Accounting Change May Force Companies to Look at Owning or Shortening Lease Terms

Posted by: Carl Zmaila
Industrial Specialist
775 336 4623

czmaila@naialliance.com

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are looking into changing the way companies carry leases on their financial statements. Right now, a lease is not considered a capital expenditure, but under the new rules this would change, making a lease an on-balance-sheet transaction.

What is the impact? Randyl Drummer of Co-Star reports the accounting change could impact corporations to the sound of well over $1 trillion. Experts believe that this will make companies reassess their leasing outlook and drive some companies to own and others to sign shorter leases.

To read Randyl Drummer’s article about FASB13 and the impact of the proposed rule change click here.

Why might this be a great time to buy a building?

Posted by: Dan Oster

Industrial Specialist

775 336 4665

doster@naialliance.com

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.

If you have been looking to take advantage of the benefits of owning rather than leasing your commercial space (that analysis is a topic for another entire discussion, so let’s assume you‘re convinced), the stars are aligning for a very favorable purchase environment. There is no perfect situation, but great properties, with low alteration costs, in good locations, at deeply discounted prices, with attractive financing are pretty compelling. Let’s take a look at each of those in turn.

Great Properties
In the boom years of 2004 – 2007, a common complaint we heard from buyers was that the right property for their requirement wasn’t available at any price. In stark contrast today, the Northern Nevada Industrial Market now sits at a record high 14.93% vacancy as of Q3 2009, 231 properties are available to occupy, of which 121 are offered for sale at this time. The sheer number and variety of properties to choose from is startling.

NUMBER OF INDUSTRIAL PROPERTIES FOR SALE IN RENO/SPARKS/FERNLEY

Alteration Costs
One barrier to moving is the cost of altering the space to fit your operating requirements. With construction material costs falling and contractors eager to work, the cost of Tenant Improvements (T.I.s) have certainly come down, easing some of the fit-up costs of a new location. With owners eager to make deals work, negotiations often include concessions to cover the costs of deferred maintenance, specialized improvements and/or owner financing. Every deal is different, but everything is on the table for discussion these days.

Good Locations
An unfortunate reality of this economy is that almost every sector has been hit, so buildings in every strata of quality and every corner of the market have gone vacant. As the Truckee Meadows has grown, most vacant lots close to the center of town have either been built on or priced for “higher and better uses” (real estate talk for too high). This forced many users into the far corners of our community even when a central location was highly preferable. Accordingly, some of the newest, highest quality buildings were built on the periphery of development – often those are the buildings open to the most aggressive negotiations today. Locational advantage (like beauty) is in the eye of the beholder it seems. An interesting micro trend we witness of late is the desire for residents in Spanish Springs to work closer to home. Gas isn’t free nor is your time, so now is a great time to locate your business WHERE it makes the most sense (or cents) to you.

Deeply Discounted Prices
A common method of valuing buildings is called “Replacement Cost Analysis”. As the name suggests, you compute the cost of building the same structure in today’s dollars. Conventional wisdom says buildings constructed during the peak of the market should be valued less than replacement cost, and based on what we are seeing, they are.

The following chart shows 9 building sale comps. All of these buildings are 70,000 – 80,000 sqft, vacant at the time of sale, sold for occupancy by a new user in either the Reno Airport or Sparks Submarkets.

Financing
The average price per square foot for these sales in 2008 was $56.88, but the average price in 2009 had fallen to $36.48. This reflects a 35.86% drop in just one year in this small segment of the market. Values in all size ranges across the entire region have suffered a similar devaluation.

The implementation of far stricter underwriting for commercial properties has clearly contributed to the fall in values. Financing for a purchase is undoubtedly more difficult to obtain than before, but it’s not impossible particularly for companies planning to occupy the new space. The Small Business Administration (SBA) has a number of programs available that allow 90% Loan-to-Value (LTV) for businesses in operation for 2 years or more – they even allow you to include T.I. costs and/or new equipment in some cases! Also, many loans written in years past (at better terms than currently available) are assumable. With a little calculator magic and fine print perusal, you may find the best financing vehicle comes with the property.

Is Now the Right Time for You to Buy?
Undeniably, any mortgage payment is too high when you’re business is under water. However, if you are still turning a profit in this challenging environment, you likely have the staying power to realize the many benefits of ownership. When considering a new building, think of a three legged stool, it should be the right building, in the right location at the right price. Today’s challenging environment has created conditions favorable to all three legs of the purchase decision. Is this the right time for you to step up and make a purchase?

The Nuts and Bolts of Nevada

Posted by: Carl Zmaila
Industrial Specialist
775 336 4623

czmaila@naialliance.com

Today while reading the local newspaper I ran across another compelling reason for California companies to relocate to the Silver State. The Tax Foundation of Washington D.C. reported that Nevada ranks 4th in the 2010 State Business Tax Climate Index. To read more about Nevada's tax friendly business enviornment, please visit Ray Hagar’s article click here.

A Real Estate Defibrillator?

Posted by: Scott Beggs
Investment Specialist
775 336 4644
sbeggs@naialliance.com

Scott joined NAI Alliance in March 2008 to assist the company with investment sales. Previously, Beggs spent over seven years with Dermody Properties as Vice President of Acquisitions and Port Management.

If you’re at all involved in the arena of commercial real estate investment and finance, the most common questions asked is , “How can the deal be financed?” My first answer is that there is no rule that debt financing has to be used to acquire commercial real estate. There was a time when most institutions bought assets with 100% equity. In those days debt was viewed as adding risk and that these conservative institutions were not too excited about increasing the risk of an investment, even if it increased the returns. What a novel concept, there is a trade-off between risk and return.

