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Commentary 1.1.12
MARKET COMMENTARY
Below is a brief commentary on the commercial real estate investment market. When all of this started in 2008 we predicted that it would be 2011 or 2012 before the capital and leasing markets turned the corner. While activity increased in 2011, the markets were hardly robust as lenders tried to deal with mounting inventory of problem or maturing loans. Property fundamentals remain weak as a result of persistently high vacancies, flat rents and tenant failures. With property values in many cases still below loan balances and operating income barely sufficient to cover debt service, banks and servicers of securitized loans are having a difficult time trying to figure out how to satisfy their regulators (Banks) or Bondholders.
The bright spots have been sale of institutional core assets, multi-family housing which has made a major comeback resulting from the problems in the housing market and the availability of financing, and medical office buildings. These asset classes have been attractive because of their stability.
(2011) What we expected
· A weak leasing year with improving fundamentals late in the year
· An increase in velocity of investment sales
· Continued loan defaults resulting from maturities, insufficient capital to meet obligations, or failure to meet loan requirements
· Limited loan availability for acquisitions
· Values for "distressed" assets at 40-60% of previous peaks
(2011)What Actually Happened
· With a few exceptions the leasing markets showed little or no improvements. Small businesses remain under financial stress, technology continues to dampen the need for new office hires, and internet sales continue to erode store sales. All these factors led to a lower demand for space
· The number of investment sales increased but still remains anemic. The institutional core asset market was very active and banks made available what many consider to be their less desirable REO assets. The market has been described as a "barbell" with properties on either end being sold but little activity on the value add properties in the middle.
· With limited availability of core assets (including single tenant net leased properties) and much cash sitting on the sideline prices for these assets were bid up and bargains were scarce. Although there were plenty of buyers for value add or distressed situations often the discounts were not steep enough and the properties remained unsold.
· Many lenders (particularly banks) extended loans or delayed foreclosures due to the sheer volume of problem loans
· Banks showed an increasing preference for selling discounted notes over foreclosure which requires them to operate REO assets before they sell them. They are finding the loan discounts are no worse than those on the REO.
· Servicing companies as expected were slow to sell. The bondholder agreements are very complex and extreme caution is required to make sure the bondholder interests are fully protected. In some cases opportunistic investors have attempted to buy the servicing companies to gain control of the assets being managed.
· There were very few "off market" deals as owners, lenders, and servicers sought maximum market exposure through brokers and "On line auctions
(2012) Our Forecast
· With an improving economy we expect leasing activity to accelerate. Occupancies will increase before rents begin to rise. Hopefully the worst of tenant failures is behind us. Overall we should see improving financials.
· The loan maturity bubble will continue. Banks will continue to focus on note sales in lieu of foreclosure with eventual sale of the property at a discount. There should be more value add opportunities in the middle of the barbell.
· We don't expect pricing to change much during the year. Institutional core assets will remain pricey as will single tenant net leased assets with long term leases.
· Buyers will be active seeking value added opportunities but only at the right price. Sellers and lenders will continue to balk since these prices will be well below previous values (40-60%); however properties will be sold out of pure necessity.
· Acquisition financing should be more readily available but underwriting will be conservative and terms will be strict. Loans for core asset purchases will be less of a problem.
The
For 2012 our goal is to be a transaction facilitator. Limiting oneself to buying opportunities closes the door to many potential highly profitable situations. Areas on which we will be focusing: purchasing discounted notes, providing equity for a distressed owner, providing an investment fund with market knowledge and ownership expertise ,or helping an owner develop and execute a work out strategy. While there are many brokers, consultants and advisors, our experience as owner/operator, our network of professionals and ability to bring fresh capital into a deal gives us a different perspective and significant benefit to our clients.
We believe strongly that fundamentally sound real estate, bought at the right price, and properly leveraged should be a part of most diversified portfolios and over time will outperform most financial investment instruments. We are also of the opinion that much commercial real estate is still very undervalued but that professional advice is necessary to properly analyze the opportunity and structure the best deal. After all cheap junk is still junk.
