Commercial & Investment Real Estate

Real Estate Trading

2011-11-29T12:18:00.001-08:00

In good economies and bad, real estate exchanging is where it’s at. A real estate exchange or trade expands your opportunities and has everyone thinking outside the box.As a seller, you could take a smaller property in exchange as partial payment for your larger property (unless the smaller property has little or no mortgage and your larger property is heavily leveraged you could still exchange but balancing the equities will be a requirement). Just think of it, if the buyer has the cash or gets a new mortgage on your property as part of the closing, you will most likely get most of your sales price in cash and there are many more buyers for the buyer’s smaller property than for your larger property, making it easier to cash out.You will have substantially increased the depth of the market for your property because now, instead of just looking for buyers with cash, you are also including a much larger audience of “buyers” who have cash and/or equity in a smaller property.If you are a seller with 20 acres to sell and no one is biting, maybe you are not a seller at all. Maybe, you are a buyer…especially if you have a little cash (or a cabin cruiser, a stamp collection or auto, race horse, diamonds, i.e. “boot”) to throw into a deal. Why not trade your “equity” in your 20 acres plus some cash and boot for that half empty shopping center that you know you can “do something with”?But the owner of the center is thinking… “I don’t want 20 acres, five houses and a stamp collection”. Well, if he gets the majority of his purchase price in cash, he can cash out the equity and boot at a discount and still have accomplished all of their goals. (Often, the party trading up will through in paper (an I.O.U.) to balance the equities.)How about an example… Terry Trader owns a 20 unit apartment property that is worth about $1,500,000 and he has paid his mortgage down to $300,000 over the years. Terry also has a $600,000 six unit apartment property that he owns free and clear. His liquidity includes $400,000 in cash.Terry’s broker has buyers lined up for the two apartment properties and also has found a $5,000,000 Walgreens store property under a 20 year triple net lease into which Terry can trade. Terry has $1,800,000 in equity plus the proceeds from a new $2,900,000 first mortgage that he will get on the Walgreens property at closing. That adds up to $4,700,000 to which he adds $300,000 of his cash to balance the equities.I’ve seen transactions where there have been four or even five parties trading up in the same transaction with one of the brokers accepting the equity in the smallest property as their commission!Also, let’s not ignore the tax benefits to the party(ies) trading up (“buying”). If the transaction is structured properly under the requirements of IRC (Internal Revenue Code) Section 1031 – caution, consult your professional tax advisors – there will not be taxes due on the parties’ transaction. The taxes that would have been levied had they sold outright and then repurchased are deferred, possibly forever. This tax savings can also benefit the seller because a “buyer” trading up will be able to pay more for the trade-up property due to their tax savings!Think outside the box. It is amazing the types of transactions you can actually pull off with some creative thinking.

Seller Financing - Now's the Time

2011-11-25T15:57:00.001-08:00

Finding it hard to sell your real estate at a "reasonable price" (whatever that means)?Consider carrying back so-called Seller Financing.The benefits can be stellar.You will defer the payment of the majority of your capital gains tax.The cash downpayment that you receive is comprised of return of a portion of your cost basis and the rest will be capital gain. The same goes for the principle portion of the mortgage payments that you receive from your purchaser. (This is simplistic, but you get the idea...consult your tax expert.)The interest portion of those payments will be treated as ordinary passive income, but you have some control there as well by charging the lowest possible interest rate that you can (don't go below the IRS's imputed rate though) in exchange for a higher selling price (which will be taxed at capital gain tax rates ONLY WHEN YOU RECEIVE IT)!This type of sale also gives you the benefit of having a safe place to invest the sale proceeds at a rate of return that is set by you. There are several ways to make sure that your loan doesn't go bad and wind up becoming a liability. A few of those ways include making the buyer maintain a real estate tax escrow with you, providing you with certificates of insurance and actually inspecting your collateral once or twice a year to make sure that it is being maintained (and making it an event of buyer default if it is not).If your property is free and clear, then seller financing is a no-brainer. If your balance is a small one, then just require a downpayment from your buyer that covers your loan balance payoff and other costs of sale.If your loan balance is not small and the loan has due on sale provisions (alienation acceleration) then go in a talk to the lender about your plans. You may be surprised at their relief in hearing that they are not about to get back yet another property!

