Millridge Real Estate Blog

There are many issues that can arise with respect to how you take title to property, and especially so in a commercial context. If you take title as an individual, you may be exposing yourself to potential liability exposure that you might want to try to avoid or at least minimize. You take title through a business corporation, but doing this could be disaster from a tax standpoint point. Sometimes, there may be other alternatives such as forming a limited liability company that you would own and control that, in turn, could lease the property to your business entity.

If joint ownership is involved, you should clearly understand the differences between taking title as joint tenants, as tenants in common, as a partnership, or as community property. You should also clearly understand your rights versus the rights of your co-owners. Each and all of these types of ownership have significant ownership implications and rights of survivorship.

It short, there are no universal rules of thumb with respect to how to take title. It’s always advisable to seek professional advice, including your lawyer and CPA, to assist you in making a smart decision.

It is difficult to imagine economic turmoil as a good thing for any business sector, but as markets have steadily worsened this year, the outlook for the green building industry appears to be trending the opposite direction.

November was an exceptionally robust month for the publication of green building data, with more than 10 surveys and reports exploring an array of topics such as worker productivity in LEED buildings, the impact of construction declines, cost premiums and payback periods, and perceptions of the business case for green.

Though polling and research has increased in the past few years, new data has been even more in-demand lately as property stakeholders attempt to gauge how the credit crisis and a full year of recession have affected green building.

Almost universally, the data points to another good year in 2009.

One of the more insightful reports is the “Green Building Impact Report 2008” from Greener World Media, which quantifies the overall effects of LEED on industry and the environment.

In its boldest conclusion, the report said that companies in LEED building have realized annual employee productivity gains exceeding $170 million as a result of improved indoor environmental quality — a cause and effect that has been difficult to quantify. That figure is predicted to jump well into the billions by 2015 as the number of employees in LEED buildings grows more than 10-fold, the report said.

On the industry side, LEED-certified projects have specified more than $10 billion of green materials to date, which has been a boon for the manufacturing sector, according to the study. Environmentally, LEED buildings have cumulatively saved 400 million vehicle miles traveled, 9.5 billion gallons of water and 0.03 quadrillion quads of energy.

The report predicts an overall “flattening” of the rate of LEED growth as it begins to saturate markets, but continued growth in the amount of floor area that is certified. “The current economic situation coupled with increased stringency in the LEED requirements will contribute to an expected slowdown” in LEED growth, the report said.

McGraw Hill’s “2009 Green Outlook” study said green building seems to be insulated from the recession and is growing “in spite of the market downturn.” The value of green construction increased five-fold from $10 billion in 2005 to as much as $49 billion this year, and could triple by 2013 to nearly $150 billion, the study reported.

In Turner Construction Co.’s “2008 Green Building Market Barometer”, more than 80 percent of real estate executives said they would be “extremely” or “very likely” to seek LEED certification for new projects in the next three years. And at an Ernst & Young roundtable of construction company financial executives, 99 percent of survey respondents said interest in green development would increase next year, or at least remain the same as it is this year.

For the second year in a row, architects said that sustainable design is being driven by client demand, which is in turn being driven primarily by perceived energy savings and marketing benefits. More than 20 percent of architects also said that “market demand” was motivating clients to build green. Only 10 percent said that was a factor last year.

Nearly three-fourths of architects polled were concerned that clients are still not willing to pay cost premiums for green design, although according to a new global study written by sustainability expert Greg Kats, premiums for new buildings average just 2 percent.

Called “Greening Buildings and Communities: Costs and Benefits”, the report found that most green buildings cost less than 4 percent more than conventional buildings, with the greatest concentration of premiums in the 0 percent to 1 percent range.

As a CoStar study revealed earlier in the year, key indicators of building value such as occupancy, sale prices and lease rates tend to be higher in green buildings than in conventional buildings, the Kats study reported.

It also said that green buildings reduce energy use by an average of 33 percent, and that cost savings from energy efficiency would more than offset the green development premium, often in five years or less.

Kats said those factors have made green buildings remarkably resilient to the economy. “The deep downturn in real estate has not reduced the rapid growth in demand for and construction of green buildings. This suggests a flight to quality as buyers express a market preference for buildings that are more energy efficient, more comfortable and healthier,” he said.

That notion is not lacking for supporters.

Nearly 70 percent of corporate real estate executives responded that sustainability is a “critical business issue” in a survey by Jones Lang LaSalle and corporate real estate trade group CoreNet Global in a recent survey, which is up almost 20 points from last year.

