The Auto Parts Segment as a Net Leased Investment Strategy

At this point in the economic cycle it’s good to look for more recession proof businesses as your tenant in a net lease investment. Specifically, with regards to the auto parts segment, the last recession took a huge bite out of new car sales and the next one will do the same.

Typically, the economic cycles run 12 -14 years peak to peak and trough to trough so we’re about due for another downturn. I don’t think the next one will be anywhere close to the viciousness of the last mostly because credit markets have been restrained throughout this recovery.

High unemployment and stringent credit markets decimated new car sales during the recession. As a result, the average vehicle age increased year after year. Older vehicles need parts replaced, and with limited income most car owners are forced to buy the part and replace it themselves.

There are four major and one smaller players in the segment. First is Advance Auto, founded in 1929. Second is Auto Zone.  Third is NAPA, founded in 1928.  Fourth is O’Reilly’s, founded in 1957.  And the fifth slightly smaller player is Pep Boys.

The players in this segment of triple net retail investments have targeted a more low to middle income, working class, blue collar type areas and neighborhoods. Also population growth will increase the number of cars on the road and continue to drive demand for auto parts

Net lease assets such as these fill a highly desired price range, generally trading between $1.0M – $2.0M. Additionally, the typical big four Auto parts store lends itself to a wide array of reuses in the unlikely event of a vacancy as these are a big rectangular box on one to two acres of land. Pep Boys tend to be even larger and with service bays which allows so advantages concerning depreciation with cost segregation.

Whether it is a Columbus Ohio triple net retail opportunity, Santa Monica triple net retail or anywhere in between, It’s time once again to take a serious look at this segment.

For triple net retail, nnn, net lease commercial real estate for sale for 1031 exchange or purchase

If you’re in a 1031, these are relatively easy to locate on short notice (within the 1031 exchange 45 day identification period). If you’re interested in pursuing this segment as a NNN net lease buying opportunity, I would be happy to help.  Contact Scott Harris Realtor at 614-905-6614

Mixed Use 11 Story Retail & Apartments Replacement for the Swan Cleaners Building in Downtown Columbus

New 11-story mixed user with net leased retail and restaurant space for lease completes Columbus’ River South

Another terrific concept from local developer Brent Crawford. This time to replace the three story Swan Cleaners building in downtown Columbus at the intersection of Cherry and High St.

The building is proposed as an 11 story with 120 units and ground floor triple net retail for River South in Downtown Columbus. I have no idea how much Columbus net leased retail or restaurant space there will be.  Whatever it is, it will make us Columbus commercial real estate agents and brokers happy to have some new inventory.

The project goes before the Downtown Commission next week on September 20th. At least with the Downtown Commission the project isn’t likely to come back with the top four or five stories missing as would be the case with a few area commissions just to the north.   I suspect this one will be left intact.  To have population growth in the Columbus central business district, we need density.  In order to do that, we need to build taller.

The local architectural firm, Design group created the design. The rendering faces northwest with the two partially completed LC properties just to the north.  With this property, River South is just about complete.  That’s start to finish in eight years.

Given how tight the local commercial real estate market in High Street corridor has been over the last many years, new retail developments are leasing up before construction begins. If you have any interest, feel free to contact me, Scott Harris Realtor, at 614-905-6614.

Retail and Restaurant Tenant Credit Ratings

This one is for my triple net retail investors. Net leased retail buyers desiring leverage know that national credit retailers’ credit ratings with S&P and Moody’s are hugely important for getting a loan at decent rates and terms or even getting the loan at all.

Investment grade credit is S&P BBB or above. Once in a while you can get a BBB- rated retailer done by the big lenders, including life companies. For non rated local retailers, restaurants, etc., a local bank with whom you have an existing banking relationship is your best choice.  And better to be non rated than have a B- or a C rating.

I created a credit rating chart a couple of years ago with the then current ratings of the major net lease national retailers. I just updated the chart with current ratings. See the link below.

