorrow.
This past Wednesday, July 13th, was the 26th anniversary of a huge music event, Live Aid. The great thing about it is that it was the idea of just one man, Bob Geldorf. One person can make a difference!
Photo: The 3-legged chair in Geneva looms opposite the "Palais des Nations". Standing 12 metres (39.37 feet) high, The Broken Chair is a reminder of the tragedy caused to human lives and limbs by land mines.
Restaurant of the week. Nishimura, 8684 Melrose Avenue, W. Hollywood, CA(310.659.4770). Danger: this is very serious sushi. A little tricky to find but worth it.
On the road...
July 18-22: New York
July 25-Aug. 14: Northern California
Aug. 15-19: New York
Aug. 23-Sept. 6: Vacation
Sept. 12-16: New York
These are my views and not that of my employer.
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Lessons Learned and Earned, Part II
Thursday, July 14 2011 | 02:27 PM
Robert Knakal
Chairman,
MASSEY KNAKAL | Last week, I began reviewing notes from a speech I made before the members of the local chapter of CCIM here in New York City in late April.
The subject of the talk was the lessons I have learned over the years building a brokerage company and selling properties in the most competitive market in the United States.
This week we continue the recap of those lessons.
It is important to note that I am not implying that the platform we implement is the best one out there. It is clearly the one that works best for us, but we realize that other platforms have their merits as well. I am merely trying to convey the thought process behind our systems and pass along the lessons we have learned along the way.
At Massey Knakal, we implement a strategy of breaking up the massive New York metro area market into small “territories” in which our agents focus, specialize and become market experts. This territory system is one of the most misunderstood platforms in the business as many people believe our agents are allowed to work only within the territory they are assigned, thus limiting their potential. This couldn’t be further from the truth. The fact is that while each of our agents does indeed focus on a specific geographical territory, they are free to originate business, and earn commissions, anywhere they can. Often, our top agents have a commanding market share within their territory and, additionally, are participating in sale transactions all over the metro area.
One of the reasons we decided to implement this platform is because this city is far too large for anyone to know everything about every neighborhood. By focusing on small territories, each agent really gets to know these areas as well as, or better than, anyone else. Each agent knows who is buying, who is selling, what properties have sold and all the details of those sales; what zoning changes have been adopted or are proposed; and what new developments are under construction or are in the planning stages. This focus does a number of things, not least of which is to enable us to accurately determine property value. This is a key to brokerage in a city like this, where identical buildings may have very different values depending upon which side of the street they are on.
The importance of all of the factors mentioned in the previous paragraph was recognized by Paul Massey and I immediately when we began our careers. This led us to a fundamental realization and to the main reason we utilize the territory system: We are not in the real estate business; we are in the information business. Bricks and mortar are merely the medium for the information. Understanding that the quality of the information we have is the most important thing we bring to the table convinced us that a territory approach made the most sense for us. So …
Lesson 11:
Know what business you are actually in.
_______________
The Massey Knakal platform, in addition to using a territory system, is highly specialized. In our investment sales practice, we represent only sellers and will work only on exclusive listings. We believe we are the only firm in New York that works this way.
We believe that representing only sellers eliminates potential conflicts of interest and allows us to be indifferent when we are dealing with buyers who are trying to purchase one of our exclusive listings. Buyers know that whether we have known them 25 years or 25 minutes, they have an equal opportunity to purchase the property and they will be treated fairly. It is very clear that our main objective is to maximize the result for our client, the seller.
The territory system also eliminates conflicts of interest within the office as it is very clear whose territory a property is located in. These aspects of our platform have been part of our corporate plan since the early days. So …
Lesson 12:
Have a game plan.
______________
Other benefits of our platform include the ability for brokers, without a tremendous amount of experience, to quickly demonstrate expertise in a neighborhood. Within several months of working in a territory, the agent probably knows as much as anyone about what is happening there and, after brokering a few sales in the area, is likely to have as good a track record in the area as brokers who have been working for years but have not had a specialized focus. As the agent’s career grows and develops, this track record in the local market becomes tangibly better.
This focus provides an agent with the ability to differentiate his or her capabilities from others by demonstrating a command of the dynamics within the territory. So …
Lesson 13:
Be able to differentiate yourself from others in the marketplace.
______________
After achieving the ability to differentiate yourself from others, it is important to create a competitive advantage. There is no doubt that our platform requires discipline to implement, both from a management perspective and from the brokers themselves.
Often in our business, a brokerage firm is a group of individuals who are essentially working independently but all under the same roof. There are several examples of brokerage teams that work very well together and achieve great results. It is rarer to see several of these teams working collaboratively at a firm to produce a mutually beneficial environment.
We try to achieve this by getting our agents to realize that they are part of an integrated platform that promotes their individual achievement but also provides open access to the vast resources and the potential of other professionals within the firm to enhance their personal performance.
It occurred to us that there are three potential cultures a brokerage business can have. The first is the “dependent culture,” which is the culture of “you.” Here, there is almost an entitlement psychology so that agents feel like, you should take care of me; you must come through for me; you didn’t do enough for me; you are responsible for my success or failure—I blame you! This culture is certainly not one for fostering a successful collection of agents. After all, this is a business in which you effectively eat what you kill, and, for the most part, you must put in tremendous effort on your own behalf and are primarily responsible for the relative level of your success or failure.
The second of these cultures is the “independent culture,” which is the culture of “I.” Here, everything revolves around the individual: I can make it happen; I am responsible for my own success or failure; I am self-reliant; I can decide how best to use my time. There are many brokers in our business who operate with this mind-set and several of them are very successful. Often we see several of these brokers working within a firm, and, collectively, they do a good job but may not be maximizing their true potential by being completely independent.
