Southern California Office Real Estate Blog

DISTRESSED INVESTMENT PROPERTY SOLUTIONS

DISTRESSED INVESTMENT PROPERTY SOLUTIONS

By Jodi Summers

Experts in net lease properties and 1031 exchanges say there may be ways to soften the blow of distressed situations, including the tax consequences of foreclosures.

“The biggest challenge is certainly the current market environment, which has so many investors fearful and sitting on the sidelines,” said Ed McRedmond, senior vice president of portfolio strategies for Invesco PowerShares.

Advisory groups such as BRC Advisors, Calkain Opportunity Services, Net Lease Capital Advisors and ES Group LLC have experience structuring exchanges for investors who face losing a property to foreclosure. A good advisor can minimize the tax bill and put the distressed property owner into a new investment.

 If an owner is proactive in pursuing a remediation strategy before they are foreclosed on, advises Carl Christensen, managing director of Net Lease Capital Advisors, “They can deed their property back to their lender through a qualified intermediary and do a 1031 exchange into a new investment.”

There are a significant amount of potential replacement triple-net properties that are primarily leased to investment-grade tenants and typically highly leveraged, says Christensen. Though it depends on the financial and tax particulars of each case, putting equity into the new investment can be considerably less costly than paying the capital gains–which, since a foreclosure is considered a sale, includes the discharge of debt above the owner’s basis–and depreciation recapture tax bill, he adds.

“They’re facing a 20% to 25% tax problem. But you can solve that problem for 7% to 13% [equity] and have the benefit of owning your own real estate and saving money,” says Christensen. “The downside is they have to come out of pocket for the cash, because there is no equity in the property in this particular scenario, but what they have to come out of pocket for to buy the replacement property is significantly less than what they’d have to come out of pocket for to pay the IRS.”

Even in difficult situations such as foreclosures, there are options that can help, agrees Calkain president and CEO Jonathan Hipp. “The last thing you want to do is not be smart about your options. Don’t just assume that you’re dead in the water,” he says. “It’s about good tax planning and trying to be ahead of the bus.”

Beyond foreclosures, the strategy could also be applicable to forced-sale situations, when owners can’t put additional equity into a property when refinancing (at today’s lower leverage standards) is necessary and thus are forced to sell at a lower price than what they paid for the property.

“Those folks will have a little bit of equity, they won’t be totally upside down,” says Christensen. “This kind of solution is beautiful for them, because they won’t have to dump more money in to preserve their tax position.”

http://www.globest.com/news/1346_1346/insider/176880-1.html

http://www.thestreet.com/story/10448393/1/new-property-fund-meets-distressed-market.html

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BARKER PACIFIC GROUP IS READY TO BUY AS VALUES READJUST

BARKER PACIFIC GROUP IS READY TO BUY AS VALUES READJUST

Barker Pacific Group has a new strategy. The LA-based investment and development firm has two new principals and plans to raise $300 million of new equity to acquire distressed and value-added commercial real estate notes and properties.

The company is targeting leverage ratios in the range of 50% and is looking for both performing and nonperforming properties and notes. It has already acquired a note that is performing but is going to be coming due, and it is considering another that is performing that it would acquire at a discount.

Although Barker expects that commercial real estate foreclosures will increase, he anticipates that most of the opportunities to acquire distressed assets will arise from the financing problems that borrowers will face when their loans mature. Borrowers who financed properties two or three years ago may find that those assets have declined in value, so they won’t be able to refinance them at the same loan-to-value ratios and may well face huge capital requirements, he points out.Barker says that other opportunities for value-add acquisitions may arise in a variety of situations, such as when a lease rolls over and a major tenant vacates a building. Value-add is a loosely defined term, he observes, but most people think of the phrase in terms of properties that require some work to be done, such as finding tenants for empty space or investing in capital improvements.

Get the whole story @

http://www.cityfeet.com/News/NewsArticle.aspx?Id=31664

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BUY, SELL LEASE - OFFICE SPACE FOR ALL IN 2009

BUY, SELL LEASE - OFFICE SPACE FOR ALL IN 2009

The most recent report from Grubb & Ellis found that nationally 90 million square feet of office space was under construction at the end of 2008, most of which will be available for use in 2009. This new space combined with a projected 45 million square feet coming available as tenants vacate and a big jump in subleased space, will push vacancy rates up by 2 percentage points to end 2009 at 16.5 percent, the report predicted.

The whole story @ http://www.realtor.org/RMODaily.nsf/pages/News2009010602?OpenDocument

THE LOS ANGELES OFFICE MARKET LOOKS GOOD FROM A NATIONAL PERSPECTIVE

THE LOS ANGELES OFFICE MARKET LOOKS GOOD FROM A NATIONAL PERSPECTIVE

by Jodi Summers

By the end of 2009 most economists agree the U.S. will be well on its way toward recovery, with full-fledged expansion ramping up through 2010. This is the optimism shared by the winter 2009 US Office Market Forecast from Cushman & Wakefield. The study weighs how the current economic conditions are likely to impact the performance of the top-12 Central Business Districts. Both Los Angeles and Orange Counties qualified in this grouping, and the outlook for Los Angeles, was brighter than Orange County.

