Wednesday, December 30, 2009

Drug Developer Expands in Newtown Business Commons

"Clearview Printing Co. Inc. sold the warehouse building at 114 Pheasant Run in Newtown, PA, to KVK Biological Tech for $1.71 million, or about $70 per square foot.

Located in the Newtown Business Commons, the facility was built in 1973, and sits on over 2.5 acres of land. The buyer, a pharmaceutical company, plans to do renovations to the building before occupying the entire facility."

Commercial Real Estate in 2010

This is a great article with great professional opinions (good and bad) for 2010

"Hope and fear are overlapping in the commercial real estate industry on this eve of a new decade. The industry doesn't know whether to look out for it or look forward to it.

On the one hand, the industry is grateful that 2009 is coming at long last to an end. It was by many accounts the worst year in its history as values and incomes shrunk at precipitous rates. Whether that comment can be backed up by statistics is debatable, but few would argue that the hurt was deep and widespread.

On the other hand, much of the bad from 2009 will carry over into 2010. Investors are saddled with troublesome debt and weak fundamentals and 2010 presents very few elixirs for the pains of 2009.

Go back in time one year and remember that the industry felt it was chronologically closer to the beginning of a recovery than the beginning of the downturn. There were even a few fool-hearted souls who boasted that 2009 would present the greatest opportunities for wealth building that the industry would ever see.

The industry may seem a long way from those sentiments now. However, 2009 did give us surprises it never expected. REITs proved far more resilient than feared and even managed to raise abundant more capital and experience a mini bull market.

Still going into 2010, there is a sense the industry could mangle Franklin Roosevelt's famous quote: We have nothing to fear but fear itself. This year, the saying might go: We have nothing to fear but those things for which we hope.

"Most exciting about 2010? Unprecedented low priced buying opportunities," said Andrew Segal, president of Boxer Property in Houston. "Worries about 2010? Unprecedented low priced selling opportunities."

While that remark may come off sounding a bit contrived, it's not. We received many similar paralleled phrases in responses to our query of industry executives for this story.

"What most excites me [about 2010] is the prospect that commercial real estate may find its inflection point and start to turn upward in 2010," said Paul N. Arena, president of Venturi Capital Advisors Inc. in New York. "The last month of the year has brought greater optimism, and the investors with whom we have relationships are preparing to underwrite and invest in 2010. I'm further excited by a return to basics that we are witnessing-a move away from chasing vague or general opportunistic strategies, in favor of generous but realistic returns generated by specific, focused strategies that are; preferably, hard asset backed, and that can pay some form of current return."

Then Arena continued: "I am concerned that one, the commercial lending market will be slow to react to the increase in activity and to accommodate it, and two, that managers won't recall the restraint and lack of underwriting standards that got them in trouble in the first place."

And there in a nutshell is the irony that we are at a point in this recession where the dichotomy between hope and fear is so narrow that the two seem as one.

What follows are comments from industry executives and observers first about what excites them about 2010 and second what worries them about 2010.

What Most Excites Us About 2010

The prospects for 2010 are much brighter than we would have imagined even six months ago. Liquidity is returning to the market, as evidenced by the powerful resurgence of the public REITs, the ability of private REITs to raise capital from retail investors, increased lending activity by life companies and the successful execution of the market's first securitizations in more than 18 months.
Christopher T. Moyer, Associate, Cushman & Wakefield Sonnenblick-Goldman, New York, NY

Opportunities in the acquisition of REO as well as underperforming, nonperforming and distressed debt.
Donald A. Shapiro, President / CEO, Foresite Realty Partners, L.L.C., Rosemont, IL

Here in the Metro Detroit area, I am hopeful that residential housing market has reached a bottom which will hopefully translate into increased consumer confidence. I am optimistic that values will slowly increase over the next years. Our firm is very diversified and opportunistic so I believe there will continue to be buying opportunities that are unprecedented. I believe some of the well capitalized discount retailers will be conservatively looking at taking advantage of discounted rental rates and pursuing infill sites. 2010 will be a year to look to purchase as more REO opportunities will surface.
Harry Cohn, Director of New Business Development, Broder & Sachse Real Estate Services Inc., Birmingham, MI

I am cautiously optimistic about 2010 in that we could have a period of a stable bottom of the market place where deals trade at profitable cap rates for buyers - 9% to 12% - and that stays the new normal for the next few years. The downside of the new normal is that deals financed at 5% to 6% caps won't be able to refinance as the terms come due and there will continue to be defaults.
Stephen Karbelk, CAI, AARE, President/Broker, National Commercial Auctioneers, Tulsa, OK

I am most excited about the commercial real estate cycle bottoming out, which will probably occur about halfway through 2010. I think that the second half of the year will be when the smart money that has been sitting on the sidelines gets back in the game and these investors will be buying properties at historic lows once the cycle ticks back up. That will be good for brokers and investors.
W. Price Muir, Vice President, Raulet Property Partners Inc., Atlanta, GA

Perhaps, this year banks will be willing to sell assets at prices that make sense to buyers. Up until now the bid-ask delta has been too large for any velocity to make an impact on the marketplace.
George A. Arce, Jr., President & CEO, Centers Dynamic, Redwood Shores, CA

The potential for the banks, special servicers, and FDIC to make the process of buying their delinquent notes and foreclosed assets a reality in a more transparent, market-dictated-price process. We are excited about the fact that these bad debt holders might actually sell the notes/properties in 2010! We are excited about the potential to actually buy properties that make sense on today's terms and market fundamentals.
Steve McCrann, President, MB 35 LLC, Carrollton, TX

Transaction activity will be more prevalent than what took place in 2009 although transaction activity will begin at a slow pace through the first half of 2010.
Matt Tritschler, Senior Vice President, Colliers Investment Services Group, Atlanta, GA

What excites me the most in 2010 is that any day you can find that rare "home run." It doesn't happen every month or every year. It is the challenge to outwork everybody else and find that special property.
Steven Aberman, Senior Acquisition/ Leasing Manager, WBS Properties, Boca Raton FL

The ever-so-eagerly-talked-about possibility that 2010 brings a bleak and minute chance that not only will 2010 not be as bad as 2009, but that there may be blue skies appearing in the real estate world for 2010.
Matthew DePrato, Acquisition & Development Coordinator, PFG Capital LP, York, PA

Refinance opportunities for multifamily and health care facilities. We should start to see some conduit maturities toward the end of the year that will be seeking refinancing.
Ron Weis, Vice President, Gershman Mortgage, Springfield, MO

The opportunities that arise from this economic destruction that would not have been there otherwise. We are finally going "back to the basics" where accountability and performance are "King!"
Leigh C. Bower, CFO/Partner, US & Company Real Estate Advisors, Atlanta, GA

I think and hope we will finally be past the negative attitudes of 2009, in real estate and in general. If we are, people and companies will be able to get back to "business as usual" which will be good for everyone's psyche and good for our economy.
Howard Greenberg, Principal, Howard Properties Ltd., White Plains, NY

The hope that corporate decision makers will begin to "get off the fence" and make decisions regarding the growth of their businesses. Also, the decrease in unemployment which will have a positive effect on corporate growth, thereby stimulating expansion and relocation.
Barbara Bennett, Vice President, Thompson Realty Corp., Dallas, TX

We have experienced one of the longest recessions and constraints on our financial system. Hopefully 2010 will be a year when we see a measure of economic recovery and the full impact of the stimulus funds.
Carl J. Conceller, Principal, Coldwell Banker Commercial CRA, St. Louis, MO

Distressed properties. They're with us for a while and will provide opportunity and work for real estate professionals.
Kostas Stoilas, Associate - Industrial, Cushman & Wakefield Inc., Tampa, FL

The much anticipated "bottom" of the commercial real estate sector. Hopefully this will encourage sidelined investors to get back into the game and take advantage of the situation.
Laura Di Bella, Adams Property Consultants Inc., Coral Springs, FL

What Most Worries Us About 2010

Official U.S. government policy of "pretend and extend" is going to exacerbate the problems in the commercial real estate market What should have been a painful march towards normalization has not only been arrested, it's been partially derailed. Essentially, U.S. policy has taken what otherwise would have been a slow moving traffic jam, and turned it into a massive pileup.
Steven Sandler, CEO, Crosswind Capital LLC, Rye, NY

We are worried about market stagnation like in the first part of 2009. Some financial institutions are taking strong action to move forward with their inventory of loans and problem assets, but others are ignoring their problems and pretending they don't exist. I think banks are making a huge mistake in working-out too much of their loans rather than taking back the assets. Banks can mitigate losses by selling to people who know how to fix bad assets. A lot of what we see now is bad investors who have made bad decisions and are not being punished for their actions. These same individuals continue to invest while thinking that if they make mistakes it will ultimately fall back on the banks or their investors. This is bad situation. Real estate is not going to come-out of its slump any time soon. We have excess inventory on shopping centers and much less available dollars to spend in them. The general contraction of the economy will take a toll on all classes of real estate asset. For example, in multifamily products we have seen rents going down 15-25% in the Los Angeles core markets. Office occupancy is not going to improve in the next two years, and rents are been reduced.
Sagiv Rosano, Managing Partner & President, Rosano Partners, Los Angeles, CA

1) How much the high net worth segment of the market has not yet revealed the depth of its financial distress? 2) An over-recovered stock market. 3) A badly weakened US Dollar. 4) High natural resource and raw materials costs 5) The potential for future inflation and 6) That there has been too much money raised targeting high IRR equity returns that has already begun to overpay for the trickle of deals coming forth in an effort to do something, anything with the money, even if the realistic risk-adjusted returns don't justify the promises to investors.
Gabriel Silverstein, SIOR, President, Angelic Real Estate, New York, NY