Valuing Shopping Centers

2011-09-14T14:28:00.000-07:00

Here's my answer to a LinkedIn question () asking about how to value shopping centers..."What a good question! I would test all approaches to get an overall feel for the project. The quick and dirty approach would be to determine the Net Operating Income (“NOI” which is gross revenues less operating expenses not reimbursed by tenants). Then consider roughly how much equity you will be investing. Next, “pay yourself first”! What I mean by that is how much cash flow you would like to have on the equity invested. So, if you’re putting down a million dollars and, based on the quality of the income stream, would be satisfied with say 8% cash flow then merely subtract the $80,000 cash flow from the NOI to determine how much is available to go to pay for debt service. Given an amortization schedule and interest rate available to you, you can now solve for the amount you can afford to borrow. Now, just add this resultant loan amount to the equity to solve for how much you can afford to pay for the center. (Don’t forget to deduct from this value the cost of curing any deferred maintenance. Oh, also deduct tenant improvement costs and commissions for any space(s) that will need to be renewed or released.) When you test the more sophisticated approaches to value, don’t just rely on empirically observed capitalization rates, structure you own hypothetical rate by adding up the components of a cap rate, which are RETURN OF investment plus RETURN ON investment. RETURN OF investment is 100% divided by the useful life of the property. RETURN ON investment is the sum of the percentages that you allow for Safe Rate, Loss of Liquidity, Management and Risk. Empirically observed cap rates only determine the position of the property in the current market. The hypothetically structured cap rate helps you to predict “whither the market goeth”. For a more in-depth answer to your question, download my article entitled RETURN ON that you will find in the Box feature on my full LinkedIn profile. Hope this answer has helped! Good luck with it. David M. Kaufman, CCIM"

Federal Is About More Than Money

2011-07-22T15:01:00.000-07:00

What's at stake in the current federal debt ceiling impasse is about much more than just money... What is really at stake is the very freedom and liberty historically enjoyed by Americans.

I hope it is not too late to reign in spendthrift Republicans and Democrats alike. If we don't balance our budget, cut spending and stimulate business through tax elimination for business then get ready for the anarchy and dictatorship that will certainly follow.

State of Illinois Asked to Help Save Shore Bank?

2010-02-01T19:25:00.000-08:00

Here is my recent response to Crain's Chicago Business Article on Should the State of Illinois Help Save Shore Bank?

The state of Illinois is not in the greatest financial shape! Where are they going to get the $$$$? Print it??? Besides, how about all the other banks in Illinois? They all have good, hard working decent people in their organizations who don't deserve having to apply for a greeter's position at Sam's Club. Why support Shore Bank and not the others? Besides, the federal government doesn't need any competition from the State of Illinois in bailing out private sector companies.

C'mon, let the private sector and free market economy work out its own woes without tapping the taxpayers' wallets with wild eyed insane bailouts. Government "help" is just going to prolong this depression and make it deeper.

2009-11-25T12:13:00.000-08:00

Here is an answer to a recent LinkedIn question that I thought would be good to share...

Q: Where do you typically get your commercial real estate information?
I am talking listings, news, comps, etc. The obvious answer is the leading company that charges exhorbitant fees for very good information. Do you, or does your office, pay those fees, or do you use the "fragmented" (using a combination of sites that each offer a little of what I need) search approach that I have been using? How about the MLS? How useless could that really be for commercial real estate information?

A: For finding properties for sale, it is hard to beat Loopnet, CoStar and Cityfeet. For in-depth ideas and cutting edge answers to C/I issues, the best is Commercial Investment Real Estate (The Magazine of the CCIM Institute). You can view it online at www.ciremagazine.com (or go to www.ccim.com, click on "Resources" and then click on "CIRE Magazine". I use to be the chairman of its editorial committee and can promise you that it will provide you with a lot of food for thought. In the current issue you will find articles on Troubled Assets, Re-Useful, The Auction Advantage, Capital Markets Conundrum, Investor Insights, Cost Segregation Solutions, QI (Qualified Intermediary) Questions, Leasing Green, Market Trends, International Outlook, Regional Outlood etc... Hope this answer helped.