(CoStar)

My top 5 list of rookie mistakes:

1. Ignoring local market conditions

There are two levels of due diligence required to evaluate a real estate investment–the market and the property. And of the two, local market conditions trump everything else.

A great property in a bad market can be a big loser. A poor property in a great market can be a gold mine. How do you know the difference?

Every market is different, and a deal technique or property type that is profitable in one market it does not mean the same holds true anywhere else.

Analyzing the demographic trends of population growth, income, and employment in the local market will tell you where opportunity lies, or not. It will also show which property types are in demand, or oversupply. Those conditions will make or break your investment.

Investing in an area with declining demographic trends is destined for trouble. So learn your market. Then listen as it tells you how, when, and where to invest.

2. Inadequate property due diligence

The second level of due diligence is the property condition, including physical items such as building systems, environmental matters and structural components. Just as important are the intangible items, such as title, survey, and zoning and land-use regulations.

Knowledge of contract law, insurance, finance, accounting, and tax law is also critical to doing things right at the beginning to insure success at the end.

If you’ve never done it before, this is not a DIY project. The money you think you’ll save by doing it yourself can cost twice as much to fix, and may jeopardize the entire investment.

Red Adair, the famous oil and gas field firefighter, said, “If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.”

Admit what you don’t know. Approach the property like an open book test. If you don’t know the answer to a question, find an expert who does know to give it to you.

Get accurate estimates from professionals of what it will cost to fix what is wrong. The time spent inspecting the components is minimal and can save thousands of dollars in unexpected repairs.

3. Botching the math

This is not rocket science, but real estate is a numbers game. Value is dependent on net operating income�gross revenue minus operating expenses.

That’s why it is so important to get the real operating numbers, not a projection of potential gross income and estimated expenses.

Confirm and verify every element of income and expense. Value the property based only on present income, not projected income you have to produce.

Your profit is dependent on net income. Net income is the net operating income minus debt service. If you’ve overestimated revenue, underestimated expense, or have too much debt service, your profit will suffer or turn into a loss.

Understand that risk increases with every assumption made. Do not assume you can save expenses by cutting corners or that you can raise rents the day after you take possession.

Anyone who has ever prepared a projection of operations has realized that by tweaking the assumptions, the bottom line can be manipulated into whatever will make the deal work.

The problem comes when it’s time to make the numbers happen. It’s real cash then�your cash�and when the rents don’t go up or the expenses don’t come down as much as the projection called for, you take the hit.

You might tweak the numbers to make it work on paper, but paper won’t pay the bills, and hope is not a plan.

4. Over-leverage

Borrowing too much money in this business is fatal. Highly leveraged deals do happen, but unless it’s backed up by a solid plan with sufficient capital, it can be disastrous.

Using 100% financing for entry level deals is like believing gravity doesn’t exist as you jump off a building. You can argue all you want, but you’re going to hit the ground�the only question is how hard.

The proper use of leverage is a function of deal structure and investment strategy. Every investment property should be evaluated in light of the break-even ratio.

The break-even ratio is equal to the Operating Expenses plus the Debt Service, divided by the Gross Potential Income. [(OpEx + DS)/ GPI = BE]. When break-even exceeds 80%, the structure depends on perfection, and that’s dangerous territory.

5. Failure to have multiple exit strategies

An investment plan incorporates all of the due diligence findings and outlines all the possible outcomes of the investment, best case to worst case.

Ask yourself why you think you can do a better job running this property than the seller did. If you can’t answer that with specifics, you won’t do better, and probably not as well.

Your plan should answer the questions of how the property will be managed; what improvements are needed and their cost; how much money might be made (or lost); how long it will take; how to get out if things go wrong; and how to access the profits when it goes right.

The answers will reveal a realistic plan to maximize value in the shortest possible time with the least possible downside. I rarely have less than three exit strategies, and usually a half dozen or more. I’ve learned that if I don’t have a plan to get my money out of a deal, I will soon be out of money.

Tuesday, Oct. 7, the Wake Forest Planning Board again continued the public hearing about a special use permit for Wake Union Place, the major shopping center planned for the former Parker-Hannifin site on Wake Union Church Road adjacent to Capital Boulevard. The plan calls for Wake Union Church Road to end at the southern edge of the center site. A new street, not named, will turn west beside the Sleep Inn, then turn to the north adjacent to the St. Ive’s subdivision and end at the northern edge of the property. In the future, plans are to extend it north to Jenkins Road. A second street, running east and west, will connect the first street to Capital Boulevard at the existing traffic signal. Twelve retail stores in a strip design and five out-parcels were shown during the two community meetings. The plan does include the two-acre site for the west side fire station between Kearney and the new unnamed street, with access only on the unnamed street. The center is a project of Wake Forest developer Jim Adams, Interface Properties of Boca Raton, Fla., and the national firm Weingarten Realty Investors.