However, for most investors the use of debt financing is a foregone fact of life. The use of debt allows investors to ration their equity and potentially enhance their returns. Unfortunately for these debt-hungry investors, the CMBS market has come to a grinding halt, banks are hoarding cash, and life companies are focused only on the top-tier of the commercial real estate investment universe. The net result is that debt financing has become more rare than the Atkins Diet.

So does that mean that real estate investment will go the way of floppy-discs? Not hardly. Already we are seeing signs of the public market filling the void. There have been no fewer than 25 IPO registrations for mortgage REITS. On average these funds would raise between $500M and $1.0B. While this is a drop in the bucket compared to the issuance of CMBS during the go-go days of 2005 and 2006, this capital will partially satiate the needs of the commercial real estate industry. Also, there are rumors that there may be a new CMBS issuance by the end of this year. This issuance will likely reflect the more conservative underwriting standards required by today’s risk averse investors.

Regardless, there is no doubt in my mind that capital will once again begin moving through the veins of the comatose real estate investment industry.

Reduction in Consumer Spending is Upon Us

Posted by: Kelly Bland Retail Specialist

775 336 4662

kbland@naialliance.com

Kelly specializes in anchor tenant representation and shopping center anchor leasing, acquisition and site sales for both retail land and shopping center sites. Additionally, Kelly is involved in investment sales of retail properties.

Ever since I attended college and started paying attention to economics, it has been a constant mantra on the news that consumer spending made up roughly two-thirds of the Gross Domestic Product or GDP. The other one-third was comprised of business investment. Since it has been divided that way ever since I can recall, I assumed that it was just the way it was and should be. But along the way, we started to get some warning bells going off.

In 2006, the U.S. was showing a negative savings rate of 1%, which was the largest negative savings rate since the great depression in 1933 when it was negative 1.5%. In fact, in 2006 it had been negative for 21 consecutive months. During these boom years, people viewed their rising stock and home values as a defacto savings account that was doing the savings for them, i.e. all gain with no pain of having to actually save money out of their incomes.The latest national figures show that the savings rate increased to 6.9% of income. This is by far the largest amount consumers have socked away for some time. This allowed consumers to shift more money into spending so that by 2007, consumer spending was making up about 71% of GDP.

Then came declines in the housing markets. It first started with the sub-prime loans turning bad but eventually spread to housing value declines across all sectors and in most markets. In our local economy, the Median home price for Washoe County, NV now sits at $182,000 as of June of 2009. That is off the high water mark of $325,000 set in October of 2005, or a 44% decline. Using this median home value as a metric does not necessarily indicate that everyone’s home in Washoe County has come down in value by 44% per se, but we know that we have taken substantial hits on our values.

The housing declines were followed by a precipitous drop in the stock market. After hitting a high of 14,164 on October 9, 2007, the stock market declined 55% by the time it reached the low set on March 9, 2009 at 6,440. Even after rising 44% off the lows, the Dow Jones Industrial Stock Index in early August 2009 is still off over 34% from its high set in on October, 2007.

With a current decline in the stock market of 34% and a 44% decline in the median home price, local consumers are now seeing a major decline in values for their two largest asset classes. Consumers can no longer save by watching their stocks and home values rise. They actually have to save money from their incomes, which is exactly what they are doing.

The latest national figures show that the savings rate increased to 6.9% of income. This is by far the largest amount consumers have socked away for some time. Compared to a 1% negative savings rate in 2006, this is a total swing of 7.9% coming out of consumer spending.

Another factor impacting consumer spending is the level of unemployment and underemployment. The national unemployment rate currently stands at 9.5% while Washoe County has an 11.8% unemployment rate and rising. There are also a large number of underemployed people working at part time jobs even though they would like full time employment. One report I recently read indicated that Washoe County could have a figure closer to 21% including unemployed, underemployed and people who have quit looking for jobs. While unemployed and underemployed consumer spending does not drop to zero, their discretionary spending is largely limited and has a negative impact on overall consumer spending.

The effects of the decline in home value can be divided into two camps. One is the overall “wealth effect” and the other is the lack of availability of home equity loans available to homeowners now. A 2007 study by the Congressional Budget Office titled Housing Wealth and Consumer Spending made an attempt to quantify these two issues. The report showed that home equity withdrawals peaked in late 2004 and 2005 at nearly $900 billion per year. They estimated that one quarter or $225 billion of that home equity withdrawal was used for consumer spending. The report also indicated that at the height, the home equity withdrawals comprised slightly over 10% of personal disposable income. For many consumers, the equity in their homes has been decimated and many banks have either ratcheted down or withdrew lines of credit for home equity loans to borrowers. The loss of home equity lines of credit is another factor that will detract from overall consumer spending.

In addition to the retrenchment in the home equity lines of credit, credit card companies have also began to scale back credit limits for borrowers they consider a credit risk, further reducing consumer spending.

All of these factors have led to a “perfect storm” for the consumer. Loss of wealth in their stock portfolio and homes, loss or fear of job loss, and less available credit has led consumers to increasing their savings rate substantially. All of these factors impact the consumer’s ability to continue their spending at the peak levels set in 2007 and 2008. The question now is, “How much of an impact will this have on consumer spending going forward”?

This is where I need to make my disclosure. I’m a commercial real estate broker, not a full fledged economist. The following is my attempt to quantify this question the best I can after contemplating it for several months. So, here it goes.