The third type of culture, which is the one we try to promote, is the “interdependent culture,” which is the culture of “we.” Those who are part of this culture believe that their greatest successes can be achieved by exerting maximum personal effort and augmenting this effort with the efforts of others. Here, the psychology reflects a knowledge that teamwork works best: we can do it; we can combine our talents for the greater good; we can cooperate with each other; working collaboratively, we can create something better together. It is important to realize that all things in nature are interdependent and this interdependence leads to a balance that provides maximum results. Independent people who do not have the ability or the desire to think interdependently may be good individual producers, but they are not typically good team players.
If a collection of interdependent people can pool their abilities and resources and work cohesively, an environment can be created that is difficult to compete with because it is so rare to find this type of environment. As we continue to strive for a fully interdependent culture, our brokers are afforded an advantage. So …
Lesson 14:
Do what you can to create a competitive advantage.
______________
The Massey Knakal territory system and operating platform have pros and cons. The pros are numerous and include unparalleled market knowledge and incomparable transactional implementation. There are no conflicts of interest internally, and no conflicts of interest between the firm’s interactions with buyers and sellers. It creates a competitive advantage and the ability to differentiate our services in a very tangible way. Colleagues are completely accountable to each other. Most important, all of these aspects of the platform allow for the focus on the client’s best interests at all times.
On the con side, brokers must pay a “tax” to other agents on transactions they originate outside of their assigned territories. Also, they must be extremely disciplined and comfortable with being fully accountable to others within the firm. Additionally, as the operating platform is so unique, growth must be achieved organically as brokers from other companies generally find it too difficult to adapt to such an abstract and disciplined method of operating. This last point is what makes it virtually impossible for an existing platform without such guidelines to morph into a similar system. Because of this, Massey Knakal will always be a net producer of agents to the industry rather than a receiver. You will likely never see that we have hired a team of brokers from another firm to join us.
While there are clearly pros and cons to our system, the important point is not endorsing one approach versus another, but simply fully understanding these pros and cons. So …
Lesson 15:
Know your strengths and weaknesses.
______________
As I wrote last week, Massey Knakal was founded in 1988. People often ask why Paul and I chose that time to start the firm as it had been only about a year since the stock market crash of 1987. The fact is the real estate sales market continued to perform well in 1988. Many principals and brokers who were active in the market at that time remember that even though the stock market crashed in October 1987, the building sales market in New York remained strong in 1988 and even into 1989. In 1990, however, the building sales market came to screeching halt. The volume of sales dropped to the lowest level we had seen since 1984, when Paul and I had started brokering building sales at Coldwell Banker Commercial (now CBRE).
Our overhead at that time was about $15,000 per month and, by late 1990, we were down to our last $15,000 in the bank. We thought about how to deal with this predicament. Should we pay $5,000 in essential bills for each of the next three months? Should we pay 100 percent of the next month’s bills and see what happens? We even seriously thought about going to Atlantic City and putting it all on black.
What we decided to do was to go to every bank we saw and apply for as many credit cards as possible. We were able to obtain a total of $60,000 in credit card lines and took down cash advances on these cards to get us through this period. As a few transactions closed, we were able to pay off these balances and were lucky to have been able to finance our operation in this manner. So …
Lesson 16:
Always maintain a good credit profile.
______________
By late 1991, the sales market had really not improved all that much. We were not prepared for such a poor market for such a long period of time. We had to take cash advances on the credit cards and when they were maxed out, we were coming up short once again. We approached a client of ours, who was very wealthy, looking for a $75,000 loan to keep the lights on. The client said he would be happy to provide the loan, but he wanted 50 percent of the stock in our firm in exchange for the loan. Paul and I left that meeting with our tails between our legs. We were not prepared for a response like that.
We believed that we would be able to come up with the money, so we approached another individual for the loan, agreeing to give 25 percent of the stock in our firm in exchange. Paul set up a meeting for us with John Holler, a very successful mortgage broker he knew. John agreed to give us the loan, but, to our great surprise, he said, “Guys, I don’t want the equity in your firm. Someday you will be very successful and you will regret that you gave me that equity.” We were completely unprepared for this act of generosity. Since that time, one of our top company awards is named after Mr. Holler as a small token of appreciation for what he did for us. So …
Lesson 17:
Be prepared for the unexpected.
______________
These trying times after the savings and loan crisis forced us to look brutal reality squarely in the face. There is something called the “Stockdale Paradox,” which derives from the actions of Admiral Jim Stockdale. He was the highest-ranking military P.O.W. during the Vietnam War. He was held captive from 1965 to 1973 and was tortured 28 times. He survived by confronting his reality head on and holding a staunch belief that eventually he would be released. He did not delude himself with unrealistic expectations or blind optimism, but instead maintained a clear focus on his reality and conviction that he would prevail.
During the early 1990’s, we had to face an ugly reality but always believed that we needed to do whatever it was we had to because, ultimately, things would work out. So …
Lessons 18 and 19:
Confront brutal reality directly and honestly; and have unwavering faith that you will succeed.
______________
During these difficult times, it would have been easy to simply worry about getting the next transaction closed as our economic viability was seemingly dependent upon it. It was a time when property values had plummeted and, for owners who did not have to sell, it was not a good time to be putting assets on the market. As difficult as it was, we advised many clients not to sell at that particular time. This paid off well for us as most of those potential sellers came back to us years later when they wanted to sell, remembering that we gave them the proper advice. So …
Lesson 20:
Regardless of the circumstances, always keep the client’s best interests in mind.
We will conclude this three-part series next week. Stay tuned.
