Friday, December 26, 2008

102-TNG Radio - The Norris Group 12-27-08

Bruce Norris is joined this week by the loan officer for the Norris Group, Craig Hill, and the full-time property buyer for the Norris Group, Greg Norris.

Bruce asks Craig about how long he’s been in the hard money loan business and who the typical borrower was when he first started. Craig talks about buyers he used to work with and how it changed 20 years ago because of rule changes. Craig then talks about how he started working with Bruce and how it made much more sense to lend to investors. Craig says the investor has made not only more sense but are better at making payments.

Bruce then chats with Greg about his past year and a half as a property buyer. Greg talks about his early experience watching trustee sale buyers and what they liked to buy. Greg talks about loans available for investors and how conventional loans are currently at a liit of four.

Bruce asks Craig why lenders are hesitant to lend to investors. Craig says lenders have a false perception that investors are bad to lend to. An investor has more money down and has just as many reason to stay in a home as an owner occupant but lenders don’t want to be involved in that transaction.

Greg talks about how long ago he started making offers straight out of the MLS. Greg says making offers straight out of the MLS was not successful in early 2008 as the lenders wouldn’t budge. In the first six months of 2008, zero deals came out of the MLS, most were coming from auction. Now towards the end of the year, almost all came from the MLS that The Norris Group purchased. Now, The Norris Group is buying about 5% of the offers made.

Craig talks about last minute funding calls and why these investors are in a rush. Craig goes into detail why people with money make these investor loans. Craig says our main target market are seeing loans being made of $85,000 to $120,000 where last year those same homes were being bought for $200,000. There’s been a big change in price. Money sources have become a little nervous.

The perception right now is everyone wants a cookie cutter deal. Everyone wants a $100,000 loan and money sources do not want to be aggressive. Those that want larger loans or are buying in areas out of comfort zone areas will need more in money in the transaction. Money sources in Northern California are wanting to invest in smaller loan amounts and also invest in Southern California where they feel TNG performs best.

Most hard money loans have to have investors put more money into the deals right now. Different sources have gone out the window because of the market.

Bruce asks Greg what he is looking for now as he is making offers on things inside the MLS. Greg says he is looking for anything within a $30,000 range where he thinks he can buy it and make a profit. Sometimes these are short sales and sometimes his offers don’t get accepted for months. Sometimes he gets deals because other investors fall out and he’s the only one left.

At this point, Greg is not being able to talk with people directly often. Right now, banks seem to be dictating to REO agents where before there was much more relationship involved. Greg says he sometimes gets no reaction from REO agents when making offers. Every agent reacts different. Some email when we didn’t get a deal and some do.

Bruce says between 2000-2006 most of our hard money loans came from investors purchasing from people directly. Craig says it’s now changed almost completely where 100% are bought out of the MLS, through auctions, and occasionally from trustee sale and probate. The MLS at this point is creating the most real estate opportunities.

Out of the 40 properties Greg has purchased this year, 30% of the deals were auctions, the rest were from the MLS. Greg is not looking forward to attending auctions. It’s a lot of work for sometimes no results. REDC and Hudson and Marshall have been mixed this year.

Craig says the inventory he is making hard money loans on is different form the 90s. In the 90s there were more 30s and 40s built home located in San Bernardino and Moreno Valley. This time, the investors are being savvier. Investors are buying a little bigger homes and newer homes. The inventory is much better.

Craig talks about why some investors get frustrated because they can’t participate in our money program. Credit issues aren’t the biggest issue. Liquidity is just very important right now. Most people don’t mind hearing “no” because we’re trying to set them up for success. Some investors just don’t understand the process.

Bruce talks about deals Craig turns down and investors coming back later thanking him for now allowing them into the deal. Craig finds that very gratifying. More next week.

Craig Hill has been in the hard money loan business for over 25 years. Greg Norris has been working as the Norris Group's full time property buyer for going on two years. More information about The Norris Group at thenorrisgroup.com and tngproperties.com.

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Friday, December 19, 2008

101-TNG Radio - Stephen Blank 12-20-08

Bruce Norris is joined this week by the Senior Resident Fellow of Finance for the Urban Land Institute, Stephen Blank.

Bruce asked about the ULI Emerging Trends report and how long it’s been around. Stephen says it’s been around for 30 years and has always been national in scope. The report has gone through different partnerships but the report is now a joint venture between the Urban Land Institute and Price Waterhouse Cooper. The report interviews 100s of people in the real estate business and compiles their opinions. Interviewees include developers, private and public owners, advisors, institutional investors, service providers and lenders.