Clearing is nearly complete and construction is underway for the second and third phases of Wake Forest Crossing shopping center on Capital Boulevard. Kohl’s department store will be the anchor for this new section. Lowes Foods is the anchor for the first phase. When complete, there will be a second entrance/exit on Stadium Drive west of the seminary cemetery.

There is also clearing and construction underway for Gateway Commons shopping center at the intersection of the N.C. 98 bypass, Jones Dairy Road and Wait Avenue. Lowes Foods and Ace Hardware are the announced tenants.

On Nov. 8, 2007, the planning board recommended approval of an increase in the height of the hotel developer Daryl Cady plans for La Scala on Star Road just north of Living Word Family Church. Plans are for a 60-foot high, four-story, 90-room hotel near the road facing a 28,800-square-foot office building. Behind those buildings will be a large ballroom/convention building.

The Wake Forest Planning Department is also reviewing the master plan for La Scala phases two through four on 85.5 acres along Star Road. It includes 239,200 square feet of office space, 375,250 square feet of retail space and a 40,000-square-foot hotel. The zoning is highway business.

Within the next few months Shuckers will have new owners and will move to Heritage Shoppes on Rogers Road. The moving date depends on construction.

Fallcreek Construction has begun construction of the building for the future Mellow Mushroom at the corner of South Main Street and Wake Drive. Several large trees on the lot will be saved.

What was Todd’s will soon be Forestville Commons, or it will be as soon as owners Williams Hicks and others can work out the building design features with Assistant Planning Director Ann Ayers. The plan is to echo or reflect the design of the Forestville Baptist Church next door. There will be a convenience store with gasoline sales plus seven retail bays in a flex building.

Officials with Franklin Academy Inc. recently held a meeting with neighbors in the Flaherty Farms subdivision and the Wake Forest Planning Department is reviewing the construction plans for the new Franklin Academy High School. The school is slated to open next July and will eventually house 500 students.

Construction for Bob Luddy’s newest private school, Thales Academy at the end of Heritage Trade Drive, is nearly completed.

The planning department has issued a development permit for a miniature golf course at The Factory.

Assistant Planning Director Ann Ayers still does not have the complete plans for a Walgreen’s drug store in the southwest corner of the N.C. 98 bypass and South Main Street (U.S. 1-A). The developer does have state Department of Transportation approval for a right-in, right-out access to the bypass.

Some of the national stores said to be looking at Wake Forest are J.C. Penney, Marshall’s and T.J. Maxx.

The Wake Forest Planning Department is reviewing building plans for an Aaron Rents Furniture at Wake Pointe Shopping Center (Wal-Mart).”

(The Wake Forest Times)

I was glad to see Treasury Richard Moore speak against the Wachovia buyout by Wells Fargo.  Moore urged all shareholders to oppose the bailout, saying the $5-6 per share price amounted to “highway robbery”.   Should the buyout go through the State retirement stands to take a 85% loss in value of 3.2 million shares of Wachovia? In addition to this staggering number, many Wachovia employees (20,000 in North Carolina) will surely lose their jobs.  

Wachovia’s sale has been fraught with controversy almost since the beginning. Federal regulators pushed the faltering bank to sell itself on the last weekend of September. That Monday, Citigroup said it would buy the bulk of Wachovia for about $1 per share. By the end of the week, Wachovia had spurned the Citi agreement and decided to sell itself to Wells in a deal currently worth about $5.50 per share.   Moore believes the true value is still closer to $25 per share. 

As  North Carolinians, we all have a huge stake in having our companies preserve jobs and be treated fairly as the Federal Government looks to help some companies and allow others to fail. AND If you are a shareholder of Wachovia it is important that you vote against this merger and try to bring Wells Fargo back to the table for a more realistic price.

By Trey Watkins

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Starting Oct 1, 2008,  the Real Estate is now requiring brokers to disclose to their clients any rebates, bonuses, and other compensations being offered.  The disclosure should be disclosed to client-buyers before the property is shown.   Disclosure can be oral but must be put to writing before client makes an offer to buy or sell.   Trey Watkins,  per Real Estate Bulletin Volumn 39

Horace Mann Takes 41,800 SF in Morrisville

Insurance Company Signs Deal at Perimeter Park

Horace Mann Insurance Services signed a lease for 41,800 square feet on the second floor of the Perimeter One office building in Morrisville, NC.