COURTESY OF THE NEW YORK OBSERVER
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Lessons Learned and Earned, Part I
Monday, July 11 2011 | 02:50 PM
Robert Knakal
Chairman,
MASSEY KNAKAL | A couple of months ago, Al Holloman, a broker in our Queens office and a member of the local chapter of CCIM, asked me if I would speak at the upcoming CCIM luncheon in late April. I accepted, but was surprised by the topic the folks at CCIM wanted me to address. Most of the time when I speak in public, I am talking about the investment sales market or some aspect of the trends between buyers and sellers of properties in the New York metro area.
The topic for this speech was to be my experiences in the brokerage business and the lessons that I learned along the way. Preparing was more difficult than I imagined, as it took me on a trip down memory lane back to my early days in real estate. We are often so caught up in our day-to-day activities that we fail to take a step back and observe things from a macro perspective. This engagement would force me to do that.
Certainly, I am very proud of what Massey Knakal Realty Services has become over the years. Since 1988, we have sold over 4,000 investment properties having a market value in excess of $15 billion. Since 2001, when CoStar began tracking the market, we have sold over 2,200 properties in New York City, nearly four times the number of our closest competitor, which has sold fewer than 600. Putting my speech together made me think about how we got here. I think I can sum it up by saying it took a lot of hard work and a lot of luck (not necessarily in that order). Paul Massey and I have made hundreds of mistakes over the years, especially in the early days, but fortunately haven¡¯t made many of them more than once. Today, we have fantastic partners and a senior management staff that helps keep us moving in the right direction. From the mistakes we have made and the experiences that we have had, there have been many lessons learned. When I finished preparing my notes for the CCIM speech, I had come up with 30 lessons learned and, interestingly, none of them were real estate-specific. Most of them are applicable to any service business and some are even more far-reaching.
In this week¡¯s column, I would like to begin sharing those lessons with you. First, a little background.
My career in real estate started by accident. In 1981, I was a freshman at the Wharton School at the University of Pennsylvania. Like most Wharton students then, I wanted to be the next great Wall Street trader. In order to get into one of the big investment banking firms after college, I thought a r¨¦sum¨¦ showing a strong track record of summer work would be helpful. During spring break of that year, I drove around Bergen County, N.J. (where I grew up), dropping off my r¨¦sum¨¦ at every commercial and investment bank that I saw. I was coming out of a Paine Webber office in Hackensack and across the hall I saw ¡°Coldwell Banker.¡± I entered the office and dropped off a r¨¦sum¨¦ thinking it was another bank.
Later that day, I received a call from someone at CB wanting to set up an interview the next day for a summer job. Prior to the interview, I went to the library to look up this ¡°bank¡± so I would look knowledgeable in the interview (remember, no Internet in 1981). When I discovered that Coldwell Banker was a real estate company, I almost did not go to the interview. Who wanted to get into the commercial real estate business? Not me!
As it turned out, it was the only summer position I was offered. I took the job and loved it from my first day. I went back my next two summers and started my full-time career with CB after graduating in 1984. So ¡
Lesson 1:
Keep an open mind and think outside the box.
_______________
After that first summer at CB, I took as many real estate and related courses as I could at Wharton. One of those was entrepreneurial management.
One day we had a guest speaker who was a Wharton alum. He told us that when he was in school, he wanted to be an investment banker like everyone else. As it turned out, he entered the pet food business and found that he loved it. He said that whenever he ran into his old Wharton buddies, who were mostly working on Wall Street, they would often look down their noses at him because he sold dog food for a living. He quickly got over feeling like a second-class citizen as he was making millions a year and was incredibly happy doing what he loved.
This taught me that enjoying what you do is one of the most important things there is. People who do a particular job simply for the money often get burned out and are generally not as happy as people who do what they are really driven to do. If you have passion for your work, you can achieve great things and it may not seem like you are struggling to make things happen.
So ¡
Lesson 2:
Be passionate about what you do.
_______________
I was very lucky to have met Paul my first day on the job. He had spent a year in CB¡¯s ¡°wheel program,¡± where he spent a few months in different divisions of the company learning about all of the different services the company was offering. He decided he wanted to get into the investment sales area, which is the sector of the business I was attracted to.
On my first day, the boss told me to follow Paul around. At the time, CB had about 50 brokers leasing office space and four brokers specializing in sales. Paul was one of those four and the other three each had at least 20 years of experience and couldn¡¯t be bothered with the two youngsters fresh out of college.
On my second day on the job, Paul and I decided to become partners and work on all of our transactions together. A year later, we were made the co-directors of the investment sales division (it felt kind of strange being the bosses of the more experienced guys). We grew that capability within the firm and left there in 1988 to form our company. I have been partners with Paul since 1984 and feel so fortunate that our partnership has worked as well as it has for so long.
People often ask what the secret to a lasting partnership is. I¡¯m not sure I know the answer, generally, but for us it has worked because of an equal passion for the business and an equal work ethic. If we logged the hours worked over the past 27 years, I would imagine that our totals would be extraordinarily close.
So ¡
Lesson 3:
Your partner(s) must have a similar passion and work ethic.
_______________
One of the secrets to Massey Knakal¡¯s success has been our territory system, where each agent is assigned a specific neighborhood in which to specialize. This platform requires a system of rules and guidelines to dictate parameters pursuant to which business is done. A clear understanding of these rules and guidelines and their strict implementation by management is required to give the platform integrity.
At CB in the mid-1980¡äs, they attempted to implement a similar system but, unfortunately, the rules were not applicable to everyone equally. The minute the system appears to be-or is-inequitable, it breaks down.
In our platform today, everyone is treated equally. A new broker who joins the firm has the same exact protections as does a 20-year veteran. No one is ¡°more equal¡± than anyone else.
So ¡
Lesson 4:
Rules must apply to everyone equally.
