Monthly Archives: September 2009

Facing an Uncomfortable Refinancing Reality


The availability of money remains in the open market; the difficulty, though, that owners/borrowers are having is dealing with the severely declining values making refinancing impossible. A condition which cannot be corrected by anything other than a commercial real estate market that appreciates in value — something that will probably not happen for several more years, at the earliest.

Most property owners acquired properties at aggressive cap rates as real estate values increased from 1999 thru 2007. Loans were readily available at 75% to 80% of acquisition price, frequently with an interest-only feature. For instance, $1 million of net operating income valued at a 6% cap rate resulted in a value of $16.7 million and a loan amount (75%) of $12.53 million. Today, net operating is income is most likely 85% of what it was several years ago, $850,000, and current cap rates are 9%, resulting in a current value of $9.44 million. Lenders have become more conservative lending at 60% loan to value ratios, or $5.67 million.

In order to refinance the outstanding loan of $12.53 million, the property owner will need to invest $6.86 million ($12.53 million less $5.67 million) to be able to secure a new loan for this property. Since the property value is currently less than the outstanding loan amount ($9.44 million current value vs. $12.53 million outstanding loan amount), it doesn’t make good business sense for the property owner to invest this additional capital into the property.

The result will be for the lender to take over the property and sell it at current market values, being forced to absorb a significant loss of at least $3 million, assuming no further deterioration in property value. The only thing left for the property owner is a huge tax obligation for his debt forgiveness.

Until the CRE industry accepts the fact that current values are significantly less than past years values, they will continue to blame the lending community for lack of funds. There are loans available from most banks, insurance companies and private funds in today’s environment, but at prudent underwriting standards — which most property owners refuse to accept.


Article By: Jeff Chambers, Director, Westcap Corp., Irvine, CA
Source: Watch List Voice: Facing an Uncomfortable Refinancing Reality

New Linneman White Paper On Recovery From The Recession Now Available

Robust Growth Will Follow Economic Recovery’s Slow Start, Says NAI Global Chief Economist Dr. Peter Linneman


The Great Recession has officially ended and recovery will be far more robust than anyone can imagine, according to a new white paper from NAI Global Chief Economist Dr. Peter Linneman. The paper examines the economic recovery and Dr. Linneman provides insight into the leading indicators that the market is stabilizing and investment activity is on the rise.

“Although the news continues to focus on the negative, the economy has bottomed and is on the road to recovery,” said Dr. Linneman. “Historically, the U.S. economy has rebounded in ways that were unimaginable at the time and usually within two years of a recession.”

Is This a Recovery?, NAI Global’s white paper, offers proof that the recession has come to an end and that recovery, however slow, is under way. Dr. Linneman discusses in depth the country’s current economic status, and provides historical evidence from past recessions to support his prediction of a robust recovery by 2012.

You can download the white paper here, or visit, select Publications, then Research Articles & White Papers to see the full archive.

Credit: NAI Global

Finding a Joint Venture Partner


These collaborations can breathe life into troubled properties. 

Despite the doom and gloom in today’s news, companies and individuals with cash are willing to invest in high-value properties that currently are underperforming. By using a joint venture partner to commit additional capital to a property, owners can pay down financing to a functional level or make necessary capital improvements. While sometimes risky, if well executed these arrangements also may attract high-quality tenants while raising a property’s value.


Vet Your Partner

The most important consideration when working with a JV partner is to do your homework. Though cash is king in the current market, don’t let funding blur the details. It is imperative to completely understand a deal’s economics and effects.

Many of today’s JV partners are looking for protection and greater upside. Some are trying to structure deals that are similar to loans. Be wary of a JV partner that seeks a 15 percent priority return on contributed capital plus the return of its capital first, which essentially is a 15 percent nonrecourse mortgage. The numbers can be startling. With $10 million of contributed capital and a 15 percent preferred return, the required preferred return would be $1.5 million annually, which ignores the compounding of the preferred return.

In addition to hammering out the economic relationship, both JV partners must agree on who controls the property and share a synergistic outlook on the property’s exit strategy. For instance, if one party considers the property to be a long-tem hold, the other should not be looking to flip the property quickly.


Tax Considerations

Property owners must address many tax concerns when adding a partner, and the place to do that is in the JV agreement. With careful planning, owners can minimize the tax ramifications of restructuring.

When negotiating a JV agreement, taxpayers must consider issues such as income allocations, Internal Revenue Code 704(c) depreciation allocation methods, and lock-out periods on the property’s sale and debt repayment. JV agreements should be drafted carefully to avoid situations that cause phantom income allocations, which are income allocations without cash. This can be accomplished by carefully modeling the allocations or including tax distribution clauses.

The most advantageous IRC 704(c) method also should he determined. The original property owner must be aware that depreciation deductions may be stripped and sent to the JV partner. With proactive tax planning, the burden of the stripped deductions can be reduced.

Lastly, negotiating lock-out periods where the property can’t be sold or the debt can’t be paid down can lead to many tax benefits. These include holding off gain recognition upon sale to a more tax advantageous period and avoiding the recapture of large negative capital accounts as a result of a decrease in the debt that supports them.

As with all property-related decisions, owners should seek the advice of tax and legal specialists before embarking on JV partnerships.


–by Jonathan Farrell, CPA, a principal in the tax department of DiCicco, Gulman & Co. LLP, a Woburn, Mass. – based business advisory firm.