LaSalle Investment Management today released the 2010 edition of their Investment Strategy Annual. A publication that provides an outlook for global real estate markets.

The report notes that the plunge in values has stopped in most major markets it follows and sings of increasing investor confidence are beginning to be seen.

LaSalle anticipates a further re-alignment in the pricing of risk with an increase in deal flow as sellers slowly move from denial to acceptance. Investors should seek an appropriate balance between total risk aversion and inappropriate risk tolerance. The former is already resulting in a surplus of capital targeting a handful of ultra-safe deals.

Jacques Gordon, Global Strategist at LaSalle Investment Management said: “Overall, investors in commercial real estate should be cautiously optimistic about the outlook in 2010. However, as a late cycle participant in the general economic recovery, real estate will behave differently from other asset classes. The income streams from leased buildings weathered the global recession in remarkably good shape, but as leases mature in generally weak markets, net operating income will be under downward pressure in many countries for several years to come.”

“At the same time, in terms of stimulus packages and bail outs, commercial property has been treated quite differently from residential real estate, banking and other industry sectors. And private equity prices have not yet recovered as robustly as stocks or bonds. All these differences mean that real estate’s diversifying power in a portfolio will be restored.”

The firm goes on to state that in 2010 investors can look forward to more rational pricing and, in cases of distressed properties and owners, some hugely interesting opportunities. As they develop investment strategies for 2010-2011, investors with a clear view of the returns they require can take full advantage, says LaSalle.

William Maher, Head of US Strategy, LaSalle Investment Management said, “Investment opportunities in North America will improve but are likely to remain limited in 2010, particularly in the United States and in Mexico. In the US, the best opportunities, both core and higher return, will evolve from the resolution of the large level of maturing and failing loans.”

La Salle go on to recommend that investors in the US focus on low-risk re-priced core properties. A large number of opportunities are expected to emerge from the problems caused by the excessive leveraging of the real estate sector over the past five years.

As regards high return strategies, the areas to focus on include distressed debt (public and private) and a wide range of structures that focus on the provision of “rescue capital” to private real estate funds, developers, individual assets, and lenders.

Not surprisingly, the major risks to Commercial Real Estate according to the report is with the capital markets, which are expected to be the main driver of performance, while economies are weak. Real estate capital markets could be quite volatile in the years ahead, says LaSalle. The unintended consequences of monetary and fiscal stimulus policies could lead to too much money flowing back into property ahead of a solid recovery in fundamentals. This excess liquidity risk is already building in China and, to a lesser extent, the UK. To manage this risk, investors should maintain a strict discipline that focuses on achieving a required return with realistic and diligent underwriting.

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

Still reeling from the large losses in Real Estate investments over the last few years it may seem futile to search for any ray of light to ease the pain.

But, wearing an optimistic hat, it is possible to see some benefits for the investor moving forward. The main positive is in the area of fee’s and how they are structured into the deal.

At the height of the boom, the general partner was soaking up a large chunk of the deal through exorbitant management fees. Everyone was happy, deals were going well, and people were taking the eye off the ball when it came to what was going to the sponsor. Figures got so out of hand that the sponsor was finding themselves with as big a piece of the pie as the investor, without having to stump up much cash, if any.

It was not uncommon to see 6%+ placement fees greeting investors at the door with an annual charge of 1%+ on Gross Asset Value thrown in for good measure. Not to mention the piece of the action at the back end which in many cases left the developer/sponsor with up to 50% of the profits.

When one looks at it logically, it simple did not make sense that those who are providing the equity were being left with a decidedly meager offering of the riches on offer.

This is no longer acceptable and developers need to start taking a long hard look at their investment model and ensuring that the fees are at an acceptable level. Investors are wiser as a result of their recent hard knocks and simply won’t accept a sponsor trying to take all the good out of a deal with unreasonable fees.

The institutional investment world is no different and managers here are also in for a serious wake up call.

Until recently, fund managers structured their funds with “2/20” fees. This meant charging investors a 2% fee on their contributions during the fund raising period, and then another fee of up to 20% based on a percentage of the fund’s total profits once it closed.