_______________
Paul and I first decided we wanted to start our own firm in 1986. We figured we needed about $300,000 to make that happen. We confidently went to Chemical Bank, where we had been banking for two years, and asked to speak to someone about a new business loan to start the company. We did not expect any problems-we were successful brokers, had good balances and always went out of our way to say hello to the branch manager.
To our chagrin, we were told to go start the business and once we established a successful three-year track record, we could apply for what would be a modest business loan. Leaving the bank with our tails between our legs, we came up with a two-year plan to save the money that we needed to start the business. Each morning, as Paul and I had breakfast (something we did together every day for about 15 years), he would pull out his pen and, on the back of a napkin, write down how we were coming along with our plan, what transactions were scheduled to close and how much money we would put aside from each sale to meet our objectives.
So ¡
Lesson 5:
If you are starting a business, don¡¯t expect bank financing for a while.
_______________
Right from the start of the firm, we knew what we wanted to do and how we wanted to be perceived by the marketplace. Early on, we came up with the first of our company mission statements:
¡°Massey Knakal Realty Services is a place of purpose, order and meaning. A place in which being human is a prerequisite but acting human is essential. A place where discipline and will are prized for what they are: the backbone of enterprise and action, of being what you are intentionally instead of accidentally. We are committed to building a tradition of exclusively representing sellers with integrity and respect, providing the highest level of professionalism and ethics to achieve maximum results.¡±
While our mission statement has changed over the years, the words above still guide our core values and principles.
So ¡
Lesson 6:
Know exactly what it is that you want to do (and how you want to be perceived by participants in the market).
___________________
The brokerage business requires the proper mind-set. After all, we are simply intermediaries representing the best interests of our clients. The need to produce today is today¡¯s reality-and current financial obligations are dependent upon this-but the real mantra of success is sustainability and growth. This is true with respect to our attitudes toward our clients as well as all other market participants, particularly other brokers with whom we compete.
Regarding other brokers, you can either take the position that the pie of potential business is finite, and every piece that someone else gets is one fewer piece for you; or you can take the attitude that the market is very large and there is more than enough business to go around. The latter provides more comfort and allows one to keep things in better perspective and also provides a basis for forming mutually beneficial relationships with your competitors.
Paul and I have always had this perspective and we feel fortunate that we count among our good friends many of the top building sales brokers in New York. Many observers of the market may be surprised by that, but the friendships we have formed are long-lasting and are an integral part of the happiness we get out of our careers.
It has been said that this business is a marathon, not a sprint. Having this perspective allows you to do what is in the best interest of your client, not what is in the best interest of the transaction. This is a key to sustained success.
So ¡
Lesson 7:
Have a long-term perspective on your business.
___________________
When we started Massey Knakal, Paul was 28 years old and I was 26. We ran the business initially by trial and error and made more than our share mistakes. We had a secretary keeping our books who couldn¡¯t balance her own checkbook, never realized that the letterhead stock we actually received was much thinner than the stock we ordered and paid for, and didn¡¯t think to ask for our first report covers to be laminated after printing, leaving black ink all over the reader¡¯s hands. These were just the tip of the iceberg when it came to the mistakes we made.
Fortunately, we learned from our mistakes and applied what we learned. It is said that ¡°To learn and not to do, is not to learn,¡± and ¡°To know and not to do, is really not to know.¡± These words could not be more true.
Unfortunately, we did not take the time to seek out senior people who could serve as mentors for us back in those days. Today, we have an advisory board made up of some of the most respected professionals in our industry and we rely on their counsel constantly.
So ¡
Lessons 8 and 9:
Seek out and ask senior people for advice; and making mistakes is O.K.-just don¡¯t make the same mistake twice.
___________________
Many people say that they¡¯d rather be lucky than good. While I believe that luck plays a role in all of our lives, I believe that the harder you work the luckier you get.
Over the years we have seen it time and time again. The brokers who are in at 7 a.m. and leave after 7 p.m. (or any combination of the 12-hour day that is required) always seem to make more commission dollars than those who work less. These folks are also the ones who will be in the office on the weekends, getting prepared for the weeks ahead. I am often asked what it is that brokers do before 9 a.m. or after 5 p.m. that makes the difference and I really don¡¯t exactly know. Perhaps it is more planning or getting paperwork done so they can spend more time on the phone during ¡°traditional business hours.¡± Perhaps they read more or study comparable sales more closely.
I am not sure exactly what it is but the results are undeniable: those who work harder are generally the most successful.
So ¡
Lesson 10:
Hard work is essential.
___________________
More lessons to follow next week ¡ Stay tuned.
COURTESY OF THE NEW YORK OBSERVER
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The future?, New jobs, Knish-Nos
Monday, July 11 2011 | 09:38 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | So, welcome to the future, aka the third quarter of 2011. First of all, can you believe the passage of time? But I'll leave that for another day. Because we're in an industry that measures a lot of performance and activity by quarter, I thought I'd talk about that for a minute. Real Capital Analytics (RCA) had this to say at the end of May in their U.S. Big Picture Report:
May marked an important benchmark as sales achieved their highest monthly total so far in 2011, rising to $15.6b and notching a remarkable 124% gain over the year-earlier month. The growth trend was broad, as every property type registered its most active month this year and both pending deals and new offerings point to a strong June. Still, wide variances in momentum persist both among and within property sectors. CBD office, garden apartments, and full-service hotels continue to drive growth at present, although regional malls are quickly gaining currency, as evident not only in recent transactions but also in a spate of new offerings, including Westfield’s 17-property US portfolio. Suburban office sales remain lackluster, but surprising strength is emerging in secondary and tertiary markets for retail and apartment properties as yield-seeking investors scour markets for more.