Lack of liquidity on the debt side. The life companies have returned some liquidly to the market but CMBS and the banks are still a major question mark.
William L. Jackson, Senior Vice President/ Managing Director, Northmarq Capital, Dallas, TX

That uncertainty will reign. Until an "RTC 2" is created with FDIC and REMIC enforcement of loan terms forcing foreclosures to clear the system, we will likely be in a long period of limited activity. Investors typically want either "safe bets" or "steals" in times of confusion. Everything else is priced to the most conservative underwriting and as a result, does not trade.
Bernard Haddigan, Senior Vice President & Managing Director, Marcus & Millichap, Atlanta, GA

Unemployment. This is the single most important gauge of recovery. While, nationally, the rate of job losses appears to be slowing-- and that's good-- we're still losing jobs as opposed to gaining on a net basis. And the fact that workers 60 and older may be postponing retirement and others may be accepting shorter work weeks may be masking the true extent of the unemployment problem. Until we start adding jobs at a significantly net rate, it's going to be rough going.
Fredric J. Leffel, President, Kaufman New Ventures. New York, NY

This market for investment sales in 2009 was brutal. Even when motivated owners priced aggressively to move properties, investors were hesitant to buy given horrible market supply/demand fundamentals and falling values. No one wanted to catch a falling knife. There are preliminary signs that the investment sales market may start moving again in 2010. It looks like increasing vacancy and negative absorption may be ending. There are lender owners willing to sell at cheap prices. A few distressed sales have set badly needed price benchmarks. And we are working with many clients who have real access to cash and are saying they are ready to buy. But, are these buyers really willing to step up in 2010? Has the fear of investing in an uncertain market shifted to greed to capitalize on the historic value opportunity?
Steven K. Lindley, Senior Vice President Capital Markets, Grubb & EllisBRE Commercial, Phoenix, AZ

I think the biggest fear for most of us is that all we are really doing is replacing a few digits; 2009 to 2010. Economic fundamentals don't change just because the calendar does.
Barry C. Smith, President,, Scottsdale, AZ

What worries me most is that there has been a fundamental breakdown of the capitalist system and we won't be able to "re-boot" the system by the usual methods (government subsidies, loosening capital markets). I am concerned that the free market economy reached a critical mass in the 2004-2008 period and exposed an underlying core weakness or flaw in this system. Ours is a consumer based economy. Lack of savings, over extended credit, speculative investing, these are weak links in the capitalist chain. It worries me that we won't learn from our mistakes and adopt an attitude of systemic frugality and focused investment. It worries me that markets are dysfunctional at the core and the quick fix mentality just won't get the job done this time.
Rachel Maman, Acquisitions, Sales & Leasing, Hera Development Corp., Brighton, MA

I'm most worried by the massive amounts of maturing debt and the continued disconnect between buyers and sellers. The active investors today are focused on buying notes versus taking direct ownership in real estate. They get good upside without the "getting your hands dirty" element of owning real estate. The other thing that worries me is the bubble in the bond market. Junk bonds are now yielding as low as 7.5 %. Earlier this year these same bonds were trading at yields well above 10%. This can't continue.
Whitney E. Kerr, Jr., Principal/Vice President, Colliers Turley Martin Tucker, Kansas City, MO

Once again our wonderful politicians in DC do not understand that the "pork" has to be cut from the budgets. Yearly deficits will catch up with us all in the very near future. I'm very concerned that the bankers still have their heads buried in the sand and hope that we will not notice the huge bonuses being paid after a year of record setting profits. When will they open the lending for commercial properties? With $1T in commercial loans coming due before the end of 2012 something has to happen, the sooner the better.
Jerry Hall, CCIM, Sperry Van Ness Wilson Commercial Group, Columbus, OH

Looming loan maturities on commercial real estate concerns me greatly. TARP money with 3- or 5-year term does not adequately address the loan maturity issues. I hope our federal government will seek a long term solution versus short term solution. Complacency concerns me. In the last few days we have been reminded that we are not above another terrorist attack. We need to maintain our vigilance and never, ever forget 9/11.
Marshall De Wolfe, Senior Director, Mark One Capital, Palo Alto, CA

My biggest concern is that people may remain on the sidelines and not move forward. Businesses and consumers need each other to survive; and when either of them sits idle, they both struggle. There will always be reasons to sit still and do nothing. But those who are positioned to take advantage of opportunities-to grow, spend, hire, etc. and still don't because of the fear factor are delaying a recovery. Their reasons are understandable; however, we need to get the ball rolling.
Joan Earhart, Executive Vice President, Fullerton Community Bank, Fullerton, CA

Unemployment and the CMBS tsunami headed our way. We have started taking steps to address the CMBS "challenge" but I fear the timer is running down with no time outs left.
Kristin Hammond, Pacific Real Estate Partners Inc., Portland, OR

Unprecedented tenant concessions such as moving allowances, free rent, discounted rent, termination options, and turn-key tenant improvements. I anticipate these will get even more aggressive in 2010 and will force many Landlord's to sit on the sidelines because doing a lease deal simply won't pencil. Well capitalized landlords will have the advantage.
Matthew Hinrichs, Pacific Real Estate Partners Inc., Bellevue, WA

The nations growing debt. It has got to bite us in the near future. The banking industry is also still in for some hard times and the liquidity for commercial real estate shows little signs of improving. The banks are not showing or listing their inventory of homes because they would then have to write down the losses and increase their reserves.
Harry Bennetts, Olympia, WA

What really worries me about 2010 is that another bubble could burst. With government spending out of control, huge debt loads on companies and commercial properties, and high unemployment undermining consumer confidence, I expect there could be another event that triggers the marketplace to have another retraction. The retraction would most likely be short lived as a confidence disruption and buyers sit on the sidelines with deals put on hold. If the government raises taxes and pursues other social policies that undermine capital investment, prices will keep dropping since buyers will have to make more money to compensate for the higher costs of doing business.
Stephen Karbelk, CAI, AARE, President/Broker, National Commercial Auctioneers, Tulsa, OK

Friday, December 18, 2009

Facebook Adds to Stanford Research Park Leasehold

Great article. BTW-California rates are quoted on a montly per sqft number. The $1.25NNN quoted is actually $15NNN.

SAN FRANCISCO-Facebook has nearly tripled its leasehold at Stanford Research Park. Fourteen months after leasing 137,000 square feet at 1601 California the online social networking site has committed to subleasing from Beckman Coulter an additional 265,000 square feet in three buildings at 1050 Page Mill Rd., according to a recent post on
The sublease from the medical diagnostics firm consists of 135,000 square feet of space in a two-story R&D building, 43,000 square feet in another and 86,000 square feet of single-story warehouse space, according to the posting. The Palo Alto office of CBRE had the leasing assignment.

The company moved to 1601 California earlier this year after outgrowing several buildings in downtown Palo Alto.

At the time, a company source tells the company--which planned to grow from 600 employees to 1,000 by year’s end--may ultimately decide to maintain some Downtown office space to cover any overflow. “While the new building is large enough to hold all of our current employees, it may not be adequate to keep all of us together until we find a permanent headquarters,” said a company spokesperson. “To prepare for this contingency, we expect to retain some of our current space in downtown Palo Alto as well.”
Instead of continuing to occupy some of its Downtown space, the company decided to lease additional space near 1601 California, a former Hewlett-Packard building that later housed HP-spinoff Agilent. The property is slated for eventual conversion to housing under a 2005 agreement between the city and Stanford University. A leasing flyer for the building said it could be leased through mid-2013. The asking lease rate was $1.25 per sf per month, NNN.

Stanford Research Park is a 700-acre, 10-million-sf development on land owned by Stanford University. The park is home to 162 buildings housing approximately 150 companies predominantly scientific, technical and research oriented.

Thursday, December 17, 2009

Express Scripts scraps Bucks plan

"After receiving a Keystone Opportunity Zone designation on 15 acres in Bristol Township, Express Scripts has decided not to relocate and expand its local operations, according to a published report.

The company was set to expand into a 241,000-square-foot building off Rittenhouse Circle that once housed Jones New York. Express Scripts won approvals to designate the property as a KOZ, giving it steep breaks on state and local taxes for the next 10 years. It was expected to add 60 jobs beginning next year as part of its plans.

The St. Louis-based pharmaceutical distribution company told The Intelligencer newspaper that it won’t move forward with those expansion plans and has yet to decide what to do with its existing operations in Bucks. The company employs 950 people in two Bensalem sites.

The company’s plans started teetering after contract talks between the company and the Service Employees International Union faltered, according to the Intelligencer. The company couldn’t be reached for additional comment."

ESW America Renews in Montgomeryville

"ESW America, a company specializing in vehicle/engine emissions testing, recently renewed its lease at 200 Progress Drive, in Montgomeryville, PA. The renewal extends the company's presence for a period of roughly four and a half years.

200 Progress Drive is Building 2 in the Bethlehem Pike Industrial Center. The single-tenant facility measures 40,220 square feet and is situated on 3.1 acres. The building was initially constructed in 1973. It contains four loading docks and two drive-in bays"

Tosoh Bioscience Leases 13,500 SF

"Tosoh Bioscience, a global company that provides diagnostic systems to doctor's offices, hospitals and laboratories, has leased 13,493 square feet of office space at 3604 Horizon Blvd. in King of Prussia, PA.

The single-story, 22,500-square-foot office building sits on 3.9 acres in the Renaissance Park office campus. It was built in 1997. Tosoh Bioscience is taking occupancy in May 2010.

Bruce Hartlein represented the landlord, Liberty Property Trust, in-house."

Warren Buffet Completes Buy of Capmark's Servicing, Loan Business

I blogged on this earlier last month but I thought I'd share it again for anyone who missed it.

"Berkadia Commercial Mortgage LLC, a newly formed entity owned by Berkshire Hathaway Inc. and Leucadia National Corp., completed the acquisition of Capmark Financial Group Inc.'s (Capmark) North American loan origination and servicing business.

