Valuing Southern Multifamily: GE Capital Sells, Blackstone Buys Big


multifamilyThe recent $2.7 billion purchase of approximately 30,000 apartments across the Dallas, Atlanta and other southern markets by private equity giant Blackstone has some multifamily sector observers scratching their heads.

At first glance the sell side makes the most sense: GE Capital appears to have corporate cultural issues with real estate.  But more interestingly,  while multifamily dwelling demand remains solid nationally, the idea that apartments in many metro areas are underperforming or offer a ton of upside in other ways just does not appear to be  the most popular view at the moment.  Owing perhaps to a national follow-on effect of the housing crisis, multifamily nationally has a lot of boom in its recent history and perhaps not as much in its future. The debt that has converted single-family homeowners into renters may have done most of its work already, says the conventional wisdom.  Apartment construction is up and declining vacancies have stalled out to post-crisis lows.

The great Llenrock blog had an interesting take on Blackstone’s head-scratching strategy.  With a shrug, Eric Hawthorne suggests stability or general energy-boom chasing as possible aims of the deal, noticing that Blacktone’s recent history in single-family might make their play more about market and less about asset class:

After years of high demand and value creation, the multifamily sector appears to have reached something of a plateau, which will no doubt continue as more and more apartment buildings open and fill. Multifamily development has outpaced the rest of the CRE world since the recession, and the market will soon have to catch up with all the new inventory.

It could be this deal is simply a bid for stability. Whether they gain value or not, no one can deny multifamily communities offer their landlords stability. More likely, I think, Blackstone’s sudden shift from single-family to multifamily is less about the asset class than the market. According to RTTNews, the 30,000 apartments (give or take) Blackstone acquired are in Atlanta, Dallas, and other parts of the Southeast and Texas. Dallas, of course, enjoys a great deal of activity from the energy sector and is a major growth market. Atlanta, on the other hand, has lagged behind many other cities in the economic recovery, so its values are yet to reach the levels of other comparable markets. All of this is to say that multifamily may indeed have some value-add opportunities left–in certain cities, anyway.

Further suggesting Blackstone’s idea is about future rent raises in a rising market is Marcus & Millichap’s recent report on the Dallas /  Fort Worth Metroplex, celebrating the new inventory pipeline and low vacancies with unrestrained enthusiasm.

Time will tell, but it looks to me like Blackstone’s DFW bet is on the location more than anything else.


Source:  Commercial Source


Could Proposed Accounting Rules Throw CRE Investors Off Balance?


Even as new accounting rules propose to bring property and equipment leases onto company balance sheets, the new rules will leave certain other financial obligations, namely service contracts and leases with terms of 12 months or less, as off-balance sheet items, according to a report from Fitch Ratings.

In some cases, Fitch reports, extension options and variable lease payments may also be excluded from being capitalized as a lease liability under the new proposed accounting rules.

While the proposed rules are intended to more accurately reflect the economic substance of leases, the value of the rules hinges on whether they are successful in increasing – or at least not further obscuring — financial transparency for investors and analysts, said Fitch analysts John Boulton, Alex Griffiths and Frederic Gits.

With the Sept 13 deadline fast approaching for public comments on the new proposal, CRE groups and other stakeholders are weighing in, and in some cases doing battle in the court of public opinion, over what they believe will be the dramatic effects the new accounting rules will have on landlords, tenants and the broader CRE market.

While almost all parties agree that it is vital for companies to divulge information about cash payments and the nature of leased assets in ways that allow investors to make judgments in asset financing decisions, how best to do so remains a point of disagreement.

Corporations often adjust their balance sheets in an attempt to reflect a fair estimation of implied debt from leases, however, critics claim that these adjustments are inconsistent, and frequently understate the lease obligations.

Companies implementing the proposed standard will face a heavy administrative burden since they will have to collect and input a substantial amount of data and perform complex calculations to determine the amount to be capitalized. Most companies have not developed a corporate strategy to address the issue or have been slow to start their transition plans, according to a recent white paper by Boston-based tenant representation firm Cresa.

“The bottom line is the need for transparency, and the biggest hurdle is how companies will maintain comprehensive, comparative and valid information in order to perform this analysis,” said Michael Hetchkop, senior vice president of lease auditing at Cresa Washington D.C. “It’s going to be more of a challenge for companies to make sure the information they have is complete.”

Reaching a solution has proved difficult for accounting standard setters, who are faced with conflicting and sometimes contradictory definitions of what exactly constitutes a lease, defining the lease term, and measuring payments, the Fitch report said.