If I add a 7.9% swing in savings, estimate 6% reduction from home equity loans, 2% reduction for unemployment and underemployment, and maybe 2% for reduction in stock prices and reduction in credit card spending limits, I come up with an estimate of 18%. Let’s say I underestimated the resilience of the consumer and/or the duration of prolonged unemployment and we add back 3%. We still have a reduction in consumer spending around 15%.

I think that would be a reasonable working estimate of what we should expect to see in regard to the reduction in consumer spending for the near future.

One question I have remains. What impact will this reduction in spending have on the amount of shopping center space needed to serve the consumer? I would say there will be a proportionate share of retail space that will be vacated and remain vacant until we see a resurgence in consumer spending. Perhaps it will be a bit less given the remaining retailers will probably suffer with reduced sales per square foot as well. Let’s say one-third of the loss is shared with the existing tenants with lowered sales and two-thirds results in store closing. That would indicate a vacancy rate increase of 10%.

Interestingly, our overall vacancy rate has increased from 6% in 2005 to 15.64% today. That’s almost a 10% increase in the vacancy rate. That seems to jibe pretty well.

Believe me, I know there is a lot of margin for shifting these estimates around. That is why I’ve had a challenge framing these estimates in my own mind for the last several months. But maybe, just maybe, we are getting close to the bottom in the occupancy levels within our local retail real estate market.

After Zero Residential Lot Transactions in the First 6 Months of 2009, Q3 is Off to a Good Start

Posted by: Aaron West-Guillen

Land Specialist / Land Entitilement Consultant

775 336 4674

awest-guillen@naialliance.com

Aaron West-Guillen has 15 years of land acquisition, entitlement and development experience in northern Nevada.

After zero residential lot transactions in the first 6 months of 2009, Q3 is off to a good start. Based on available data, here is what I can make of the transactions in July:

Ryder Homes has stepped into Shadow Ridge (Pyramid Hwy north of Calle de la Plata), purchasing 52 finished lots and 10 partially completed homes from Bank of America (which foreclosed on Syncon Homes). Word on the street puts the finished lot value at $25k per, which provides an average of $115k for the partially completed homes. I wonder where that puts a value for the remaining 126 paper lots still owned by B of A?

Lewis Operating Corp. has purchased a substantial portfolio from Landsource Communities Development LLC out of bankruptcy. Including:

• Pioneer Meadows Village II – 34 finished lots in Spanish Springs for $25.5k per lot.
• Damonte Ranch Phase 5 – 214 mapped lots and 410 paper lots in south Reno. Nothing to back this up, but the math works out perfect at $10.5k for mapped (includes water) and $4k for paper. Hopefully the applicable credits were included, considering all the off-sites and grading completed.
• Copper Canyon – 102 finished lots and over 100 paper lots in Dayton. Even if the paper lots were free, that would put the finished lot cost below $20k per; my guess is somewhere around $16k finished and $3 paper.

Does this mean the positive indicators over the last few weeks are finally leading to money coming off the sidelines? At these values it’s hard to see how anyone could get hurt…

Q2 Retail Market Report Available

Posted by: NAI Alliance Retail Group
775 336 4600

The Q2 Retail Report is now available for download

Basin Street Properties Relocating Corporate Headquarters to Reno

Posted by: Dominic Brunetti
Vice President Office Properties
775 336 4674
dbrunetti@naialliance.com

During his career, Dominic has worked with clients such as: Centex Homes, CTX Mortgage, Landmark Homes, 1st Premiere Mortgage, AG Edwards, Alere Medical, CHSI Nevada, The CFO Group, Ameriwest Financial, North American Title, Andregg Geomatics, Manhard Consulting, HDR Engineering, State Farm, Gizmo Wireless, The Corner Doc, First American Title Company, Stewart Title Company, GI Consultants, The Hilton Foundation, Hartford, PC Doctor and more.

What is extremely encouraging about the relocation of Basin Street Properties to Reno is that this is Downtown Reno’s largest private investor in commercial office space. Their relocation gives merit to the belief in our region’s quality of life and the factual benefits of doing business in Nevada; not to mention that it will add jobs and have a positive economic impact on the region.

To read an article with more information about the Basin Street Properties relocation to Reno, please click here.

A Downtown in Full Swing

Posted by: Dominic Brunetti
Vice President Office Properties
775 336 4674
dbrunetti@naialliance.com

During his career, Dominic has worked with clients such as: Centex Homes, CTX Mortgage, Landmark Homes, 1st Premiere Mortgage, AG Edwards, Alere Medical, CHSI Nevada, The CFO Group, Ameriwest Financial, North American Title, Andregg Geomatics, Manhard Consulting, HDR Engineering, State Farm, Gizmo Wireless, The Corner Doc, First American Title Company, Stewart Title Company, GI Consultants, The Hilton Foundation, Hartford, PC Doctor and more.

Reno’s Downtown office submarket is slowly but surely benefiting from the “makeover” taking place. The revitalization projects over the past five years have transformed downtown and the trend continues. New and redeveloped condo complexes, coupled with street beautification projects and the Reno Aces AAA baseball stadium & event center truly make downtown a desirable place to live, work and play. This all spells good news for the downtown office market, although competition with other Northern Nevada submarkets for the relatively limited demand will likely remain tough through 2010.

In the 2nd quarter of 2009, Class A downtown office vacancy increased to 18.7% from 16.49% compared to the same period the year before. This is largely due to overall market conditions; office vacancy rates in every northern Nevada submarket increased over 2008 levels and are at or near their highest levels since official records have been kept.