Capmark, which in October voluntarily filed for reorganization under Chapter 11, received approval from the U.S. Bankruptcy Court for the District of Delaware to complete the sale.

The sale includes a servicing portfolio of more than $240 billion - the third largest in the United States - as well as leading Fannie Mae, Freddie Mac, FHA, life insurance company correspondent lending and asset management operations. As of June 30, Capmark was named special servicer on 8,618 loans in 113 CMBS transactions with an outstanding balance of $47.5 billion. Capmark was actively specially servicing 280 CMBS loans totaling $2.4 billion and managing 57 CMBS real estate owned properties valued at $342.9 million.

Berkadia has more than 20 origination and servicing locations in markets across the country and will be based in Horsham, PA.

Berkadia has indicated that it will retain all of Capmark's servicing management and staff and intends to keep current business plans in place. Additionally, the company will retain Capmark's systems, vendor relationships and policies and procedures. Berkadia is in the process of hiring more than a thousand of Capmark's approximately 1,500 current employees.

Fitch Ratings said it views the completion of this transaction favorably as it removes the risk associated with Capmark Financial Group's financial instability."

Friday, December 11, 2009

CMBS: Back in Business?

Investors Showing an Appetite for Bonds Backed Even by the Weakest Real Estate Sector and No Government Support

Fullerton Metrocenter in Fullerton, CA, is benefitting from new CMBS issuance.
The commercial mortgage bond securitization window that has been closed for nearly two years during this recession has reopened for business in the last few weeks and investors have lined up encouragingly to take advantage of a new round of CMBS offerings.

Several investment banks have announced that they are firing up their conduit lending programs and will begin to originate and warehouse loans for multi-borrower securitizations, said Chris Moyer, an associate with Cushman & Wakefield Sonnenblick-Goldman in New York.

At least three have publicly announced, or are actively discussing, such programs, while others, have brought on senior managers who have experience building conduit-lending platforms. The active banks are Goldman Sachs, Bank of America and JPMorgan. Word on the street is that RBS and Deutsche Bank are also ramping up securitization activity.

As CoStar reported just before the Thanksgiving break, Developers Diversified Realty Corp. and Goldman Sachs Commercial Mortgage Capital got the ball rolling through a new $400 million securitization backed by bricks-and-mortar assets. That deal was driven in part by the availability of inexpensive funds from the federal government's Term Asset-Backed Securities Loan Facility (TALF), which the Federal Reserve initiated to help "jump-start" the securitization market.

The DDR deal was significant in that even though it was backed by retail, one of the weakest performing properties in this recession, it demonstrated strong investor demand and set a benchmark for potential issuers considering similar transactions. In fact, since then, two new deals have either come to market or will shortly, but importantly, neither is relying on government support.

Last Thursday, Bank of America priced a 7-year, $460 million CMBS offering for Flagler Development (controlled by Fortress Investment) without government / TALF support. The loan is secured by the borrowers' fee interest in 44 office and industrial properties in Florida, which collectively constitute 5.8 million square feet. The deal also includes easement interests along a 351-mile railway corridor, and fee interests in 23 parcels adjacent to the rail corridor.

"Obviously, the fact that a fully private CMBS deal got off the ground for the first time since mid-2008 is a positive for the market," said Charles Cecil, partner and CEO of Opin Partners in New York. "But the pricing -- a blended rate of 5.8% on the bonds -- was much wider than the TALF-supported DDR deal (which priced at a blended rate of 4.2% with a comparable 51% loan to value). The wider pricing can probably be attributed to a heavy geographic concentration in Florida and an unusual collateral mix that included cash flows from leases and usage rights from a railway and fiber-optic cables."

Next up is a new CMBS for the $500 million senior portion of a $625 million JP Morgan deal for Inland Western Retail Real Estate Trust Inc., which will also be issued without utilizing the TALF program and again is supported by retail property.

Inland Western Retail obtained the newly secured loan from JPMorgan Chase Bank on a portfolio of 55 retail properties in 23 states in a joint venture owned by Inland Western and principals of The Inland Real Estate Group Inc. The portfolio contains 22 grocery-anchored centers (32.3% by allocated loan amount).

"The closing of this non-recourse secured debt financing is a significant accomplishment, as we have now addressed virtually all of our 2009 maturing debt and a substantial portion of our debt maturing in 2010," said Steven Grimes, CEO of Inland Western.

All three new issues have involved single borrower entities, which have not made up the bulk of CMBS deals in the past. And single-borrower deals likely will be the case going forward, according to analysis by Standard & Poor's.

"In the near term, we expect to see single-borrower transactions as the first ones to be securitized," S&P wrote in a recent report. "The underlying loans will likely be to REITs and institutional owners/operators with unencumbered assets or assets with low leverage. Other potential issuers include finance and insurance companies with real estate holdings and seasoned loan pools on their balance sheets, or the ability to leverage their balance sheets to originate new loans."

"We expect the loans to be smaller than in the recent single-borrower transactions, with lower all-in leverage, little or no additional debt held outside the trust, five-year loan terms with 25- or 30-year amortization schedules, and terms and conditions that are more lender-friendly. The properties are likely to be underwritten more conservatively, with higher vacancy assumptions and in-place rents (without the projected upside that may have been factored into recent-vintage loans). In fact, it is possible that property values will reflect a downward trend or an expectation that rents and occupancies may fall further," S&P wrote.

Only time will tell whether these welcomed new transactions will mark a return to more normal levels of availability of credit for commercial real estate, the real estate finance and distressed asset teams of the California law firm Luce Forward commented to its clients. However, the firm wrote: "The timing could not be better with billions of dollars of CMBS maturing next year and beyond."

North American S. Broad has sewn up four leases

The North American building off South Broad Street in Philadelphia has sewn up four leases that brings its occupancy up to about 91 percent.

The building at 121 S. Broad completed the deals, all of which were renewals, with:

• DMi Partners, an Internet marketing company that expanded its headquarters into 8,219 square feet in a five-year deal. The company was in 4,983 square feet. DMi plans to hire additional employees.

• The Philadelphia Trial Lawyers, which extended its lease for 10 years on 6,610 square feet.

• Gerolamo McNulty Divis and Lewbart, a law firm that renewed on 6,610 square feet — a full floor — for another four years.

• And Mitchell & Ness, a sports nostalgia product company.

Meanwhile, Alstin Communications relocated from 1401 Walnut St. The firm took a full floor.

Market Street between 34th and 41st streets in University City is undergoing a seven-month makeover. The streetscape improvements are being funded by property owners and landlords along the targeted area of Market Street and a $2 million grant from the City of Philadelphia’s ReStore Philadelphia Corridors program. University City District came up with the project and the Science Center is overseeing it. Once completed, it is expected to change the look and feel of that area along Market Street in University City with new pedestrian lighting, sidewalks and plantings ...

U.S. Realty Capital arranged a $2.5 million construction loan for the acquisition and conversion of an historic elementary school at 137 Grape St. in the Manayunk section of Philadelphia. The 24,000-square-foot building will be turned into 22 apartments ... A five-unit apartment building at 2114 Pine St. in Philadelphia traded for $1.02 million, or $204,00 a unit. An undisclosed buyer from New York picked up the building. Marcus & Millichap arranged the sale.

Orleans Homebuilders gets NYSE Amex delisting notice

Orleans Homebuilders Inc. got word from NYSE Amex exchange that the company’s shares will be delisted since it’s not in compliance with certain continued listing criteria. The Bensalem homebuilder said that it received the letter from the exchange on Dec. 1.

Orleans (AMEX:OHB), like just about all homebuilders, has been struggling during the last four years as the housing boom went bust. The company failed to file its annual report in a timely manner for its fiscal year that ended June 30, which is a violation of the listing criteria. The company did submit a plan on Nov. 16 letting Amex know what it intended to do to bring the company back into compliance by this coming Feb. 10. However, Orleans didn’t file its fiscal first-quarter report either, another violation of the listing criteria.

The company said it didn’t file the annual and quarterly report because it would have required unreasonable effort and expense. It might submit a new plan to the exchange by Dec. 15 and hopes to file both reports early next year. The company’s stock is trading at around $2 a share.

Creative Child Care Leases in Plymouth Meeting

Creative Child Care Centers signed a long-term lease at 3037 Walton Road in Plymouth Meeting, PA, for 7,580 square feet.

The building was previously occupied by Chesterbrook Academy and was built in 1985. Creative Child Care Centers will continue to use the property for childcare purposes.

Philadelphia Multifamily Sells for $1M

Private investors acquired the multifamily building at 2114 Pine St. in Philadelphia for $1.02 million, or approximately $204,000 per unit.

The five-story building was built in 1900 and features two one-bedroom apartments, two two-bedroom apartments and a studio unit. The property is located in the Rittenhouse Square area and was fully occupied at the time of purchase. The reported net operating income of the property is $63,000 annually.

Friday, December 4, 2009

Neshaminy Mall owner General Growth files reorganization plan

"General Growth Properties Inc. filed a bankruptcy reorganization plan today in hopes that it can work out its $9.7 billion in secured mortgage loans.

The Chicago real estate company locally owns the Neshaminy Mall in Bensalem and the Christiana Mall down the road in Newark, Del.

Neshaminy Mall totals 1 million square feet and has 120 stores. Among its anchors is Macy’s, Barnes & Noble, Boscov’s and Sears. The mall opened in 1968 and was renovated in 1995 and 1998. Christiana, a 1.08 million-square-foot mall, has 130 stores of which Lord & Taylor, JCPenney and Macy’s are anchors. That mall was constructed in 1978 and renovated in 1990.

The filing highlights two big issues converging at the same time on retail property owners. One is the difficult credit market, where borrowers are having a tough time renegotiating debt, and the other is the challenging retail climate. The $9.7 billion exceeds previously announced agreements in principal to restructure $8.9 billion of mortgage loans.