If you have any questions or need info on a major retailer not listed, call me, Scott Harris Realtor at 310-473-4789 or 614-905-6614

Tenant-Credit-Ratings

Pricing Bubble Returns Again to Commercial Real Estate

In DLA Piper’s annual survey of the commercial real estate industry, 85 percent of senior executives at commercial real estate brokerages, REITs, etc., hold a bullish outlook for the remainder of 2013.  56 percent see a combination of low interest rates and a abundant debt and equity capital as a primary reason for their optimism.  Only 40 percent named an improving US economy as a reason.

The Feds pledged to keep interest rates low until the unemployment number falls below 6.5 percent, which many analysts think won’t happen until late 2015 and to continue buying $85 billion per month in Treasurys and mortgage bonds to keep  long term rates low.

What happens, however, when the feds ease back on Qualitative Easing and interest rates get back to normal?  Due to recovery in capital markets, CAP rates are at or near historic lows for most property classes even as other fundamentals remain weak.

While it’s certainly a golden age for capital availability, it’s not so golden for real estate fundamentals, said Sam Zell, chairman of Equity Group Investments, during the keynote discussion at DLA Piper’s 11th Annual Global Real Estate Summit this week in Chicago.

“In terms of the cost of leverage, this is the cheapest cost of capital since the ’50s. But it’s not a golden age from a demand perspective,” the legendary real estate mogul and billionaire dealmaker told his audience.

Are we heading toward another mother of meltdowns as this bubble runs its course and interest rates rise?   Some of the threats sited are the potential for a midterm squeeze on liquidity when interest rates go up rapidity and the existing debts come due for refinancing.   Plus, the readily available low cost debt is encouraging loosening of underwriting standards.   I’m seeing this now with the number of deals that can get financed now that I couldn’t touch six months ago.  I think we all know where this will lead.  Didn’t we just go through this in 2008?

More than 68 percent surveyed in the DLA Piper survey think that CAP rates will hold steady while 20 percent feel that CAP will fall further.  A senior economist, John Kainer, with the Economic Research Department of the Federal Reserve Bank of San Francisco expressed concern with the disconnect between low cap rates and still weak fundamentals prompting concern that the low interest rate policy of the Fed may excessively boast property prices.   Record low CAP rates coupled with a quick run up in interest rates is a recipe for disaster …. again.

http://www.dlapiperresummit.com/export/sites/resummit/downloads/surveys/DLA_Piper_2013_State_of_the_Market_Survey.pdf

More Lenders and More Money for Construction

Developers report that although money is still tight for new commercial development, money is far more available that it was a year ago, especially for new multiunit development.

“It’s a good time to be a multifamily developer,” says David Cardwell, vice president of Capital Markets for the National Multi-Housing Council. “I don’t know of any who are not pursuing new construction of substantial rehab.”

Permits for new apartments have reached an annualized rate of 250,000 per year since the summer and that’s twice the rate from a year ago when the only source of funds was the federal housing subsidies.

Both debt and equity financing are more available, according to the National Multi Housing Council’s October 2012 Quarterly Survey of Apartment Market Conditions. The survey’s indexes measuring equity financing (56) and debt financing (65) all measured at 50 or higher, indicating growth from the previous quarter.

“The members I’ve talked to are bullish and have been able to secure pretty good terms,” says NMHC’s Cardwell. Well capitalized developers can once again find low find non-recourse loans, for example, provided they put equity equal to 30 percent or 35 percent of the development costs into the proposed project. Investors such as insurance companies once again joint venture to provide equity for many deals. Interest rates are much more affordable. “Spreads have tightened,” says Cardwell.

Once again, commercial banks are fulfilling their tradition role as a primary source for construction financing now that they have recovered sufficiently from the recession. This has made the arduous process of securing financing form the FHA much less important although the interest rates at near 3 percent are still attractive plus the banks can close much more quickly.

More Money Available for Construction

Commercial Transactions – SNDA and Estoppel Agreements

I’m going to do a real quick, hopefully brief ‘Cliff Notes’ summary of these two important documents.  This of course applies to not only retail, but any commercial transaction where there is a tenant and a lender involved.