Stephen says the people that were interviewed in 2007 actually said they were expecting 2008 to be difficult. Emerging Trends is unique because of the process and the one-on-one interview process. These interviews tend to be very frank in nature. There is one writer and three editors to help put the report together. The real estate industry has been very supportive in being involved in this report.

Bruce asks Stephen where the blame is in his opinion. Stephen says there was a period of unparalleled liquidity. With that liquidity came an increasing need for income-producing assets and increased competition to lend money so interest rates were forced to low levels. Increased liquidity increased leverage pushing down rates of return.

The subprime market was unregulated and obviously became an issue. Mortgage bankers took these loans and then passed them on to Wall Street. Some argue the models that were used were too old and relied to heavily on ratings. There was a failure to do due diligence and it’s created a big mess. People ended up day trading condos.

Bruce says there’s been some confusion between investor and speculator. Now, we’ve assured ourselves the downturn because the investors are limited to the number of loans. Investors can’t 1031 exchange and investors can’t buy rentals due to limits put in place by lending institutions. Purchase prices are being driven down even further because of this issue and the government isn’t addressing it at this time.

Bruce asks if Stephen thinks the residential problem will move to commercial and if it will be as severe. Stephen says he doesn’t think they’re related and that an economic downturn needs to happen. Commercial is a lagging indicator. Residential could cause a downturn in the economy which would then spill over to commercial. Stephen says we didn’t build as much so we’re not going to have over supply meeting under demand like the last down market. Only some areas like Las Vegas and Florida will have issues because of over building.

Bruce asks if he sees commercial lenders taking back a glut of properties in the coming years. Stephen sees sharp increases in foreclosures for loans adjusting in 2009-2010. The loan-to-value ratios are going to be an issue unless their income has increased a great deal. Bruce and Stephen discuss if lenders could leave a loan in place to avoid taking back a building, also known as performing non-performing loans. The debt is still being paid. Lenders, if they can, would rather nurse these along until the market improves. Not all lenders can do that unfortunately.

Bruce asks if commercial lenders did the same kind of stated income programs that we saw in residential. Stephen says that as competition increased, banks started looking at other factors to base loan amounts on. Reserves were lowered. If the markets had continued to go up, the property could afford this new method. In a decline, it’s an issue.

Stephen sees cap rates going up. 15-20% price decline could occur because the cap rates are changing. Not as much personal guarantees are on commercial. Moving forward from now, more lenders are requiring personal guarantees.

Historically loans had an amortization with ten year term assuming a 25 year amortization period. In ten years you would historically amortize 12-13% of the loan which added protection for the lender, even if prices declined. As the market was more competitive, amortization period was eliminated and the loans were interest only. As these are refinanced, no equity exists.

Bruce asks about unemployment and commercial. Stephen says it will be an issue and vacancies will increase. Declining lease rates will also be an issue. Stephen says REITs are not originators of loans but purchase already existing debt. They may originate mezzanine loans but are not conventional lenders. REITs are owners of income producing properties. Primary lenders are commercial banks (40% of markets), insurance companies (20% of market), and commercial mortgage-backed securities (40% of market). Stephen says that the mortgage backed system is on life support. Insurance agencies are a major source now but it’s taking more time and they have the pick of the market.

For more information on the Urban Land Institute, visit uli.org.

Stephen R. Blank joined ULI-the Urban Land Institute (ULI) in December 1998 as Senior Resident Fellow, Finance. His primary responsibilities include: expanding ULI’s real estate capital markets information and education programs; authoring real estate capital market commentary for ULI’s web site (www.uli.org); participating as a principal researcher and adviser for the Emerging Trends in Real Estate series of publications; researching and authoring papers and articles on finance issues for Urban Land; and organizing and participating in real estate equity and debt capital markets programs at ULI’s Fall and Spring meetings, the McCoy Symposium on Real Estate Finance, District Council meetings, and ULI’s European, Asian, and Latin American Conferences, as well as participating in real estate industry meetings, seminars, and conferences.

Prior to joining ULI, Mr. Blank served from December 1993 to November 1998 as Managing Director, Real Estate Investment Banking of CIBC World Markets, the successor to Oppenheimer & Co., Inc. His responsibilities included: structuring, underwriting, and executing corporate financings including initial public offerings of common and preferred shares, unsecured debentures, and convertible bonds; property acquisitions, dispositions, and financing; and financial advisory services including mergers and acquisitions, corporate restructurings, and recapitalizations.

