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GMAC Real Estate
Tenant Alert
In This Issue:
Time to sell
corporate real estate?
Many key indicators suggest that the real estate market is peaking in
all the major cities: New York, Los Angeles, Chicago... In addition,
analysts anticipate a downturn in consumer spending, which will impact
companies' revenue and profits. For businesses that forecast a revenue
drop, a "sale-leaseback" can provide a cash infusion that compensates
for decreased sales.
The term describes the act of selling property to an investor, who then
leases the real estate back to the corporation. By selling at the
height of the market, companies can invest the sales proceeds in other
opportunities while the market cools.
Things to consider
Before cashing in, firms need to:
- Analyze
business forecast and real estate holdings. What are the
company's revenue projections for the next five years? How does this
forecast affect the firm's real estate needs? If this analysis points
to a real estate surplus, selling excess holdings may make sense.
- Appraise
current real estate assets. How much is the real estate
portfolio worth? When was the last time an outside entity appraised
these properties? Assessing market value of the real estate portfolio
provides key numbers when evaluating a sale-leaseback.
- Determine
if a surplus exists. If projected earnings do not support
current property holdings, selling the real estate now can provide
additional capital to weather a downturn.
- Consider
the impact of timing. Some investors will purchase an
entire real estate portfolio, which allows swift disposition and
negates the need to find individual buyers in local markets. Other
situations may call for a more gradual phase-out.
In
evaluating a business strategy for 2008, firms should consider
corporate asset disposition while property values are high. GMAC Real
Estate experts can provide a fresh, informed point of view to
businesses making such an analysis.
For more information, contact George F. Donohue,
president of GMAC Real Estate, at (212) 620-2611 or via email.
Executive View -
Market uncertainty creates opportunity
In times of uncertainty, elements of the real
estate market are either in flux or changing direction. This shift
causes sellers and landlords to rethink their positions, especially
when facing a duress situation.
Sellers who were holding out for a specific price may now accept less
money. In some parts of the country, the mortgage on a house can exceed
the property's value. These homeowners face a difficult situation as
they consider their options: Surrender their home to the bank, declare
bankruptcy or sell the home at a loss.
In the commercial sector, the value of many buildings is tied to the
amount of rent generated. Landlords may lower rents to fill office
space vacated by tenants that are downsizing, moving out or going
bankrupt.
The same principles apply to the retail market: If consumer spending
drops, sales slow as people spend less. Retailers respond by
surrendering non-performing space, which forces landlords to backfill
these new vacancies with tenants who pay less rent.
All these factors work to the advantage of buyers, renters and lessees.
Just remember: Deep discounts inspire fierce competition. The key is
having cash reserves and the flexibility to take swift action.
Opportunity abounds for investors at all levels: from single homeowners
to investor groups that pool their money into "vulture funds" to
purchase distressed real estate portfolios.
Now is the time for real estate professionals to revisit markets
previously considered "out of bounds" because of the disconnect between
value and price. Value and price are coming closer together in key
markets, including Manhattan.
If New York was off the corporate radar screen because of sky-high
rents and prices, now is the time to call the professionals at GMAC
Real Estate to get the market facts. That office or warehouse space may
actually fall within the firm's real estate budget.
Jargon -
Capitalization Rate, or Cap Rate
The "capitalization rate" or "cap rate" of a real estate asset
describes the ratio between the cash flow of the property and its
capital cost, the original price paid for the asset. The rate is
calculated by using the following formula:
Annual cash flow / Capital Cost = Cap Rate
For example, if an investor pays $1,000,000 for a building that yields
an annual net cash flow, or net operating income, of $100,000 (after
subtracting fixed and variable costs from gross income), the
capitalization rate is 10%.
$100,000 / $1,000,000 = 0.10 = 10%
Capitalization rates measure how quickly a real estate investment will
pay for itself. The building in the above example will be fully
capitalized after 10 years.
Financing -
Navigating today's mortgage mess
The subprime mortage crisis is coming home,
literally, to buyers in the nation's most expensive housing markets. In
Manhattan, where the average apartment sells for $1.33 million,
prospective homeowners are finding it hard to secure financing at
reasonable rates and terms.
Government-sponsored finance agencies like Fannie Mae and Freddie Mac
cannot guarantee "jumbo" mortgages, loans that exceed $417,000, and
fewer investors are willing to take on the risk.
Six months ago, the difference between a conventional mortgage and a
"jumbo" was around 0.375%, depending on the lender. Now, that gap has
increased to 2.0%. The Fed rate cut was expected to ease the problem,
but so far, the cut has had minimal impact.
Closing the gap
Despite the tumult in the subprime market, the overall economy remains
strong. Several factors can help ease the current financing crunch:
- Higher
"jumbo" ceilings. Congress is reviewing several proposals
that would raise the caps currently imposed on the government-sponsored
agencies, including a temporary measure that would raise the ceiling to
$626,000.
- Higher
T-bill rates. While federal interest rates are typically tied
to three-month Treasury bills, skittish investors have left the stock
market and driven those T-bills to just 4%. A stronger stock market can
restore the balance.
- Lower
federal rate. Currently, the Federal Reserve's benchmark rate
is 4.75%. An overwhelming majority of financial experts predict
anywhere from one to three cuts to narrow the gap between this rate and
three-month T-bills.
Securing
a mortgage
For consumers shopping for a mortgage, the experts at GMAC offer the
following advice:
- Wait,
if possible. The longer a borrower can wait before securing a
mortgage, the better-especially in the residential market.
- Consult
the experts. GMAC Real Estate offers a wealth of information
to help clients secure the best rates. Let us help you navigate today's
highly volatile market.
For
more information on financing, contact Christian Deutsch at (212)
620-2619, or via email. Or visit
the RECAP website at www.recapam.com.
GMAC Real
Estate / IPG New York
520 Eighth Avenue
22nd Floor
New York, NY 10018
Phone: 212-620-2611
Fax: 212-265-8751
GMAC Real Estate IPG is an independently
owned & operated firm.
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