London-based private equity researcher Preqin, say that today’s fees vary widely and have come down from the old 2/20 standard. For example, most real estate funds now charge from 1.5% to 1.74% during their fund raising program.

Even more recently, managers have come under increasing pressure to trim their fees even further and to better align their fee structures to the actual performance of the funds.

Developers, and fund managers alike, are becoming incrasingly aware that they are now dealing with a whole different species of investor. One that has felt that wrenching feeling of a deal gone South and will not take that leap of faith so easily next time. Once bitten……

Equity Interface is an online real estate investment service designed to connect developers and accredited investors. By offering unparalleled research tools and information, Equity Interface empowers members to discover mutually beneficial real estate opportunities. For more information, please visit www.equityinterface.com

Lending conditions for the commercial real estate industry continued to worsen in the third quarter, according to an index by San Francisco based Banc Investment Group. The index is supported by data from the US Bureau of Labor Statistics, CB Richard Ellis, Grubb & Ellis and Reis.

The index dropped 10.6% to 63.67 in the third quarter from 71.24 in the second quarter, which was an 11.6% decline from the first quarter.

The BIG CRE Index is essentially a forward-looking measure of strength of Commercial Real Estate market conditions for community banks. Values are derived from third-party providers and data collected by Banc Investment Group’s consulting services group, which provides a loan pricing model for community banks nationwide.

In summary, conditions in the industrial sector fell 21.2% representing the largest fall, according to Banc Investment Group. Retail sector lending conditions dropped 7.7% while the the office sector dropped 7.1%. Multifamily fell 9%.

This data foretells a testing lending environment for the fourth quarter of 2009 and into 2010.

Retail

•    The retail sector of the index fell to 60.89 in the third quarter from 65.99 in the prior quarter, down 7.73%. Half as much as compared to the second quarter.
•    For neighborhood and community shopping malls, rents fell an average 0.7% during the quarter. Vacancy rates at neighborhood and community shopping malls exceeded 10%, while rates rose nearly 2.5% at regional malls. In both subsectors, the rate of deterioration is only about half that of the second quarter.
•    More than six in ten markets experienced a rise in vacancy rates, and more than 95% recorded negative rent growth.
•    Lending conditions benefitted from a modest improvement in retail sales (less gas and autos). Sales rose 0.6% in August and 0.4% in September.

Industrial

•    The industrial sector of the index fell to 43.97 in the third quarter from 55.84 in the prior quarter, which is a decrease of 21.27%. This was slightly tempered in comparison to the decline between the first and second quarter.
•    Vacancies rose again, up an average of 3.4% in the quarter.
•    With inventory levels sinking, industrial production has turned positive for every month in the third quarter.

Multifamily

•    The Multifamily sector of the index fell at an increased pace of 9.06% to 76.74 in the third quarter from 84.39 in the previous quarter.
•    Unemployment rose 30 basis points from June through September. The average vacancy rate increased 1.3% over the quarter to a 23-year high. The vacancy rate is expected to climb further, although at a slower pace. In tandem, rent growth dropped 30bps.
•    Across the U.S., about 65% of metropolitan locations reported a rise in vacancies, while more than five out of ten saw rent decline.

Office

•    The office sector of the index fell to 73.07 in the third quarter, down 7.19 % from 78.73 in the prior quarter.
•    The sector posted negative net absorption levels with vacancies rising nearly 4% over the third quarter, despite only half the amount of space coming online as the second quarter. Nearly 85% of Metropolitan areas experienced a rise in vacancies.
•    Year-to-date, average rents dropped 7%, with nine in 10 areas suffering rent declines.

Equity Interface is proving to be a rich source of funding for many of our developers/sponsors.

Having launched our community only 18 months ago, we know have a membership of nearly one thousand members. Our membership consists of a myriad of Real Estate professionals from individual investors, institutional funds, and hard money lenders, to mortgage brokers and attorneys.