We look forward to working with you in 2012.
PREF Represents Crate and Barrel
PREF LLC along with Chicago based KB Real Estate Inc. has represented
Crate and Barrel in the relocation of its flagship Atlanta store from
Lenox Square Mall to the Shops Around Lenox. The new 25,000 square
foot store is expected to open during the first quarter of 2012.
PREF LLC through it's advisory group represents tenants and owners for their real estate needs. These services include; tenant facility leasing, acquisition and disposition, development, asset management, investment analysis and due diligence, 1031 exchanges, tax advantaged and asset protection ownership structures and stratigic planning.
What is AMT?
WHAT'S AMT AND HOW DOES IT AFFECT ME?
Alternative minimum tax (AMT) was originally created 40 years ago to capture tax on the most wealthy of Americans who were avoiding paying taxes via various tax shelters and schemes. It was broadened to its current form in the 1980s under President Reagan.
AMT is based on a parallel tax calculation that computes tax liability two ways. The calculation typically works with the same data that's used to compute taxpayers' "regular tax," but with adjustments, exclusions and different rates (details below). After both calculations are complete, the taxpayer is required to pay the higher of the two amounts.
Fifteen years ago, only individuals with unique transactions paid AMT. Today, however, the majority of taxpayers with incomes between $200,000 and $650,000 pay AMT.
How is it computed?
The AMT calculation differs from regular tax calculation in two ways:
· Adjustments to taxable income - The most common adjustment is where tax write-offs are added back, they aren't deductible for AMT purposes (i.e. state income, real estate, ad valorem, etc.) Also, personal exemptions aren't a deduction for AMT purposes either. For many taxpayers subject to AMT, those are often the only adjustments they'll have. Other common adjustments include: miscellaneous itemized deductions, depreciation, incentive stock options, private activity municipal bond interest, and intangible drilling costs.
· How the computation is calculated - There are two unique parts to the AMT tax calculation. First, taxpayers receive a large AMT exclusion ($74k in 2011) that phases out as income levels rise. Second, the tax rates for AMT only have two brackets (26 and 28 percent).
Why am I affected? What can I do?
There were several reasons for the sharp increase in the last decade regarding the number of taxpayers affected by AMT. Surprisingly, the biggest factor was tax cuts. The "Bush tax cuts" reduced regular tax rates to historic lows. Unfortunately, however, the cuts didn't affect AMT rates. Therefore, in a system where the taxpayer pays regular or AMT tax based on whichever is highest, the reduction in regular tax caused a massive number of taxpayers to owe AMT.
Today, as we look at potential tax increases discussed on a daily basis, the pendulum could easily swing back to the point where regular tax again exceeds AMT. Obviously, that isn't a solution anyone looks forward to.
Unfortunately, there isn't much planning that can be done to avoid AMT when a taxpayer has income levels within the ranges described above. However, when a taxpayer faces circumstances that may cause their income levels to drop below or rise above this range, planning opportunities emerge. They may include maximizing deductions not allowed by AMT during these years by bunching multiple years' expenses into one year. A year-end tax-planning discussion with your tax advisor is always best to cover these types of topics.
Author
Jim Leutenegger, C.P.A.Westbrook, McGrath, Bridges, Orth & Bray A Westbrook Gallivan Group Firm
TAX CREDITS CAN MITIGATE ONE'S AMT - PLEASE CALL STEVE ROTHSCHILD
Village of Old Trace
PREF, LLC is pleased to announce that it has purchased on behalf of a private investor group the Village at Old Trace in Marietta, Georgia in a joint venture with Cincinnati based Viking Partners. The 53,000 square foot shopping center was purchased for $5.6 million or 35% of the price the previous owner paid in 2007. Based on the current occupancy of 55% the property generates an immediate 8% annual return on investment with the opportunity to increase cash flow and value significantly through lease up of the vacant space. US bank provided the financing. Leasing is being handled by The Shopping Center Group.