Anyone who has survived the commercial loan process knows about these two documents.  Tenant estoppels and SNDA (subordination, non-disturbance and attornment) are two primary documents of lease administration that are frequently overlooked.

A SNDA is actually three agreements in one – subordination, non-disturbance and attornment.  The “subordination” allows a lender who is the mortgagee of the property to subordinate the leases to the lender’s lien on the property.

The lender, in the event of a foreclosure, may eliminate all junior liens, insisting that their lien is first lien.  Most lenders insist that their loans be a ‘first lien’ and most landlords appreciate that their property will be more attractive to lenders if all of their leases are subordinate to subsequent mortgages.

Lenders will demand another agreement to ensure that tenants can’t abandoned their lease in the event of a foreclosure.  This agreement is named an ‘attornment’ and creates a contractual relationship between the tenant and third party mortgagee to which the tenant agrees to recognize as landlord.

The third part of a SDNA is called the ‘non-disturbance’ and exists to protect the tenant.  The agreement provides that the lease stay in force provided that the tenant is not in default.  Tenants with long term leases or expensive tenant improvements are well advised to add a ‘non-disturbance’ clause to any subordination agreement.

Next, the estoppel certificate is a declaration, signed by the Tenant, that certain facts pertaining to tenant’s lease with its landlord are true.  The estoppel give the buyer and/or lender an assurance that the lease is in full force and that certain moneys have been paid to landlord as security deposits and rent and that the landlord is not in default of any landlord obligations under the lease.

There’s a lot more detail needed here that for the sake of brevity, I’ve omitted.  So I’ll say it again, when purchasing a property, seeking a commercial loan or executing a lease, see a real estate attorney licensed in the state where the property is located.

Commercial Real Estate Capital Markets From a Regional Bank’s Perspective

Commercial Lender Regional BankI attended a seminar last week sponsored by the Columbus Board of Realtors with one of our largest regional banks, and I want to disseminate some of what I heard.  Banks once again have production goals, so that could benefit you , the investor or owner user, IF you fit their profile.  Huntington Bank as in most other local or regional banks are interested in holistic relationships with borrowers.  That means that they are not interested in lending just their balance sheet to the borrower, but want to see a two way long term banking relationship.   If you intend to be an owner user, even better.   Most banks will want your depository relationship so if you have a long term good relationship with your current bank, you’re much better off to start there.

The focus was mainly on the Columbus / Central Ohio market, but keep in mind that Huntington is a large Midwest regional bank so what they said applies to many Midwest markets.   I’m going to upload the handout we received and it will be linked at the bottom of this post.

I’m going to quickly summarize the major points of the program.

Vacancy Rates

Vacancy rates are falling across all product types lead by multifamily residential.  Apartments have  experienced the steepest declines due to the far more restrictive lender requirement for residential mortgage financing causing vacancy rates to drop below 5% overall.  This makes this landlord’s market and will lead to increased rents.  This will of course lead to an increase in construction capital in this sector and will make new construction of apartment projects feasible, which will introduce more supply into the market until the market is over built.   That is the way the market churns, and one factor we will never have is equilibrium in a market.  We’ve been here many times before and there’s no reason it will ever change.

Cap Rates 

Cap Rates are compressed on multifamily to cycle lows and they’re steady to falling slightly on other product types.  Also very strong is the national credit, corporate leased, triple or absolute net, single tenant retail.  The net leased, single tenant retail is trading at caps that I don’t think I’ve seen before in  this market or many other markets with which I’m familiar.  Multi tenant retail with non-credit tenants are still languishing on the market.  Eventually, caps will fall far enough on the triple net, credit tenant retail that it will start to pull some of this other product up with it, even in secondary and tertiary markets.

I’ll stop now and provide the link to the 15 pages of the program I attended last week.  If you have any questions, feel free to contact me, Scott Harris at 310-473-4789 or 614-905-6614.

Capital Markets From the Perspective of a Large Regional Bank

Commercial Real Estate lending heating up.

