CDC Commercial Inc

October 2010 Monthly Letter

“It’s tough to make predictions, especially about the future.”
~Yogi Berra

September saw some sobering memories. September 11th was a stark reminder of how fragile our freedom is and how it is constantly threatened. September 15th was the two year anniversary of the Lehman Brothers bankruptcy and weekend that our banking system faltered at the brink of a meltdown. The aftershocks continue today to affect our economy and personal lives as we struggle to regain our financial freedom. This year has been marked by a great deal of frustration; low-to-no deal flow, erratic economic news, skittish stock market, anemic consumer confidence, a ballooning Federal deficit and more of the same from the Washington crowd. With that as the backdrop, I realized I’m not in a slump, the economy is! Now let me tell you the best news; the economy is getting better…slowly. Now let me tell you some of what I expect; lots of political fireworks in the month ahead, higher than expected industry earnings reports, real estate transactions (leasing and sale) picking up, banks starting to disgorge REO’s and slowly begin lending again. However, expect deals to require more equity, less leverage, higher debt service coverage ratios. And of course the most important reason … the government told us so… not that it didn’t elicit a smirk from most of us, but the National Bureau of Economic Research (NBER) announced that the present recession ended and the recovery began June of 2009.

One other change to expect and adjust to: there is a proposed FASB rule (already existing in International accounting) that requires the entire obligation created by a lease to be put on the company balance sheet as a liability. It is likely that businesses may want to shorten leases to reduce liability. Also, more businesses may prefer to buy instead of lease – since if the lease liability is greater (or close) than ownership makes sense again.

U.S. Commercial real estate yields (cap rates) are near their highest level relative to treasury bonds on record. This is typically considered a signal that it is time to buy property. Cap rates seem to be stabilizing and in some cases going back down. Unfortunately, I don’t see any signs of rent growth yet (and probably won’t until we see job growth or unemployment drop.) To get there we need a robust level of small and medium-size business entrepreneurs who are deciding to move ahead with starting, purchasing or growing their businesses.

Having attended the Shopping Center Convention last month I will tell you it was as quiet as last year, however, this year there were deals happening and more optimism (and realism.).

As we take this recovery day by day and week by week, I thought I would pass on to you some negotiating strategies to help with existing tenants during these times. These are some bullet points from an article by attorney Anne Clinton of Cox, Coshe & Nicholson, LLP.

1. Review the tenants’ financial statements – you need to know if it is worth helping them.
2. If they are in default – you don’t get rent relief.
3. Use a Confidentiality Agreement – be sure there is a financial penalty for violating the agreement.
4. Rent reductions are temporary and short term.
5. Get concessions – give up market-rate option or exclusive rights or require sales reporting.
6. Recapture right – so long as the tenant has rent reduction you have right to terminate space (or they pay full again)
7. Defer rent, don’t abate it.
8. Tenant t must be open and operate continuously.
9. Include a right for Landlord to show space.

By the time you finish reading this letter, I will have finished one of my life long goals of running a triathlon (made tougher by my historically poor or lack of swimming skills.) What I have learned in this goal quest is to break the goal into bite-size pieces, pursue it daily and relentlessly one stroke, one pedal or one step at a time.

Like our economy, when a baseball player is in a batting slump, he’ll do anything to change his luck. Things like superstitions (rabbit’s foot, not shaving, wearing the same underwear) to changing batting stance, to extra coaching. But the one thing that usually breaks the slump is extra batting practice – to regain the grove.

Believe me – we at CDC Commercial are taking it one step at a time, swinging the bat every day and taking each week as it comes. I hope you enjoy this month’s story and enjoy the weeks ahead of you before you lose your marbles.

The older I get the more I enjoy Saturday mornings. Perhaps it’s the quiet solitude that comes with being the first to rise, or maybe it’s the unbounded joy of not having to be at work. A few weeks ago, I was shuffling toward the garage with a steaming cup of coffee in one hand and the morning paper in the other. What began as a typical Saturday morning turned into one of those lessons that life seems to hand you from time to time. Let me tell you about it.

I turned the dial-up into the phone portion of the band on my ham radio in order to listen to a Saturday morning swap net. Along the way, I came across an older sounding chap, with a tremendous signal and a golden voice. You know the kind; he sounded like he should be in the broadcasting business. He was telling whomever he was talking with something about ‘a thousand marbles.’ I was intrigued and stopped to listen to what he had to say.

‘Well, Tom, it sure sounds like you’re busy with your job. I’m sure they pay you well but it’s a shame you have to be away from home and your family so much. Hard to believe a young fellow should have to work sixty or seventy hours a week to make ends meet. It’s too bad you missed your daughter’s dance recital’ he continued. ‘Let me tell you something that has helped me keep my own priorities.’ And that’s when he began to explain his theory of a ‘thousand marbles.’ You see, I sat down one day and did a little arithmetic… The average person lives for about seventy-five years. I know, some live more and some live less, but on average, folks live about seventy-five years.’ ‘Now then, I multiplied 75 times 52 and I came up with 3,900, which is the number of Saturdays that the average person has in their entire lifetime. Now, stick with me, Tom, I’m getting to the important part. It took me until I was fifty-five years old to think about all this in any detail’, he went on, ‘and by that time I had lived through over twenty-eight hundred Saturdays. I got to thinking that if I lived to be seventy-five, I only had about a thousand of them left to enjoy. So I went to a toy store and bought every single marble they had. I ended up having to visit three toy stores to round up 1,000 marbles. I took them home and put them inside a large, clear plastic container right here in the shack next to my gear.’

‘Every Saturday since then, I have taken one marble out and thrown it away. I found that by watching the marbles diminish, I focused more on the really important things in life.’ ‘There is nothing like watching your time here on this earth run out to help get your priorities straight. Now let me tell you one last thing before I sign-off with you and take my lovely wife out for breakfast. This morning, I took the very last marble out of the container. I figure that if I make it until next Saturday then I have been given a little extra time. And the one thing we can all use is a little more time. ‘It was nice to meet you, Tom, I hope you spend more time with your family and I hope to meet you again here on the band. This is a 75 year old Man, K9NZQ, clear and out. You could have heard a pin drop on the band when this fellow signed off. I guess he gave us all a lot to think about. I had planned to work on the antenna that morning, and then I was going to meet up with a few hams to work on the next club newsletter. Instead, I went upstairs and woke my wife up with a kiss… ‘C’mon honey, I’m taking you and the kids to breakfast.’ ‘What brought this on’ she asked with a smile.’ ‘Oh, nothing special, it’s just been a long time since we spent a Saturday together with the kids. And hey, can we stop at a toy store while we’re out? I need to buy some marbles.’

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