Helen Sause

Editor's Column

Dear Colleagues,

Thanks to all of you who took the time to share your supportive views on la t month’s column. Hopefully the misleading rhetoric will die down and the decision makers  (who do have a choice of excellent health care plans) will settle in  to ensuring that those that don’t have choice are  provided for.

Onward to other matters close to home. I am eager to hear from your scribes what is happening in the housing market in your areas.  One reads that there are some signs the housing market is  recovering. Then you wonder  if it is the resale of bank  repossessed properties or whether these are pent up sales waiting for the market to turn OR said she hopefully, new buildings just being completed.
                  
One of the things I prize about LAI is the diversity of our membership... I like to tell people that  anyone who touches a real-estate deal from a gleam in the developers’ eye to the person issuing the  title report is welcomed into LAI. This is a fine recognition that we all have a role to play in transactions and the more we understand each others needs, practices and principles the better
our deals work.  I am delicately leading up to questions about appraisals and hoping not to offend anyone.

On May 1, 2009, a sweeping change took effect that was meant to reduce the conflicts of interest in home appraisals while safeguarding the independence of the people who do them.  Brokers and real estate agents can no longer order appraisals. Lenders now control the entire process. In some areas the Home Valuation Code of Conduct is setting off bitter battles with mortgage brokers,lenders, real estate agents, regulators and appraisers all arguing over whether an effort to fix one problem has created new ones. 

The agents, maintain that the changes are effectively blocking home sales by encouraging the use of inexperienced appraisers, they are asking Washington to suspend the Code until 2011.  For their part, appraisers acknowledge that the change may have been well intended but argue that it has no teeth and is undermining the economics of their profession. It appears that this attempt
to rectify the problem that has grown out of the collapse of lending standards and the pressure on  appraisers from all sides. This certainly is a complex issue with the Code having unintended consequences. 

I wonder if  this is a place where LAI could lend its professional skills to strike a rational balance? Has this affected your chapter’s membership? 

Please let me know what you hear.

Till next time, best

Helen Sause
International LAI Editor
helensause@alamedanet.net

LAI Author hits the newsstands:

Outstanding In Their Field: How Women Corporate Directors Succeed, released by Praeger Publishers June 8, 2009 is now listed as #1 Hot New Release and #1 in the category of Management & Leaders, Women & Business, Business & Investment at Amazon.com as of June 29, 2009. The author is Elizabeth Ghaffari so please offer her your congratualtions when you see her next probably in Chicago.

Praeger's information is available on their Upcoming Titles page: http://www.praeger.com/catalog/C37584.aspx and
at ABC-Clio: http://www.abc-clio.com/products/overview.aspx?productid=111244

Elizabeth has  created a web site which describes the book and its target audiences  www.outstanding-in-their-field.com 
and where all the Advance Praise received to date have been posted. Her contact information is below:

Elizabeth Ghaffari
Champion Boards, a service of Technology Place Inc.
2807 Highland Avenue, Suite 5
Santa Monica, CA 90405
tel: 310-396-9863
fax: 310-392-3909
www.championboards.com
www.outstanding-in-their-field.com

CONGRATULATIONS  ELIZABETH!  I know you have been researching, interviewing and writing this for some time,
great launch!..Ed.

 

In Memoriam

Ely Chapter

Sadly, the Ely Chapter reports the passing of its first administrator, Anne Koch.  Anne was the chapter’s administrator for many, many years, beginning in 1947.  Upon her retirement, her daughter-in-law, Sherry Koch took over her duties.

Anne was a very loyal and thoughtful administrator who touched the lives of many. She will be missed. Memorials to the Monarh Hospice & Palliative Care, Inc. (3115 B. Wilke Road, Suite H, Arlington Heights, IL  60004) would be appreciated. 