General Growth filed for bankruptcy in April. The reorganization plan is set to be confirmed on Dec. 15 and will allow the company to emerge from bankruptcy by the end of the year. The company has over 200 regional shopping malls in 44 states."

Monday, November 30, 2009

Deals of Note for Monday

"Archway Inks 350,000-SF Renewal in Valley Forge

Marketing Operations Firm Extends Lease at Distribution Center Archway Marketing Services has renewed its lease of the 352,456-square-foot distribution building 1001 Trooper Road in Norristown, PA.

Located in the Valley Forge Corporate Center, the facility delivered in 1969 and was expanded in 1980. Features include 31,721 square feet of office space, 24 loading docks and two drive in bays. It sits on 33 acres.

Archway specializes in marketing, fulfillment and supply chain management services. Archway was represented in-house."
By Vickie Katlic

"Performance Years Inks 30,000-SF Deal in Hatfield.

Performance Years, a supplier of classic Pontiac car parts, signed a 30,000-square-foot industrial sublease in Hatfield, PA. The tenant is moving from 2880 Bergey Road to 2705 Clemens Road, which keeps the company in the West Montgomery County Industrial submarket.

Built in 2006, the 80,000-square-foot warehouse is in the Clemens Business Center building park and is situated on approximately seven acres. Building features include six loading docks, two drive-in bays and ceiling heights of up to 28 feet."

By Melannie Skinner

Tuesday, November 24, 2009

Warren Buffett group in $468M deal for Horsham's Capmark

"A joint venture of Warren Buffett's Berkshire Hathaway Corp. and New York-based Leucadia Corp. has agreed to purchase Horsham-based Capmark's loan servicing business for $468 million, up from an earlier "stalking horse" bid of around $400 million, Reuters reports here.

The deal was welcomed by Capmark workers who believe "Berkadia" is more likely to keep them employed than other potential bidders, such as PNC, which has its own commercial mortgage loan-servicing unit.

Capmark is one of the largest servicers of office and apartment complex loans. The company, once part of General Motors' financial arm, faced mounting losses incurred under current owner KKR, and filed for bankruptcy protection in Wilmington earlier this year."

Monday, November 23, 2009

Region's recovery may begin during the winter

More encouraging signs about recovery coming.

"Two of the newest measures of the health of the regional economy are showing signs that a turn in the business cycle may be near.

The Greater Philadelphia Leading Index has risen for five straight months through September. The index, built by the economics firm IHS Global Insight, uses indicators that generally change direction six months before the overall economy.

Phil Hopkins, director of research for Select Greater Philadelphia, which sponsors the quarterly report, retained his cautious outlook, but said the leading index could be forecasting a bottoming of the regional economy this winter.

(Remember: bottoming is good because it means the next direction is up.)

With lots of economists and analysts speculating that the U.S. recession ended during the summer, that doesn’t put our region too far behind the curve. But the start of an economic recovery often feels a lot like the end of a contraction because of the lousy job market.

Hopkins said it may be the end of 2010 before the region sees “sustained growth in employment.”

The other measure, the Greater Philadelphia Coincident Index, fell for the 20th time in the last 21 months. (A coincident index tracks indicators that vary directly with movements in the business cycle.) Hopkins noted that the month-over-month decreases have become more gradual and the hope is that it will begin to increase during the next three months.

In truth, the paint is still wet on these two indexes, which were launched in the thick of last fall’s global economic crisis. So while Hopkins is encouraged by the trends showing up in the indexes, the next quarterly report in February may be the key one that determines if these regional tools can “catch the turning point” in the business cycle.

All recessions are different, but Philadelphia’s reputation has been that it lags during recoveries. Following the 1991 recession, it took the Philadelphia area 69 months before employment surpassed its pre-recession peak, Hopkins said. It took the nation only 31 months.

But after the 2001 recession, the Philadelphia region surpassed its previous peak in employment in 41 months compared with 47 months for the U.S. as a whole, Hopkins.

And this time? IHS Global Insight forecasts the employment level here climbing above its pre-recession peak during the second or third quarters of 2012. Sounds bad, but that would be faster than 34 states."

Wednesday, November 18, 2009

Fed Reserve's TALF Program Backs First New Issue CMBS

Developers Diversified, Goldman Sachs Put CMBS Deals Back in Action
Fed Reserve's TALF Program Backs First New Issue CMBS

Town Center Plaza in Leawood, KS, benefited from the first new CMBS deal in more than a year
The first new-issue commercial mortgage backed securities (CMBS) supported by brick-and-mortar properties in nearly two years successfully sold this week.

DDR Depositor LLC Trust 2009 Commercial Mortgage Pass Through Certificates, series 2009-DDR1 represents the beneficial interests in a trust fund established by affiliates of Developers Diversified Realty Corp. The trust fund will consist primarily of a single promissory note secured by cross-collateralized and cross-defaulted first lien mortgages on 28 of Developers Diversified Realty's properties. Goldman Sachs Commercial Mortgage Capital originated the $400 million loan.

The deal sold at its asking price and saw strong investor demand. The word on the street was that the deal was up to five-times oversubscribed. The capital markets had been looking to this deal as a measure of investors' appetite for risk involving commercial real estate assets and, in some ways, as a sign of the potential strength of the recovery.

As sold, DDR's five-year loan would bear an interest rate of less than 6% after factoring in all fees and expenses. As a result, the strong demand for this deal could prompt other potential borrowers to pursue CMBS financing, according to Opin Partners LLC, an investment house in New York. In fact, DDR is said to have another upcoming securitization, and other REITs are also expected to come to the table including, Fortress Investment Group, which may have as much as $650 million in commercial mortgages to package into a new-issue CMBS eligible for TALF funding.

The Federal Reserve's TALF (Term Asset-Backed Securities Loan Facility) was key to the deal. The Federal Reserve created TALF to help market participants meet the credit needs of households and businesses by supporting the issuance of asset-backed securities collateralized by commercial mortgage loans, auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration, or residential mortgage servicing advances.

Eligible borrowers on the DDR deal can borrow Fed funds for the five-year fixed period at a rate of 3.5427%. TALF funds can only be used for the purchase of AAA-rated class of securities. Of the $400 million DDR deal, Fitch Ratings rated $323.5 million as AAA ($41.5 million was rated AA and $35 million A). The DDR deal is expected to close officially next week at which time, the loans will also be funded.

Some of key ratings drivers cited by Fitch Ratings included:

Loan-to-Value Ratio (62.4%): The Fitch stressed value is $641 million, based on a Fitch weighted average cap rate of 8.7%.

Debt Service Coverage (1.44x): The Fitch-adjusted cash flow for the 28 properties was $55.6 million, approximately 16.% less than the trailing 12 months net operating income.

Strong Tenancy and Mix: A majority of the portfolio is anchored by national or large regional tenants, with Wal-Mart representing the largest tenant exposure at 10.3% of the total square footage and 5.4% of base rent. The top five tenant concentrations, which represent 23.2% of total square footage (and 15.2% of base rent) are all investment-grade rated. Other top tenant concentrations include TJX Cos., Lowes, Home Depot, and Bed Bath & Beyond.

The 10 largest properties backing the deal and their allocated loan amount are listed as follows:

Town Center Plaza, Leawood, KS; 649,696 square feet; $54.3 million;
Hamilton Marketplace, Hamilton, NJ; 956,920 sf; $44.4 million;
Plaza at Sunset Hills, Sunset Hills, MO; 450,938 sf; $30 million;
Brook Highland Plaza, Birmingham, AL; 551,277 sf; $26.4 million;
Crossroads Center, Gulfport, MS; 545,820 sf; $26.4 million;
Mooresville Consumer Square, Mooresville, NC; 472,182 sf; $19.5 million;
Deer Valley Towne Center, Phoenix, AZ; 453,815 sf; $18.9 million;
Downtown Short Pump, Richmond, VA; 239,873 sf; $13.4 million;
Abernathy Square, Atlanta, GA; 129,771 sf; $13 million; and
Wando Crossing, Mt. Pleasant, SC; 325,907 sf; $12.8 million.

- Mark Heschmeyer

Office Delinquencies Latest Driver of CMBS Troubles

Great article on delinquencies and Commercial Mortgage Back Securities.

"Job losses and subsequent office loan defaults, coupled with continued hotel underperformance, resulted in another monthly increase in U.S. CMBS delinquencies. And new matured balloons and past due loans secured by interests in non-traditional assets propelled U.S. commercial real estate loan CDO delinquencies past 10% for the first time, according to the latest index results from Fitch Ratings.

U.S. CMBS late-pays rose again in October, up 28 basis points to 3.86%. The office sector had the highest increase in delinquencies since September with 19.4% additional delinquencies followed by hotels, with a 16.5% increase.

Delinquency rates for all major property types were as follows:

Office: 2.29%,
Hotel: 6.81%,
Retail: 3.55%,
Multifamily: 6%, and
Industrial: 3.09%.

Office delinquencies increased $557.4 million in October 2009. Contributing to the increase were three newly delinquent loans greater than $50 million, the largest of which was 550 S. Hope St., a $165 million loan in GSMSC 2007-GG10. The loan transferred to the special servicer in August 2009 after the borrower, Maguire Properties, stated that it would no longer fund the debt service shortfalls. Cash flow from the property has not increased to the banker's underwritten expectations at issuance as lease expirations are not yielding the higher assumed rental rates.

"Though longer leases on office properties have historically mitigated sharp changes in performance, continued job losses are expected to increase pressure on the office sector," said Susan Merrick, managing director of Fitch and U.S. CMBS group head. "With the looming possibility of leases expiring on space under-utilized by companies that have downsized, office performance may not reach a trough for a few years."

