Thursday, February 25, 2010

Government Sale-Leasebacks

Chris Shanks :: Investment Properties Group Posted by: Chris Shanks
Investment Analyst
775 336 4620

Chris is responsible for analyzing, valuing and marketing properties for the NAI Alliance Investments Team. He is also involved in the disposition and acquisition of investment properties for clients.

In the midst of a statewide recession and a budget shortfall, local governments have found themselves grasping at ways to trim budgets and raise new capital. Our Legislature has just entered into a special session to try and solve these problems. While there are many issues being debated and fought over, I’m only going to weigh in on one; the leveraging of government owned real estate assets to raise capital. This is not a new concept; the State of Arizona recently raised $735.4 million dollars using the same method that I am going to recommend. I propose that our local governments, from city to state, may be able to weather their current budget difficulties by entering into sale-leaseback agreements, more specifically through the issuance of certificates of participation.

Certificates of participation have the same underlying principles as a traditional sale-leaseback; an investor purchases a building while the seller agrees to lease it back under the terms and conditions of a sale-leaseback agreement. This structure works best with traditional property types and strong tenants that can commit to long term leases. The fact that most government buildings are special use and their leases allow for a penalty free walk-out, keeps them from being able to benefit from traditional sale-leaseback transactions. Investors would demand high cap rates to compensate for the risk, which essentially increases the governments cost of capital. Certificates of participation take the sale-leaseback concept further by essentially issuing debt that is serviced by their “lease” payments.

In COPs financing, title to a government owned asset is assigned to a bank trustee (non-profit corporation) that simultaneously leases the asset back to the agency and holds title for the benefit of the investors, the certificate holders. The participation of many investors in the lease transaction allows the transformation of what would otherwise be a straightforward financing instrument executed between a lessee and a lessor into a marketable security. This financing also allows for the government agency to issue the certificates at a rate that reflects their bond rating, not the asset specific risk of the property, resulting in a much lower cost of capital.

There are many more moving parts that need to come together for a transaction of this nature to take place. I will explain in more detail what those components are in my next blog.

Thursday, February 18, 2010

2009: The Year of RENOvations

Posted by: NAI Alliance Hospitality Division
775 336 4647

In 2009, many hotel property owners, both new and old, invested money (lots of money) into their properties. Through face-lifts, remodels, additions, and even down to the bones redevelopment Reno’s hospitality properties were a flurry of construction activity. The result is a forever changed city skyline bubbling with increased hotel rooms, Las Vegas style luxury, and a chance at city living in the biggest little city. Although several of the developers suffered major financial set backs resulting in receivership, foreclosure, and loss of their projects the renovations were a great sign for Reno...

Year In Review 2009 Hospitality Report is now available for download.

Tuesday, February 16, 2010

A Snapshot of the Reno Apartment Market

Morgan Walsh - Multi-Family Specialist

Posted by: Morgan Walsh
Multi-Family Specialist
775 336 4646
Morgan Walsh is a commercial broker with 20 years experience in investment sales, multifamily and specialty sales, representing buyers and sellers, institutional and private developers in market rate apartment sales, mixed-use residential devepment and the development of affordable housing projects.

Projects of Interest in the market:

The Alexander at South Virginia, a 350-unit, Class A project by A.G. Spanos will be fully delivered in 2010 with an expected absorption of 15-25 units per month. Of the more than 750 units of new construction in the 100+, Class A category now in lease-up regionally, the median absorption of 18 units per month indicates a sluggish demand for apartments at the top of the market.

Key market Stat:

The Reno/ Sparks re-sale home market continues to show steep increases as new home construction dwindles, re-sale prices decline to a median value of $183,000 and housing affordability climbs . This metric accounts for a 15% reduction in apartment demand as qualified tenants move to the for-sale market or the shadow market of single-family rentals acquired by investors. Reduced apartment demand has forced a 5% decline in median rents and a market vacancy of 9% in the 100+ market. The market average rental concession has stabilized at 13% of net effective rents, but additional single-family foreclosures continue to work through the market, with more than 6,000 homes in default and not yet foreclosed.

Distinguishing characteristic of the Reno market:

Unemployment and falling household income have combined with a slight population decline to undermine apartment fundamentals regionally. Weakened tenant quality and reduced net effective rents jeopardize stabilized occupancy for some operators and keep overall occupancy in 100+ projects under 92%. Northern Nevada is exceptionally well positioned to rebound as the recession lifts. Known as a low-tax state with few barriers to business entry, Northern Nevada will surge in apartment demand by 2014 with the echo boom generation and tax refugees from California moving into the region. Astute buyers now have excellent quality to acquire at outstanding values for a region in which little or no new construction is planned or being built.