Bloomberg Journalist Appreciates My Compliment

2009-09-15T22:20:00.000-07:00

sss

From:	David Kaufman
To:	DAVID M LEVITT, BLOOMBERG/ NEWSROOM:
Subject:	Commercial Property Deal Drought Worst in 18 Years
Date:	09/15/2009 1:3:31

David,

My compliments on a great article based in realism.

I did the first, last and most auctions for the RTC during their existence. You nailed it when you said… “…the lender in most instances doesn’t have the ability to take the charge to earnings and sell the property.”

David Kaufman, CCIM

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

From: DAVID M LEVITT, BLOOMBERG/ NEWSROOM: [mailto:dlevitt@bloomberg.net]

Sent: Tuesday, September 15, 2009 8:50 AM
To: kaufman100@gmail.com
Subject: Re:Commercial Property Deal Drought Worst in 18 Years

Thanks. I'm glad it rang true to you, especially since I wasn't around for the last time. I was trying to see if we've ever quoted you before, but there are too many David Kaufmans in our system. You're not David W. Kaufman of Millersburg Ohio, right? We don't have you under your current or recent associations.

From: David M. Kaufman

To: David M. Levitt

Sent: Wednesday, September 16, 2009 12:39 Zulu

David,

I was around then and your article rang very true. That’s why I wrote to you. You captured the essence. You nailed it.

If you click on my LinkedIn profile ( www.linkedin.com/in/davidmkaufman ) it will give you my complete background and also, you will find a link to my blog (and website) which has an expansive answer to a similar issue. I’ll paste it below for your convenience.

At one time, I was the national spokesperson for the CCIM designation ( www.ccim.com ). I have been interviewed all over the country by all major news sources at one time or another over the past 20 years. I’ll attached some samples.

I would very much like to give you my commentary when and if you are looking for some.

There are all kinds of misconceptions that I hear and would like to correct. It frustrates me when I hear some news people dragging out all the old saws that really do not apply but are ingrained in peoples’ minds. For example…location, location, location are not the most important things in real estate, it is actually location and timing.

Or how about… “It’s a buyers’ market”. There is no such thing as a buyers’ or sellers’ market. There is just the market and if you set your price to the market guess what, your shopping center, or what have you, sells! Even in these difficult times, any seller can create a so-called sellers’ market by dropping their asking price 50%. The buyers will line up and come out of the woodwork. But, the problem is that the first buyer in line will buy at that 50% price. The price never gets a chance to increase.

That’s why I do auctions of real estate. In the buyers’ minds at auction the price has been cut to zero and the lineup of buyers are ushered into a room where I can get them to compete against each other for my sellers’ property and they race right past that 50% discounted price to the revealed market value. I like to say, “Demand never sleeps.” And you can quote me on that!

One last thought, I looked for you on LinkedIn and did not find you. Unless I just missed you, it is imperative you not only get on it, but use it as the phenomenal source that it is (a network of 43,000,000 business and professional people worldwide). Buy LinkedIn for Dummies, it will blow your mind. Take a hard look at my profile and you will see about what I am talking.

David M. Kaufman, CCIM

Bloomberg/Newsroom Journalist Appreciates My Compliment

2009-09-15T22:18:00.000-07:00

FDIC Bank Failures (Selected Best Answer - Linkedin)

Mike O'Mara's Question: FDIC Bank Failures

FDIC Bank Failures

Bank takeovers by the FDIC are up to 77 YTD as of August 15th and the markets are still waiting for the FDIC put into place a viable program to move these toxic assets through the system?

What ‘s your view on this situation and how do you invest in the distressed debt & real estate through the FDIC?