Prior to joining Oppenheimer & Co., Inc., Mr. Blank served from February 1989 to November 1993 as Managing Director of Cushman & Wakefield, Inc.’s Real Estate Corporate Finance Department, where he was responsible for property acquisitions, dispositions, and financings, as well as providing financial advisory services including mergers and acquisitions, restructurings, and recapitalizations.

From August 1979 to January 1989, Mr. Blank served as Managing Director, Real Estate Investment Banking, of Kidder, Peabody & Co., Inc. where his responsibilities included property acquisitions and dispositions, placement of mortgage financing, financial advisory services, and corporate financings. Additionally, Mr. Blank served as President of KP Realty Advisers, Inc., the firm’s real estate investment advisory subsidiary.

From August 1973 to July 1979, Mr. Blank was a Vice President, Corporate Finance, of Bache & Co., Incorporated, where he was responsible for transaction origination, due diligence, and structuring, marketing and closing, and post-offering supervision of SEC-registered and privately placed direct investments in real estate and other industries.

Mr. Blank is a member of The American Society of Real Estate Counselors (CRE designation), the National Association of Real Estate Investment Trusts, and ULI-the Urban Land Institute, and serves as a member of the board of directors and Chair, Audit Committee, of MFA Mortgage Investments, Inc., a member of the board of directors and the Audit Committee of Home Properties, Inc., and is a member of the board of trustees of Ramco-Gershenson Properties Trust where he serves as the Board’s Lead Trustee and Chair, Audit Committee. Additionally, Mr. Blank is a member of the Advisory Board of the Real Estate Research Institute, the editorial board of the Journal of Asia-Pacific Real Estate, and the Editorial Board of RERC Industry Outlook, a publication of the Real Estate Research Corporation. Further, Mr. Blank acts as ULI’s representative to the Green Building Finance Consortium.

Mr. Blank has participated as a Guest Lecturer at the Harvard University Graduate School of Design Advanced Management Development Program, the Boston College Graduate School of Business Administration, and the Cornell University Program in Real Estate.

Mr. Blank received his B.A. degree from Syracuse University and was awarded a M.B.A. degree from Adelphi University.

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Friday, December 12, 2008

100-TNG Radio - Lee and Associates 12-13-08

Bruce Norris is joined once again by Paul Earnhart (Founding Principle) and Erik Hernandez (Senior Vice President) of Lee and Associates in Ontario, CA.

Bruce asks Paul how this downturn compares to downturns he’s seen before. He says this one is broader compared to the 90s. In the 90s there was an oversupply of four years. Lenders ended up taking back large quantities of properties and the RTC got involved. Values fell rapidly because of quick liquidation. The Inland Empire survived because of the influx of companies from the LA area looking at their bottom-line and moving into cheaper areas. Capital, however, never dried up. Banks were still making loans. Capital now is much tighter. This time it’s systemic and more problematic.

Bruce asks about oversupply of inventory. Erik says certain categories are overbuilt and in certain areas there’s lots of standing inventory. Some inventory is too far along into building to stop. There’s more coming in the coming year. They started building when vacancy and absorption rates looked good and the world has changed.

Bruce thinks there is going to be a vacant building glut. He asks how vacant buildings are going to be appraised. Paul says appraisals will be looking at income values not at sale comps. If someone wants a loan on a vacant building the financing will be of the hard money variety or you’ll need to prove a tenant is coming in. Owner occupied is still good but the income will still be scrutinized.

Bruce talks about what happened in the past with the City of Perris. Bruce feels the next two years will be ugly but long-term migration outlooks look good. He asks Paul about unemployment and how that changes the commercial real estate industry.

Paul says it’s a two-edged sword. Warehouses are a very small piece of commercial and over 100 million square feet over the past five years. The assumption was that consumers would keep spending so it’s been really overbuilt. The question becomes now if there’s a structural vacancy. Some companies are already gone: Linen and Things, Bombay Company, Levitz, etc. If people aren’t working they aren’t spending. There’s less need for these kinds of spaces.

Bruce asks if the new tenant that takes over for some of these large spaces pay much less. Erik says landlords are very motivated and list lease rates and significant discounts.

Bruce talks about reading through loan docs for his line of credit and how he was surprised at the ways the lenders can get heir money back. He asks if commercial is the same. Paul says that lenders do have some say if things start going bad. If lenders see the balance sheet doesn’t look good then they can take action.