“Add political sensitivity due to the size of the lease market and you have a potent mix. It is no surprise that progress towards a solution has been slow,” Fitch said.

Cresa’s Hetchkop agreed.

“This has been a gut wrenching process since it started four years ago, with 800 comment letters [for the previous exposure draft], then going back to square one. And now, another comment period, and who knows what will happen at the end?”

A recent letter to the FASB and IASB from a diverse group of more than 30 trade organizations, including the Roundtable, International Council of Shopping Centers (ICSC), CCIM, American Trucking Association and Equipment Leasing and Finance Association expressed their displeasure with the latest proposed leasing standard.

“In its current state, it is our opinion that the proposed leasing standard may result in substantial costs to businesses, lack any benefits for investors … will increase complexity, drive economic activity rather than reflect it and will create adverse unintended consequences and pressures upon financial reporting systems. Further, the proposed leasing standard will not result in more decision-useful information compared to that currently available. If our concerns cannot be addressed, then it is our belief that the proposed leasing standard should not be finalized.”

FASB/IASB will begin a month-long series of public roundtable discussions on four continents on Sept 10, starting in São Paulo, Brazil. After weighing the feedback, a final standard is now expected to be issued in early 2014.

The new standards would be effective no earlier than annual reporting periods beginning on January 2017, but would include a two-year look back provision.


Source: CoStar

Investors, Users, Cap Rates, And The Income Approach To Commercial Real Estate Valuation

cre valuation

The world is awash with capital.

It is global and digital. Significant amounts are transferred in a matter of seconds each day. Like weather shifting in the atmosphere, this capital moves in measurable and often predictable ways into various asset classes. As with lightning, tornadoes, and hurricanes, however, these flows can also be fickle and unpredictable, as we have witnessed in the recent recession. The goal, then, is to improve the predictability of these cash flows by creating models that enable us to value the underlying assets in an optimal fashion, and to thereby enable investors and businesses alike to make decisions in a timely and reliable manner. It is the model for valuing commercial real estate on which I focus in this article.


The methodology for calculating the value of commercial real estate is complex and comprises myriad variables. Commercial real estate often competes against stocks and commodities for capital, but there are several large differences between them. While stocks and commodities are standardized contracts that trade more often and have options and future derivatives so that pricing is transparent at any given moment in time, commercial real estate is non-standardized and trades less often. Therefore, the pricing of commercial real estate can be more difficult to verify. I will make the case that if certain methodologies are used, commercial real estate can be priced quite accurately.

Similar to stocks and commodities, commercial real estate is subject to supply and demand. Early in my career I worked on the Chicago Board of Trade (CBOT) Commodities Floor, so I speak from experience when I tell you that many stocks and commodities have supply and demand factors that change drastically over short periods of time which result in large shifts of pricing overnight—or even during the same day. Conversely, many of the supply and demand variables in commercial real estate can be forecasted over longer timelines, and change less often and to a lesser degree. Therefore, the pricing of commercial real estate tends to shift more slowly.


To begin to understand the true value of commercial real estate, one must understand the dynamics behind supply and demand. At the core of this dynamic is the existing NOI (Net Operating Income) or the potential NOI that the property will provide. In the same way that stocks and companies are valued based on their EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), commercial real estate relies on NOI for valuation. Commercial properties with long-term leases containing fixed terms have NOI that is very predictable. These properties are typically the most reliable and standardized assets among commercial
real estate. They trade similar to bonds, and are often called “Coupon Clippers.” However, not all properties have long-term, stable leases, and this is where commercial estate valuation gets tricky. It is not simply the property’s current NOI that affects its value, but rather what the market believes will happen to this NOI in the future. Even if there is a long-term lease in place with fixed terms, the lessee may go bankrupt and reject the lease as part of its reorganization plan. It may also choose to cram down the lease if the market allows it to do so. In some cases, a zoning law change or simply the path of progress will provide the opportunity for redevelopment to the highest and best use, which will in turn generate a higher exit sale strategy, such as with a condo tower, or potentially an alternative use as we saw with Merrick Park in Coral Gables converting from industrial use to high-end, retail mixed-use. In some cases, redevelopment is not even necessary in order to capitalize on a higher NOI,and one simply needs to find a new tenant that can make more money in the specified location and therefore pay more rent.