The biggest news for downtown in 2009 is the Reno Aces Baseball Stadium, which has revitalized the east side of downtown, known as the Freight House District, and has breathed new life into one of Reno’s largest office buildings, 300 E. 2nd Street. Basin Street Properties, with a touch of luck and talent, put 300 E. 2nd Street, also known as the Park Center Tower; into contract prior to the Baseball Stadium development was announced. Now proud owner and soon to be tenant, Basin Street Properties is relocating their corporate headquarters from Petaluma, Ca to Downtown Reno. Both Basin Street and baseball fans alike have benefited from the eleven floors of parking this fifteen story office building provides. The building has undergone significant redevelopment and more is planned with ground floor retail scheduled to open as early as Q4 2009.

While the new baseball stadium seems to steal most of the headlines regarding downtown redevelopment, let’s not forget some other notable office redevelopment projects in the Downtown submarket.

Downtown Office Redevelopment Projects

100 and 140 Washington Street
Despite market conditions, AMH Properties continues to gain ground in this 32,000 square foot two building redevelopment project. After acquiring this nearly vacant office complex in 2007, AMH Properties completely updated the interior, exterior and landscaping with new energy efficient, contemporary designs. The complex is now home to a number of new tenants such as Understand.com, The Laughton Company, Gaston & Wilkerson and more.

275 Hill Street
The next in line for an AMH Properties’ redevelopment is this two story office building which is currently being converted into a mixed use project with ground floor retail and 2nd floor office.

250 Bell Street
Cathexes Design recently turned this dated 20,000 square foot office/warehouse into a new vibrant multi-tenant office building. An artistic design coupled with green building construction makes this a truly unique downtown redevelopment.

445 South Virginia Street
Dermody Ventures LLC is in the process of redeveloping this former multi-tenant office and once downtown grocery store into a mixed use Retail/Office complex. The building is surrounded by the heavily traveled S. Virginia Street, Sierra Street and California Avenue. The building has great visibility and one of the highest parking ratios downtown.

Downtown New Office Construction

State Street Plaza
MTK, LTD. recently completed this centrally located mixed use project on the corner of State Street and S. Virginia St. This Class A development is in the heart of Reno’s financial district sitting neighbor to Reno’s Pioneer Center for the Performing Arts. State Street Plaza consists of ground floor retail and 2nd floor office.

The aforementioned projects have driven the insipid reputation of the CBD into an energetic downtown. Yes, statistics show an increase in office vacancy, but with a hint of new construction and sprawl of the national economy, a two point increase depicts a healthy performance when compared to the double digit increases in alternative submarkets. As once characterized as the “rubber band” effect, tenants and citizens alike are realizing, once again, the convenience, amenities and diversity Downtown Reno bestows.

Matt Grimes, Associate, NAI Alliance
Dominic Brunetti, Vice President, NAI Alliance

The Elusive Search for the Bottom

Posted by: Aaron West-Guillen

Land Specialist / Land Entitilement Consultant

775 336 4674

awest-guillen@naialliance.com

Aaron West-Guillen has 15 years of land acquisition, entitlement and development experience in northern Nevada.

“New and improved underwriting criteria on the part of lenders is not only eliminating access to financing for new projects but limiting the ability to refinance existing loans coming due — that is, without a substantial capital infusion. All of this fear is driving investor’s expectations on return into double-digit cap rates with a devastating effect on property values. As one can imagine, the resulting effect of building value declines is further magnified for vacant land. The term “land is worth less than zero” has become something of a mantra for those investors snooping around the market. However, those investors are snooping around the market.”

Read the entire article at: http://www.nnbw.biz/ArticleRead.aspx?storyID=13269

Land 2Q Market Report Available

Posted by: NAI Alliance Land Group
775 336 4674
awest-guillen@naialliance.com

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The Q2 Land Report is now available for download.

Is Anyone Credit Worthy?

Posted by: Scott Shanks, SIOR

Senior Vice President Office Properties Group

775 336 4671

sshanks@naialliance.com

During his career, Scott has worked with clients such as: Barnes & Noble, GM, Merck Pharmaceutical, Henry Schein, Home Depot and Ahold to facilitate their real estate needs.

Even though it seems like forever ago given the downtrodden economy, only a short time ago, Landlords didn’t pursue personal guarantees nearly as aggressively as they do now. I certainly don’t blame them in trying to protect their investment and having some sort of collateral in place in the event of default, but it’s pretty tricky in trying to determine who’s financially viable in today’s marketplace. It’s also very difficult on the tenant representation side to recommend to a client that they financially obligate themselves beyond the business level and expose their personal assets. Are there ways around this issue or is there a happy ground that can be met between Landlord and Tenant? Absolutely. One simple suggestion is to seek a “termed” personal guarantee, whereby the personal guarantee is eradicated after a set period of time of faithful performance of the lease obligations. Though at times it becomes a necessity to successfully complete a transaction, if you’re a tenant and are out looking for space or are preparing to sign a lease, seek a professional and look for alternative options before signing a personal guarantee.

Competition Still Exists

Posted by: Scott Beggs
Investment Specialist
775 336 4644
sbeggs@naialliance.com

Scott joined NAI Alliance in March 2008 to assist the company with investment sales. Previously, Beggs spent over seven years with Dermody Properties as Vice President of Acquisitions and Port Management.

