April 1, 2009
RE: Monthly Letter
Dear Clients:
Sales taxes rise by 1% today, April 1st, and that is no April Fool’s joke! In looking for humor these days, I did have to laugh at a bumper sticker that read, “Honk if I pay your mortgage”. I will tell you that never in my 24 years in the business have I worked so hard for so little. The glimmer of hope is that our call volume is slowly returning, but it is still a struggle to get deals closed because of fear, lack of credit, and people’s general uncertainty.
This is a time of resetting who wins and who loses. This is a time when leadership must shine not just management. To illustrate my statement, let me give you a better definition. Management is the efficiency of climbing the ladder of success. Leadership determines which wall to lean the ladder up against. Today’s survivors are the new winners.
As promised, here are some of the responses to last month’s request for advice/vision going forward.
#1 Thanks for the news letter. Here is my advice in the eyes of a downturn: “You never cut quick enough and you never cut deep enough.” It has to be painful to operate at that level until you adjust to it. Most companies that follow this motto survive a downturn instead of using all of your assets trying to prop up a ship taking on water, robbing Peter to pay Paul and soon find themselves too far in debt to survive.
#2 I say, use your available cash to pay down debt with a higher interest rate than banks are offering on savings, CD’s, etc. I will be paying down my mortgages to get a good return on investment and increase cash flow and at the same time have a secure investment in myself and my own property.
#3 At 33, this is my 1st down cycle as a building owner. I feel that were it not for equity, this would be a trial by fire.I feel homeowners are in Stage #2 and #3. Commercial seems to be just entering stage #2.
#4 What an exceptional newsletter. My addition to the list of what to do in this kind of market is to get above the trees at all costs so as not to be blinded by all the trees in the way. “Where there is no vision, the people perish.” (Proverbs 29:18). The long view is critical so we can see our way out of this particularly dark forest.
As spring blooms and opening day for baseball arrives, I reflect on turning losing seasons around, changes of ownerships, disappointing steroid eras, yet a new season springs with hope eternal. When I coached baseball, I used to say the best two days of a coach’s life were draft night when you were sure you had the best 12 players in the world and the team party when you could finally say goodbye to those unruly kids and their parents!
One of my favorite things to watch in baseball was the turning of an unassisted double (or even a triple) play. Well don’t look now, but our economy is starting to turn (maybe unassisted!). After months of nonstop bad news, there are hopeful signs on the horizon. They include:
- a broad rally in stocks
- back to back jump in retail sales (ex autos) for January & February
- upward sloping yield curve
- Swedish clothing store H & M plans to open 225 new stores around the world
- 22% surge in February housing starts
- a return to profitability of several major banks
- housing affordability at all-time high
- Microsoft revealed plans to open retail stores
- Game Stop expects sales increase of 22% over last year
- a 41/2 year high in the dollar
- the Navy has added $758 million to its already planned expenditures in San Diego. All to be spent by September 2010
The National Association of Realtors – Commercial Alliance has proposed to Washington the following three goals for the Commercial Markets and the solutions to achieve them.
I. GOAL: Stabilize and Provide Liquidity to the Commercial Real Estate Credit Markets, including Mortgage-Backed Securities.
Solutions:
a. Make mark-to-market accounting rules more flexible, including use of discounted cash flow analysis for valuing assets in illiquid markets.
b. The Treasury and Federal Reserve should exercise their authority to implement and/or expand the Term Asset-Backed-Securities Loan Facility (TALF). The TALF should be encouraged to purchase commercial mortgage-backed securities and conventional commercial real estate loans.
II. GOAL: Maintain or Enhance Federal Tax Policies that Strengthen the Commercial Real Estate Market.
Solutions:
a. Retain current capital gains rules as they apply to appreciated property, like-kind exchanges and carried interests, in particular by keeping the capital gains tax rate at the existing 15%. Suspend passive loss rules.
b. Improve the depreciation, depreciation recapture and leasehold improvement rules without triggering the Alternative Minimum Tax.
c. Reduce the investment impediments caused by the passive loss rules by providing a temporary suspension of the rules for designated investments.
d. Attract new investment in existing real estate by providing higher income limits and expenditure limits to the so-called “small investor” provisions of the passive loss rules.
III. GOAL: Stimulate and Support the Commercial Real Estate Industry through Investment.
Solutions:
a. Provide federal funding for capital improvements to our nation’s infrastructure (transportation, roads, energy grids, etc.).
b. Encourage the commercial real estate industry’s investment in energy efficiency and “green” building initiatives through tax and other incentives, and not through legislative and regulatory mandates that artificially raise the cost of construction and operation of commercial real estate properties.
Our advice in the short run is as follows:
- Work hard to make the deals on the table. “Time kills all deals.”
- Make your existing tenants feel appreciated.
- Start on renewals early.
- Keep low rents and concessions short (3 years or less). Buy yourself into the future.
- Give the tenant something rather than a rent reduction if possible.
- If you have a loan refi coming up in the next 2 years, start work immediately. They’re all taking longer.
- Be ready for inflation or at least re-flation.
If you are interested in learning more about what the future holds for Commercial Real Estate, you might want to attend the following breakfast meeting on April 15, 2009 at the USD Burnham Moore’s Center for Real Estate. “After the Fall: What’s Next for Commercial Real Estate.” www.sandiego.edu/breakfast
Remember what the great baseball wordsmith Yogi Berra once said, “The future ain’t what it used to be.”
Regards,
Don
Don S. Zech
CDC Commercial
Real Estate Services
FLORIDA COURT SETS ATHEIST HOLY DAY
In Florida, an atheist created a case against the upcoming Easter and Passover holy days. He hired an attorney to bring a discrimination case against Christians, Jews and observances of their holy days.
The argument was that it was unfair that atheists had no such recognized days.
The case was brought before a judge. After listening to the passionate presentation by the lawyer, the judge banged his gavel declaring, “Case dismissed!”
The lawyer immediately stood objecting to the ruling saying, “Your honor, how can you possibly dismiss this case? The Christians have Christmas, Easter and others. The Jews have Passover, Yom Kippur and Hanukkah, yet my client and all other atheists have no such holidays.”
The judge leaned forward in his chair saying, “But you do. Your client, counsel, is woefully ignorant.”
The judge said, “The calendar says April 1st is April Fool’s Day. Psalm 14:1 states, ‘The fool says in his heart, there is no God.’ Thus, it is the opinion of this court, that if your client says there is no God, he is a fool. Therefore, April 1st is his day. Court is adjourned.”
