Real Estate Monitor: Fall 2010

This issue of the Real Estate Monitor includes the following articles:

Survey of Northeast Ohio's Construction & Real Estate Industries

We recently conducted our 3rd annual Survey of Northeast Ohio's Construction and Real Estate Industries. Click here for a copy of the survey's findings as compiled by our Real Estate and Construction Group.

If you find these survey results helpful, we'd love to have you input included in next year's survey. We will include an invitation to participate in the next edition of the survey in our Real Estate Monitor and Construction Connections e-newsletters.

We would be very interested in your feedback on this year's survey and your thoughts as to how we may be able to improve future editions of the survey (new questions to add, questions to remove, etc). Please feel free to contact us at 440-449-6800 with any suggestions that you may have or if you would like to further discuss the survey in any way.

Communicating the Value of Development Projects Through Economic Impact Analysis
By Dennis McAndrew, MBA, CPA, Silverlode Consulting Corp.

In today's economic environment, economic impact, and specifically, job creation has become a primary measure for development projects. This is especially true when economic incentives and other public funding sources may be involved. Stakeholders such as government officials and the general public want to know what their investment in a project will return. In fact, numerous federal stimulus programs and other non-stimulus federal programs such as the New Markets Tax Credit program now require that the economic impact of a project be estimated in applications for assistance and economic impact is a major consideration during the evaluation of applications for these programs.

Economic impact modeling methodologies such as IMPLAN and REMI, two of the most widely used, were developed decades ago to guide significant public policy decisions and found applications primarily among governmental and academic users. Today, their use has expanded widely in the private sector. Utilizing these tools, the impact of projects can be reliably predicted and analyzed in detail.

Click here to learn more about economic impact analysis.

The Outlook for Construction and Real Estate
By Roger T. Gingerich, CPA/ABV, CVA

In this column, we'll take a look at some national trends that are taking place in the industry.

Declining home sales. With the end of the Homebuyer's Credit on April 30th, the May numbers for home sales would be the first data not influenced by the $8,000 rebate. As expected, these numbers dropped. Sales of existing single-family units, which are completed transactions that include single-family, townhomes, condominiums and co-ops, were at a seasonally adjusted annual rate of 5.66 million units in May, down 2.2% from an upwardly revised surge of 5.79 million units in April. May closings are 19.2% above the 4.75 million-unit level in May 2009.

Sales of new single-family homes plunged 33% in May to a record-low level, according to the Commerce Department, and May also saw a 10% decline in home starts. Home inventories continue to fall to the lowest level in 39 years.

Click here for more results from our 2010 survey.

Commercial Real Estate: How Will Refinancing Take Place?
By Stuart Eisenberg

Is the consensus correct that commercial real estate (CRE) underwriting became too tight because of the panic-recession, or was it just about right?

Financing all but evaporated, as lenders searched for metrics (underwriting requirements) that limited risks in response to the recession and collapse of CRE values. In recent months, the underwriting environment has improved for properties with quality tenant profiles to levels allowing deals to happen. Loan-to-value (LTV) ratios between 65 and 75 percent are available for various property types and debt-yield requirements have begun to decline .In addition return of CMBS financing has also begun to add liquidity to the market.

Click here to read the rest of this article.

Proposed New Accounting Rules
By Anthony La Malfa

The Financial Accounting Standards Board (FASB), in conjunction with the International Accounting Standards Board (IASB), is proposing a new standard for the accounting for leases that could have a major impact on the way tenants choose to lease space.

The new standard, which is to be issued in April 2011 will require companies to book the present value of all future lease payments as a liability on their balance sheets with a corresponding right-of-use asset to comply with "generally accepted accounting principles" or GAAP.

Click here to read the rest of this article.

Due Diligence: Purchase with Care
By John Tax

With real estate markets under pressure, buyers are looking for bargains and in some cases may be tempted to quickly close a deal before other buyers appear. As a result a buyer may curtail or even forego customary "due diligence" procedures, even to the extent of putting down a non-refundable deposit before a contract is signed. This could prove to be a costly mistake. Not-withstanding unethical behavior by a seller, a property's physical condition and financial picture may turn out to be much different than expected upon close inspection after the title has passed.

Click here to read the rest of this article.

Leases Checking: Property Tax Invoices
By Mitchell Gartenberg and David Tevlin

Most tenants with escalation clauses in their leases, when receiving an invoice for real estate taxes (usually billed annually or semi-annually), simply pay the bill and assume the correct formula has been applied in determining the tenant's pro rata share. Astute bookkeepers may pull a copy of the lease out of the bottom drawer to verify the formula; once having done so, they are likely to assume that all is well and issue a check.

However, often all is not well for a number of reasons. It is possible that the tenant is overpaying, sometimes by large amounts, its share of the tax bill for the building in which the tenant occupies space. Four mistakes frequently found by audits of property tax bills are:

Failure of the landlord to share refunds;
Inclusion of the other property tax bills;
Failure of tax bills to reflect tax abatements; and
Incorrect use of higher tax rate.

Click here for the rest of this article.

Upholding a Letter of Intent
By Alvin Arnold

The Oregon court of appeals ruled that provisions in a letter of intent were enforceable, requiring the seller to pay damages for breach of the letter (Logan v. D.W. Sivers Co., 141 P.3d 589). The case involved the enforceability of a "nonshop" provision contained in a letter of intent to enter into the final purchase and sale agreement for real property. In the nonshop provision, D.W. Sivers Co. promised Lillian Logan not to solicit other orders or contract to sell the property to a third party for a period of sixty days. The property at issue was a shopping center the plaintiff intended to buy as part of a Section 1031 exchange to avoid tax liability from her sale of a different property. However, 21 days after the letter of intent was executed, Sivers entered into a sale agreement with a third party. Logan began this action for breach of contract and a jury awarded her the consequential tax losses she suffered, but not the expectation damages she anticipated. The trial court entered judgment notwithstanding the verdict (JNOV) on the grounds the letter of intent was not an enforceable agreement and that even if it were, the claimed damages were unavailable as a matter of law. The appellate court reversed.

Whether a contract exists is a question of law. Sivers argued there was no enforceable agreement because the parties expressly stated they did not intend to be bound by a purchase and sale agreement. Logan countered by saying the parties did express their intent to be bound by the nonshop provision and provisions to supply and review due diligence documents. This constituted an enforceable agreement to negotiate on those terms and it is that agreement to negotiate that Logan is seeking to enforce. The court said that courts have identified four main types of preliminary agreements.

Cleveland Market Overview
By Andrew Coleman & J.R. Fairman, Jones Lang LaSalle

Deal and tour velocity picked up in the third quarter as employment increased by nearly 41,000 from April through July. Employment growth in the manufacturing and professional and business services sectors helped spur some of the activity as the sectors accounted for approximately 3,000 and 5,000 hires, respectively. Leading indicators for the Cleveland-Elyria-Mentor MSA point towards growth leading into fall, albeit slow.

Despite job growth, new leasing activity should remain relatively stagnant through 2010. Tenant expansions will continue to drive positive absorption as companies opt to reserve capital. Tenants with leases expiring will continue to survey the market, levaraging the aggressive rental rates and concessions being offered by well-capitalized landlords.

Click here for more information on leasing activity, tenants in the market, sales activity and construction activity, courtesy of Jones Lang LaSalle.

Prior issues are available at our E-Newsletter Archive. If you would like to subscribe to this free quarterly e-newsletter, send an email to info@skodaminotti.com.

If you have any questions about any of these articles, post a comment below or please contact our Real Estate & Construction Group at 440-449-6800.

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