This is a very encouraging report but then there's the debt side to any deal as only a few cultures has enough to pay cash for buildings these days. Talking to some commercial lenders recently they told me that, yes, they are lending, still selectively but with a bit more aggressiveness (can you say compromises in underwriting, maybe?). And, talking about the infamous "Lessons Learned" from the 'last down so low it looks like up to me cycle' I'm still concerned about the flood of institutional money chasing core deals and driving prices up and cap rates down, way down. Hey, we're now in that time where we're creating the next cycle and, just like trying to call the bottom of the market, we won't know what this cycle will look like until the next one.
Congratulations to, Jeff Gandel and his colleagues who have successfully lifted out their team from Fidelity and have formed Long Wharf Real Estate Partners in Boston.
The other interesting things occurring are the continued moves of some senior people to different firms...seems like a lot of this is in Asia but in Europe as well. The "Asian" market seems to be more and more the topic of discussion of global players but there are also excellent opportunities closer to home, wherever your home might be.
Knish-Nosh has been in Forest Hills, NY since 1952. My friends and I have been eating their knishes for a long time. Serendipitously I was walking through Central Park in New York last Monday. At the sailboat pond there’s a little concession stand that I’ve walked by hundreds of times, always thinking that one day I’ll stop there, sit and relax and have a coffee like I’ve seen many people do (often with their dogs which I admire for being able to behave off-leash). Anyway, it was a holiday and I wasn’t going anywhere so I stopped for coffee and a bagel and I see something on a high shelf that says Knish-Nosh. As I return my tray I see a guy there and ask him if this place is run by Knish-Nosh. He says yes and I tell him about growing up in Forest Hills, blah, blah, blah. He says that that type of thing happens twice a day. He also tells me that they’re moving locations in Forest Hills and will be next to the Midway Theatre (also an old haunt of ours). In addition, he tells me that they ship knishes (mostly to people who can put the sizable shipping cost on their corporate expense statement). But, the most important part of this story is that they’re going to start distributing Knish-Nosh Knishes through places like Costco on a nationwide basis (well, maybe not nationwide as I’m not sure that knishes would ‘play’ in some markets). Anyway, watch out for them in your neighborhood Costco soon.
Congratulations to, Tim Shine, who has recently joined Parmenter Realty Partners.
YouTube of the week: I didn’t know that Daryl Hall wrote, “Every time you go away”. I always liked that song but here it is played the way I think he envisioned it when he wrote it.
Congratulations to the folks at Pearlmark Real Estate Partners (formerly Transwestern Investment Company) on their snazzy new name.
Restaurant of the week. Tatra restaurant, 24 Goldhawk Road, London. Disclaimer: I have not yet visited this restaurant. I met the husband and wife team that own and operate the restaurant at my friends’ wedding last week. I just have a good feel that this is excellent Mediterranean food.
Photo: Recently discovered: my mother swimming with her father at a resort in New Jersey (August 17, 1936)
Congratulations to Chris Gerra, who has just made an internal move and joined Thomson Reuters Tax and Accounting division.
On the road....(taking it a little easy over the summer):
July 10-12: Beverly Hills for the NMS Real Estate/Real Assets Roundtable
July 18-22: New York
August 8-12: New York
Sept. 20-21: Amsterdam to moderate a panel at the PERE Global Forum
Nov. 2-5: Washington, DC to attend the CRE Annual Convention and perform with the CREatures of Havoc Band
Nov. 9-10: New York to moderate a panel at the PERE Forum-New York
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CLS £29.4m Unsecured Bonds Start Trading Today
Tuesday, July 05 2011 | 10:53 AM
James Wallace
Finance Editor,
COSTAR | CLS Holdings has closed SEK 300m (£29.4m) worth of unsecured, unrated five-year bonds.
The bond investors, which can be secondary traded from today following their listing on the NASDAQ OMX Stockholm Stock Exchange, comprise a mix of Swedish insurance companies, pension funds and family trusts.
The total cost of debt was around 5.15%, comprised of a floating rate coupon of 3.75% above three months’ STIBOR, at circa 2.4%, payable quarterly in arrears.
It is thought the UK-listed commercial property investment company sought a private placement in Sweden because terms offered by the UK banking market were uncompetitive, with lenders requesting security, a rating and a higher total cost of debt – at around 7%.
“The London financing market is failing in its primary duty of offering competitive debt financing for borrowers,” a source said.
This is another example of UK property companies seeking cheaper funding sources to the traditional banking market, including British Land and Great Portland Estates recent US private placements and Derwent London’s UK convertible bonds.
After two years, CLS will have the right to redeem all outstanding bonds together with accrued interest subject to an early redemption premium to the nominal value.
Carnegie Investment Bank AB in Sweden acted as sole lead manager and bookrunner.
Yesterday, CLS confirmed it had completed the refinancing of 19 French loans with an aggregate value of €128m raising an additional €35m. In aggregate, this extra £60m brings to over £225m the liquid resources, in cash, corporate bonds and undrawn facilities, now available. CLS is thought to be pursuing an active pipeline across the UK, Sweden, France and Germany.
Landesbank Saar financed 15 loans, €100.6m, with maturities of between five and seven years, while Société Générale provided four seven-year loans worth an aggregate €28.0m, with a weighted average loan-to-value of 70% and a margin of 1.5% above EURIBOR.
Separately, CLS has signed a revolving credit facility – also outside London – with Danske Bank for SEK 300m for working capital purposes.
Sten Mortstedt, executive chairman of CLS, said: “We are delighted to have secured these loans and facilities on attractive terms to the Group. They reflect our continuing excellent relationships with Société Générale and Danske Bank, and we are pleased to welcome Saar LB as an important addition to our stable of 20 banks. It is testament to the strength of the Group’s portfolio and track record, that we are able to arrange these facilities in the current credit markets and economic climate. They give the group additional flexibility and firepower going forward.”