However, it should be noted that even with the increase in October, the office sector has the lowest delinquency rate currently at 2.29%.

Hotel delinquencies increased $493.9 million in October. The hotel sector has the highest property type delinquency index at 6.81%, with nine delinquent loans of more than $100 million. Newly delinquent hotel loans included three related Red Roof Inns loans that had been included in the index in August. The loans, totaling $292.8 million, became 60 days late after reverting to 30 days in September.

The largest newly delinquent loan in the index is Riverton Apartments, a $225 million loan collateralized by a 1,230 unit rent-stabilized, multifamily housing project in Harlem, NY. The loan has been in special servicing since August 2008 after the borrower was unable to convert rent-stabilized units to deregulated units as quickly as projected when the loan was underwritten. The loan had been using debt service reserves to remain current.

By dollar balance, retail loans continued to lead the index with $4.9 billion of delinquent loans, stable from September. The delinquency volume for multifamily loans rose only slightly to $4 billion from $3.9 billion, while hotel loan delinquencies increased from $3 billion last month to a total of $3.5 billion in October. Loans collateralized by industrial properties ended the month with $746 million of delinquencies, a 3.8% month-over-month increase.

The Fitch commercial real estate loan CDO delinquency index for October increased to 10.8% from 8.7% last month, with non-traditional property types now representing 44% of all delinquencies, a disproportionate amount compared to the% of all collateral in CREL CDOs. Non-traditional property types, which include loans secured by interests in land, condominium conversions and construction projects, comprise only 13% of the collateral in Fitch rated CREL CDOs.

"About a third of the new delinquencies are large matured balloon loans that may be ultimately extended," said Karen Trebach, senior director of Fitch.

The largest new delinquency was a $110 million A-note secured by a portfolio of eight multifamily properties in five states. An affiliate of the asset manager assumed the loan and subsequently extended it for a year at a below market rate, which was 200 basis points lower than the coupon at origination. Without this spread reduction, the cash flow would not have been sufficient to cover debt service. Upon its newly extended maturity date, this loan defaulted.

New delinquencies secured by non-traditional property types this past month included two loans secured by interests in land and two secured by construction projects. Land loans currently comprise the largest component of the index with 32% of all delinquent loans. Approximately 40% of all land loans in the Fitch rated CREL CDO universe are now delinquent with increased delinquencies expected. Other non-traditional asset types also have high overall delinquency rates with condominium conversions at 23% and construction loans at 29%. Fitch assumes all loans secured by interests in land and other non-income producing assets experience a term default as part of its rating reviews."

Pintzuk Brown Holdings Grabs Caln Plaza for $4.3M

Investor Group Purchases Fully Leased Shopping Center in Coatesville

Pintuk Brown Holdings acquired the Caln Plaza shopping center at 1847-1855 E. Lincoln Highway in Coatesville, PA, for $4.25 million, or about $75 per square foot.

The 57,400-square-foot retail center is located on approximately nine acres of land on the busy Business Route 30. Caln Plaza is currently 100 percent leased and is anchored by Amelia's Grocery Store, Family Dollar and Rent-A-Center.

-Michael Nylund

Willis of Pennsylvania Inks 31,500-SF Office Renewal

Great blurb about Willis in Radnor.

Willis of Pennsylvania Inc. signed a 31,524-square-foot lease renewal at 5 Radnor Corporate Center in Radnor, PA.

The five-story, 164,577-square-foot office building at 100 Matsonford Road was built in 1985 and is in the Upper Main Line submarket. It is part of the Radnor Corporate Center building park.

The landlord, Brandywine Realty Trust, received in-house representation.

Pain, but no ‘blood in the streets’

Great quick piece in the Inquirer.

Cutting through the gloom at today's 2010 Emerging Trends in Real Estate Forum hosted by the Urban Land Institute Philadelphia was Robert Fahey, who sells commercial real estate for CB Richard Ellis.

Fahey said his group, which works from northern Delaware north to Princeton and west to Harrisburg, had closed six deals in the last two months after a two-year slump.

Fahey, an executive vice president, told a crowd at the Union League that buyers and sellers had started reaching consensus on prices, which they could not do for a long time.

There has been pain for sellers, he said, but it has been short of "blood in the streets."

Thursday, November 12, 2009

Pfizer Reducing R&D Space After Wyeth Acquisition

This article is on how the Pfizer acquisition of Wyeth is effecting the Collegeville, PA location.

"Pfizer Reducing R&D Space After Wyeth Acquisition

Pfizer Inc. is significantly reducing its research and development operations, following the $68 billion acquisition of competitor Wyeth that made it the world's largest pharmaceutical company.

As part of a new R&D model, Pfizer plans to consolidate its primary operations into five sites in Cambridge, MA; Groton, CT; Pearl River, NY; La Jolla, CA; and Sandwich, U.K. Pfizer intends to run its BioTherapeutics, PharmaTherapeutics and Vaccines divisions out of these facilities. Additionally, some specialized research is to be handled at other sites.

Pfizer is reducing its R&D footprint in an effort to more efficiently make use of its real estate. Some functions in Collegeville, PA; Pearl River, NY; and St. Louis are to be moved to other locations. Pfizer also plans to completely discontinue operations in Princeton, NJ; Clinton County, NY; Sanford and Research Triangle Park, NC; and Gosport, Slough/Taplow, U.K. R&D operations in New London, CT, will be moved to the nearby facility in Groton.

The consolidation cuts Pfizer's R&D space by 35 percent, going from 20 facilities to five main hubs and nine specialized centers. Approximately 2,000 employees are expected to lose their jobs.

"In less than a month, we have made complex business decisions needed to combine these two R&D organizations thoughtfully yet quickly," said Martin Mackay, president, PharmaTherapeutics Research & Development.

Two of Pfizer's competitors, Johnson & Johnson and Eli Lilly, also recently announced major staff reductions."

Wednesday, November 11, 2009

Real Estate Deals of Note

Here are a couple of deals that recently got done in the Philadelphia area.

"BioClinica Inc., a provider of bio-imaging and data systems support for clinical trials, signed a nine-year lease for 36,143 square feet at Rittenhouse II in Norristown, PA.
The 65,716-square-foot office building at 800 Adams Ave. is in the Valley Forge Corporate Center. The three-story building was built in 2008. It is only minutes from Route 202, I-76 and the Valley Forge interchange of the Pennsylvania Turnpike.
O'Neill Properties Group, the landlord, was represented in-house by Timothy Dugas and Larry Doyle."

"The industrial building at 195 Oneill Road in Quakertown, PA, sold for $3.4 million, or $44 per square foot, in a sale between private parties.
The 77,502-square-foot warehouse was built in 1974 and sits on about five acres. It features 11 loading docks, three drive-in bays, 24-foot ceiling height and heavy power."

Monday, November 9, 2009

How to spot recovery

Another great article in the Inquirer this morning about CRE and recovery.

Special Report: Commercial Real Estate's Troubles

Exactly when the Philadelphia region's distressed commercial real estate landscape will shed its "Space Available" banners is uncertain.

Some experts suggest recovery is a year away. Others lean closer to three years, given that two significant changes must precede it: employment growth and a resumption in lending.

What's more predictable, those experts say, is what the recovery will look like.

One of the first signs of a turnaround will be a spike in rents - a basic function of demand outpacing supply.

In the office market, currently not considered overbuilt and not expecting new spaces for at least three years, "I think you'll see 20 percent" rent increases, said Sid Smith, managing partner of the regional office of Newmark Knight Frank Smith Mack, a global real estate services company.

As for the rest of commercial real estate's postrecession constitution, expect a "new normal" premised on lessons learned over the last year of pain, said Jim Mazzarelli, regional director of Liberty Property Trust, a major landlord in this area, with about 10 million square feet of office space.

For one, landlords will not assume that tenants, especially established, high-profile tenants, are forever. As a case in point, real estate professionals refer to this year's dissolution of the venerable Wolf Block law firm, which added 175,000 square feet of vacancy to Philadelphia's Market Street West submarket.

"The days are gone when you would [assume] a major law firm would be around for 60 years and give them $10 million in [building-improvement] capital," said Dave Campoli. He is a regional vice president for HRPT Properties Trust, a national real estate investment trust with nearly 5 million square feet of commercial office space in Philadelphia.

In the new world, Campoli said, such a law firm likely will have to put up a portion of the cost of any site improvements it wants.

Tenants will be choosier, too, he said, doing more vetting of landlords to verify whether they have the financial foundation to fulfill promises made at the time a lease is signed.

That will lead to what Liberty Property's Mazzarelli calls "flight to a stronger brand." It's a pattern he contends will dominate commercial real estate decisions when the economy picks up.

Traditionally, economic downturns have triggered so-called flights to quality in the office market. That's when tenants take advantage of depressed rents and move to higher-end buildings whose rents in boom times were beyond their budgets.

At the heart of "brand flight" will be tenant concern over "who's going to take care" of them once they move into a building, Mazzarelli said.

"Companies that are in a tough business environment don't want to have to worry about the real estate they're housed in," he said. "They don't want to worry about the roof leaking or whether taxes are being paid."

What kind of buildings will fill up first when businesses resume the hunt for space?

When it comes to big-box retail, early indications suggest the answer is: big-box retail.

Brandon Famous, chief executive officer of Fameco Real Estate L.P., a broker of retail space, said electronics retailers trying to break into this market have been "scouring" the region for empty Circuit City stores and signing leases at rental rates nearly half what was being charged three years ago.

In the office market, the properties offering energy-efficient, sustainable features will be in highest demand, and not necessarily because tenants have had a green consciousness-raising, said Brenda Gotanda, a partner and specialist in green building at the law firm Manko, Gold, Katcher & Fox L.L.P., of Bala Cynwyd.