This has allowed us forge close relationships with many different areas of the financing tree and so offer developers numerous solutions to their financing requirements. For example;

To begin using the Equity Inteface community and benefit from its financing capabilities, please click here.

On 16th September we hosted an exclusive event at the Trump Tower to present a uniquely NYC  investment proposal.

Invited guests were introduced to the highly experienced Split Rock Development team who specialize in luxury residential renovations in Manhattan.

The event took place at Split Rock’s latest project – a 3,300 sf duplex renovation Central Park views and fantastic finishes. Click Here for details.

The evening began with a casual discussion on the NYC luxury market over wine and cheese before the team presented their investment strategy.

An equity contribution of approximately $15 million is sought to partner in the acquisition of financially and physically distressed units in the best Manhattan locations with the intention of refurbishing and selling within a 30 month window.

Split Rock have successfully completed a number of similar projects in the last few years and on average have shown very strong investor returns. They are keen to take advantage of the discounts that are currently available in the luxury market and have identified a number of target properties.

The evening was a huge success and we have been following up with the attendees who have told us how impressed they were with the opportunity and the Split Rock team.  As we discuss details with a couple of the investors we are confident that Equity Interface will once again succeed in connecting a sponsor with a like minded investor.  Stay tuned and we will provide you with an update over the next few weeks.

To view details on the opportunity please click here

We may be hosting another event in the near future and would ask investors to express their interest by emailing NYC@equityinterface.com to ensure they are included on the guest list next time.

Real Estate Syndication involves bringing a group of individual investors together to pool capital for investment in real estate.

It has become increasingly popular over the last number of years as a means of investing in commercial real estate The main appeal is that it typically offers individual investors the opportunity to gain access to large-scale property transactions/opportunities that they would not ordinarily have the resources to participate in individually.

Conversely, on the developer’s/deal originator/syndicators/ side it can provide an alternative source of capital for which to take advantage of an opportunity.

Real estate syndicates typically own income-generating residential or commercial real estate, with investors having an interest in tangible “bricks and mortar” assets. This characteristic is untrue of many other investments and provides added security for the investment.

One of the key benefits of this structure for the investor is the professional management which might not otherwise be economically feasible for the small investor.

Parties Involved

There are three central participants, or sets of participants, as follows:

- The syndicator or promoter who creates the syndicate in the first place;

- The syndicate manager who typically sources the equity and manages the syndication. In certain instances, this can be the promoter as well;

- The investors who purchase the investment units.

Legal Structure

The structure of a real estate syndicate is invariably based upon one of the following six legal relationships: co-ownership, divided ownership, corporation, trust, general partnership and limited partnership.
Selecting the form of organization involves practical as well as legal and tax considerations. The responsibility rests with the syndicate manager to ensure that the appropriate structure is used. Each of the available entities has advantages and disadvantages.

The corporate form insures centralized management as well as limited liability for the investors but is seldom utilized in modern syndicates because of its negative tax implications.

The general partnership (joint venture) avoids the double taxation normally involved in a corporate entity but the unlimited liability provision and lack of centralized management inhibit its use.

The limited partnership combines nearly all of the advantages of the corporate and partnership forms. It has the corporate advantages of limited liability and centralized management and the tax advantages of the partnership. As a result, the limited partnership form of organization is the one most frequently selected for real estate syndicates.

Another form of business, the limited liability company, was added in 1994 and includes liability limitation similar to that afforded shareholders of a corporation.

There are various laws and regulations that govern the actual formation, and day to day operations of real estate syndications. These laws will vary by state, and it is important to speak with a qualified Real Estate Lawyer in your particular area to see what suits/works best.

Earnings/Fees

- Investors typically receive:

A preferred annual return on their invested capital. They receive a percentage figure which is stated from the outset on invested capital prior to the developer / owner receiving payment. Depending on the risk attached to the deal, this typically rests somewhere between 5% and 10%. In some rare cases, this may be a guaranteed minimum return, which is guaranteed by the developer / owner; (note: It is important to clarify whether this return is simple or compound. It can vastly affect figures.)