Bruce talks about some investors writing themselves a check into savings from their home equity line of credit and the bank then taking the money out of the account and then closing the line of credit altogether. All agree it seems far reaching but more and more, even the most credit worthy individuals are having credit disappear.

Bruce asks Erik if we’re gaining commercial tenants. Erik says people who don’t have to be here are gone. Paul says the taxes and bureaucratic nonsense of California is not very business friendly. Businesses are only here because they have to be due to logistics of distribution and manufacturing. Those that don’t have to be here go to states like Texas and Arizona who are more business friendly.

Bruce asks if businesses tend to lease or buy in this market. Landlords are being very aggressive so buying a building would need to pencil. Commercial leases vary by sizes. Fixturizing a commercial building can be expensive so companies who put in the infrastructure for larger buildings will stay in longer leases.

All three talk about the very short time frame that economists and experts give industry constituents as far as market outlook and much of it is wrong. For those in commercial, there’s a very long time line and the world can totally change. Those that came out early saying there was a real problem took lots of heat.

Finally, Bruce asks where Paul and Erik see opportunity in the commercial sector. Paul sees land opportunity coming first followed by small to mid-sized office product. Industrial on mid to large size won’t be good for 12 to 24 months. Liquidity is the real issue here.

Paul Earnhart is the founding Principle at Lee & Associates – Ontario which is one of the most successful commercial real estate teams in Southern California.

Paul has been with Lee & Associates since 1983. Paul has his Juris Doctorate from Western State University and is affilaited with the Society of Industrial and Office Realtors (SIOR), the American Industrial Real Estate Association, the Industrial Asset Management Council, State Bar Association of California, and the Board Member of the Inland Empire Economic Partnership. Paul speaks for the American Industrial Real Estate Association Annual Forecast Meeting, the Appraisal Institute Annual Real Estate Recap, and the Inland Empire Economic Partnership.

Erik Hernandez a Senior Vice President with Lee & Associates – Ontario, and a partner with TEAM EARNHART. TEAM EARNHART continues to be one of the most successful commercial real estate teams in Southern California, and has achieved regional and national recognition within Lee & Associates and the real estate community for its success. TEAM EARNHART has a combined experience of over 50 years and has completed over $3 billion worth of real estate transactions.

Specializing in industrial real estate, Erik’s specialties include active land sales and development, tenant/buyer representation, landlord representation and investment sales and analysis. Erik has been active in the commercial real estate market in the Inland Empire for over eleven years, and has been a licensed real estate agent with Lee & Associates since 2000. He is a CCIM (Certified Commercial Investment Member) candidate, expecting to complete the designation in 2006. Erik was also selected to part of NAIOP’s2006-07 Class of the Young Professionals Group.

Erik brings a unique perspective to the review and analysis of the commercial real estate market, having previously directed the market research efforts for two Lee & Associates’ offices (Ontario and Las Vegas, Nevada) from 1995 through 1999, and also directed a companywide, 10 office market research effort for a major competitor from 1999 to 2000, before returning to Lee & Associates as a sales associate and member of Team Earnhart in 2000.

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Friday, December 5, 2008

99-TNG Radio - Lee and Associates 12-6-08

Bruce Norris is joined this week by Paul Earnhart (Founding Principle) and Erik Hernandez (Senior Vice President) of Lee and Associates in Ontario, CA.

Lee and Associates specializes in industrial commercial real estate. Bruce asks when the commercial real estate market peaked. Paul said the peak was about the same as residential but that it became more obvious in July of 2007. This is when several partners backed out of deals and much more scrutiny started taking place.

Bruce asks Erik about financing and if commercial had its own version of stated income. Erik says Lehman was doing commercial lending as well but it wasn’t as aggressive. Paul says lenders were willing to finance on sales comparables instead of income streams. No income stream analysis was taking place but now that has changed.

The typical buyer from 2004-2006 in the commercial Inland Empire market were Asian entrepreneurs and domestic buyers for consumer services. The market has receded but some areas on the outer edges of the Inland Empire are being hit harder. No new development is taking place. Foreign investors haven’t disappeared but are slow and cautious when making decisions.

Bruce asks if commercial deals were leveraged or if they were bought cash. Erik says if it was an owner occupant (owner user) the deal would typically have 10% down and 90% would be financed. Lenders would do a first trust deed at 50% and then a second at 40% would be guaranteed by the Small Business Administration (SBA). Erik says this program is currently still around. Wells Fargo, Bank of America, and some regional banks are still active in the commercial arena since they are only 50% into a transactions. Bruce asks if the SBA is in line for the bailout.