I fully acknowledge that prices have come down considerably from the 2005-2007 period. I would also contend that some very high quality assets with little risk continue to trade at what most would consider very low cap rates (on our market in the 7% to 8.0% range). The argument that I continue to try and counter is the one that I hear from folks who say ALL real estate will or should trade north of a 10% cap rate. Based on what? Buyers would like sellers to believe that, but this is just not reality. Will some deals get done at 10%, 11%, 12% or event 13% cap rates, absolutely. Will ALL deals get priced at that high of a cap rate. No.

And oh by the way, if buyers want to achieve excess returns (and I would argue that double digit initial yields should be considered “excess returns”), they had better be offering with ALL CASH, relatively short due diligence periods, and a demonstrated ability to close. Motivated sellers will in fact have to part with certain assets at very high cap rates (low prices) due to ill-conceived capital structures. But the winners of those deals will be the groups that can demonstrate their ability to close with little uncertainty to the seller. The seller will sacrifice pricing for execution, to the extent they can. But sellers are not going provide highly attractive pricing AND accept the risk that a buyer will be able to get a 70% LTV loan over and extended due diligence period.

And while it is definitely a buyer’s market, there are and will continue to be a lot of very well qualified and motivated buyers when the pricing get enticing. To think that there are not a lot of other well capitalized buyers out in the market looking for these same good deals is myopic. Regardless of the environment, buyers do not have an open playing field.

Downtown Reno Open House Event

Posted by: Dominic Brunetti
Vice President Office Properties
775 336 4674
dbrunetti@naialliance.com

During his career, Dominic has worked with clients such as: Centex Homes, CTX Mortgage, Landmark Homes, 1st Premiere Mortgage, AG Edwards, Alere Medical, CHSI Nevada, The CFO Group, Ameriwest Financial, North American Title, Andregg Geomatics, Manhard Consulting, HDR Engineering, State Farm, Gizmo Wireless, The Corner Doc, First American Title Company, Stewart Title Company, GI Consultants, The Hilton Foundation, Hartford, PC Doctor and more.

There is something new coming to downtown Reno and it is the State Street Plaza office and retail center located next to the Pioneer Center for Performing Arts. The developers of this office and retail center, MTK Limited, will be hosting the chance for you to see what downtown Reno has to offer. When: July 7, 2009. Where: 170 S. Virginia Street, State Street Plaza. Please RSVP to dbrunetti@NAIAlliance.com.

Uncertainty Running Rampant

Posted by: Scott Shanks, SIOR

Senior Vice President Office Properties Group

775 336 4671

sshanks@naialliance.com

During his career, Scott has worked with clients such as: Barnes & Noble, GM, Merck Pharmaceutical, Henry Schein, Home Depot and Ahold to facilitate their real estate needs.

Not a day goes by that something observed in the media does not cause uncertainty at some level. In general this is not some new or strange phenomena, but the unsettling issue is the levels at which we see it; government, jobs, housing, oil, banking, commercial, manufacturing…and the list goes on. Until we stabilize in the broad base of sectors, we will continue to see the large gyrations that the financial and real estate markets go through weekly. I believe that this is the largest challenge that the current administration is facing, which is simply getting everything to the point that we can start to see some semblance of normalcy in the market place. Good luck!

Diversifying your portfolio with Commercial Real Estate

Posted by: Chris Shanks
Investment Analyst
775 336 4620
cshanks@naialliance.com

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.

Diversification, it’s one of the prominent terms associated with investment portfolios. We are beaten over the head with this word almost every time the word portfolio is mentioned. With all of the air time the word gets you would think that everybody would firmly grasp the concept and know how to apply it to their current portfolio right? The answer may surprise you.

Many people interpret diversification as the act of adding an asset to their existing portfolio that is in a different class, or sector, than the assets they currently own. On the surface that assumption makes sense, but many times those assets can end up performing exactly the same as some of the assets they already own i.e. they have a high correlation coefficient. To truly understand diversification you have to know how to interpret correlation coefficients and more importantly the modern portfolio theory and the capital asset pricing model (CAPM). Since that is a whole other topic and concept I’ll spare the in-depth analysis and get to the overall point. The optimal diversification of a portfolio is achieved by adding assets that increase the portfolio return without adding any additional portfolio risk. That usually translates to assets with low correlation coefficients with respect to the portfolio and a majority of their risk being diversifiable. So what does this all mean to a real estate investor?

Since it is nearly impossible to create a standard deviation for an individual commercial real estate asset we have to turn to the REIT world to get our data for an apples to apples analysis. I used the NAREIT Equity REITs Index’s monthly returns going back to 1972. I compared that data to the monthly returns of the Dow Jones Industrial Average and the Standard & Poor’s 500. Below is the correlation table for their historical returns.

As we can see the correlation coefficient for the ^DJI and ^GSPC is close to 1, which means that their returns almost mirror one another, as we’d expect. The 0.54 and 0.56 coefficients that they share with the Equity REIT means that if you were to combine either of them with the Equity REIT you would be able to diversify out some of the individual asset risk that each possesses as a standalone asset. The ultimate goal is to have the maximum return for your specific risk threshold. Adding commercial real estate to a portfolio is one of the ways to reach that frontier. One of the services we offer is helping clients determine the right price to pay for a commercial property that will create an optimal return for the risks they will be incurring.

Lenders Forced to Listen

Posted by: Ryan C. Judson
Land Specialist
775 336 4641
rjudson@naialliance.com

Ryan C. Judson works at NAI Alliance as an associate for the Land Department. His responsibilities include market data mining, researching and tracking distressed properties, and analyzing off-market vacant land opportunities. Ryan received his Bachelor’s of Science in the Business Administration Real Estate Program from San Diego State University in December of 2007. Shortly after moving to Reno in 2008, Ryan obtained his Nevada Real Estate License while working for NAI Alliance and now assists in the acquisitions and sales of vacant land in the Northern Nevada area.