A priority of repayment of capital in the event of a sale or re-financing of the property;

A percentage share of the profits at exit. This is typically based on a waterfall model whereby the sponsors’ cut of the profitincreases as the profits rise. Differing ‘hurdle rates’ are set which dictate the profit split.

Example:

- The sponsor typically receives:

Fees for services provided to the partnership / venture, which may include any or all of structuring the syndication, identifying the property, managing the development of the property, providing property management for the finished property, managing the partnership / venture, managing the disposal of the property;
(probably put in market averages here).

A share of the profits after payment of a preferred return on the investors capital and the return of their capital; (as illustrated above)

A return on the equity it has contributed to the venture.

Potential Pitfalls

Investors must remember that the underlying investment is real estate, and as such, normal real estate risk factors apply. There are also other risks that relate to the structure of the investment. Typical risks for an investor to bear in mind when reviewing syndication include:

- Possible unforeseen costs or liability associated with the properties. Very important to ensure that the debt secured by the sponsor is non-recourse and thus in a worst case scenario the investor can only lose their original equity.
- Uncertainty in general market conditions related to the future sale of properties
- Uncertainty regarding future taxes.
- Real estate is “illiquid” and so it could take a long time to sell.
- Issues with Sponsors that own affiliated companies that service the properties.
- Possible conflicts between Sponsor and Investor. Investor needs to have full faith in competency of sponsor as management and decisions moving forward rests with them. conversely, Sponsors need to ensure they have complete control and can operate without any impediment from an awkward investor.

Getting Started as a Syndicator/Sponsor

If I want to put together a syndicate of investors, what do I need to do?

Historically, sponsors would approach equity raising houses, or syndicate managers who would raise the required equity and manage the monies on behalf of their clients. These firms will also put together the appropriate structure to incorporate these clients. Typically, the company would charge the sponsor a fee of anything from 2% to 5% of equity raised. This covers the professional fee’s involved in structuring the investment vehicle (legal, tax), the marketing material used to sell the deal to its clients, and for the provision of equity to the sponsor.

The other option is using Equity Interface (www.equityinterface.com), which offers you direct access to their pool of accredited investors and allows you commence dialogue with those that are interested. This could potentially save you hundreds of thousands in equity raising firm fees.

Do I need an attorney?

An attorney is imperative. All measures need to be taken to ensure that liability doesn’t rest solely with the sponsor in the event of the deal not succeeding as planned.

What other advisors do I need?

Tax – It is the sponsor, or syndicate manager’s, responsibility to ensure that the investor has minimal tax exposure. With that in mind, a tax consultant is one of the most important cogs in the syndication wheel. They will instruct you, or your firm, on the best entity to use for each possible scenario. As every real estate deal is different, there will often be subtle nuances that require a specialist to review and advise.

Marketing – Elements of the syndication process can be seen as a sales excise as ultimately you are trying to sell your product to a willing audience. The publication of a complete offering memorandum is central to this, and it is important not to understate its importance. Many large syndication firms have departments solely dedicated to the production of offering memorandum’s and other supplementary marketing materials like summary sheets, web pages etc.

How do I vet potential investors?

If you are using an equity raising house then this should come under their remit. However, the basic rule is to ensure they are accredited investors. In the United States, for an individual to be considered an accredited investor, they must have a net worth of at least one million dollars or have made at least $200,000 each year for the last two years ($300,000 with his or her spouse if married) and expect to make the same amount this year.

Getting Started as an Investor

What are the key things to look out for in an investment?

When assessing possible opportunities, there are a number of key elements, which should be focused on, the main one’s being;

Sponsors Track record: The sponsors experience in the field is one of the most important things to look out for when assessing a real estate investment. Look for past successes/failures and how they are viewed in the market place. While the real estate asset is the investment, it is really the team who plan on turning this opportunity into returns that you are truly investing in.