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Embracing differences, Playing the game?, Charles Angoff
Tuesday, July 05 2011 | 09:18 AM
Steve Felix
Head of Real Estate Client Relations - North America,
AVIVA INVESTORS | Ok, so this morning a random driver, arranged by the hotel, drove me to the airport. As I had adopted from Gerald Hines many years ago, I sat in the front passenger seat with the driver. He was from Pakistan, about the same age as me and we had a lively conversation. His name is Abdul. We talked about a lot and found that we agreed on many things. He used two good sayings and I thought I’d relate them to you. One, in regard to the massive amount of debt that people in developed countries have taken on, he said (and maybe he didn’t originate these but I hadn’t heard them before): “I don’t agree with the philosophy of ‘buy now, pay later.’ I believe many people have adopted the attitude of ‘buy now, pay in the next life.’ And the other one, in relation to the sub-prime mortgage situation (how about the news this week that Bank of America is setting aside $12Bn to pay fines!) he said, “When the ship is going down, I’m going to look out for myself. For all I care, the captain can go down with his ship.”
One of the wonderful things about leading a serendipitous life is experiencing random interactions of this type. But, you also have to be open to them. I’ve long believed that while I don’t believe that the world will ever experience ‘peace on earth’ (for reasons that I’d rather not discuss here) we can bring the world closer together, one person at a time, by taking time to engage people. We can learn from each other and, like with Abdul this morning, we can appreciate that we are all members of the human race and value and respect our differences.
Most of my career has been spent working for entrepreneurial type companies. A couple of times I have worked for larger firms like A&P supermarkets & Midlantic Bank. But I have been a real estate consultant rather than an employee to more larger firms such as (you’ll excuse the reference to some long gone) Chase Manhattan Bank, Bankers’ Trust, Chemical Bank, Mass Mutual, John Hancock, Kohler Co., Merrill Lynch Smith Barney, The New York Urban Development Corporation. I have also had the privilege of being, for lack of a better term, the ‘industry shrink’ to a number of real estate investment management firms, which, in some ways, would read like a who’s who of that industry. And, as an independent trusted advisor I was brought into the inner workings of a company to provide consulting and coaching services (I forgot if I wrote this to you recently but a friend of mine educated me on the differences between coaching and consulting. A consultant provides ideas and solutions; a coach asks questions…it’s up to you to find your own way. When she told me that I simply shook my head in agreement. I may be getting a little off the path here but that’s nothing new, right?
When I worked for Herb Kohler in Kohler (next door to Sheboygan, Wisconsin) I was brought in to provide consulting services on one project but as time went on I was ‘dragged’ deeper and deeper into the company and sometimes the politics started taking a toll on my ability to perform my services. On a number of occasions during my two year engagement I went downstairs in the Kohler Design Center to watch a multi-media presentation about the history and future of Kohler (the company and the town) and it helped me remember that a lot of what was being done there was working towards the realization of a visionary, Herb Kohler, and didn’t necessarily need to make economic sense. And, on two occasions I went to visit the man himself. After he asked me how things were going (I used to see him monthly in the real estate committee meetings as well) he asked me why I was there. I told him that I was being dragged into departmental politics and it was both draining and distracting. He simply told me, “Steve, one of the reasons I wanted you here was that you can keep yourself distant from those things; you aren’t an employee and you can operate on a different plane. Don’t let them suck you in.” I left those brief meetings both energized and with more reinforcement of my involvement and how I could help Herb, in some small ways, achieve his dream. That was probably the deepest corporate political doo-doo that I’ve ever experienced. But many large companies (large being relative) seem to suffer from the drain of bureaucracy, politics, insecurity, fear and jealousy. And having been both a coach and consultant to firms in North America, Europe and to a small degree Asia I can validate the negative impact that those things have on a company, on the morale of the people and on the price of gaining desired results. The amount of time wasted, the games played, the failure to stay focused on the mission but rather on keeping your job (or doing your darndest to help someone fail at theirs and watch them pack up their stuff in a box and walk out the door.) As Bill Withers sang, “We all need someone we can lean on and baby you can lean on me.” I have found that to be more and more true as time goes on and am grateful for the friends and colleagues I have that I can lean on from time.
When I started college, at Fairleigh Dickinson University (FDU)in Rutherford, NJ, I was fortunate enough to be assigned to a freshman English class with a professor named Charles Angoff. Our FDU campus was close to Manhattan and was able to attract teachers of a higher quality, who lived in NY, than you might expect from a relatively obscure (except in New Jersey) university. Angoff was one of those special ones. He was an accomplished author and editor. I don’t know what got me thinking about him recently but I bought a book written by someone who knew him well: The Man From The Mercury: A Charles Angoff Memorial Reader. Edited and with an Introduction by Thomas Yoseloff. Among other stuff it contains one Angoff short story titled, “The Tone of the Twenties” (as in 1920’s). There are a bunch of quotable and notable things but the one that struck me and that I want to share with you is this: “Times of vital leaping imagination are not times of unalloyed happiness. No happiness is ever unalloyed. The sense of fleeting time and the apparent purposelessness of the entire scheme of things surround all calm and all joy with an inaudible sigh. This seems to be the divine plan.”
Heavy eh?
Congratulations to Richard Lowe, new editor of IPE Real Estate.
Congratulations also to Martin Hurst who has assumed the COO role at IPE.
Congratulations to Mike Stratta who has joined the Aviva Investors Real Estate Multi-Manager group.
To all Americans, enjoy the Independence Day weekend. To everybody else, enjoy your weekend.
On the road….