The insurance company will take occupancy in December. The five-story, 204,851-square-foot Class building delivered about a year ago at 3005 Carrington Mill Blvd. in the Perimeter Park, which is in the RTP/RDU submarket.

Smith & Nephew Leases 26,600 SF in Durham

Medical Company Coming to Imperial Center

Smith & Nephew, a London-based medical device developer, signed a 10-year lease for 26,588 square feet on the first floor of 4721 Emperor Blvd in Durham, NC. The firm will take occupancy in December 2008.

Known as Carlisle Place, the four-story office building totals a little more than 120,000 square feet. It delivered last year within the Imperial Center building park, across from the Sheraton Imperial.

Rockwell Automation Leases Office Space in Cary

Occupancy at Edinburgh Center Planned Before Year-End

Manufacturing products maker Rockwell Automation leased 15,575 square feet at 113 Edinburgh Drive in Cary, NC, with occupancy planned in December.

The 30,013-square-foot office building was built in 1984 and is part of the Edinburgh Center building campus.

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In response to the main headline in the 10/27/08 N&O, The RRAR makes these points that contradict

the headline “5 reasons for housing crash,” which is yet another attempt to scare local readers by using data from selected national sources. The writer states five reasons; crashing home prices, investor speculation, complex

investments, job losses and repeat delinquencies. The RRAR provides some local perspective on each of the five reasons cited in the AP article.

1)  When analyzing our market, I look at data from the counties of Wake, Durham, Orange and Johnston.

Within this market, the average closed price of all housing is up 8% and the average closed price of

resale housing is up 6%. House price appreciation, which compares the two most recent sales prices of

the same house , is an area where the Triangle outperforms the national market. Our current rate of house

price appreciation in the Triangle is just over 4%. This rate beats the state (+3.6%) and national rates

(-4.5%).

2)  The Wake County Revenue Department reported +/- 21,000 closed sales within the past 13

months. Roughly 5% of these sales were purchased by buyers from out of town, a huge difference

compared to the 20% rate nationally.

3)  It is almost impossible to track what percentage of local purchases were made via the subprime loan

mechanism. Per the FHFA mortgage metrics survey for the second quarter of 2008, 17% of all

outstanding mortgages in the U.S. are rated as subprime. Therefore it would be hard to argue that a

majority of house purchases were made via this mechanism.

4)  Job losses are real both nationally and locally. The Raleigh/Cary/Durham MSA did not have a

workforce increase comparing 8/08 with 8/07 for the first time since the 8/01 versus 8/00 period.

5)  The mortgage metrics survey reveals some additional information regarding the national mortgage

market. They surveyed over 30 million outstanding loans in the Fannie Mae and Freddie Mac system and

found that 98.6% of these loans were rated as current. They also state that foreclosure proceedings

were initiated on 432 homeowners per day during the second quarter, a big difference from the 2,700

per day figure stated in the lead paragraph.  There are currently +/- 14,000 listings within the four county

area in TMLS. Roughly 3% of these listings are classified as foreclosure, bank or corporate owned. I have

been tracking the residential market within the Triangle for over 20 years. The foreclosure market has

always accounted for a very small percentage of activity.

Our current market can be summed up with my version of the good, the bad and the ugly:

The Good

• Third quarter closings were the 6th highest in history
• Current supply of 8 months is lower than national current supply of 11 months
• Average house price appreciation is superior to state and national rates
• Average re-sale sales price +6%, average overall sales price +8%, average list price +2%
• Houses priced correctly have sold in an average of 55 days

The Bad

• Overall inventory grew 7%, making 2 consecutive months of less than 10% growth
• Withdrawn listings increased 2% compared to 9/07

The Ugly

• 29 consecutive months of inventory growth, 20 consecutive months of lower pending sales
• 63% of all price points have an oversupply of housing product
• 9/08 expired listings were 227% higher than 9/07 expired listings

A survey of Wake County house purchases where the house was purchased and then re-sold within

the past 12 months reveals a median percent per gain of 0%. I think that is pretty impressive

compared to what is happening in the national market.

As we have seen during 2008, our local market is not immune from happenings in the national

market. Our biggest challenges during the fourth quarter of this year and into next year are to grow

the workforce and cut down on the number of price points with an oversupply of housing.

(From Stacey Anfindsen of the Raleigh Regional Association of Realtors)