True, many banks are still working through their distressed property pipeline, but many have recently decided that it’s time to jump back into commercial lending, and yes,  even for development and construction financing.  It must be noted though that this is one area that brought down more banks during the downturn than any other.  The banks who have gotten back in see multifamily and owner occupied properties as preferred targets.

I’ve written about this a number of times over the three or four months so what I’m going to do below is link you to a number of quotes that Mark Heschmeyer of CoStar News has collected recently when he asked CoStar subscribers for opinions.  Pardon the brevity, but this one isn’t about my opinion.

CoStar News – Article – Competition Among Banks Heating Up for CRE Lending

Commercial Real Estate Lending Update

It’s a mix of both moderately good news and some bad news.   Starting with the bad news is that we had a major drop off in construction and development funding from $321 billion last to $240 billion this year.

I was pretty optimistic back during the second and third week of January when I was seeing quite a bit of new triple net or absolute net, single tenant, corporate leased retail properties coming on the market.  I mistakenly gave the impression to many of my buyers that they had a huge inventory with which to choose from.  We all know what happens then: nothing gets chosen while waiting for something more perfect than the last one looked at.  Now that inventory is sold with little new coming on the market.   I didn’t expect this to happen as I thought we’d have a much better inventory this year.  I need to clarify that we have plenty on the market, but not of the NNN, triple net or absolute net, single tenant, corporate leased retail that seems to be everyone’s favorite product type.

Ok, now for the good news.  Mark Heschmeyer with CoStar news reported

“It’s not a big hook to hang a hat on, but the small increase in some commercial real estate loan balances on bank books at the end of the year serves as yet another indication of thawing lending markets for property investors.

Overall loan balances on bank books posted their largest real growth in four years, according to year-end numbers released this past week by the Federal Deposit Insurance Corp. (FDIC).”

There was a minor dip in CRE lending for multiunit residential, but other than that, we are slowly coming out of this.

Total loans outstanding for owner-occupied CRE and multifamily properties saw a modest increase year over year — from $452.6 billion to $457.2 billion for owner-occupied and from $212.7 billion to $218.5 billion for multifamily.

CoStar News – Article – Banks Returning to CRE Lending

Mortgage Bankers Association – Continued Growth in 2012

Commercial real estate lenders are expecting to build on a very good 2011 with a stronger 2012.  Barring international shocks such as a war with Iran or disruption in oil supplies, 2012 should see a loan volume in the range of $230 billion, up 17% from 2011, and continue to rise to $290 billion by 2015

“We’re in a period of stability. Everyone is talking about increasing volume. Barring a major dislocation in capital markets, it should be a strong year,” said Tom Fish, executive managing director with Jones Lang LaSalle’s Americas Real Estate Investment Banking division.

Leveraged yields are very attractive with 10 year treasuries under 2%.  The CMBS market that started to trickle back in 2010 will open to secondary markets and properties.

If we manage the basics, we should be off to a very good year.

NREI Online – Conference Coverage – MBA Attendees Expect Continued Growth in 2012

Banks Move Carefully Back Into Commercial Real Estate Lending

For the first time in five years, a majority of banks are considering growing their loan portfolio due to improving conditions in just about all sectors of the economy.

There’s neither an overwhelming consensus nor a large gain in activity, but most banks feel that they are through the worst of the write downs and are ready to return to CRE lending.  They think that five years has been long enough to work through most of the trouble related to commercial real estate and that the segment represents a great potential for earnings growth.

“We’re beginning to see opportunity in the marketplace in select markets, and in particular asset classes,” said William H. Rogers, Jr., president and CEO SunTrust Banks Inc. “We transitioned this business back into production mode, and we believe there is good future potential here. As with our other non-housing related exposures, our commercial-oriented real estate businesses have also performed relatively well through the cycle.”