The use of the NOI to derive value involves one other variable, which is the Capitalization Rate or “Cap Rate.” Different asset classes involve different risks and therefore two properties with the same NOI will likely trade at different prices based on the Cap Rate investors will apply to the property. The Cap Rate calculation is the inverse of the Price/Earnings ratio many investors monitor when dealing with stocks. Earnings are the equivalent of NOI. Instead of Price/Earnings, it is Earnings/Price or NOI/Price. Cap rates tend to vary by geography and the type of asset. The highest quality assets in core markets with the most upside and/or the least amount of risk will trade at lower cap rates, and vice versa for assets that are located in non-core markets which may have less upside and/or carry more risk.

The Trouble With Appraisals

The most difficult factor in commercial real estate is that no property is exactly like another, so the potential NOI can be a moving target. Every property stands on its own two feet. For this reason, appraisers are often employed to derive value for tax and legal purposes. While appraisers will use comparable sales, cap rates, and rental rate trends to value the property, these factors are typically backward-looking. Highest and best use is something that appraisers often cannot accurately include in their report, if only because they are not working with the current buyers in the market who may be setting new trends. Appraisers may not always account for the possibility of variances and/or public hearings to change the zoning laws to allow for larger development or alternative uses. They also may not be aware of new tenants in the market that can pay higher rates, or existing users that are willing to pay more for the real estate.

Regardless, appraisals play a very necessary role in and lie at the heart of the value discovery phase in a SARE (Single Asset Real Estate) bankruptcy case. They facilitate a push and pull process with each side attempting to provide expert witnesses and data that allow them to anchor value in a manner that will support their respective positions. Strategies vary and can include a 363 sale, cramdown, reorganization, relief from stay, and more. The stakes can be high and will often hinge on the ultimate value assigned to the asset and/or the legitimacy of plans to increase that asset’s value, so it is often worthwhile to leverage as much expertise as possible to support the correct value. As part of an appraiser’s research and in order to verify the data and ensure an arms-length transaction, appraisers will spend a large amount of time calling the commercial real estate brokers who sold or leased the properties referenced in their reports. In such a case, an active, veteran commercial broker will be more in tune with the value of a property than an appraiser, and also will be more aware of the inherent variables that affect that value. This is not to say that a commercial real estate broker will always know the exact value, but rather that that broker receives empirical feedback daily on active listings and is on the front end of the market and can therefore more accurately read the pulse of the market.

“In essence, appraisals are necessary to determine value, but when combined with the testimony of a credible broker, a more accurate valuation may be obtained. This is especially important when attempting to prove the legitimacy of a reorganization plan, or deciding whether a 363 sale strategy is feasible.”

Active Listings As A Tool

The truth of the matter is that an active listing itself is the ultimate test of true value. The FDIC has guidelines in place for assets in receivership, also known as “Loss Share Banks.” FDIC guidelines recommend the use of an experienced and knowledgeable broker for every REO property, and that reductions in price only take place after a certain amount of time has passed, in most cases three months. Simply listing a property, however, does not guarantee results. In order to ensure that this live testing of the market is truly indicative of value, the bankruptcy estate must hire a commercial real estate broker who employs methodologies that consider all possible uses, and perhaps most importantly, who helps ensure that every possible purchasing group has the opportunity to review the property. While it may appear to be common sense that a broker should enlist the entire market, including other brokers, to sell the property, one must consider the human motives inherent in such a process in the same way that a creditor must consider the motives of the debtor and vice versa. As the price of a property falls below the market value, the pool of buyers increases significantly. In many cases, if a property is priced below market value, the broker will not need to spend any money marketing the property, and neither will that broker need to solicit cooperating brokers to bring their customers to the table and thus be forced to split the commission. One must also consider that in such a case the property will sell faster.

So in fact, we see that brokers are often incentivized to manipulate a price to be lower than market value in order to save on marketing fees, to pocket both sides of
the commission, and to spend less time on the property. Of course, a good and ethical broker will rise above such tactics and take the time to add value to the asset
through creative property management techniques that will lower expenses, while at the same time bringing tenants to lease up the property. If capital expenditures, such as tenant improvements, must be made to implement these strategies, then each instance must be measured on its own merits based on a present value analysis. A good commercial broker, such as those with the CCIM (Certified Commercial Investment Member) designation, can advise on the benefits and disadvantages with a breakeven analysis of such an expenditure on a present value basis using IRR (Internal Rates of Return) and NPV (Net Present Value). Both the reduction of expenses and the increase in rental income will enhance NOI in the short term. This increase can then be leveraged at the market capitalization rate for that specific asset class, thus exponentially increasing the value for the bankruptcy estate.