With the number of foreclosures at an all time high, and speculation that the banks are holding onto excess inventory in order to prevent further price drops, the return future for new home developments remains on shaky ground. But, a recent state law, signed by Gov. Jim Gibbons, which takes effect in July, would allow homeowner-occupants facing foreclosures to demand a sit-down mediation with the lenders, overseen by an attorney or a retired judge. At a cost of up to $200, it may be worth it for many who want to save their homes but are having trouble getting their lender’s ear. One component of the law forces the lenders to produce promissory notes, and a deed of trust, showing that the money is owed and that their bank has security on the loan. For some banks, where the note has been sold to a third party or has been taken over by another financial institution, this law could pose a significant threat. It could allow for the mediators to greatly reduce the amount of the loan, allowing the current homeowner the ability to stay put in their house. To read the full article from the Las Vegas Sun, click here.

There is no doubt that for those who are willing to pay the $200 and go through this process that it will in some way slow down the foreclosure process. However, it will remain to be seen whether this new law will actually help these homeowners stay in their houses long enough for the market to return, or if it is just delaying the inevitable.

Another Tool for your Toolbox – 1031 Exchanges

Posted by: Scott Beggs
Investment Specialist
775 336 4644
sbeggs@naialliance.com

Scott joined NAI Alliance in March 2008 to assist the company with investment sales. Previously, Beggs spent over seven years with Dermody Properties as Vice President of Acquisitions and Port Management.

Earlier this week I attended a two-part class covering 1031 Exchanges. I did this because I felt like there were more than a few aspects of this part of the IRS code that I did not understand. Am I an expert now? NO. But I do understand the topic well enough to know that when applied correctly, it is a very useful tool for many investors. At the heart of a 1031 Exchange is the ability to defer the tax on the gains realized, that is to say you are not avoiding this tax, you are deferring it. Someone joked with me that in this depressed market no one has gain on the sale of real estate. While transactions are few and far between right now and values are depressed from a few years ago, the 1031 Exchange is still an important tool that all owners (and brokers) should understand. And there are plenty of current sale situations where the 1031 Exchange can still be an effective tool in minimizing your current tax burden upon the sale of an investment property. One of the most basic, and unchangeable, aspects of a 1031 Exchange is the timetable involved. A seller has 45 CALENDAR days from the close of escrow on their sale of their property to identify a trade property. Further, a Seller has 180 CALENDAR days from the close of escrow to complete (i.e. close escrow) on the purchase of their replacement property. If you know nothing else about 1031 Exchanges, you should remember these time frames because the IRS does not allow any exceptions or extensions to these time frames (except by Presidential decree of a disaster area). At the end of the day the total dollar amounts involved in a single commercial transaction dictates that any owner of investment property should consult their tax attorney or CPA to ensure a successful transaction. If you get a blank stare from your broker when you bring up the topic of 1031 Exchanges, you should probably rethink your representation.

Housing Starts..."unexpectedly fell"?

Posted by: Aaron West-Guillen
Land Specialist / Land Entitilement Consultant
775 336 4674
awest-guillen@naialliance.com

Aaron West-Guillen has 15 years of land acquisition, entitlement and development experience in northern Nevada.

“The Commerce Department reported that housing starts unexpectedly fell in April, brought down by a large decline in apartment groundbreakings that offset a modest increase in single-family housing starts. Housing starts dropped 12.8% to a seasonally adjusted 458,000 annual rate compared to the prior month, the Commerce Department said.”

Housing starts "Unexpectedly fell? " With construction lines-of-credit that fund housing starts being withdrawn by lending institutions daily, new foreclosure filings surging beyond historic highs and the median sales price in most communities plummeting to below replacement cost; how can this be "unexpected?"

In order to compete with the distressed residential properties currently overwhelming the market, builders would have to price new housing starts with the intent of losing money; not a good business model…

Residential Land. Where are we headed?

Posted by: Ryan C. Judson
Land Specialist
775 336 4641
rjudson@naialliance.com

Ryan C. Judson works at NAI Alliance as an associate for the Land Department. His responsibilities include market data mining, researching and tracking distressed properties, and analyzing off-market vacant land opportunities. Ryan received his Bachelor’s of Science in the Business Administration Real Estate Program from San Diego State University in December of 2007. Shortly after moving to Reno in 2008, Ryan obtained his Nevada Real Estate License while working for NAI Alliance and now assists in the acquisitions and sales of vacant land in the Northern Nevada area.

According to Ticor Title’s recent stats, resales have been increasing for the past few months (starting with Feb 09). If this trend continues and foreclosures start to drop we will see median home prices settle on a bottom. Once this happens, new home sales should begin to increase and overall housing inventories should decline.

With inventories dropping, and an increase in demand, the remaining developers will snatch up any abandoned unfinished subdivision projects they can get for a steal. Only with a readjusted basis will most of these projects make sense to build. Bank financing will be available for only the most stable of companies and due to the difficulty of this, developers will need to find new equity relationships with investors who’ve been waiting on the side lines.

