2010 June | CPE Blog

In Phoenix, thank Freddie Mac and Fannie Mae for the spike in multifamily values

Jun 282010

By: James Dumars

We’ve not seen a recovery in the multi-family rental market but values have increased dramatically. It’s easy to draw the positive correlation between lower interest rates and falling cap rates for multi-family.

Multifamily owners have a significant advantage over owners of all other types of commercial real estate as they can access government guaranteed debt from Freddie Mac and Fannie Mae. As I understand it, the investors who buy this debt on the secondary market are rewarded with higher yields than standard US Treasuries but receive the government’s guaranty on the bonds. Consequently, recent Freddie Mac securitizations have reportedly been very successful as fund managers snap up the paper. �
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A case in point: A specific property would have traded for a 6.25% cap rate a year ago. The property recently went under contract at a 5.25% cap rate, which is approximately 20% more than it would have traded for a year earlier, despite the fact that rents have not increased. The buyer obtained an agency mortgage with a fixed rate of 4.93% based on today’s closing treasury yield plus a spread of 197 basis points. The buyer competed with 20+ other investors for the deal and was selected from a best and final of the top three. The buyer, like many others, recognizes that the replacement cost of the Class A asset is $125,000 per door and he would likely have to go to the outskirts of town to build a similar property. Buying the asset in the $90k per unit range provides him with upside in value and future rents once the oversupply is eventually absorbed. He also locks in a very attractive interest rate on a fully assumable mortgage that can be increased in the future through supplemental funding.

I’ve seen this market transition from vulture buyers looking for multifamily to buyers who have raised funds and intend to build a presence in Phoenix. The vultures have gone quiet as the opportunities they were waiting for have not materialized, thanks to the very competitively priced capital available from the agencies.

James DuMars, managing director/senior vice president for NorthMarq Capital’s office in Phoenix, has more than 20 years of experience resolving complex commercial financing issues. Contact James at (602) 508-2206 or jdumars@northmarq.com

When is Rent Not Rent?

Property Taxation No Responses »

Jun 242010

Rental income has always been the touchstone for calculating real property values and is a key element in determining taxable value for ad valorem property taxes. Because it plays such a crucial role in the property tax valuation, paying attention to what rent includes can result in lower tax bills.

Rental income for properties such as multi-family residential is closely associated with real estate usage and is easily capitalized into an indication of taxable value. That is not the case, however, for properties used by service-oriented businesses, such as full-service hotels or stores in high-end retail malls. In those situations, the stream of income generated by the facility may represent both a return to the real property as well as to franchises, branding, or a trained and assembled workforce.

In most states, these non-realty rights and assets are not subject to property tax. If local tax assessors calculate assessments using income that includes a return on non-realty elements, the property owner will overpay property taxes.

Similarly, in those situations where landlords participate in their tenants’ revenues through percentage rent, taxpayers should determine whether those rents represent a return solely to real property or if they also allow the landlord to share in profits that the tenant generates from customer services and branding. This situation frequently arises when private companies operate in government-owned facilities, such as public airports with privately run concessions.

So, what should investment property owners do? First, determine whether service-oriented businesses are operating in the property or whether percentage-rent arrangements are in effect. If either is the case, contact the local tax assessor and learn the basis for the property’s tax valuation. If the assessed value is based on property income, the property tax may be based in part on non-taxable income. In that case, the property should receive a reduction in taxes.

Cris K. O’Neall specializes in ad valorem property tax matters as a partner in the Los Angeles law firm of Cahill, Davis & O’Neall, LLP. His firm is the California member of American Property Tax Counsel, the national affiliation of property tax attorneys. Mr. O’Neall can be contacted at cko@cahilldavis.com.

Richard Green: On Real Estate

Finance No Responses »

Jun 062010

Are We There Yet?

Property Management No Responses »

Jun 012010

For those with children, depending on their age, the cry from the backseat “are we there yet?” can invoke either wonderful memories of years gone by or dread with your summer vacation nearing. However, most recently, this cry is not heard from children, but from some of the most intelligent and respected real estate industry experts and analysts, who are much more intelligent than I with respect to Capital Markets and rental numbers.

With the national office vacancy rate edging up from 16.4% in the fourth quarter of 2009 to 16.7% in the first quarter of 2010, this rise in vacancy was described as being positive, as this was “the fifth straight quarter of decelerating declines.” This is good news in many ways, as we are all searching for the next run up in real estate values and rents, which of course translates to higher profits, commissions and salaries. For simplicity, business cycles typically consist of 4 components, and having gone through an extreme contraction, it would appear we are in the trough and ready for expansion.

Over the past few months, we have seen the sale leaseback of 452 Fifth Avenue, the purchase of 417 Fifth Avenue, 125 Park Avenue, 600 Lexington Avenue and most recently 340 Madison Avenue. 340 Madison sold for $570M or $760/square foot. Comparing this price to what was paid only four years ago ($550M) does not show that large of a drop off in base price but a closer look reveals that today the building is 92% leased as compared to 4 years ago when 340 Madison was only 40% leased. Though it should also be mentioned that four years ago, a building with pending turnover or even vacancy was looked upon as increasing value positive and not a negative.

Have fundamentals returned? Economic principals of real estate value may indicate that scarcity and supply and demand may have contributed to the cost not having dropped even further, but a positive capitalization rate for one would/is nice to see.

What does the sale of 340 Madison have to do with Property Management? Simply, many who are in the profession of property management forget it is our responsibility to help increase value by reducing costs and continuing to educate ourselves on the fundamentals of what constitutes value. The industry has evolved and has entered the “trough.” Many owners have lost properties and or gone into foreclosure due to many reasons, namely timing, but they also strayed from the basic fundamentals. These investors have learned, and will not make the same mistake. It is my belief that unless all team members responsible for managing an asset can help in increasing its value, then they may need to find another line of work. What do you think?

Jack Terranova, PE LEED AP
Senior Vice President
Cassidy Turley, New York