Barbara Morris, Ely Chapter Administrator

Chapter Corner

Ely Chapter:

Have you registered for the Land Economics Weekend yet?  October 22nd thru the 24th will be a fantastic culmination to the Burnham Centennial.  Check www.ely-chicago.org or www.lai.org for the itinerary and to register for the weekend events.  Don't forget to purchase your copy of the 'The plan of Chicago @ 100: 15 View of Burnham's Legacy for a New Century'.  Through the tremendous efforts of the many people in the Ely Chapter, we have sold approximately 1,500 copies of the book at this time.  There was a book signing event on September 2nd at the Barnes and Noble at DePaul University that featured eight of the authors.

The Ely Chapter has a great summer social on August 19th at Millennium Park.  There was also a new member social with 61 attendees that braved the elements with 28 new members from the June initiation class that joined the crowd for an evening of meeting, networking, great discussion and and even better program of events.

Allen Joffe, Scribe

Golden Gate Chapter:

Capital markets are always a popular topic for LAI Golden Gate Chapter’s monthly luncheon, and September was no exception.  A full house of LAI members and guests heard a presentation by Ron Sturzenegger, Global Head of the Real Estate, Gaming and Lodging Group at the newly combined Bank of America Merrill Lynch. Sturzenegger is based in San Francisco and is responsible for the firm's investment worldwide banking activities for the real estate, Real Estate Investment Trust (REIT), lodging, leisure, gaming and homebuilding sectors.

Sturzenegger’s presentation focusing on the implications of current capital market conditions for the real estate sector, including on the role of REITS, CMBS lenders, and banks.  He stated that unless asset values are allowed to decline drastically, the real estate sector’s capital needs have outgrown the lending capacity of commercial banks.  Participation of all three lending sources is required achieve the level of liquidity required for normal operation of real estate industry. 

Currently, virtually no commercial banks are making new real estate loans. However commercial banks, who hold between 10% to as high as 30% of their loan portfolio in real estate debt, are extending existing real estate loans when ever possible.  Extending debt on performing assets coming up for renewal in today’s low interest rate climate is a preferable option to taking the asset back and selling it at distressed sales rate for REO properties.

However, CMBS loans maturing in 2011-12 represent a challenge to the future stability of national real estate markets.  Those loans will need restructuring, likely before depressed asset values recover to levels that can support the original debt amounts.  Many experts expect a wave of commercial foreclosures when those loans mature.   After those loans are restructured, a return to more normalized conditions may occur by 2013.   A secondary wave of CMBS loans will mature in 2017, suggesting that unless economic expansion pushes asset values higher, the Real Estate sector will continue to experience capital market turmoil for most of the next decade. Sturzenegger expressed a need for Federal help to prevent the looming foreclosure crises, with rule changes rather than federal bailouts as the recommended approach.

After this sobering prediction, Sturzenegger’s description of successful recapitalization of public Real Estate Investment Trusts (REITs) was more encouraging.  He described the investment banking approach to recapitalizing both debt and equity for the 80% of the REIT sector in which he  was involved as a value play by equity investors, and recognition of the underlying values of RET assets by the lenders.

Sturzenegger acknowledged that given declining asset values and rents, property owners may be operating their portfolios on behalf of the lender, with the owner’s return on a far more distant horizon than previous operating models.  He urged the industry to “hug your banker”--recognizing that the close partnership between capital sources and developers will remain critical to both sectors, and that both are currently under unparalleled stress.  Using the RTC crises as a case study, he advised that property owners who managed these assets best in this capital market crises and maintained good relations with their lenders, would stand to profit most as conditions turned around.

London Chapter:

Investing in the Indian Real Estate Market
Still too spicy for some?

Sharad Gohil – 10 September 2009

The main summary of the talk confirmed that Indian property market is not for an unseasoned investor as local partnerships and legal structures need to be watertight to protect an institution’s interests. Too spicy for some – probably!

General Overall Economic

Sharad confirmed that prior to previous thought; no market was immune to a global crisis that we have just been through. Earlier optimism that India and China will save us has not happened.  This was an interesting point so when was the last time you heard the term ‘decoupling’ ?? (No such thing!)