Returns: Be sure to note if returns are stated as a simple percentage rate, or compound. The method which is often used to state returns is Internal Rate of Return(IRR). Technically, this is the discount rate that makes the net present value of all cash flows equal to zero. More simply, it’s the year on year return of the project. Below is compared the return on a five year project with an equity stake of $100,000. As can be seen, the difference is great.

Fees: Ensure that fee’s are both comparable to market rates and highly transparent. Often fee’s can seem to be wrapped up in the deal but are really just going into the sponsor’s back pocket. Ideally, the main sponsor’s slice should be incentivised to help ensure that they will endeavor to push returns as high as possible, thus benefiting the investor in the long run.

Asset:The offering memorandum should provide detailed information on market comparables and where the market is thought to be moving. Alarm bells should be ringing if this information is not provided in a high degree of detail. When sponsors are anticipating returns, be sure that these returns are based on a realistic, or even pessimistic, valuation of sales price.

Other things to look out for regarding the asset are;

- quality and stability of tenant
- possible added value potential
- planning issues
- rent roll and status of leases
- Sponsor supplying equity: While not imperative, it is a good sign in an investment if the sponsors are contributing a percentage of the equity themselves. This shows a confidence in the deal and also means that the sponsor is working for their own money too and not jst the investors.

Many developers begin looking for investors by producing  a comprehensive package of materials detailing their  opportunity.  Such packages often include, but are not  limited to, site maps, renderings, current state photos,  finished design samples, hard and soft cost proformas,  resumes and the all important “expected cash flow  summary”.  However, the packages often neglect to include  a snapshot of the deal from the investor point of view.  At a  high level – how much investment is required, for how  long, at what rate of return and how will that investment  and return be repaid.

Investors are interested to know if a deal makes sense for their investment strategy and how a particular opportunity stacks up against other deals that they are currently reviewing.  If a deal is presented in a beautiful, large package that has to be read from cover to cover to determine its essence it can be a major turnoff to the busy investment professional and casual investor alike.  This level of detail is only required after a first level decision has been made. To remedy this habitual overload of less important information, we suggest a simple spreadsheet investor summary.

Begin with the name of the project and a very brief description of the deal (it may be that this is the only document that the investor will look at to determine their interest in your project).

After this initial description comes the project cost and the request for funds – “equity requirements”. The equity requirement is similar to the sources and uses component of a traditional debt term-sheet.  It shows the investor how much the sponsor is committing to the deal themselves and how much is being sought externally. A typical equity split involves investors providing 90% of the required equity with the sponsor adding the remaining 10% (a 90:10 split).

It is then important to show the investor what they will get in return for participating in your deal – “Expected Returns to Investor”.  Here you overview what you are going to pay (typically broken out per year) followed by an internal rate of return calculation. The IRR tells the investor what their annual return would be if they invested in your project for x number of years. Three to four years is a typical investment timeframe, but investors do love deals that have long term high returns as long as they are verifiable (It should be noted that the “I hope to hold this deal for my grandchildren” is not always the best response to the investor timeframe question!).

Once you have laid out the equity requirement and the associated returns over the timeframe, you next have to prove your model.  In the example template below we have presented a breakdown of the cashflows to the investor and the sponsor and the refinance assumptions that feed the model.  On the supporting worksheets in the financial package it is prudent to model every aspect of the deal so that when an investor sees a number in the summary sheet that is questionable, he/she can follow the links and understand where that number originates.

Pulling together an investment summary can be a relatively easy process especially if you have the proforma model outlining all the costs and revenues – it is really just highlighting the right information and presenting it in a clear and concise manner.  Without it however, your deal can die before it is even reviewed by the investor.

We hope this helps you to think like an investor and to more easily secure the equity you need for your projects.

Sample Template

Eureka! You’ve found a golden real estate deal. But what happens if your bank won’t finance the amount needed to secure the property, or won’t do it in the short time frame needed? Do you cry yourself to sleep or do you seek alternative options?

One such option is a hard money loan.  A hard money loan is an asset-backed loan where the borrower receives funds secured by the value of a parcel of real estate. In situations where money is needed quickly, going down the hard money route can be very successful. However, before you run out the door, blueprints in hand, to your local hard money lender there are a few key factors you need to keep in mind.