July 1-7: Northern California
July 14: Bistro Jeanty,Yountville, CA to celebrate Bastille Day. A friend of mine plays the accordion to add to the festivities. Sounds like it'll be a fun time.
July 18-21: New York
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Apollo closes in on €400m acquisition of WestImmo
Monday, June 27 2011 | 02:29 PM
James Wallace
Finance Editor,
COSTAR | Apollo Global Management, the US opportunity fund manager, is expected to complete its circa €400m purchase of Westdeutsche ImmobilienBank, the German property lending bank, within weeks.
The sale by West LB, the German government-owned bank which owns WestImmo, will transfer a commercial property loan book of around €12bn to €15bn, comprising predominantly performing loans and a smaller non-performing loan portfolio secured against a diverse mix of European and US property.
Apollo has two strategic options with its acquisition of WestImmo: the first is to buy the bank’s loan book at a discount to book value, break it up and sell the loans on – piecemeal – at a premium to the negotiated discount, although in the current market Apollo would be unable to sell on even the performing loans at par.
The second strategy, which Apollo is expected to adopt, is to run the bank as an ongoing European commercial property lender, which will require sustainable, long-term funding. WestImmo is a pfandbrief-funded bank, which allows it to lend against commercial property and sell on its loans as pfandbrief bonds, similar to the covered bond market in the UK, to recycle its capital.
Apollo recruited Bernd Knobloch, former CEO and chairman of the board of managing directors of Eurohypo and member of the supervisory board of Hypo Real Estate, now Deutsche Pfandbriefbank, in autumn 2009 and has been advising Apollo on its WestImmo acquisition since the US opportunity fund manager’s interest has been firm which was when the sale process was launched in February 2010.
The day-to-day management will likely continue under current WestImmo chief executive, known as speaker of the board, Peter Knopp, while Knobloch is expected to get a role on the superadvisory board, under Apollo’s ownership. Apollo’s MD for Germany, Manfred Puffer, a former West LB board member, has led the acquisition of WestImmo.
Knobloch and Puffer have worked closely on assessing the viability of WestImmo’s ability to use the pfandbrief market as a continued funding source.
“Pfandbrief bonds are secured obligations. Investors should be confident on the quality of the assets in the covered pool and also the strict process in terms of eligibility, leverage of the underlying loans securing the pfandbrief,” explained one expert.
When the ownership of WestImmo is transferred to Apollo, Europe’s rating agencies will review their ratings of WestImmo on a stand-alone basis; that is, when it returns to private ownership and outside the guarantee of West LB group.
West LB hived off €77bn of commercial property loans into a “bad bank” in June 2010, which WestImmo’s rating subsequently benefits from. Apollo will have to inject equity into WestImmo’s balance sheet to reach an adequate rating to maintain its ability to issue pfandbrief bonds.
“The question is what will be the standalone rating of WestImmo; sufficient to be able to issue AAA/Aaa pfandbrief? While pfandbrief are secured obligations with a defined pool of collateral, rating agencies are more and more focusing on support rating and rating of the issuing bank,” continued the expert.
But there is precedent for this. US private equity firm, Lone Star, acquired Corealcredit Bank, formerly Allgemeine Hypothekenbank Rheinboden, through its Lone Star Fund 5 German Investments fund in late 2005, completing on January 2, 2006.
Lone Star, which now 100% owns Corealcredit Bank, has completed an extensive restructuring programme with new management and has refocused its lending solely on commercial real estate lending in Germany and has subsequently issued pdandbrief bonds.
“There should be investors in new pfandbrief paper by WestImmo under Apollo, but the pricing will most likely reflect the loss of direct government backing.”
West LB was forced to sell WestImmo, by the European Commission, after it requested €5.4bn in emergency funding in October 2008 to shore up its balance sheet. West LB subsequently appealed to the EC against its required sale of WestImmo in autumn 2010, which was immediately rejected, with the EC ordering West LB to implement a full scale sale by February 15 and propose a wholesale restructuring of West LB, which the EC is now considering.
West LB attempted to reduce the size of the performing loans sold onto Apollo, importing some loans onto its own balance sheet, although West LB has only had modest success at this. This jostling between West LB and Apollo is thought to be behind the delayed final acquisition by Apollo.
Apollo Global Management declined to comment.
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Glory Days Return for US CMBS
Monday, June 27 2011 | 02:28 PM
James Wallace
Finance Editor,
COSTAR | Four commercial mortgage backed securities (CMBS) have been issued in the US this week, worth an aggregate $3.24bn, in a frenzy of activity reminiscent of the pre-crash heydays.
According to CoStar Group US news service, new players are jumping into the arena for the first time, while loan-to-values are returning to their old highs, with low debt service coverage and interest-only loans.
The mood across Europe in commercial real estate finance markets, and at last week’s Global ABS 2011 conference in Brussels was much more sedate.
The largest of the deal is issued by Deutsche Mortgage & Asset Receiving Corp, DBUBS 2011-LC2, and is one of the largest issued in the last 12 months. The trust balance is a whopping $2.14bn, according to CoStar Group’s report, and is backed by loans originated by German American Capital Corp., UBS Real Estate Securities, and Ladder Capital Finance.
All of the loans were originated within the past 12 months. All loans make debt service payments at a fixed rate with a weighted average interest rate of 5.522%. Interest rates range from 4.258% to 6.643%.
The pool consists of 67 loans secured by 132 commercial properties. The largest loan is $219.8m or 10.3% of the pool balance, and the 10 largest loans represent 56.6% of the pool balance. The average loan size is $32.0m (1.5% of the pool balance).
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FDIC Posts Q1 2010 Results - Yee Haw!