David Kaufman's Answer (Selected Best Answer - Linkedin):

With such good and knowledgeable answers, I probably should not attempt to weigh in on this question, however, I do have a few observations.

When the S&L crisis was first heating up, I can remember that Congress voted to shore up the F.S.L.I.C. with 2 or 3 billion to take over, liquidate failed thrifts and their assets while covering the depositors at the same.

You don't hear much about them anymore because they were under in a heartbeat (the F.S.L.I.C. that is). It took my breath away.

During that crisis, I conducted the first, last and most auctions for the Resolution Trust during their brief existence and worked with a lot of good people from this organization.

I recall that after my first auction in Houston (125 houses for Fannie Mae in 1985), I met some wonderful Texans. One of my new friends asked me if I would visit "his" bank with him because he was on the board of directors and was very proud of it.

I did, and after seeing all the beautiful artwork, furniture, conference rooms, etc... I suggested to him that he should call his attorney and ask his attorney if he should resign immediately. While he was flabbergasted at my suggestion, he did call his attorney who told him, "hell, yes, resign!".

He resigned and the Feds took that bank down a year later. Because he resigned when he did, he avoided the legal onslaught that financially swallowed the other members of the board.

Now is not the time to be on the board of directors of a bank!

There are so many commercial loans coming due shortly that are not worth their mortgage balances because of the vacancy rates in the underlying collateral that I fear will lead to a huge number of financial institutions going under.

For many reasons that I won't go into here I don't think that the Private/Public buyout of "toxic" assets has a low chance of succeeding. In my opinion, the only resolution to this huge problem will be the same as it was in S&L Crisis and that is for the government to take over the failed institutions and liquidate their assets including their real estate.

While this may not be the bottom, nobody can ever pick the bottom, so it is probably a good time to start buying. But wade in carefully because it is very dangerous.

Go to the F.D.I.C.'s website, look for their auctions and sales and use LinkedIn to network to the right people.

There will be many a

FDIC Bank Failures (Selected Best Answer - Linkedin)

2009-08-24T08:18:00.000-07:00

Mike O'Mara's Question: FDIC Bank Failures

FDIC Bank Failures

Bank takeovers by the FDIC are up to 77 YTD as of August 15th and the markets are still waiting for the FDIC put into place a viable program to move these toxic assets through the system?

What ‘s your view on this situation and how do you invest in the distressed debt & real estate through the FDIC?

David Kaufman's Answer (Selected Best Answer - Linkedin):

With such good and knowledgeable answers, I probably should not attempt to weigh in on this question, however, I do have a few observations.

You don't hear much about them anymore because they were under in a heartbeat (the F.S.L.I.C. that is). It took my breath away.

During that crisis, I conducted the first, last and most auctions for the Resolution Trust during their brief existence and worked with a lot of good people from this organization.

He resigned and the Feds took that bank down a year later. Because he resigned when he did, he avoided the legal onslaught that financially swallowed the other members of the board.

Now is not the time to be on the board of directors of a bank!

While this may not be the bottom, nobody can ever pick the bottom, so it is probably a good time to start buying. But wade in carefully because it is very dangerous.

Go to the F.D.I.C.'s website, look for their auctions and sales and use LinkedIn to network to the right people.

There will be many a new fortune made out of this huge disaster. Be ready to participate.

IRC Section 1031 Tax Defered Real Estate Exchange

2009-04-22T08:58:00.000-07:00

I received an email asking if an exchange of vacant land for an improved income producing producing property qualifies for tax defered treatment under Section 1031. Short answer is yes.

Basically, any real estate held for business use or investment may be exchanged for any other real estate held for business use or investment.

Owner Financing

2009-04-20T19:46:00.000-07:00

In these difficult times with a lack of financing in the markets, it pays to be up on owner financing. By lowering the equity requirement, a seller can greatly increase the size of the qualifying possible purchasers and put off the capital gains tax on most of the gain.

Also the opportunity may exist to amortize the underlying loan(s) more quickly than the seller financing created thus building equity after the sale of the property.

Glad to field questions on this subject and stimulate input from others as well.