Monday, July 31, 2006

Slacker Nation
What the hell is wrong with these guys? As I read this story, I wondered the politics of these men. I bet many of these guys are "value" voters who do not see the contradiction of their politics and their current positions. Stop immigration! Intelligent design! Prayer in school! Don't stop my disability! SUCK IT UP AND GET TO WORK!

Thursday, July 27, 2006

Mammoth Ad
Mammoth Equities had a full-page ad in yesterday's Wall Street Journal. Wow! No mention of its TIC operations. I wonder if any TIC money went to pay for this unnecessary extravagance.

Tuesday, July 25, 2006

Delaying the Inevitable
This article in the New York Times confirms what I have been saying for sometime, that people cannot pay their exotic mortgages and need to refinance when the teaser period is over. According to the article the new mentality is that no one lives in a house for thirty years, so why paydown the mortgage, just get the lowest possible payment. This may work for a small number of people, but my guess is that the refinancings are based on an inability to pay the higher rate not a nomadic view of housing. The dollar value of loans subject to adjustment in 2007 will be two and a half times this year's value. The article does not mention the refinance cost - $3,000 to $5,000 per refinance - and how borrowers do not see these fees. Nor does it mention that a house is a great source of wealth accumulation. I would bet that the largest asset of the parents of these over extended borrowers is their house. This is a safety net their kids will not have.
The tables below need to be updated as I found a few errors. I will do this later today. CPA 16's Front-End Load needs to be lowered slightly and Inland's Operating Load needs to be raised.

Update: The correction and adjusted rankings are shown below. I caught the errors, not a sponsor. The CPA 16 change was an adjustment not an error, as the leverage was lowered to the amount used for the other REITs (compared to the figures shown in the prospectus which were in the original table). This lowered the fee, but as half this fee is deferred and accrues interest at a rate of 5%, it is still understated. (The deferred acquisition fees payable to CPA 16's Issuer grew 11% in the first quarter.)

Thursday, July 20, 2006

Pay Me Now or Pay Me Later
The difference in how sponosrs of Non-Traded Real Estate Investment Trusts (REITs) compensate themselves is interesting and important for investors to understand. Some of the REITs charge fees as a percentage of total assets, some charge fees as a percentage of revenue and some charge fees on both assets and revenue. I determined the Operational Fees for six large REITs, making general assumptions to make the comparison equal - i.e. same amount of leverage and revenue to match the property type held in each REIT. The Operational Fees are shown as a percentage of investor equity. Below are the results along with the corresponding front-end fees:

Front-End Fees

Op Fees





Dividend Capital TRT


CPA 16


Hines REIT


CNL Inc Prop


Well II


Wells II


CNL Inc Prop


Inland American


Inland America


Div Cap TRT


CPA 16


Hines REIT


The REITs with the highest Front-End fees have the lowest Operational Fees, and the REITs with the highest Front-End fees have the lowest Operational Fees. It is not suprising that the sponsors of these REITs pay themselves in a way, that in my opinion, obscures how much they are really making, and these fees do not even include any revenue sharing that a sponosr may be paid. An investor hears 1% and thinks its is not that bad. For example, CNL and WP Carey charge a 1% Asset Managment Fee, but this is triple the amount they would earn if they charged a 4% of Revenue Property Management Fee.

Mutiple fees in small amount don't seem bad, until they are added up and compared to what investors are earning. The Hines REIT has three small charges, but added together total more than half of its dividend yield to investors. (Maybe this is one reason Hines REIT has no exit stragegy.) Understand the fees before investing.

Tuesday, July 18, 2006

Money for Nothing
It is good to be a farmer. As this Washington Post article shows, farmers across the country received Federal aid that totaled $25 billion in 2005. Over the past several years, farmers received payments for damages by drought, frost, wind and even falling debris from the space shuttle Columbia. Isn't frost, wind and drought a risk of being a farmer, and can't farmers get insurance that would cover these business risks? I don't imagine any of these welfare payments were passed on to consumers in the form of lower crop or livestock prices. Welfare payments to farmers need to be dramatically reduced, but I bet no politician has the courage to tackle this issue.