Monday, February 8, 2010

Damned if you do and damned if you don’t………………what’s a landlord to do?

Posted by: Dave Simonsen
Industrial Specialist
775 336 4667

Dave has more than 21 years experience as a commercial real estate broker. Dave exclusively works with industrial tenants, buyers, developers, landlords and land owners. He has represented companies such as AT&T, Barnes & Noble, Converse, DHL Worldwide, Delta Industries, Hawco Development, Lucent Technologies, IBM, Hopkins Distribution, Nextel, NEC, Sherwin-Williams Company, and UPS.

Many landlords find themselves in the troubling position of what to do with a vacant building in a falling rental and value market. Market rental rates have fallen 20 to 40% and building values have fallen further due to low rents coupled with rising capitalization rates. A landlord with a vacant building is faced with lowering rental rates to entice a tenant even though the contract rent might not cover the building mortgage. If that tenant wants a long term lease, the owner must pay improvement costs and commissions up front to lock in a money losing transaction in hopes of stopping the immediate monthly pain. The alternative is to not sign the low market rent lease and continue to pay on a vacant building in hopes of the rental market improving in the future. Looking at current inventory, waiting for the market rents to rise does not look like a good option. The final option is to sell the asset. This is also not a very attractive option seeing as values are depressed due to low rents, high cap rates and a poor lending environment. In many cases, the value of the asset has dropped below the loan amount forcing a cash infusion to sell out of the building. It is bad enough when an owner loses their down payment equity, now they are faced with paying additional funds just to relieve themselves of the continuing obligation. In addition, some owners simply do not have the money to make up the difference of loan to value so they can sell. So, what is a landlord to do? Selling is not a good option, waiting for market rents to improve does not seem to be a good option, so the selection is made to do and pay whatever it takes to sign a close to break-even lease to ride through the storm. The good news with this option is the hole is filled and once the up-front cost of getting the tenant in the space is paid, the on-going loss is minimized. However, signing a low rent confirms the loss of value in the building and if you have a loan coming due in the near future, your lender will be asking for another 35% of the reset building value out of your pocket just to make the loan. So, should a landlord sign a low rent deal to fill vacancy in today’s market…………….their damned if they do and damned if they don’t.

Friday, February 5, 2010

How many warehouses or Distribution Centers (DCs) should your company have?

Dan Oster - Industrial SpecialistPosted by: Dan Oster
Industrial Specialist
775 336 4665

As a member of the Industrial Properties Group, Dan has participated in the sales and leasing of a wide variety of Industrial properties from 1,000 to 700,000 sqft in Northern Nevada. Dan's primary goal is to provide unsurpassed customer service to the clients he represents.

This seemingly simple question is not so easy to answer. There are very expensive computer models, run by even more expensive consultants who will take hundreds (even thousands) of data points on your inputs, outputs, warehouse metrics and strategic directives to arrive at an answer to that question. For the rest of us, when faced with a decision, a few simple Heuristics can help lead to a rational decision.

Two “Rules of Thumb” to consider, while opposing, together can be revealing.

First is the Square Root Law (SRL) of Inventory. This law makes sense intuitively. The more facilities you add, the more safety stock you will have spread around which will increase your inventory cost. Adding your 7th or 8th facility will have less of an impact than adding your 2nd or 3rd. To really boil it down, More facilities = Higher Inventory Cost.

For a more technical explanation click here

Still with me? Good.

Now the opposing force hasn’t become a fancy Law, but it’s still worthy of consideration. Generally speaking, inputs cost less to transport into a facility than outputs cost to transport out to your customers. Therefore, given the same level of demand, the more geographically dispersed your DCs, the lower your transportation cost will be. Add into this effect the very real possibility that Fuel prices will go up in years to come as the economy improves, consumer demand recovers and grows globally, government taxation on carbon increases, etc. This would lead you to have more, smaller, geographically dispersed DCs or a Decentralized Distribution Network. To really boil this one down, More Facilities = Lower Transportation Cost

So on one hand you should have fewer DCs to lower inventory costs on the other hand you should have more DCs to lower transportation costs. Which is it? How many warehouses or Distribution Centers (DCs) should your company have? Well, your answer depends on where you spend more – Transportation or Inventory Carry. Consider these two costs along with the many other factors those darn consultants keep bugging you to provide, and you could be much closer to the decision. If you decide Reno/Sparks might be the right place to locate, give me a call. I’d love to help you out.