CMBS Issues Hammered Retail Closings in Third Quarter

Retail closings fell 46% in the third quarter to $8.2 billion from the second quarter’s $15.2 billion.  As bad as that was it was still an improvement over last year’s third quarter of $6.6 billion.   True, second quarter might be distorted a bit by Blackstone’s $9.2 billion acquisition of Centro Property Group’s portfolio, but activity has been trending down over the last quarter versus the first two quarters.

Activity in the first two quarters had spread to secondary and tertiary markets, but when the CMBS market came to a halt, funding for the $10 million and up deals also slowed dramatically.

CMBS is coming back a bit, but investors are very cautious about anything other than single tenant, national credit retail type deals.  Of course now we have a supply shortage because of the difficulty obtaining construction financing over the last three years. 

Retail Traffic Mag – News – CMBS – Drove Down Sales Volume Third Quarter

CMBS Market Slows Due to Nervous Investors

The CMBS recovery was coming along so strongly in the first two quarters of 2011 that conservative estimates were $35 – $40 billion and some predictions as high as $50 – 55 billion in originations for the year versus $10 billion for all of 2010.  Then we had the stock market, job growth and debt ceiling negotiations turbulence.  We lost what head of steam we had.  Can we regain it in the fourth quarter?

“The latest deals all involve public offerings that have been bolstered with extra credit enhancements to appeal to the higher level of class holders. And the appetite for the highest rate portion of those deals (dubbed CMBS 3.0) has been strong.

The downside, though, is that the demand for the lower-rated portions of the deals has been muted, prolonging the expected completion of the full deal.”

“CMBS was in recovery in the spring and it looked like things were on a roll. At the beginning of the year, we thought CMBS volume was going to be $35 billion or maybe $40 billion. We were on the conservative side of that. Right now, its looks like we’ll be lucky to cross [the] $30 billion [threshold] for U.S. originations,” said John Levy, founder of investment banking firm John B. Levy & Co. in his podcast this week.

At the link is more from Mark Heschmeyer at CoStar News

CoStar News – Article – CMBS Market Splits as Investors Avoid Taking on Risk

SBA 504 Refinance Program a Failure

I’ve written several times in the past year about the September 2010 newly launched SBA 514 program, and like so many government programs as of late, has been a failure. 

How could this happen so quickly?  It has gone in one year’s time from considerable fanfare in September 2010 to dormant today.  Only about $50,000,000 in total loans have been issued from the $15 billion allocated to the program.  The program was bound to be attractive with up to 90% LTV with very low rates and long 20 to 25 year amortizations.  So what happened?

We’re all heard the old cliché that the ‘devil is in the details’.  Well those details eliminated about 99% of all loan requests.  None of mine made it.

There was a major delay getting the program moving which wasted about six months of the two year window that the program was to be in effect.  Probably just bureaucracy doing what it generally does best.

Other major issues were that the linage of the existing loan also had to qualify under 504 rules meaning if more than 15% of the borrows’ existing debt was ever used to finance working capital then that portion of the debt was ineligible and killed the entire SBA 504 refinance.   This requirement has not been modified or eliminated.

Another problem is that the existing loan had to balloon before 12-31-12 to qualify, which in itself probably eliminated 90% of the loan requests.  This requirement was later modified to requiring a loan that balloon period regardless of time.  Then later even this requirement was dropped.

You also can’t refinance an existing government loan such as a 7a

The appraisal had to be ordered prior to loan submission, so borrows were reluctant to spend that considerable sum before they had any idea whether their loan request would be approved.  If I’m not mistaken, this requirement has also been eliminated and can be done after commitment.

It’s such a shame to have wasted the first year of this program working the bugs out when so many small businesses could have benefited.   There is still just a little over a year left in the program so maybe the responsible parties can get their act together and do something useful with the time left.

Mortgage Purchase Applications at 15 Year Low

US Mortgage Purchase Applications Fell to a 15 Year Low and economic uncertainty resurfaces.

“Another week of volatile markets and rampant uncertainty regarding the economy kept prospective home buyers on the sidelines, with purchase applications falling to a 15-year low,” Mike Fratantoni, MBA’s vice president of research and economics, said in a statement. 