Interest will come as much from a recession lesson - that no cost-saving opportunity can be ignored - said Gotanda, who represents owners of office buildings, including Liberty Property Trust.

In Pennsylvania, she said, added impetus for property owners to incorporate features such as solar panels, motion-detection light switches, and automatic window shades will come from the double-digit increases in energy prices expected when state-imposed electricity-rate caps expire next year.

At HRPT, Campoli does not disagree. But he said selling green features to tenants as a long-term cost-savings measure might not be easy - at least not in the early stages of an economic recovery - if it means boosting rents to help cover installation costs.

He speaks from experience. When he recently proposed some green features in one of HRPT's properties, warning a major tenant that those additions would result in a rent increase, Campoli said the tenant replied, "Why don't you have a blood drive if you need to feel good?"

In today's offices, "it's just survival mode right now," Campoli said.

It's a little like that in Matthew McManus' world, too. He is chairman of Bluestone Real Estate Capital, an investment bank for real estate investors, primarily in three sectors - multifamily, hospitality, and health care.

"We had a very scary 2008," he said recently, noting that the nearly $400 million in business his firm closed that year involved deals made in 2007.

So far this year, Bluestone has closed just under $250 million in business, McManus said. But out of this slow time has come innovation.

Working with developer Bart Blatstein, Bluestone is pulling together an institutional-equity fund of between $100 million and $150 million that will start making investments the first quarter of next year in Philadelphia and the surrounding counties.

"We're subscribing to the belief," McManus said, "that risk can be controlled by investing in your backyard."

Sunday, November 8, 2009

Commercial real estate facing worse days

This is a great local commercial real estate article from the Sunday Inquirer.

Special Report: Commercial Real Estate's Troubles

From his 30th-floor Center City office, William J. Hirschfeld has an in-your-face reminder that all is not well in commercial real estate.

His view is of One Liberty Place, the 61-story premier office address that, to the casual observer, is a glistening marvel. To Hirschfeld, it's also a constant prod that he's "gotta make the doughnuts."

That means finding a tenant for the 54th floor, a spectacular space that, despite pulse-quickening views, Hirschfeld, as One Liberty's leasing manager, has had no luck filling since Cigna moved out three years ago.

It's just a hint of the harrowing state of affairs in commercial real estate, where vacancies are on the rise across virtually all sectors, rents and property values are dropping, building owners are low on funds, and financing options are drying up.

And bad as things are, they're expected to get worse - the next slide in the snowballing economic crisis that began with the collapse of the housing market and continues to claim casualties.

"There's a tremendous amount of pain coming," declared Sid Smith, managing partner of the regional office of Newmark Knight Frank Smith Mack, a global real estate services firm.

There's plenty of pain already, and abundant evidence that economic suffering is as contagious as flu in the workplace:

The office market is faring the worst, a direct result of layoffs and the shuttering of businesses altogether. At the close of the third quarter, the office-vacancy rate in the Pennsylvania suburbs was 18.4 percent; in South Jersey, 16.1 percent; in downtown Philadelphia, 12.6 percent, according to data from Grubb & Ellis Co., a national commercial real estate services company. For the combined region including Wilmington, the rate was 16.3 percent, slightly better than the national rate of 17.1 percent, which Grubb & Ellis attributed to the diversity of this area's economy and a lack of overbuilding before the recession started.

Those who have lost jobs or fear losing them are shopping less. That, in turn, has led to retailers' going out of business or pulling back on expansion plans, leaving empty storefronts in shopping centers and on Main Streets, and vacant big-box hulks. The region's retail-vacancy rate is put at 8.3 percent.

With shopping down, so is a lot of manufacturing and the need for stockpiling inventory, thus creating vacancies in warehouses and other industrial spaces.

Multifamily commercial properties (apartment and condo buildings) don't have a lot to crow about, either: Vacancies have been on a gradual climb there, too, currently about 8 percent in this market. Some reasons: unemployment (young people aren't leaving home, for instance) and abundant now-less-expensive homes for sale.

All this empty commercial space is driving down rents, creating a capital-flow problem for the landlords who can least afford it - those with debt coming due. Of the $3.5 trillion in outstanding commercial debt, an estimated $535 billion will mature over the next two years, according to Marcus & Millichap, a national commercial real estate brokerage firm.

Property values are down as well, as much as 40 percent since October 2007, the most recent peak. Those drops contributed to the bankruptcy filing last month by Capmark Financial Group Inc., a commercial-property lender in Horsham that wound up owing more to its own creditors than its loans were worth.

As fortunes in commercial real estate have worsened, a new trend has emerged: Tenants are scrutinizing the creditworthiness of landlords.

Smith, of Newmark Knight Frank Smith Mack, said that was "something we spend more time on than we ever had in the past."

"Today, it's one of the first questions you ask," he said. "You want to know the capitalization of the landlords, can they meet their obligations. The landlords fortunate to have capital are making leases."

But who will be well-capitalized is a bit of an unknown.

Commercial real estate "is going through a whole regime change in terms of financing," said Tim Schiller, a senior economic analyst at the Federal Reserve Bank of Philadelphia. "There's going to be less lending into this industry and requirements for more owners' capital."

For instance, a property bought in 2005 for $10 million with a $7 million mortgage now might be valued at $6 million, said Steve Blank, a senior fellow in finance at the Washington-based Urban Land Institute.

"Now, you go into the bank to refinance the existing loan," Blank said, "and the bank says, 'We can only give you 60 percent loan-to-value.' Sixty percent times six million is $3.6 million."

With the bank willing to refinance only $3.6 million of the original $7 million mortgage, that leaves a stomach-churning gap of $3.4 million.

"How does that gap get closed?" Blank asked. "Will the owner decide to put more money into the property? Will the bank accept a lower-than-full payoff? These are the imponderables."

Some analysts estimate the credit crisis has driven $138 billion worth of U.S. commercial properties into default, debt restructuring, or foreclosure.

Not that lenders are eager to go with the most severe option: taking possession of property.

"It's just not so easy for the banks to go into foreclosure mode," Blank said. "One of the reasons is they need to have income or equity before they can take the losses."

With more than 100 bank failures so far this year, Blank said his guess was that for at least the short term, lenders will opt for a "pretend-and-extend" strategy - settling, perhaps, for payment of interest for a time.

"Everyone is going to try to get through this by kicking the can down the road for a while," he said.

Because commercial real estate is a lagging indicator, recovery is not expected until at least three to six months after the economy shows signs of growth. Meanwhile, more office vacancies are coming.

The recent merger of pharmaceutical heavyweights Pfizer Inc. and Wyeth will result in the closing of Wyeth's Great Valley campus next year. The 87-acre site consists of two buildings with a combined 529,000 square feet.

In Center City, a big question mark is what will become of the 160,000-square-foot Rohm & Haas Co. headquarters on Independence Mall in the wake of the company's acquisition by Dow Chemical Co.

What those properties don't have going for them is "trophy" status like One Liberty Place does.

"Trophy" is the top subsector of the highest class of office building. Compared to the rest of the office sector, it is performing well, said Hirschfeld, One Liberty's leasing agent and senior director at Cushman & Wakefield of Pennsylvania Inc.

One Liberty's crisis years were 2005 to 2007, when it was 42 percent vacant compared with 9 percent today. Asking rent then was $28 to $30 a square foot, plus electric; today, it's $36 to $38 a square foot, plus electric.

On a recent sun-soaked afternoon at One Liberty's bare 54th floor, Hirschfeld was upbeat. He noted that few buildings in the city offered such spellbinding views: the Schuylkill and Delaware River, the Ben Franklin Bridge, William Penn atop City Hall, the soaring Comcast Tower.

"We have prospects," Hirschfeld said. "Whether we're going to do a deal very soon, who knows?"

By Diane Mastrull
Inquirer Staff Writer

Friday, November 6, 2009

Emerging Trends: "The Bottom is Near!" Predict CRE Forecasters

This is a great article about the bottom being near.

Most Market Forecasters See a Pricing Bottom Next Year, and at Least One Prognosticator Suggests that Transaction Pricing for Institutional Investment-Quality Real Estate May Have Already Bottomed in the Third Quarter

Having reviewed the next round of commercial real estate surveys, forecasts and emerging trends issued this past week for 2010, about the only good news appears to be that the market has hit bottom -- or will soon. Rents and values have continued to fall across virtually every commercial real estate sector and across almost every market.

However, forecasters see the prospect for near-term opportunity once the markets bottom out, bringing a long-expected deluge of loan workouts, write downs, defaults and foreclosures -- along with the time-tested rush by patient, cash-rich investors, who, with some fortunate timing, will be able to tap some very attractive buying opportunities at bottom-of-the-cycle prices.

Also, leasing activity is expected to increase as tenants seek to take advantage of sharply lowered rents, resulting in more potential commissions for brokers, but also likely resulting in more pressure on highly leveraged building owners.

At least five major surveys and forecasts have been released since late last week by such influential industry groups as Real Estate Roundtable, the MIT Center for Real Estate, the National Multi Housing Council and NAIOP. PricewaterhouseCoopers and the Urban Land Institute released one of the industry's most widely watched surveys, the annual Emerging Trends in Real Estate, on Thursday morning.

"There is some gloom and doom, but it's going to be a great time to buy if you're able to do so," said Susan Smith, director of PwC's real estate advisory practice. "With all the pain and challenges, buyers are still anticipating the opportunity to capitalize on it and buy some decent quality assets at great pricing.

"But it's going to take time."

The surveys tend to confirm the 2010 projections made last month by CoStar and its newly acquired analytics and forecasting advisory firm, Property Portfolio and Research Inc. (PPR), which were among the first forecasts to be released. The office vacancy rate stood at 13% at the end of the third quarter, and CoStar forecasts several more quarters of negative absorption and another 300-basis-point increase in the vacancy rate to 16% as the office market trails what's shaping up to be a "jobless recovery." Strong demand for office space is not expected to return until 2011-12, but when it does recovery should be robust, with the national office vacancy rate expected to fall to 10.5% by 2014 if job numbers begin to pick up as expected, according to CoStar and PPR projections.