From the end of 2007 through December 2008, the U.S. economy lost 2.6 million jobs of which 914,000 (35.3%) were in office-using industries. Los Angeles County has felt the effects of the weakening economy, but the report notes that the Los Angeles Central Business District continues to hold strong. The report states that, “Despite a large financial, insurance and legal tenant base, only a few firms in these sectors have consolidated or become insolvent. Though direct vacancy has declined steadily for the past few years, it is beginning to flatten out, and that could last into 2011.”

Bright spots include the fact that class A product has experienced a few notable leases provide evidence that it is “business as usual” for Los Angeles office space. A few Westside firms are predicted to migrate east toward downtown, but that is not indicative of a trend that will spur a flurry of activity. With few leases set to expire in 2009 and a general tenant hesitancy due to economic concerns, leasing activity will likely level off until 2010.

The current downturn is characterized by greater losses in white-collar jobs; this is affecting Orange County’s office market, which will continue to soften as the prolonged slump in the labor market will yield overall weakness in office demand. Additionally, Orange County is known to have a heavy concentration of mortgage finance companies, and the uncertainty in the financial sector, will continue to be felt through the local economy, resulting in job losses.

The upside is that the majority of the subprime lenders, which employed the greatest number of employees in Orange County ceased to operate in 2008, the market is poised to recover quicker than other markets that are just beginning to experience the effects of the slowing economy. It will take at least 12 to 18 months for employment to make a modest comeback and at least one to two quarters thereafter for the office market to start showing signs of a meaningful and lasting turnaround.

Another positive note is that, Orange County’s unemployment continues to be the lowest in the state.

The report anticipates that the government stimulus programs will be lead to a greater demand for office space. Additionally, policies put in place by the U.S. Federal Reserve and Treasury to ensure availability of credit will support growth in borrowing as businesses and consumers return to credit markets. Finally, the normal cyclical process of recession to economic recovery will lead to stronger growth in consumer spending during the second half of the year as pent-up demand will eventually be acted upon.

CHICAGO NEWSPAPER MOGUL PREDICTS SPRING 2009 RECOVERY

CHICAGO NEWSPAPER MOGUL PREDICTS SPRING 2009 RECOVERY

 by Jodi Summers

Financial mogul Sam Zell, owner of the Tribune Co., recently told an Israeli business conference that the U.S. real estate market will be in recovery by spring 2009.

Zell blamed the current crisis – at least in part – on ill-considered decisions. Optimistically he shared the fact that the U.S. population is growing and with fewer than 600,000 building starts in 2008, a million fewer than any of the last 10 years, demand for housing will rise.

“We are living through our first Blackberry recession where, literally, information is instantly disseminated around the world and people, in effect, respond to it, perhaps, often without any particular caution or attention,” he said.

Immediate communication gives new meanings to the terms buy and sell.

FYI…Zell’s Tribune Co., declared Chapter 11 bankruptcy last week.

Source: http://www.realtor.org/rmodaily.nsf/pages/News2008121505

REAL ESTATE ROUNDTABLE CONCLUDES THAT THE END IS IN SIGHT

REAL ESTATE ROUNDTABLE CONCLUDES THAT THE END IS IN SIGHT

 by Jodi Summers

Recently there was a recent real estate round table in downtown Los Angeles. Hosted by Marty and Barbara Stolzoff, only top real estate executives were invited. What everyone took away is we are in the dredges of that u-shaped recession our governmentalists talk about.

Christopher Thornberg, an economic adviser to the State Controller, and co-founder of Beacon Economics, noted, “The good news is, we’re about halfway through this. You’re looking at the bottom of the recession around the third or fourth quarter of this year.”

Thornberg’s investment takeaway: People with cash seeking distressed assets should start looking for commercial foreclosures somewhere around the end of 2010.

Randy Zisler, chairman and CEO of Zisler Capital Partners, said he sees real estate securities “bottoming in 2009,” and that the “middle of the year is a good time to start looking to buy.”

Jack Kyser, chief economist of the Los Angeles County Economic Development

Corp., agreed the third quarter is the likely bottom for the regional and national economies, pointed to some possible high notes, including the stabilization of the LA area’s aerospace manufacturing industry.

A very positive note is the renewed  interest in C-17 Globemaster cargo aircraft, thanks to the Obama administration.

“Obama seems to like the C-17,” Kyser added.

This is brilliant for Boeing Co. who is on the verge of issuing a “stop work” order to its suppliers for the C-17 cargo aircraft, which is manufactured in Long Beach, with several subcontractors located throughout Southern California.

Get all the dirt @ http://www.globest.com/news/1328_1328/losangeles/176350-1.html