CNBC – US Residential Purchase Applications at 15 Year Low

Real Estate Capital Surges in the Second Quarter

A reported $35.48 billion was raised in the second quarter for acquisitions and refinancings.  The total for the first half was $66.43 billion.  It took nine months last year to raise the same. 

Of what was raised, $5.42 was to be used to repay debt, while $30.5 billion was targeted for acquisitions and investments.  $5.49 billion was targeted toward non-property related investments, leaving approximately $25 billion of the money raised for property acquisitions.

At the link there’s much more from CoStar’s Mark Heschmeyer

Costar News – Flow of Real Estate Capital Surges

Commercial Real Estate – The Burden Eases

The CRE burden eases to the nation’s 7584 insured banks and thrifts.  The total of distressed commercial real estate assets are $171 billion and that’s only 1.3% of all bank assets.

As distress eases, banks set aside fewer dollars to deal with losses, and funds available for lending will increase.  This is the sixth consecutive quarter that loss provisions have seen a year over year decline.  First quarter 2011 loss provisions fell to $20.7 from $51.6 billion in first quarter 2010.   

The total of CRE loans outstanding has fallen by 2% during the first quarter.  Insured banks and thrift reported $1.58 trillion in commercial loans on the books at the end of March. 

The total of construction and development loans fell by 8%.   Multifamily was flat.  Total non-residential fell by less than a percent. 

Total delinquent commercial real estate loans fell by 2.8% from last year.

For additional detail see Mark Heschmeyer’s article at the link

CoStar News – CRE Loans Taking Less Toll on Nations banks

 

Commercial Real Estate Lending – Robust Again

The recovering capital markets are helped by the improving economy and consistent job growth.  Manufacturing is expanding and corporate profits are up strongly so the spigot is on again.  Life companies are quite active again; new CMBS offerings and syndicators are assembling new CDO offerings.  Even commercial banks are reporting loosening of commercial lending standards for the first time in about five years.

Lending is still down 75% from peak levels, but up 88% for 1st quarter 2011 versus 1st quarter 2010.  Out front has been the life companies and they are doing about 90% of what they were in the 2005-2007 period.

Competiveness has returned.  Deals that were impossible to fund in late 2010 and early in 2011 are now receiving multiple bids from lenders.  

Prices have moved higher for core assets in supply constrained primary markets, but there are still plenty of deals to be had in secondary markets.  As prices escalate to where they don’t make much sense in the primary markets, you’re seeing capital chasing assets in the secondary and tertiary markets.  2011 is shaping up to be a very good year.  Get back in while the getting is good.

CoStar News – Money For CRE Deals Starting To Flow

SBA 504 Refinance Program – Commercial Real Estate Loans

Although, I’ve written about this in February, I thought it might be a good time for reminder, that as of April 6th the SBA Small Business Administration will open its 504 refinancing option to businesses with commercial real estate balloon payments due after that date.

“With the collapse of the real estate bubble, many small business owners have found themselves unable to refinance as a result of inflated real estate values at the time they took out their mortgage,” SBA Administrator Karen Mills said.

The basic rules are:

  1. Refinance proceeds to be used for current eligible costs
  •         Owner occupied commercial real estate
  •         Machinery and equipment
  •         Closing cost associated with the project
  1. Loan being refinanced has been current for the past year with no payment(s) being deferred or past due for more than 30 days
  2. Debt must be 2 years or older prior to the date the application is received
  3. Small business must have been in business for two years or longer prior to submitting the application.
  4. In addition to a cash contribution, the borrower’s 10% contribution may be satisfied by its equity in the Eligible Fixed Asset(s) serving as collateral for the Refinancing Project or by the equity in any other fixed assets that are acceptable to SBA as collateral. (An independent appraisal of the fair market value of the project assets and any additional assets offered as additional collateral must be provided.)
  5. No refinancing of loans with an existing federal guarantee – 7(a), USDA, 504

More detail at the SBA link

http://www.sba.gov/content/504-loan-refinancing-program