 Sharad mentioned the following key statistics:

• Main Indian stock exchange (SENSEX) down 40% from its Jan 08 high
• $6bn of foreign funds had flowed out of India during this period, reacting both to slowing growth and perceptions that the market was over-valued. Probably this was also a result of the west having their own problems as cash was needed to sort out their balance sheets!
• Indian GDP was 6% pa for 2008-09 fiscal year, but the World Bank is now forecasting 8% pa for 2010, ahead of China at 7.7% pa for the same period.
• Inflation was negative for the year to the end of June 2009, the first time in 30 odd years.
• 2009 onwards has seen more optimism and the Indian government has seized on this in planning $559 bn of infrastructure upgrades over the next five years of which 70% would be state funded, and the other 30% to be funded by the private sector. I would question whether this will all happen. India is running a massive budget deficit and this could have been just political posturing to get the Congress Party re-elected which happened.

For institutional property investment there are three main areas on which to focus:

1. Capital Structure
2. Due Diligence
3. Knowing your Partner

1. Capital Structure

Joint ventures (JVs) tend to involve a local partner who is already the landowner.  It is usually only the land which constitutes his equity contribution to the JV.  The historic owner can make huge profits by just entering into the JV from day 1. Local partners are unwilling to dilute their stake or provide more equity in the downturn. In the boom times, pre-sales of residential were the general model.  As this dried up and Indians began to lose their jobs, the residential market crashed overnight. Local developers have been adverse to cut prices/rents.  The reason is a BIG EGO! They cannot be seen to be the first to slash prices as it is perceived to have a knock on effect on their other developments and their reputation. 

A JV should be structured so that both parties put in a mix of capital and land to ensure that the building completes on-time as well as interests being aligned in the upcoming sales period.
 
2. Due Diligence

Indian Bureaucracy is a minefield. Legal due diligence can be long and protracted and proving title can be very difficult. Much of land has fragmented ownership as well as charges which banks use as collateral. A relic of the feudal system and numerous family disputes!

Foreign investors need a good local lawyer to unravel all the ownerships in an effort to obtain a clean title. The key pitfalls are:

• Floor Space Index (FSI) – This is a local law different by region, which mandates development densities.  It must be checked in advance in case your 200,000 sq ft office block you were planning to build can only be a 50,000 sq ft office on the foot print of the land you have just purchased!

• Zoning – This is essentially planning, but many Zones have complex hidden covenants – eg timing and land restrictions that your lawyers need to be aware as part of due diligence.

• Arbitration – It is essential to have an arbitration clause in place with all contracts to settle disputes. It must be in a foreign jurisdiction such as Singapore or the UK. To take the matter to and Indian court could take up to TEN years!

• Title – It must be held at the local registrar.

3. Knowing you Partner  

Knowing your partner is the key to a successful development and investment.  The local partner should have a better grasp of planning issues, neighbouring property disputes and local government liaison (involving brown paper envelopes?)

The local partner is usually the most powerful one. Investors should be under no illusion that they are the lead partner! There is the need to agree ‘tagalong’ and ‘dragalong’ rights so partners can exit together. The local partner should be a large scale developer with a good regional or national track record to greatly minimise the risk.

There is a definite need to further educate Indian partners further about Western business and institutional investment needs such as risk return profiles.  Foreign investors were merely perceived to be expensive sources of debt!

Conclusion  

There was a definite Indian property bubble (as with the rest of the world) and the weight of money chasing potential 35% pa plus returns added to this.
The Indian property investment market is a difficult market to understand and crack.  However, returns are there for investors who want to be educated in dealing locally and are prepared to do proper due diligence and not just rush into deploying capital quickly with another eye looking at launching their next fund!

Property values are likely to still continue to ease across the board for at least another six months.  When values improve, it will be on the capital market side first. Occupier demand will continue to remain weak for some time except for certain residential sectors (mass urban/suburban low to middle income housing).

There are good long term prospects for India generally based on a five to seven year strategy.  However, a lot of reforms are required and the business and legal infrastructure needs to be much improved.  