A Real-Life Example

An example of such a scenario might be spending $90,000 in tenant improvements to land a good credit tenant in a retail center who will sign a 5-year net lease (expenses paid by tenant) with a total value of $720,000, or $144,000 per year for a 6,000 sq. ft. retail space at a rate of $24/ft. If we assume the cap rate of comparable retail space is 8.5%, then we can calculate that the increased income of $144,000 per year will yield an increase in price of the asset by $1,694,117 ($144,000/8.5% = $1,694,117). Therefore, the $90,000 spent to attract this tenant results in a return of over 1,800% to the bankruptcy estate when the property
is sold—a tidy profit, to say the least. Not all scenarios are so easily calculated or so handsomely profitable, but you get the idea.

Additional Considerations

As a final note, many properties in bankruptcy are owner-operated. While there is always capital readily available to purchase income property that is occupied, owner-operated vacant properties such as manufacturing facilities can be more problematic to sell. An investor who is willing to purchase a vacant, single-tenant property will often pay less, because the investor is discounting for the lease up period, the tenant improvements, and the risk associated with owning such a property. On average, there can be up to a 20-30% premium in the value that a user can afford to pay above and beyond that of an investor. In addition
to the discounts previously mentioned, this 20-30% premium is due to what I call the “Five Pillars of a User Purchase Decision.” These five pillars are

  1. Interest Deduction on the Mortgage
  2. Depreciation (which include accelerated depreciation)
  3. Paying down the Principal
  4. Appreciation of the Asset, and
  5. The ability to employ subsidized financing by the Small Business Administration

Often, a bankruptcy estate sale is not willing to entertain such financing, but the small business loan program allows qualifying participants to purchase a property
with as little as a 10% down payment with fixed terms as long as 10 years, and at a very competitive rate. This possibility may drive up the value of a property significantly. In addition, the underwriter will look to the EBITDA and cash flow of the company to service the debt, and so as long as the property appraises, the deal can be struck at an even higher price than what market rents might support. It is plausible, then, that a bankruptcy estate might receive subsidies on both sides of a 363 sale with a cramdown on the existing SBA loan and a higher value provided by the financing of a new SBA loan.

Final Remarks

The key in all cases is finding the right user or investor for the property. A user who can purchase “off the rack” as if the property is tailored to fit that user’ operations will often pay more than another user who must make significant improvements to the property. An investor who is willing to pay today for the pro forma of higher cash flows in the future will often pay more than an investor who is only willing to pay for current cash flows. A broker who is familiar with the
property’s market and already knows the users and investors in the community will be instrumental in assuring that the maximum value is obtained for the bankruptcy estate.
This article originally appeared in the print edition of The Bankruptcy Bar Association (BBA) 2013 Journal.  Click the following link to download the complete report: BBA 2013 Journal

Real Capital Analytics, Esteemed Economist, Dr. Chandan Debriefs Sperry Van Ness Advisors in a Yearly Review and Forecast

Premier real estate economist, Dr. Sam Chandan, from the Wharton business school and Real Capital Analytics recently debriefed the Sperry Van Ness family on his thoughts moving into 2011 and beyond. Dr. Chandan is well regarded within our ranks and he speaks to us on a quarterly basis, providing us key indicators and trends that give our clients the edge they need to make decisions. Click Here to listen to our recorded webcast and find out more about what buying activity he saw in the month of December, the direction of unemployment, and what asset classes and geographies are going to be off to the races in 2011. Feel free to call our office for more details on his next speech, and to review slides from his presentation.

Sperry Van Ness Sponsors – Interface Distressed Assets Florida

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* South Florida Commercial Real Estate Investor Panel: Strategies for Success in an Economic Turnaround
* The State of Distressed Assets in South Florida: How are Investors Finding Ways to “Crack the Vault?”
* The New State of Debt: Who is Lending Today, and Could Underwriting Standards Change in the New Year?
* Surviving Distress & Finding Opportunity: Working with Special Servicers and Restructuring Firms
* So, What Really is the Value of the Asset? Who Knows!
* Multifamily Investment Opportunities: Where is the Next Wave of Investment Opportunity: Broken Condo Deals, Financially Distressed Multifamily Buildings, or Something Else?
* Institutional Capital, REITs & Private Equity: How Are Equity Players Approaching the Current Climate?
* Hotel Workouts: Has the Distressed Debt “Tidal Wave” Arrived in South Florida Hospitality?

“The commercial real estate industry is over two years into a significant deleveraging process—historic in nature, presenting challenges for the highly-levered firms and the potential of tremendous opportunity for investors. InterFace Distressed Assets: Florida will provide a timely update on the opportunity, with analysis and review of how the key players, including banks and special servicers are responding. In my opinion if you currently expect to be active in the commercial real estate arena, you need to attend.”