The national builders will most likely be slow to re-establish their land development operations as they increase their share of housing starts on their current projects, although, we are currently seeing LOI’s floating around on finished lots in the area from a couple of the publics. This is a good sign and could provide evidence for an earlier than expected market return. Could we see another Great Nevada Land Rush as we did for several years leading up to this mess, or will it be a more conservative process as developers and investors are weary as to not get ahead of themselves? With stabilization of housing prices, a leveling off of foreclosures and a continued increase in number of homes sold, the Reno Residential Land Market could start its return later this year into 2010?

Office Bootcamp

Posted by: Dominic Brunetti
Vice President Office Properties
775 336 4674
dbrunetti@naialliance.com

During his career, Dominic has worked with clients such as: Centex Homes, CTX Mortgage, Landmark Homes, 1st Premiere Mortgage, AG Edwards, Alere Medical, CHSI Nevada, The CFO Group, Ameriwest Financial, North American Title, Andregg Geomatics, Manhard Consulting, HDR Engineering, State Farm, Gizmo Wireless, The Corner Doc, First American Title Company, Stewart Title Company, GI Consultants, The Hilton Foundation, Hartford, PC Doctor and more.

We have been advising Landlords on many different creative office leasing and sales incentives. One of our Landlords, Basin Street Properties, has significant office holdings in the core business district of downtown Reno, Nevada. They are currently gearing marketing towards the abundance of current and future amenities. A perfect example, the new Reno Aces AAA baseball park. An additional incentive Basin Street Properties is considering is the offering of health club memberships.

A friend and former partner of mine, Joel Grace, just came back from Sydney, Australia and brought back a franchise that he was involved in. It is called Original Bootcamp. When he came back, he met with me to discuss the various office holdings in our area, and where was the need for a military inspired outdoor fitness program. It’s a great program, but he wanted to make sure that their first entrance into the US market was in an area in which the office population could take advantage of his companies’ services. In my opinion, this would be a great amenity to an office tenant, downtown or otherwise. Do you agree?

Seller Financing: It Might Be Your Only Option

Posted by: Chris Shanks
Investment Analyst

775 336 4620
cshanks@naialliance.com

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.

If owners truly need to get properties off their books they may have to carry back the note to get the transaction done.The media might be telling us that banks have received a plethora of money to facilitate their lending and continuing of operations, but that doesn’t mean they’re giving it out. Many bank managers will tell you that they’re ready to lend, which they will if you have property that has 90+ occupancy, strong in place tenants, and long-term leases. The only problem is the owners of these properties don’t want to sell them in a down market, and therefore they represent a small percentage of the properties on the market. If owners truly need to get properties off their books they may have to carry back the note to get the transaction done.

Banks are requiring debt service coverage ratios of at least 1.35 and above. Often riskier properties have to achieve even higher ratios than that. This ratio is causing lenders to lower their loan to value amounts forcing buyers to come up with more equity. More often than not buyers can’t justify a high equity contribution because it would drastically lower their internal rate of return, which in these times needs to be 20%+ to justify the purchase of a riskier property. What all of this means to the sellers of risky properties is that their building probably won’t sell until banks loosen up their lending practices or they (sellers) provide the lending themselves.

Often times the sellers of property don’t need the proceeds from their sale to be a lump sum. Carrying back the note will provide them with an initial “pop” in the form of the buyer’s equity, and then they can claim loan payments for the entirety of the note. Being the issuer of the note sellers can negotiate the terms that need to be present for the deal to get done. Obviously there is more risk with this procedure because the sellers will need to do the due diligence and underwriting themselves, as opposed to the bank’s staff. However, real estate professionals and attorneys can help with the underwriting and drafting of the loan documents. While there are more implications to this process than I’ve mentioned (tax, legal, etc.) seller financing can sometimes be the only way a property is going to change hands. So if you’re having troubles getting you property to “move” consider offering seller financing.

Are we there yet?

Posted by: Dan Oster

Industrial Specialist

775 336 4665

doster@naialliance.com

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.

Anybody who has ever been on a long family car trip with kids has repeatedly heard this dreaded question. You feel the excitement and expectation — the longing of just wanting to be there. It turns to frustration because you know that no matter what you do, the journey will simply take as long as it takes. Sound similar to any conversations you’ve had about when this current economic downturn will be over? (Click here to view complete article)

CA Lawmakers Ask Economic Refugees Why NV

Posted by: Dan Oster

Industrial Specialist

775 336 4665

doster@naialliance.com

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.

California Legislators coming to Nevada to find out why so many California companies have left the Golden State is a great endorsement for Nevada’s business friendly philosophy (see full article here). While Nevada is internationally known as the place to come to play, it’s nice to continue to see recognition of the fact it’s a great place to live and work as well!

A lasting impact on industrial facilities throughout the Western United States

Posted by: Carl Zmaila
Industrial Specialist
775 336 4623

czmaila@naialliance.com

Nicholas Casey and Alex Roth of the WSJ recently authored an article that may have a lasting impact on industrial facilities throughout the Western United States.

They argue the Port of Los Angeles will be seeing increased competition. Why? For a multitude of reasons, from increases in regulation to companies looking for ways not to put all their eggs in one basket. One reason for the latter rationale is the labor dispute last year that handcuffed the Port of Los Angeles.

Casey and Roth are not arguing that the neighboring ports of Los Angeles and Long Beach will lose their dominance as the entry points to the United States for Asia, but other ports along the West Coast, for example British Columbia and Oregon, will see an increase in business.

This may benefit the Northern Nevada industrial market along with other industrial markets competing with the Inland Empire. By businesses choosing to diversify their ports of entry, inland distribution locations located along rail lines may well see an increase in value through the natural increase in demand.