Monday, June 27 2011 | 02:27 PM
Patrick Blount
President / CEO,
BENEWOLF, LLC | According to today's FDIC Press Release the number of institutions on the FDIC "Problem List" rose to 775 in Q1 up from 700 at the end of 2009.The total assets of these "problem" institutions rose to$431B up from $403B at the end of 2009. Only 41 institutions failed in Q1 (but we have added an addition 33 for Q2 to date).Sounding like a Jon Stewart quote Shelia Bair noted that "the vast majority of "problem" institutions did not fail." To me this is a little like saying that "the earthquake in Haiti did not kill everyone, so things aren't as bad as you think."On a brighter note the release said that the Deposit Insurance Fund (DIF) "improved" from a "negative" -$20.9B to only a negative -$20.7B. Happy days are here again!Further they reported that the FDIC's Liquid Resources stood at $63B a decline from $66B at the end of 2009. So let's do the math : $63B Liquid Resources minus $431B problem institutions equal -$368B add the -$20.7B in the DIF deficit and you get a rosy negative -$388.7B or about half of the original TARP total for all banks, AIG, Auto Industry and Fannie & Freddie. (This number is just for the FDIC)More good news, they reported the number of non current loans rose from 5.38% to 5.45% the highest level in the 27 years that institutions have reported these numbers.Direct Quote for the PRess Release:Chairman Bair concluded by stating, "There will be more failures, to be sure. The banking system still has many problems to work through, and we cannot ignore the possibility of more financial market volatility. But the positive signs I've outlined today suggest that the trends continue to move in the right direction." Oh, in that case please re-read the numbers above and double check my math.So let me end on a truly positive note. The FDIC reported that the nations 7,932 reported a collective Q1 profit of $18B. Of course that includes income from such famed banking institutions as Goldman Sachs, JP Morgan, Citi and BofA who all posted perfect games in Q1 trading whereby they made money each day for 61 consecutive trading days totaling well in excess of the $18B reported by the FDIC. But I'm not an accountant only and interested reader with a calculator.
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Investment Sales Market Trends Not as Clear as Participants Would Like
Monday, June 27 2011 | 02:27 PM
Robert Knakal
Chairman,
MASSEY KNAKAL | The building sales market continues to bounce along the bottom as the volume of sales trends and value trends fail to show consistent performance.
With regard to sales volume, we had seen 6 consecutive quarters of volume increases in the New York market through the second quarter of 2010. While our 3Q10 statistics are not completed yet, it appears that this trend will not continue.
Generally, in New York City, volume trends have been positive. Beginning at the start of 2009, we saw the volume of sales, both in terms of number of properties sold and the dollar volume, increasing. The Manhattan and Northern Manhattan markets led the way, turning positive prior to the outer boroughs. In 2Q10, we finally saw Queens and Brooklyn turn positive and we had been expecting the Bronx to turn in 3Q10. The 3Q10 numbers thus far appear that they may show these positive trends have taken a step backwards.
Given the relative strength of markets like New York and Washington D.C., if we are seeing volume trends like this here, it is easy to surmise that volume is squishy across the nation.
Value trends have not experienced the same consistency, over the past 6 quarters, as we have seen in volume. After we hit what appeared to be a bottom, approximately 32% below the peak, value appears to be bouncing along the bottom as for some product types in some sub-markets values are up slightly, and for some product types in other sub-markets values continue to slide. This volatility is representative of a market which is trying to find its natural bottom.
As we move forward, we expect continued volatility in both of these important market metrics. On the volume side, we have seen the supply of available properties pick up as distressed sellers continue to put assets on the market with greater frequency. We are seeing banks and special servicers move aggressively to clean up balance sheets by monetizing sub-performing assets. These sellers are being joined by discretionary sellers who have been sitting on the sidelines for too long, creating pent up selling demand, and those who wish to sell in order to take advantage of this year’s advantageous capital gains rates. Most market participants believe that capital gains rates will be higher next year. If the existing tax rates are allowed to sunset, the gains rate will go from 15% to at least 20% on a federal level. Many participants also believe local capital gains taxes will increase as well as municipalities struggle to bridge budget gaps.
The sellers who are trying to beat the gains tax increase will accelerate some transaction volume, effectively “stealing” activity from 2011. We saw this same dynamic with the cash-for-clunkers program and the first-time-home-buyers tax credit which accelerated volume in the auto and home sales markets. After these programs expired, volume dropped like a stone. For these reasons, we believe transaction volume will be higher than usual in the second half of 2010 (particularly in 4Q10) with a drop in volume as we enter 2011.
Total volume in 2011 will be dependent upon several factors. Increased capital gains taxes will exert downward pressure on volume while continued pace in the distressed asset market should exert upward pressure. The majority of submerged assets (properties where the debt amount is higher than the value – “under water”) have debt which was placed in 2006 and 2007 when values and loan-to-value ratios were their highest. Most of this debt is maturing in 2011 and 2012 and, due to extremely advantageous mortgage terms, many of these loans are still performing although they possess significant negative equity positions. As these loans mature, these assets will have to be recycled as refinancing will not be possible unless the owner has the ability, and is willing, to inject additional equity into the property.
An additional factor to consider is that the inheritance tax is scheduled to go to 55% in 2011. Surprisingly, an overwhelming percentage of real estate investors are not well diversified as most of their wealth is in real estate investments. As these investors pass away, estates may find no option other than being forced to sell properties in order to pay these taxes. This dynamic should exert upward pressure on sales volume.
This data demonstrates that we have not seen a clear trend and that our real estate recovery has a lot more work to do before we can all feel comfortable that things are tangibly better and that a recovery can be sustained.
Mr. Knakal is the Chairman and Founding Partner of Massey Knakal Realty Services in New York City and has brokered the sale of nearly 1,100 properties having a market value in excess of $6.8 billion.
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