Looking ahead, CoStar forecasts that the national industrial vacancy rate will rise from 10.2% in the third quarter to as high at 11% next year, but the amount of negative net absorption -- which approached nearly 150 million square feet year to date through the end of the third quarter -- should taper off over the next couple of quarters. The industrial market will slowly resume leasing activity starting in mid-2010, generating reasonably strong positive quarterly absorption through 2013. Rents, however, likely will remain moribund for two or three more years.

Coming off an idle 2009, the next year will likely rank as the slowest year of the modern era for new development, according to projections covering US market conditions presented by CoStar in a series of webinars last month.

A record 900 people participated in this year's Emerging Trends in Real Estate 2010 survey by PricewaterhouseCoopers and ULI. The results won't do much to either comfort the pessimists or encourage the optimists.

Across the board, investor sentiment was at or near record lows. Survey respondents predicted that vacancies will rise and rents will fall in all property types before the market hits bottom next year. Only apartments rated as a "fair" prospect, with all others sinking into the fair to poor range, with respondents especially bearish on retail and hotels. Development prospects ranged from "dead" and "abysmal" to "modestly poor."

"Not surprisingly, the overwhelming sentiment of Emerging Trends interviewees remains decidedly negative, colored by impending doom and distress over prospects for an extended period of anemic demand and costly deleveraging," the report said.

On the other hand, value declines of 40% to 50% off 2007 peaks will present once-in-a-generation opportunities, respondents said. "A sense of nervous euphoria is growing among liquid investors who can make all-cash purchases" from distressed sellers and banks, said ULI Senior Resident Fellow for Real Estate Finance Stephen Blank.

Debt markets will begin to recover, but loans will be conservative, expensive, and extended only to a lender's best customers. REITs and private equity funds will get into the action, providing loans to battered borrowers at a steep price.

The survey finds near-record lows in investment sentiment in every property type. Only apartments registered fair prospects with all other categories sinking into the fair to poor range. Hotel and retail record the most precipitous falls. Development prospects are "largely dead" and drop to new depths, practically to "abysmal" levels for office, retail and hotels. Warehouse and apartments scored only marginally better at "modestly poor."

Markets to Watch

Washington D.C. was the hands-down favorite market among respondents, with normally tight-fisted insurers and banks providing financing for new deals. Bethesda, home to the National Institutes of Health, should benefit from increased biomedical spending and inside-the-Beltway Virginia markets are expected to suffer only modest erosion relative to past downturns.

San Francisco. Despite volatile prices, occupancies and rents, the Bay City's expanding tech industry fed by nearby Silicon Valley ranks the city as one of the top buys for apartments, warehouse, office and hotels.

Austin. Investors expect the Texas capital's low state taxes and a pro-business environment to fuel future growth and corporate relocations.

Boston. The city's universities, life science and high-tech companies make Beantown a long-term favorite, with a tight downtown apartment and condo market.

New York. The recovery pace depends on the hammered banking industry, and Midtown availability rates are expected to skyrocket from mid single digits into the mid-teens as office rents fall 40% or more.

Rounding out the top 10 markets to watch are Houston, Seattle, Raleigh/Durham, Denver and San Jose - all of which are strong in some combination of green technology, high-tech and life science.

One of the main questions appears to be what constitutes a market bottom and when will we get there, particularly with regard to CRE prices and values? Most of the forecasts call the pricing bottom for next year, and sooner rather than later, but the MIT Center for Real Estate suggests that transaction pricing for institutional real estate at least may have already bottomed in the third quarter.

Editor's Note: Wall Street is now worrying about the deals completed in 2005 and earlier. If the concerns are correct, tens of billions of more dollars in commercial mortgage-backed securities (CMBS) may be at risk of credit downgrades. For the full version of this story, including a CoStar Analytics survey of current cap rates versus 2004, click here.

Here are some other highlights (or lowlights depending on your perspective) from this week's forecasts and surveys:

Commercial property markets remain extremely stressed with high unemployment pushing up vacancies, no credit capacity and values still plummeting with little prospect for significant near-term improvement, according to Real Estate Roundtable's latest quarterly survey of the sentiments of senior commercial real estate executives.

Despite shrinking rents and values, some developers, owners and investors are optimistic that 2010 will bring slight growth in national productivity and improved liquidity in credit markets, according to NAIOP's annual Vital Signs survey, with 44% of respondents predicting that borrowing will improve somewhat in the coming year.

For the first time in more than a year, transaction prices in commercial property deals sold by institutional investors rose in the third quarter, suggesting that the U.S. market may have found a bottom, according to the aforementioned MIT Center for Real Estate in Cambridge, MA. The center’s transactions-based index (TBI) rose 4.4% in the third quarter from the second quarter, the largest jump since before the start of the mid-2007 market downturn.

NAIOP: Confidence Will Improve - Slightly

Respondents to the NAIOP Vital Signs report, a survey of nearly 400 developers, owners and investors conducted in early September, said an increase in consumer and business confidence will likely bring higher household and corporate spending throughout 2010. Lenders, chiefly banks, private investors and insurers, will loosen their purse strings a bit in 2010.

For 2009, 64% of NAIOP respondents felt that borrowing money was the same or somewhat easier than a year ago. But confidence improves a bit for 2010, with 80% of this year’s participants indicating that loans will remain difficult or become somewhat more available. Almost 32% of respondents feel that industrial rents will improve in 2010 as availability rates start to level off. But they noted that new industrial development remains slow in 2009 and will be almost non-existent in 2010.

"Obviously the volatile markets of the last year have created great concern for those seeking capital, and the decline in development is the consequence," said Douglas Howe, chairman of NAIOP and president of Touchstone Corp. in Seattle. "While the overall consensus of this survey is somber, there’s hope that most indicators will at least stabilize in 2010."

Almost all NAIOP respondents saw office rents deteriorate in 2009, and most expect rents to level off next year, with a few markets expecting a slight increase. Vacancy rates are expected to continue to increase in 2010 -- especially in markets heavily impacted by the residential meltdown -- and begin leveling off by the end of the year. Virtually no one in the NAIOP survey had a positive take on office or industrial development -- a far cry from the boom years when development interest was in the mid 40% range.

RE Roundtable: 'Grim Reality Sets In'

The three indices tracked by the Real Estate Roundtable Sentiment Survey have risen considerably since the near-collapse of financial markets last fall -- a reflection of respondents' collective sense of relief at having survived the worst of the turmoil. However, the latest numbers, based on a survey of more than 100 respondents, remain well below the ideal of 100, with the "current conditions" index standing at 56. An index of 100 means all survey respondents have answered that conditions today are "much better" than they were a year ago and will be "much better" 12 months from now.

"The problems now are more clearly defined and there's a grim sense of reality setting in, but that's a long way from saying markets are stabilizing or that conditions are on the mend," said Roundtable President and CEO Jeffrey DeBoer. "

Though the percentage declined to 77% from 93% in the previous quarter, a large majority of respondents still noted that property values are down versus a year ago. And they aren't optimistic about the future, with 71% saying they expect values to remain "about the same" or to erode even further in the next 12 months.

Although capital market conditions remain "extremely fragile," the survey shows some somewhat improved outlooks for 2010. On the debt side, 28% of those polled said credit availability is worse today than a year ago, compared with 71% who said so in the previous quarter.

Echoing the Federal Reserve's latest Beige Book report last week, DeBoer cautioned that any signs of improvement or a leveling off in the rates of decline should be looked at in the context of where things stood 12 months ago.

MIT: Prices May Have Bottomed

The new report by the MIT Center for Real Estate notes that not only did the transaction price index (TPI) show gains, but transaction volume grew markedly for the second straight quarter in a row. Together, the report yields the first increase in market sentiment in two years. Prices that buyers are willing to pay, MIT's so-called demand index, posted a 12% increase after eight consecutive quarters of decline.

"One quarter does not a trend make, and we are still well below normal trading volume," acknowledged MIT center research director David Geltner in a press release. "Nevertheless, this is the strongest sign of a bottom that we’ve had in two years."

For its indices, MIT uses transactional data from the National Council of Real Estate Investment Fiduciaries (NCREIF), a trade group representing institutional real estate investment companies.

Article By Randyl Drummer
November 4, 2009

Feds Ready To Start Pushing Banks Toward CRE Loan Workouts

Here is a great article on Fed and Bank workouts.

With regulators shutting down seven more troubled banks on Friday, the government is getting ready to issue new workout guidelines that will push banks to restructure troubled commercial construction and mortgage loans to head off massive foreclosures that some economists believe could threaten the fragile economic recovery.

Although most of the big banks are reporting solid profits so far, early third-quarter bank earnings reports reflect hits to the bottom lines of banks weighed down by bad commercial real estate debt, especially regional and community banks. The Federal Deposit Insurance Corp. (FDIC) on Oct. 16 closed the 99th bank of the year, San Joaquin Bank in Bakersfield, CA. With the closures of Partners Bank and Hillcrest Bank Florida, both of Naples, FL; American United Bank of Lawrenceville, GA, Flagship National Bank of Bradenton, FL, Riverview Community Bank of Otsego, MN, Bank of Elmwood, WI, and Dupage Bank of Westmont, IL, on Friday, the number of banks and thrifts that have failed since Jan. 1, 2008, now stands at 132 total and shot past the century mark to 106 this year alone.

The 106 failures of 2009 are the most in a single year since 1992. Though nowhere near the scale yet of the huge bank collapses of the late 1980s and early '90s - 534 banks closed in 1989 alone - many analysts believe the current wave of failures is just now getting ready to break. The FDIC has flagged 416 banks and thrifts with combined assets totaling almost $300 billion as at-risk, adding more than 100 to the problem list in the second quarter.