Shailendra Shah MRICS
Investment Fund Manager
Canada Life UK
Submitted by Mari McMorrough Kavanagh

Phoenix Chapter:

Former Phoenix LAI Chapter President Andrew Conlin was recently appointed a “Professor of Real Estate Practice” in the MBA Program at the W.P. Carey School of Business at Arizona State University.  He will also be teaching in the Master of Real Estate Development (MRED) Program at ASU.

September 18, 2009 Phoenix Chapter Meeting with LAISA member Katherine Kittrell, graduate student and recipient of the LAI Foundation grant.  Katherine has completed her thesis on land values and planning around Phoenix Metro Light Rail stations.  RSVP

Listen to LAI Phoenix Chapter Member Dan Mercer, and our November 10th Fall Real Estate Seminar Keynote Speaker, Dr. Janet L. Yellen (President and CEO of the Federal Reserve Bank of San Francisco) on National Public Radio Listen to the broadcast >>
We invite new members interested in contributing their expertise and experience to our ongoing discourse and activities. Membership is by invitation only. The criteria for membership specify that nominees have:

• achieved professional distinction, with a minimum of ten years of work experience;
• made an outstanding contribution to the advancement of land economics; and  
• distinguished themselves in the community through public service.

If you would to nominate a colleague for consideration, complete the online nomination form now.  Online Nomination Form  Nominations are open through October 1, 2009.  This year our Holiday Party and Induction Ceremony will be held December 16, 2009 from 6pm to 8pm.  Location TBA

Sheila Hamilton, Scribe

San Diego Chapter:

SAN DIEGO HOUSING COMMISSION PURSUING 1,000 NEW AFFORDABLE UNITS

LAI Member Larry Clemens is leading an innovative effort at the San Diego Housing Commission (SDHC) to acquire or produce as many as 1,000 new affordable housing units over the next three years.  Serving as SDHC’s Senior Vice President, Housing Development & Finance, Larry brings 33 years of private sector residential development expertise, including leadership roles with the urban divisions of Barratt American, Inc. and Lennar.

On September 11, 2009, the SDHC Board approved an acquisition and development strategy for new affordable housing.  The strategy is based on three coincidental factors:

• SDHC can collateralize existing assets.  In 2007, SDHC acquired 1,366 units of public housing from the Housing Authority of the City of San Diego under an agreement with the U.S. Department of Housing and Urban Development (HUD).  In exchange, the HUD agreement obligates SDHC to create a minimum of 350 new affordable housing units.  SDHC proposes to leverage the 1,366-unit multi-family housing portfolio and use the loan proceeds to acquire or develop new units.

• The Federal stimulus program reduces the cost of borrowing.  SDHC’s financial advisor, NorthMarq Realty Services, Inc., has underwritten the majority of SDHC’s existing portfolio using either Fannie Mae conventional financing or FHA 221(d)(4) or 223(f) programs in combination with “Build America Bonds” (“BABs”) available under the 2009 American Recovery and Reinvestment Act (ARRA) stimulus program.  The BABs provide a 35% interest rebate over the term of the loan.  NorthMarq estimates that SDHC can borrow more than $95 million against the existing portfolio, using conservative assumptions.

• New acquisition opportunities are plentiful.  As a result of the current market downturn, SDHC is currently reviewing an extensive menu of potential acquisitions throughout San Diego.  These include partially complete developments, existing market-rate developments, acquisition/rehabilitation opportunities, entitled development sites, and public/private partnerships.

SDHC projects that it can acquire 1,000 new units over the next three years.  As new units are added to the portfolio, SDHC envisions leveraging additional funds to continue future acquisitions.  SDHC will carefully monitor the acquisition program to ensure conservative debt assumptions, adequate reserves, and sufficient funding for the agency’s ongoing programs.

The acquisition and development strategy will be considered by the San Diego City Council (sitting as Housing Authority) on October 6, 2009.  If approved, SDHC expects to commence acquisitions later this year.

