(Bloomberg) U.S. commercial real estate yields are near the highest level relative to Treasury bonds on record, a signal to some investors it’s time to buy property.

Capitalization rates, a measure of real estate yields, averaged 7.22 percent in the second quarter, based on an index calculated by the National Council of Real Estate Investment Fiduciaries. That was 429 basis points, or 4.29 percentage points, higher than the yield on 10-year government bonds as of June 30, according to data compiled by Bloomberg. It’s about 475 basis points higher than Treasury yields as of yesterday.

That spread is near the record 539 basis points in the first quarter of 2009, when the U.S. was mired in the worst of the financial crisis and property prices sank. Risk-averse investors are seeking the highest-quality office towers, hotels and apartments as the gap widens, according to Nori Gerardo Lietz, partner and chief strategist for private real estate at Partners Group AG in San Francisco.

“The data indicate that real estate is poised for a rebound,” said Gerardo Lietz, who advises pension funds on property investments.

View Full Article at Bloomberg.com


Bison Tales blog moderator David Repka of Bison Financial Group in St. Petersburg, FL was selected by real estate master marketer Cody Sperber as one of the “Top 75 Real Estate People to Connect with on LinkedIn”.

To connect with David on LinkedIn visit his profile at: www.linkedin.com/in/davidrepka

The entire list can be downloaded from the box.net widget on this site.

Tampa Bay Sale TrAs the price


Is it time to call a buying signal for office properties in Florida now that the acquisition price has dipped under the replacement cost? Or are office investors trying to catch a falling knife?

From ICSC Website

U.S. lawmakers introduced legislation yesterday that would increase taxes on the percent of the profits investors collect from the deals their firms complete. The proposals to increase taxes on so-called “carried interest” are part a of larger attempt to reform the U.S. financial sector, but could end up hurting the commercial real estate industry just as it is trying to emerge from the worst recession for decades.

Specifically, legislators want to reclassify “carried interest,” which is currently treated as capital gains and taxed at 15 percent. Instead, carried interest would be considered ordinary income, subjecting it to a top tax rate of 35 percent, plus the 2.9 percent Medicare tax. This is likely to rise to 39.6 percent next year. Furthermore, the 3.8 percent Medicare tax included as a last minute addition to the health care will be added on top in 2013. Limited partnerships and liability companies are so common in real estate that the impact would be wide, observers say.

Carried interest — sometimes referred to as “the carry” — refers to the share of profits general partners of such institutions receive as compensation. Typically, general partners also take management, construction or leasing fees, though that is already classified as ordinary income.

Congress initiated the carried tax increase back in 2007 as a way to target perceived excess and abuses within equity and hedge funds. Many in the real estate sector will be unintentionally swept up by the new legislation if it passes, opponents say. If carried interest is taxed as ordinary income, general partners will owe billions more in federal taxes annually. The equity at risk for higher taxation is a traditional part of compensation at real estate development and management companies (which are often partnerships) and also for individuals in private deals, observers say.

Critics point out that most limited partnership managers are not overseers of private equity and hedge funds with billion-dollar returns, but rather more-modest partnerships in which the general partners have a stake in the form of capital investment, sweat equity and reputation.

“Here’s what will happen if this bill becomes law,” said Betsy Laird, senior vice president at ICSC’s Washington office. “Real estate values will be depressed immediately, transaction volume will drop. Risk will get riskier and certain projects our members once may have undertaken will no longer make economic sense.”

Lee H. Wagman, vice chairman of Los Angeles–based CityView, also takes a dim view of the proposal. “The proposal to reclassify “carried interest” as ordinary income instead of capital gains is tantamount to a tax increase on limited partnerships which will be a significant disincentive to take the kind of entrepreneurial risks that have been the hallmark of our industry. By dampening the motivation of real estate developers to undertake new deals, we will put a drag on one of the few robust job-creating sectors in the economy,” he said. “The proposal also makes what I believe is a false comparison between real estate partnerships, where the general partner assumes significant risks in providing things like loan guarantees, upfront risk capital, and carve outs to non-recourse provisions, and the typical private equity structure where the carried interest is much less of a reward for taking on these risks and capital obligations, if at all.”

The House vote on the measure is planned for Tuesday, with the Senate vote due May 28.

The timing could not be worse, says Michael P. Kercheval, president and CEO of ICSC. “Imposing this tax burden would be devastating at a moment when the retail real estate industry, one of the U.S. economy’s biggest drivers, is recovering after the recession,” he said. “ICSC is doing all it can to make legislators aware of the unforeseen consequences of this provision.”

Compiled by the staff of Shopping Centers Today. © May 21, 2010 International Council of Shopping Centers.

Just as commercial real estate is starting to recover… Congress plans to drive a stake through its heart and raise income taxes from 15% capital gains rate to 35% ordinary income rate. Tell your U.S. Senators about the unintended consequences associated with the carried interest proposal.  Please call 202-224-3121 and ask to be connected to your Senators’ offices.  Visit http://lac.icsc.org/icsc/dbq/officials/ to look up your Senators.