Hopefully, more news like this will help push along infrastructure spending, for example the rail line improvements to accommodate stack trains being proposed over the Sierra Nevada.

To read the article by Mr. Casey and Mr. Roth please click here.

Capital Bribery

Posted by: Scott Beggs
Investment Specialist
775 336 4644
sbeggs@naialliance.com

Scott joined NAI Alliance in March 2008 to assist the company with investment sales. Previously, Beggs spent over seven years with Dermody Properties as Vice President of Acquisitions and Port Management.

NAI Global recently offered a webinar to their affiliate offices featuring a presentation by Dr. Peter Linneman, one of the leading real estate economists in the nation. During that presentation, Dr. Linneman described the current investment situation in which investors must be “bribed” into moving out of cash and into higher returning investments. The “bribe” comes in the form of a huge required risk premium on any non-cash investment opportunity. Basically, those entities with capital available for investment are choosing between two extreme investment alternatives: (1) a 0% real-return from cash equivalent investments, or (2) a requirement of 25%+ unleveraged returns over a three to five year holding period on equity investments in commercial real estate (regardless of the asset’s risk profile, which is highly problematic in my mind).

If an investment is not priced at a level that offers an investor these types of returns, those investors are staying away in droves. Investors justify this stance by pointing to all of the uncertainties inherent in commercial real estate at this point in the cycle. The most obvious risk being continued weakness in tenant demand which could lead to prolonged vacancies and/or deterioration in market rental rates. My first response to this view is that high-quality real estate investors should be able to underwrite and more importantly mitigate the risks of reduced demand in the space markets and should be able to weed-out those assets that possess undue demand risks. Secondly, this view suggests that the investor has a negative view of the resilience of the U.S. economy and a short-term perspective on investing. In that sense, these investors should maintain their cash positions because their view of real estate is too clouded by the anomalies of the last 4 years.

Another commonly noted risk of real estate investment is the fear of continued deterioration in the capital markets resulting in a prolonged (or worse, permanent) increase in cap rates. As for the risk of prolonged softness in the capital markets, those investors would seem to poses a fairly myopic perception of the long-term value of commercial real estate. (my·o·pic \ mi-ō-pik \ adjective: “a lack of foresight or discernment : a narrow view of something.”) At some point, the supply/demand fundamentals for commercial will moderate and eventually improve. Capital markets will begin to stabilize and the required risk premium on commercial real estate will decline. At that point competition amongst investors will grow and downward pressure on cap rates will build. And some investors will still have “dry powder” but they will have missed the opportunity created by this upheaval.

Revitalized by Aces

Posted by: Scott Shanks, SIOR

Senior Vice President Office Properties Group

775 336 4671

sshanks@naialliance.com

During his career, Scott has worked with clients such as: Barnes & Noble, GM, Merck Pharmaceutical, Henry Schein, Home Depot and Ahold to facilitate their real estate needs.

It’s been a long time coming…..and now worth the wait. The Reno Aces had their season opener on April 17th and the house was packed. The reception of the new ballpark has been tremendous and the attendance thus far has proved that this type of venue was exactly what the area has had a thirst for. How will this affect the surrounding area from a commercial real estate perspective? Well…the phone is already ringing and interest is coming in from both leasing and purchasing prospects looking for office, retail and service oriented company’s. With attendance of over 9,000 per game over the opening weekend, it’s hard to ignore the excitement and visibility that will be created for surrounding properties to the ballpark and the value that will be created as a result. Look for ground up development and rehab projects in the retail sector first, with office product to follow in the future.

When to Get Back in the Game

Posted by: Chris Shanks
Investment Analyst

775 336 4620
cshanks@naialliance.com

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.

Many investors across the asset spectrum have found themselves, and their money, on the sidelines of the financial game. Most of these investors currently have a healthy percentage of their wealth in cash, money market accounts, or CDs. These little to no interest earning assets, while safe, won’t provide their owners with the long term returns they should hope to realize. I can understand why many of them withdrew their money from the market, however I believe in passive management as well as the long term hold approach to assets. Trying to time the bottom, or any point in a market, is a futile affair; to use a popular term, “It is like trying to catch a fallen dagger”. No one knows when the “bottom” will be reached, but the sooner we show confidence in our economy, by getting dollars into circulation, the sooner we’ll pull out of this trough.

There are more deals now than ever in a wide variety of asset classes that present great opportunities for investors. Many high quality assets have seen their values unfairly pulled down by the declining market and economic conditions. There are those assets that are arguably performing just as well as they were two (2) or three (3) years ago as they are now. High quality real estate properties that previously would have sold at a 6.50% cap rate are now trading at least 100 – 150 basis points above that number. While these properties may not see cap rates that low for a long period of time, if ever, they are still being unfairly discounted and represent a good long term position for many investors. 2009 should at least bring more lookers into the market, there are deals out there the only matter is identifying them.

More Good News?

Posted by: Aaron West-Guillen
Land Specialist / Land Entitilement Consultant
775 336 4674
awest-guillen@naialliance.com

Aaron West-Guillen has 15 years of land acquisition, entitlement and development experience in northern Nevada.

The latest stats are out from Ticor, and I like the trend. While I’m happy to see substantial increases in new home sales and resales, further review of the data shows a consistent uptick every year at this time (call it spring fever). I believe more impressive are the number of refis, up 230% from the start of the year. What else would you expect with rates at record lows, right? Remember that interest rates have been appealing for quite some time, however, the credit has not been available. I believe this is a positive indication that the credit markets are finally easing the strangle hold on the consumer.