Cost
The rate charge by hard money lenders is typically far greater than banks, which is understandable given the short turn around time and looser lending criteria -the credit profile of the borrower is not as important as the loan is based on the value of the property that is put up as collateral. The rate is not dependent on the Bank Rate. It is instead more dependent on the real estate market and availability of hard money credit. Figures available for the last year give a range of hard money rates from the mid 12%–21% (points are often charged upfront.) In situations where the borrower is unable to meet payments, they can be charged a higher “Default Rate”. While it is to be expected that the rate you will be charged is relatively high, it is also wise to ensure that this rate is somewhere in the normal market standard range.

Amount
One needs to be aware that the amount of funds typically lent by a hard money lender are, on a loan to value basis, less than bank loan to value ratios. Usual ratios are around 60% LTV. This relatively low ratio provides additional security for the lender so that they can foreclose on the property in the event of non-payment by the borrower.

It’s also important to note that this LTV is calculated on the property’s current value rather than a future value. This is the amount that a lender could expect to earn from a quick sale of the property in the event of a loan default. Current market values can differ greatly to market value appraisals which assume a sale in which neither the buyer nor seller is in a rush to close.

Fees
Hard money lending often receives critical press for its fee structure, which commonly charges up front fees in order to work on the loan proposal. Concerns mainly stem from those lending companies in the industry who take upfront payments to investigate loans and refuse to lend on virtually all properties while keeping this fee. While it is typically a virtue of hard money lending which can’t be escaped, borrowers should be mindful of both the amount of fees charged and also the track record of the company to follow through on their initial loan estimates.

Timing
Hard money loans often can be closed within 30 to 45 business days if the loan is already in process with a bank. This rapid time frame can provide a lot of flexibility for sponsors. Using hard money loans can allow sponsors to tie up and close deals quickly typically providing an opportunity to negotiate favorable “all cash, quick closing” rates with pressured sellers or banks.

Conclusion
For many hard money borrowers the only alternative funding source is bringing in a new equity partner and giving away a percentage ownership in the property or company.  As a result, before agreeing to work with a hard-money lender sponsors typically ask themselves:
“Is it worth it for us to rent the capital for one, two or three years in order to achieve our business goals or should we bring in a new equity partner and permanently give away a part of our real estate or company.”

The answer is inevitably a very simple ROI analysis that shows that in the long run, if there is a large capital growth component to the project, the cost of the hard money loan is far less expensive than sharing the expected EBITDA growth over the next two to three years with partners.  On the other hand, having lived through a downturn in the market over the past few years, sponsors have to be very certain that their business plans will play out as expected so that the sale or refinance events take place to replace the expensive hard money loans.  Many developers had to turn over the keys to their hard money lenders because their market expectations did not play out as expected.  Caveat emptor – buyer beware.

Current Deals – 7-22-09

• RV Park – $4mm
• Rehab Hospital – $3.5mm
• Warehouse portfolio – $50mm

A joint venture between The Carlyle Group and GFI Capital Resources Group is looking to acquire distressed residential apartment buildings in the US.

The joint venture could acquire up to $1.2 billion of real estate with leverage, according to media reports. Washington, DC-based Carlyle declined to comment.

GFI executive vice president of acquisitions and dispositions, Michael Weiser, said the joint venture was looking to purchase around 30,000 apartments in the US, including New York.

The deal follows on the heels of other private equity real estate firms targeting US distress opportunities. Last month, Parmenter Realty Partners launched its fourth real estate fund, Parmenter Realty Fund IV, targeting $500 million in equity. The vehicle will invest in distressed and/or under-managed infill office properties in the Southeast and Southwest regions of the US. It could also consider multifamily investments where there is “extreme distress,” the firm said, such as the South Florida market.

A joint venture between Lubert-Adler Real Estate and The Related Group also picked up 500 condos in Florida last month, paying $100 million for the properties, which the pair said were acquired ‘at significant discounts.’