Paul says prices are down around 15% from the peak. There are a few spots where it’s worse. For those that can’t refinance, they are letting the building go into foreclosure.

Paul says they are expecting a rough road for the coming year. Rents and values have dropped and financing is impossible for some. The SBA financing is only good up to $3 million dollars. Anything over must use conventional financing. SBA is also more conservatively underwriting their loans. SBA is paying more attention to debt-coverage ratios (DCR) as opposed to pure sale comps. DCR measures your ability to pay the property's monthly mortgage payments from the cash generated from renting the property. SBA has not dried up so financing is still there.

Conventional financing is now limited to 65% of value. Lenders are much more cautious here. Bruce asks about mezzanine financing. Paul says it’s changed. Mezzanine financing used to be anything above 75% loan to value. Now it’s 60% loan to value. If the underlying lender will allow it, it’s much more expensive. 14-15% rates will apply and the financing will be for 3-5 years typically. The first can be around 10 years. They will want to get as much risk out of the way as possible.

If the property is very good construction and has good tenants, Cap rates are held low. Investors feel better protected here. The all cash buyers are looking for these nicer buildings. Leveraged buyers see higher cap rates. Caps rates are up 25% and Paul expects it to go up another 10%.

Bruce asks about what happens when a cap rate goes up from six to eight and what happens to the value. Paul says about a 25% in value takes place. Any new development is nearly impossible because land and construction can’t keep up with price adjustments. Bruce says similar things are happening for the residential market as properties are being bought for land value.

Bruce brings up that there is $100 billion of commercial financing that comes due in 2009. Bruce asks if Paul and Erik think it’s a problem for those hoping to refinance. Paul thinks that number is low because that number is premised on individual loans and some business have leveraged their building for lines of credit and those are coming due as well. Paul says that lenders can also make margin calls on these lines of credit. It could be a huge problem.

Bruce asks if pension funds buy real estate free and clear. Paul says that is true and pension funds don’t act as quickly and have a longer range outlook for investments. REITs are structured differently and some are fairing better than others. Bruce and Paul talk about REIT values going through the floor and if that will change how they are able to fund future projects.

There were many non recourse loans being made in commercial. Non recourse loans are now much more difficult to get.

Bruce asks about how insurance companies are involved and if they are big players in the financing of commercial real estate. Paul says they are much more risk averse and have pulled back in availability of funds.

Paul says vacancies are not out of control yet but they are starting to increase. Erik talks about vacancy (buildings with no tenants) versus availability rates. Many companies are subleasing space since down sizing is taking place. Vacancy numbers may be around 6% for the West End but availability rates are around 12%.

More coming next week and you can find Paul and Erik at lee-assoc.com.

Paul Earnhart is the founding Principle at Lee & Associates – Ontario which is one of the most successful commercial real estate teams in Southern California.

Paul has been with Lee & Associates since 1983. Paul has his Juris Doctorate from Western State University and is affilaited with the Society of Industrial and Office Realtors (SIOR), the American Industrial Real Estate Association, the Industrial Asset Management Council, State Bar Association of California, and the Board Member of the Inland Empire Economic Partnership. Paul speaks for the American Industrial Real Estate Association Annual Forecast Meeting, the Appraisal Institute Annual Real Estate Recap, and the Inland Empire Economic Partnership.

Erik Hernandez a Senior Vice President with Lee & Associates – Ontario, and a partner with TEAM EARNHART. TEAM EARNHART continues to be one of the most successful commercial real estate teams in Southern California, and has achieved regional and national recognition within Lee & Associates and the real estate community for its success. TEAM EARNHART has a combined experience of over 50 years and has completed over $3 billion worth of real estate transactions.

Specializing in industrial real estate, Erik’s specialties include active land sales and development, tenant/buyer representation, landlord representation and investment sales and analysis. Erik has been active in the commercial real estate market in the Inland Empire for over eleven years, and has been a licensed real estate agent with Lee & Associates since 2000. He is a CCIM (Certified Commercial Investment Member) candidate, expecting to complete the designation in 2006. Erik was also selected to part of NAIOP’s2006-07 Class of the Young Professionals Group.

Erik brings a unique perspective to the review and analysis of the commercial real estate market, having previously directed the market research efforts for two Lee & Associates’ offices (Ontario and Las Vegas, Nevada) from 1995 through 1999, and also directed a companywide, 10 office market research effort for a major competitor from 1999 to 2000, before returning to Lee & Associates as a sales associate and member of Team Earnhart in 2000.

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