One of the biggest current sources of that risk is losses on deteriorating commercial real estate mortgage, with small- and medium-sized banks particularly overweight in CRE loans, FDIC Chairman Sheila Bair and other federal regulators said in testimony last week before the U.S. Senate Banking, Housing and Urban Affairs Committee.

Bair, Comptroller of the Currency John Dugan and Office of Thrift Supervision deputy director of examinations, supervision and consumer protection Timothy Ward testified they are close to finalizing new guidelines for banks on how to modify troubled commercial real-estate loans to reduce defaults and foreclosures, and how to account for losses from those loans. Some analysts say the "extend and pretend" practices of lenders who extend loan maturities because they're unwilling to seize properties from borrowers and take the losses are prolonging the slump in transaction activity and delaying the process of price discovery.

"The agencies recognize that lenders and borrowers face challenging credit conditions due to the economic downturn, and are frequently dealing with diminished cash flows and depreciating collateral values," Bair said. "Prudent loan workouts are often in the best interest of financial institutions and borrowers, particularly during difficult economic circumstances and constrained credit availability."

Community banks held 38% of the banking industry's small business and small farm loans as of June 30, but "the greatest exposures faced by community banks may relate to construction loans and other commercial real estate loans," Bair said. "These loans made up over 43% of community bank portfolios, and the average ratio of CRE loans to total capital was above 280%."

Up to now, troubled loans at FDIC-insured institutions have been concentrated in three main areas -- residential mortgages, construction loans and credit cards. Net charge-offs for construction loans over the past two years have totaled about $32 billion, with almost 40% for single-family residential construction, Bair said.

But the biggest area of risk for rising bank losses during the next several quarters is commercial property lending. While commercial mortgage-backed securities (CMBS) and other debt vehicles had emerged as significant funding sources in recent years for commercial property, "banks still hold the largest share of commercial mortgage debt outstanding, and their exposure to CRE loans stands at an historic high," the FDIC chief said.

As of June, such debt backed by nonfarm, nonresidential properties totaled almost $1.1 trillion, or 14.2% of all loans and leases, the chairman said.

KeyCorp, a Cleveland-based regional bank with 993 branches in 14 states, this week reported a third-quarter loss of $397 million after setting aside $733 million in reserve for current and future loan losses.

KeyCorp took $587 million in net charge-offs in the quarter, up from $502 million in the previous three months. CFO Jeffrey B. Weeden attributed the increase largely to continued weakness and nonperforming loans in the bank's commercial real estate construction portfolio.

The deep recession, job losses and ongoing credit market disruptions has made this a particularly challenging environment for commercial real estate, reducing demand for space and eroding rents and vacancy rates. Investors have been forced to re-evaluate their required rate of return, causing capitalization rates to rise and property values to decline.

With the CMBS market still shut down, financing is harder to obtain and large volumes of CRE loans are scheduled to roll over in coming quarters, with falling property prices making it more difficult for some borrowers to refinance.

Construction loans have been suffering for a while, but loan losses on CRE properties have been modest so far, with net charge-offs on loans backed by nonfarm, nonresidential properties just $6.2 billion over the past two years, Bair said. However, delinquent loan volume has quadrupled over the same period, and the FDIC expects it to rise further as more commercial loans come due over the next few years.

Few details were forthcoming about the new loan modification guidelines and how they might affect the commercial real estate positions of lenders.

"We don't really have a lot of information at this point," said Charles S. Hyle, executive vice president and chief risk officer for KeyCorp, responding to a question during the company's earnings call Wednesday. "Certainly there have been public statements by the regulators that they are very focused on commercial real estate, but in terms of what impact, how they might change what they're doing, is still very much an open question."

U.S. Federal Reserve Board Governor Daniel Tarullo said in his testimony that the new guidelines will support "balanced and prudent decision making with respect to loan restructuring, accurate and timely recognition of losses and appropriate loan classification."

The guidance will reiterate that loans should not be classified based solely on declines in the value of collateral, Tarullo said.

"The expectation is that banks should restructure CRE loans in a prudent manner, recognizing the associated credit risk, and not simply renew a loan in an effort to delay loss recognition," Tarullo said.

On one hand, banks have raised concerns that Fed examiners don't always take a balanced approach in assessing CRE loan restructurings, he said.

"On the other hand, our examiners have observed incidents where banks have been slow to acknowledge declines in CRE project cash flows and collateral values in their assessment of the potential loan repayment," Tarullo said. "This new guidance, which should be finalized shortly, is intended to promote prudent CRE loan workouts as banks work with their creditworthy borrowers and to ensure a balanced and consistent supervisory review of banking organizations."

-Costar News October 23, 2009

When Is a Lease a Lease?

I found this great article on defining lease liability on the books.

Sarah Johnson, | US
November 2, 2009

A revamped lease accounting standard in the works will likely put hundreds of billions of dollars in assets and obligations onto some companies' balance sheets. That has had companies that will be most affected by the changes — such as airlines, retailers, and railroads — dreading any progress the rule-makers might make in creating a new standard. And executives of those companies have been pushing for the United States and international accounting boards not to apply the new rule to all leases.

Businesses may have gotten at least part of their wish, if the decisions made at a recent joint meeting of the Financial Accounting Standards Board and the International Accounting Standards Board are any indication. In one of the latest agreements made in the boards' glacial move to overhaul the existing lease accounting rules, FAS 13 and IAS 17, they have chosen to exclude some leases from a final new standard.

But since the boards have yet to explain how companies will know which leases will be exempted, it's too early to tell how much of an impact this change could have on the effects of the new rule, which won't be ready until at least 2011. It's also too early to know whether it will lead to the restructuring of how current lease agreements are arranged.

After all, the standard-setters must tread lightly to avoid creating a new standard with defects that are similar to those critics have cited in the one U.S. companies have been following for 35 years. A particular concern about the current rule: bright-line rules can result in the structuring of leases to inaccurately reflect a company's assets and liabilities.

Under the current rule, standard-setters believe, companies have been reworking leasing agreements to have them fall under the "operating lease" classification. In 2005 the Securities and Exchange Commission staff estimated that in this way, publicly traded companies are able to hide $1.25 trillion in future cash obligations. For example, as IASB chairman David Tweedie has noted, airlines' balance sheets can appear as if the companies don't have airplanes.

That could change under the new plan. Companies would have to capitalize assets that have traditionally fallen under the operating-lease classification. The result: companies that lease would appear more highly leveraged.

Earlier this year, FASB and the IASB released a paper outlining their initial thoughts on the plan, and they expect to propose a standard next year. But they're still ironing out the details and have met six times so far this year on the subject. They have only recently begun deliberating how lessors will fit into this new regime.

At least one item they have agreed on: the premise. Rather than distinguish between capital and operating leases, companies should think about their "right to use" a leased item, whether it be plants, property, or equipment. Lessees will record that right as an asset and their obligation to pay future rental installments for that item as a liability.

In simple terms, "The basis of the right-to-use model is to move off of thinking about the thing [under lease] and think about the right to use the thing," according to IASB board member James Leisenring.

For lessors, "the concept behind the right-of-use model is, I've given you an [item], it's mine, so it should be on my books and I'm letting you use it, day by day," explains FASB member Thomas Linsmeier.

Lessors will have to record a liability for their commitment to lending out an item and giving up the temporary right to use it. The thinking is that even though they are not using the item, the lessors still retain control of it and need to account for it. And their right to receive rental payments will be recorded as an asset.

Last week the standard-setters decided that lease contracts that are effectively purchases — in which an item is financed for ownership — will be scoped out of the new standard. Previously, the boards seemed to be tilting toward including all leases under a new standard. "A one-size-fits-all model for lessee accounting was the expedient approach, but it wasn't the correct approach," says Bill Bosco, who consults for the Equipment Leasing and Financing Association and sits on the International Working Group on Lease Accounting for the U.S. and international accounting boards.

The ELFA, which celebrated the move and has been very active in trying to influence the final standard, believes the boards are acting too quickly to meet their 2011 deadline and have accused them of not following due process. In particular, the discussion paper released earlier this year did not address lessors, so it did not give the public an opportunity to comment on the subject before a proposed standard is released, according to the trade group. In addition, the ELFA has always feared the rule would be too sweeping, and it doesn't want it to apply to small or short-term leases. According to the ELFA, more than 90% of leases involve assets worth less than $5 million and have terms of two to five years.

Rule-makers have yet to decide on issues of materiality for this standard. And they have not yet seriously discussed how companies will transition into compliance with the new rule and whether they will have to rebook current leases. Moreover, an effective date has not been proposed.

The changes apparently won't deter CFOs from their need for leasing agreements. In a survey of 846 CFOs and controllers in late September and early October, 59% told Grant Thornton they would continue to use leases or lease financing the same way they do now.

Still, says Bosco, with specifics in the new rule still being worked on, it may be too early to tell how it could affect lessees' behavior. For instance, small businesses that use leasing agreements for their short-term capital needs will still need them. And the new rule may not allow much wiggle room. "All leases will be capitalized, so the ability to do any financial engineering, which [the boards] are very afraid of, will be severely diminished," he says. "All leases will be on the balance sheet."


Monday, November 2, 2009

New Commercial Real Estate Company

Joe O'Donnell has started OMEGA Commercial Real Estate, Inc. OMEGA Commercial Real Estate, Inc. is a full service real estate company specializing in corporate tenant/buyer representation, landlord/seller representation, project leasing and investment sales for the Philadelphia and surrounding suburban areas. Joe O'Donnell has seven years of experience in all facets of commercial real estate transactions. His new website and contact information can be located at . Please contact us if you have any questions or needs.
(610) 616-4604