Taqueria del Sol Expanding
Atlanta-based Taqueria del Sol is expanding in the fast-casual Mexican category by signing franchisee agreements for new stores in Philadelphia and in Orlando, Jacksonville and Gainesville in Florida.
The 11-year-old concept’s wholly-owned subsidiary, Taqueria del Sol Development LLC, signed its first two franchisee agreements to develop and open stores in those two markets, building on the brand’s current four stores in Georgia. Three are in core-market Atlanta and one is in Athens.
The franchisee group in Philadelphia, called TAQ NE, will develop up to a dozen Taqueria del Sol units in the Philadelphia area during the next five years.
In Florida, Taqueria del Sol Development cut a deal with Calloway Consolidated Group to develop seven to 10 restaurants in Jacksonville, Gainesville and Orlando during the next five years. Consolidated Group is a Five Guys Burgers and Fries franchisee developing 14 Five Guys units in Florida.
“We’re looking for great operators who can execute the brand and who are in a great market,” said Bill Burnett, Taqueria del Sol president and chief operating officer.
Burnett said the principal owner of the Philadelphia group is a local native who knows the Philly market well, while the Five Guys operators picked for the Taqueria del Sol stores in Florida are running that burger chain’s “higher volume stores” in the Sunshine State.
Added Burnett: “We think Florida is a great area for what we do.”
Taqueria is also negotiating with franchisees for potential new stores in Charlotte, N.C., the Greenville, S.C.-Asheville, N.C. area, Baltimore and the Naples-Fort Myers area in southwest Florida, Burnett said.
Burnett acknowledged that the fast-casual Mexican category is getting crowded and more competitive, with the likes of Chipotle, Qdoba and many others. Phil Friedman, former McAllister’s chief executive, even entered the fray by announcing this week that he bought Charlotte-based Salsarita’s Fresh Cantina, an 11-year-old fast-casual Mexican chain with 82 locations.
EARLIER: Salsarita's Fresh Cantina purchased
Burnett said Taqueria del Sol’s menu, which includes items that have elements of southern comfort food infused into the traditional Mexican dishes such as tacos and burritos, sets it apart from competitors.
Taqueria del Sol also has a 12-seat full-service bar and customers are given a written menu to order their items. There is no menu board. Staffers bring food to customers’ tables.
The current Taqueria stores are doing respectable volumes as the three Atlanta-area restaurants each have average sales volume of just under $2 million, while the Athens store has a sales volume of about $1.2 million, Burnett said. The stores are closed Sunday and half of Monday.
The average lunch check is just shy of $9, while dinner is just over $12.
Taqueria del Sol’s founder and chief executive, Mike Klank, will remain in control of the four company-owned restaurants. The brand made a splash in 2010 when Klank and corporate chef Eddie Hernandez were nominated for the James Beard Foundation Award of Excellence for Outstanding Restaurateur 2011.
Read more: http://www.nrn.com/article/taqueria-del-sol-grows-fast-casual-mexican-category#ixzz1QlsBCEQd
January 2011
PREF purchased 334 Prince Avenue in Athens, Georgia. The 3,500-square foot building, valued at $1 million, is ground leased to Taqueria del Sol, one of Atlanta's most popular restaurant concepts. The property is leased through 2018. The all-cash purchase was made on behalf of a group of individual investors and provides a low risk yield of 9%.
November 2010
President Stan Sonenshine detailed why real estate continues to be a smart investment in 2011 in Atlanta Commercial Properties. Sonenshine revealed the keys to lucrative real estate investment. Learn more
September 2010
Vice President Steve Rothschild shared his expert advice on tax credits in a Q&A with the Atlanta Business Chronicle. “Tax credits viable option for some investors” provides valuable insight on the most common tax credit questions. Learn more