Vancouver Chapter:

Graeme Eadie, Senior Vice-President - Real Estate Investments for the Canada Pension Plan (CPP) was the guest speaker at the September 16, LAI, dinner.

Graeme Eadie

The CPP Investment Board is a professional investment management organization that invests the funds not needed by the Canada Pension Plan to pay current benefits on behalf of 17 million Canadian contributors and beneficiaries. In order to build a globally diversified and sustainabile portfolio of CPP assets, the CPP Investment Board invests globally in public market equities, private equities, real estate, inflation-linked bonds, infrastructure and fixed income instruments. The CPP Investment Board is governed and managed independently of the Canada Pension Plan and at arm's length from governments. At March 31, 2009, the CPP Fund totalled $105.5 billion. Graeme is responsible for leading the investment team managing the real estate portfolio. The CPPIB real estate portfolio totalled $6.9-billion as of March 31, 2009.

Graeme talked about the fund not needing cash flow which allowed it to take advantage of opportunities others did not pursue. The majority of the projects are here in Canada and the United States, but they are now looking more strongly into the emerging markets in China, India, Turkey and Brazil. These areas are seeing economic growth, industrial growth and a growing middle class which makes them of interest. Only 11% of the real estate portfolio is invested in these emerging markets.

The CPP Investment Board has made its first major foray into South American real when the pension fund announced it would invest US$150-million alongside GIC Real Estate (an arm of the Government of Singapore Investment Corporation) and the São Paulo-based developer Cyrela Commercial Properties S.A. Empreendimentos e Participações to develop, buy and manage office buildings and shopping centers in Brazil. Graeme said "Brazil is the leading economy in South America and represents one of the world's dominant emerging markets. The anticipated growth in the country's middle class will continue to drive demand for commercial real estate across a broad range of sectors." The CPPIB had previously invested in Mexican industrial projects.

He explained that Turkey has become very westernized with office buildings and shopping centers like ours in North America. This makes understanding this market easier. China is very well organized and growing fast and already is very large and diverse set of markets but is also so large that it is sometimes difficult to understand. The UK is an important part of their portfolio where they are investing in already developed projects as new projects can take from 10 to 12 years to get rezoning.

Graeme Eadie ended the evening buy saying. "The current economy and other slowdowns in other markets gives us buying options we wouldn't normally see."

Don Vaughan, Substitute Scribe

Land Economics Foundation (LEF)

LEF Grant Program   

Ron Buss, LEF Vice President

Announcements

Administration Matters!

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Save the Date ! ! !

Chicago, Fall Land Economics Weekend
October 22-25, 2009
Celebrating the Centennial of the Burnham Plan
The Drake Hotel, Chicago, IL
Hotel Reservations Rates:
*$255.00 US + taxes Single/Double
Phone: 1-800-55-Drake
Register Today!
 

Future Land Economics Weekends (Subject to Change)

2010
Spring: Minneapolis, Minnesota Chapter, May 13-15, 2010
Fall: New Mexico, Zia Chapter, October 21-23, 2010

2011
Spring: Scotland, June 1-4, 2011
Fall: TBD

New Members

London
Sharad Gohil, Arpan Real Estate Limited
Catherine Kervennic, Property Market Analysis LLP
Avinder Laroya, Excello Law
Mahanta B. Shrestha, Montys of London Ltd
Keith Steventon, BNP Paribas Real Estate

Zia
Dale Dekker, AIA, AICP, Dekker/Perich/Sabatini
Robert H. Feinberg, Grubb & Ellis New Mexico
Alexis K. Girard, Greer Enterprises, Inc.
Michael A. Halsey, Business Futures Inc.
Arturo (Art) L. Jaramillo, NM General Services Department
Joseph Quintana, Mid Regional Council of Governments
Gregg S. Robinson, Quiet Title Co., LLC
Linda Tigges, Tigges Planning Consultants, Inc.
Patrick Vanderpool, Greater Tucumcari EDC