Key Points:

  • The tax increase on carried interest proposed in the tax extenders package will have serious unintended consequences to local communities.
  • This proposal would be the largest tax increase on real estate since the 1986 Tax Reform Act.
  • This tax increase is likely to hurt economic redevelopment and job creation in our most economically deprived communities because it captures real estate development.
  • While the original target was private equity and hedge fund managers, this proposal will disproportionately impact the real estate industry because it will increase the tax on the general partner’s share of profits in a real estate partnership.
  • Unlike hedge fund and private equity firms, carried interest in real estate deals is not simply compensation for services.  Rather, it is the return for taking on the tremendous risks and liabilities associated with real estate development projects, such as environmental concerns, lawsuits, operational shortfalls, construction delays and loan guaranties.
  • This potential tax increase does not recognize the entrepreneurial risk and personal guarantees that the managing partner offers on behalf of the real estate partnership.
  • Quite simply, if this legislation is enacted, the managing partner’s incentive to take-on the risk is greatly diminished.  Projects with brownfield, mixed-use, or low income components will be most impacted by the carried interest proposal because they are the most risky.
  • This tax increase will also hit small to medium size developers the hardest.  These developers are already struggling with the current credit crisis, and this proposal will further limit available capital in the real estate market.
  • With the commercial real estate industry under serious strain due to current economic conditions, raising this carried interest tax on real estate will not only threaten economic development projects, but it will also jeopardize the related jobs that those projects create.

By Nancy Leinfuss

NEW YORK, April 9 (Reuters) – RBS Commercial Funding on Friday priced a $309.7 million commercial mortgage-backed securities offering backed by multiple loans, the first sale of its kind in nearly two years and a benchmark for the recovering market.

The so-called conduit deal is seen as a key gauge of risk appetite for securities tied to the troubled commercial real estate market, as well as investor confidence in better underwriting standards for loans.

[BLOGGER COMMENT: This non-TALF transaction is the sign the markets have been looking for to once again start lending on commercial real estate. The rules will be different than the easy money days of 2005-2006, but non-recourse senior debt will once again start flowing on well located income producing properties.]


By Hal Reinauer

The lending world has turned a more watchful eye to property condition and begun to take notice of reduced capital improvement programs. This attention has made it more difficult for those properties with some issues to find a reasonable lending solution, even with stable cash flows supporting the loan request. Appraisers and Engineers, like banks and lenders, have also felt the pressure and they have reacted with greater scrutiny and increased attention to the ongoing maintenance schedule and immediate repairs. To prevent this from affecting your refinance there are a few critical steps you can take to ensure your property receives the credit it is due.

  1. Housekeeping. First, ensure that the grounds of the property are clean and free of any refuse, graffiti and tenant property that have overflowed into the common areas. The property inspector will be adversely impacted by the minor details that are his first impression of the property exterior and grounds so make sure that any obvious exterior damage, paint peeling, torn screens, broken windows, misaligned or missing gutters, broken parking lights and any other repair item that can be taken care of at minimal cost is addressed promptly and prior to the site inspection. The cleanliness of the property is extremely important in how your property will be viewed by the engineer and the lender. Have the maintenance staff pay special attention to these needs and the long term benefit will pay off with increased occupancy and greater financing potential. The site inspection will concentrate on housekeeping, site issues, parking areas, building exteriors, roof, foundations, HVAC, plumbing, electrical, fire and life safety, dwelling units and common areas, so you as the owner/operator should as well.
  1. Anticipate. Second, identify your major capital needs before the engineer does. Engineers are looking for the building systems that need replacement now and throughout the loan term so identifying those yourself and having your own schedule prepared with cost assumptions will save you in the long run. A good replacement schedule is a detailed one; make sure you cover as many building systems as you can and make reasonable assumptions as to their useful life, replacement cost and quantity. Having the information on the age and type of the building systems is also very important; windows, roofs, HVAC systems, water heaters, kitchen appliances, counters, cabinets, vanities and flooring are typical line items included in the schedule. Also try and take an assessment of your annual plumbing and electrical expenses as these assumptions will assist your lender in differentiating between one time capital expenses and actual ongoing needs.

It’s also a good idea to acquire actual bids for projects you wish to complete in the near future as there can be a wide range of prices associated with even the most basic of repairs. Having a good bid in hand will prevent any discrepancy with what you believe a project to cost and the engineer has estimated.

  1. Awareness. Third, be aware of the big issues. Pay particular attention to any issue that could cause water infiltration, mold, electrical issues (low amperage, aluminum wiring, etc), plumbing systems (polybutylene piping, galvanized piping, etc) and any life safety issue (fire systems, hand rails, deck structures, tripping hazards etc). Being aware of the major issues at your property and having a preventative maintenance plan or explanation of corrective measures already taken will assist the lender in mitigating the risk and speed the process along.

Finally, understanding your replacement reserve schedule and escrow is essential. Once the engineer and lender have completed their site inspection they will prepare a list of immediate needs and ongoing replacement reserves. This is where the owner prepared budget and bids will play a great role in balancing the interests of all parties. The Fannie Mae guide, as well as the other GSE’s and lending institutions, includes certain parameters for the collection of ongoing replacement reserves based on a scale of the property’s condition.

  • Limited Reserves – The Property has been exceptionally well maintained such that a minimal reserve estimate is adequate to cover emergency repair issues if they arise during the Mortgage Loan term.
  • Moderate Reserves – The Property is in adequate condition for its age and construction type and will require only typical repairs/replacements during the Mortgage Loan term
  • Substantive Reserves – The Property exhibits characteristics or construction quality that make more substantial replacement reserves necessary in order to mitigate certain risks inherent in the physical asset.

Replacement reserves are an operating cost, so remember that these funds are yours to spend and utilize for the ongoing maintenance of the property. The lender holds these funds to protect their investment in the property only, and will take into consideration the effect on cash flow when sizing your facility. If your previous reserve escrow was $0 and now it’s $200/per unit per annum that does not mean your total operating costs have risen by $200 per unit, but that the allocation of funds previously included in line items such as repairs and maintenance, supplies, and contractors will now be captured in a lender established reserve and reduced from the proforma projections. The net effect on ongoing cash flow for properties that have been well maintained should be negligible if you work with your lender to ensure the accuracy of your operating statements and maintenance budget.

Finally, remember that the lender and your interests are the same; we both want to see the asset be a long term viable investment.