Rental Chic
Saturday's Financial Times (FT) had an entire supplement on the benefits of renting real estate rather than buying. FT's rental options are very expensive - $87,500 for a week rental in the South of France - but I do not think an entire section of the paper would have been dedicated to renting real estate a year ago. Several of the articles were for weekly or monthly vacation rentals, but the whole point of the section was that it is OK to rent and not buy.

Thursday, July 13, 2006

I am impressed with the investment firm Bailard. It offers a variety of institutional products, including two institutional real estate investment trusts (REITs). It has an intutitive method of looking at real estate that has several factors. One part of Bailard's method transfers well to Tenant-In-Common (TIC) analysis and can be used to help determine whether a TIC transaction has a fair risk/return expectation.

Bailard classifies real estate as Core, Value-Added or Opportunity. (Bailard did not create this model. It is widely used and CNL went into it in detail at a meeting I attended in April, but I found Bailard's presentation succinct and straightforward. The goal for any Value-Added or Opportunity property is to make it a Core property, which commands a higher resale price. A detail of the three classifications is below:

  • Core properties have the lowest risk and lowest return expectations. Core properties have stable tenants and need little capital improvement and should provide long-term income. Examples of Core properties include fully leased Class A office buildings, single-tenant net leased properties with credit tenants and community shopping centers with one, two or more national or regional anchors.
  • Value-Added properties have more risk and should have higher return potential than Core properties. Value-added properties should produce income but it will likely be variable. Examples include aging properties that need capital improvements or a properties with near- and short-term lease expirations.
  • Opportunity properties have the highest risk and highest return potential. These may be development projects, existing properties with significant vacant space or properties that need major capital improvements. Income is unlikely until the opportunity issues are resolved.
A TIC transaction's property classification and return expectations need to be determined and compared to similar classification transactions. A Core TIC offering should have a return expectation similar to other Core transactions and a Value-Added TIC transaction should have returns comparable to other Value-Added transactions. Value-Added transactions should have higher return expectations than Core transactions.

I do not have a return expectation ranges for each classification, but will start one now. It will be interesting to see how this evolves. Sponsor resistance will also be interesting, especially when a transaction is Value-Added and has Core-like return expectations.

Tuesday, July 11, 2006

Rising Cap Rates
The story in today's Wall Street Journal detailing Kimco's purchase of San Diego-based Pan Pacific Properties noted that the cap rate on the acquisition was 6.3%, which was higher than expected. This may signify that cap rates have bottomed. Improved commercial real estate fundamentals (noted below) and cap rates that are moving up is good news for the real estate market.

Monday, July 10, 2006

Strength in Commercial Real Estate
There is an interesting article in today's Wall Street Journal on the strengthening fundamentals in commercial real estate. Occupancy rates are increasing leading to increased lease rates. This was confirmed by a conference call I was on last week with Bailard, who offers an institutional real estate investment trust. Bailard showed a presentation slide with occupancies and lease rates increasing, and with potential for further improvement. The WSJ article offered an acknowledgement that the improving fundamentals will help real estate investors who have paid high prices.

Thursday, July 06, 2006

Nat's Prediction
If Ken Heebner is only partially right, a big part of the price decline is going to be caused by all the crazy mortgages that allowed people to buy more house than they could afford. As these mortgages reset in a market that is not appreciating and may even be depreciating people will realize they have little to no equity. People are going to find out the hard way what that term in the fine print "negative amortization" actually means. What's the incentive to keep paying an increasing debt payment on a property with no equity (and with a negative amortizing loan the principal amount growing)?
Ken Heebner's Prediction
In Wednesday's Wall Street Journal, in the monthly Mutual Fund section, fund manager Ken Heebner predicts that areas that had the steepest price increases in residential real estate (California, Arizona, Florida and other parts of the East Coast) could drop up to 50%. Wow! Wouldn't that be a shocker. And if the drop is anything like the early 1990s (the last time California had a real estate decline), prices will stay at the bottom for awhile. Let's hope he is not right, or only right enough so that I can sell my house for enough to move up and off this busy street I live on.