Jerry Anderson, CCIM | Executive Managing Director

Sperry Van Ness Florida

Commercial Real Estate Advisors

InterFace Distressed Assets: Florida is produced by InterFace Conference Group, a division of France Publications, the leading publisher of commercial real estate news and information in the United States. France Publications’ titles include Heartland Real Estate Business, Texas Real Estate Business, Southeast Real Estate Business, Northeast Real Estate Business, Western Real Estate Business and Shopping Center Business, along with six other commercial real estate-oriented magazines and a web site for wealth management. 

Hear from 50+ Speakers on December 8th, Including:
* Matthew Anderson, Managing Director, Foresight Analytics, a division of Trepp, LLC
* Don Shapiro, President/CEO, Foresite Realty Partners, L.L.C.
* Matthew J. Coleman, Co-Head, D. E. Shaw Real Estate Advisors, L.L.C.
* Steven E. McCraney, President & CEO, McCraney Property Company
* Lynn McKee, Vice President for CMBS Special Servicing, TriMont
* Jonathan Senn, Senior Investment Analyst, Flagler Real Estate Services
* Erika Stilwell, Director, Wells Fargo Bank, N.A.
* Tony Wood, Sr. Vice President, TRI Commercial Real Estate Services/Author, The Commercial Real Estate Tsunami
* Jerry Anderson, Executive Managing Director, Sperry Van Ness Florida
* Michael Martin, MAI, Diversified Real Estate Consulting Corp.
* Harry G. Tangalakis, MBA, SIOR, Senior Vice President, CBRE
* Patrick Blount, CEO, Benewolf/Sperry Van Ness Loan Advisors
* James Donnelly, Chief Executive Officer, Castle Group
* Peter Zalewski, Principal, Condo Vultures® LLC
* Santosh Govindaraju, Convergent Capital Partners LLC
* George W Kruse, Managing Director, Vesta Equity, LLC
* David Lang, Principal, ACG Equities/DPL Ventures, Inc
* John Roebuck, President and CEO/Auctioneer, Roebuck Auctions
* Christian Lee, Vice Chairman, Investment Properties, Institutional Group – CB Richard Ellis
* Edward Kobel, President / COO, DeBartolo Development LLC
* Kevin M. O’Grady, Managing Director, Cohen Financial
* Adam Luysterborghs, Managing Principal, AVANT Capital
* Al Rogers, Executive VP and Senior Lender, USAmeriBank
* Mark A. Lunt, Principal, Ernst & Young
* Brian Belt, Special Counsel, Duane Morris LLP
* Robi Das, Director of Acquisitions, Liberty Group of Companies
* Robert Kaplan, Principal, Olympian Capital Group
* Ronald C Muzii Jr., Senior Vice President, HREC Investment Advisors
* Gregory Rumpel, Executive Vice President, JLL Hotels
* T. Sean Lance, CCIM, Managing Director, President – Troubled Asset Optimization, NAI Tampa Bay
* Mark Weinstein, President, MJW Investments
* Mark Stern, Senior Vice President of Acquisitions, Waterton Residential
* Stephen L. Vecchito, Principal, Advenir
* Matt Fuller, Partner, Franklin Street
* Jay Massirman, Principal, Asentus Real Estate
* Oliver Swan, Treesdale Real Estate Partners, LLC
* Patrick Connell, Managing Director, Capital Markets, CBRE Recovery & Restructuring Services
* Jack McCabe, Founder and CEO, McCabe Research & Consulting
* Brad Hunter, Chief Economist and National Director of Consulting, MetroStudy
* James P.S. Leshaw, Shareholder, Chair, Greenberg Traurig
* Walter Byrd, Managing Director, Transwestern
* John  Pacheco, Chairman, Abacus Financial
* Thomas R. McOsker, Head of Tax Receivables, GFI Group Inc.
* Howard Liggett, Tax Receivables, GFI Group Inc.
* Bob Kline, CEO, RW Kline Companies

* William Hoffman, President and CEO, Trigild
* Henry Lorber, Director, Hays Financial Consulting
* Andrew Wright, CEO and Managing Partner, Franklin Street
* Margaret J. Smith, Principal, GlassRatner
* Brian Klebash, Senior Conference Producer, InterFace Conference Group

* David Garfinkle, Managing Member/ Chief Executive Officer, Biscayne Atlantic
* Chuck Ernst, Vice President, Paradise Ventures