Commercial Property Herald

California Courts Take Another Budget Blow - Time for Collaborative Arbitration, Finally?

I know that this post relates to California courts, but it probably is equally applicable to courts in other states throughout the United States. If you live anywhere else other than California, think twice about how lucky you are not to be here.

Governor Brown has just proposed an additional $544,000,000 in budgetary cuts from the California Judiciary and Court System.  These cuts are on top of the cuts to our court budgets that have gone into effect over the last few years. 

We have already seen the effect of the existing budget cuts to our court system.  Long delays when filing documents, sometimes weeks before you can get conformed copies back, where just 5 years ago and as long as I have been practicing law, you could file your documents and get file stamped copies on the spot.  Issuance of Writs and other court orders take weeks, including those for evictions and that is after you have obtained your judgment.  I can remember the days, not to long ago, when I could go to court, get the judge to sign the judgment, walk it to the clerks office along with my writ documents and Sheriff instructions and the clerk would have all of my documents to the Sheriff the same or next day.  Back then, my landlords still complained that the process took to long.

Some courts are so backed up that getting a hearing date some times takes longer than a trial date, making the motion and my arguments moot.  True, this happened to me once, down in San Diego.

Los Angeles County Superior Court will no longer automatically supply a court reporter for a hearing although you can make arrangement to have one on your own dime.  I am not sure how bad this is since I think the state courts should have gone to recorded hearings a long time ago like the federal courts did.  Nevertheless, unprepared lawyers and clients may find themselves unprepared when they need a court reporter.

My concern is that our civil court system is going to take such a hit to its operations that we will have trouble handling civil disputes in a timely fashion and efficient fashion. Ok, so it hasn't been so timely or efficient, but it is sure to get worse.

I know that I have written about this before and I am going to write about it again.  The time has come for Collaborative Arbitration where the evidence, issues, documents and arguments accumulate online for all parties to access and the dispute is resolved before an arbitrator. The other unique feature of Collaborative Arbitration is that not only do the parties exchange information in an online database shared by the parties and the arbitrator, but the arbitrator gets access to all of the information, issues and evidence from the get-go and can be in constant communication with the parties rather than only dealing with everything at the time of the hearing.  This will tend to get the parties to resolve the dispute much sooner.

Troubled CRE Assets Take Down Another Six Banks - CoStar Group

I read this article, Troubled CRE Assets Take Down Another Six Banks - CoStar Group, from CoStar, feeling a bit like Michael Corlioni from the Godfather.  "Just when you think that you got out of it, they keep dragging you back" or words to that affect.  I haven't heard much about bank failures lately only to hear that 6 more banks were taken down by the FDIC in the past two weeks. Analysts suggest that many of the failures are due to the CMBS and commercial mortgage issues. I guess bank failures are alive and doing well, back in the US.

Earlier in the week, Costar also reported that there has been a significant increase in CMBS defaults in the office sector.   There can be no doubt that my law practice, which currently focuses on post-foreclosure representation of lenders and buyers has seen a significant uptick in office properties as compared to the last 3 years in retail.  I will add that I have also seen a significant increase in new lease work and not just tenant collections.

The good news is that the pace of bank failures has gone down to an average of 5.5 per month over the first 4 months of 1012 as compared to an average of 7.7 in 2011 as reported by CoStar.

The bad news is that some analysts believe that some of the reduction in failures is attributable to giving banks more time to get the financial house in order rather than pulling the plug as fast as they did in 2010.

So what does this say about the state of commercial property and the economy.  Well, what I see is continuing economic pressure in both directions leading me to believe that we are close to the bottom, with slight blips in both directions but no real clue in which direction will be sustained.  Bottom line for me is that I really don't see a sustained major dip but a slow gradual improvement with some slight hiccups along the way.

Luxury Theater was a Good Idea, I Think

Remember about a month ago, I wrote a blog post entitled, "Replacing Closed Theaters," in which I discussed my ideas on replacing closed down, older multi-screen movie theaters, using as an examptle the recently closed Edwards/Regal Theater in the small bedroom community of Rancho Santa Margarita.  My only, I thought, good idea was to put one of those new luxury theaters into the former space.  They are different enough from the "standard" multi-cinema experiences and probably enough so to justify the smaller population and higher prices, I opined. The truth is that, being in the theater, I really liked the idea of a live theater, but it didn't make a lot of sense to me.

Well it looks like someone actually read my post and took my advice.  Okay, it was probably that someone else had the same idea but didn't get it from me.  The Orange County Register has reported this Sunday that Cinepolis Luxury Cinema will be filing the space in Rancho Santa Margarita.  I think it is a great idea and I am looking forward to seeing movies there.  It should also serve as a boon for the local shops and restaurants. 

Now for more of the unusual ideas.  Since it is going to be located opposite the city hall and pretty much in the heart of the city/community, maybe they should reserve one theater as a movie/live theater that can host live theatrical events.  I suspect that a state of the art removable screen could be designed and removed, (perhaps raised), for a full stage that can accommodate sets.  A live theater would give the city some additional identity.

 

Industrial Property Improvement Portend Better Times for #CRE?

For over 4 years, I have been looking for a sign of better economic times.  I have seen little blips and blurps at times but nothing really solid leading me to believe that there was light at the end of the tunnel,..........until now.

I don't want to get too carried away with this and truthfully, I have been seeing improvements and solidification in the industrial an warehousing market but the emprovement in 2011 is significant.  

The LA Times reports that Industrial property leases jumped nationally in 2011. I think a good part of the improvement is in the pricing.  But in this case, I believe that it truly is a philosophy of "lease it and they will come."  I suspect that this trend portends more employment.  Mind you that I do not see a sky rocket of good times but I do see signs of some improvement here.

How Will Brick & Mortar Retail Survive Online Sales - Part One

This is the first in a series of posts about “online” vs. “brick & mortar” retail sales and what I consider the factors affecting both.  It is my intention by this series of articles to facilitate thought, discussion and analysis in the hope of proposing helpful strategies to allow a healthy co-existence between the two methods of retail sales.  As General Martin Dempsey said today on Face The Nation, brick & mortar is at a “strategic deflection point,” in which it needs to learn and adapt. The bottom line is that I do not see online sales going away anytime soon and if you deal in the brick & mortar, you better think out your strategy.

During the last week of December, I read an article declaring that 13% of all online sales on Christmas day was for the purchase of an iPhone, iPad or iPod.  Steve Jobs is likely smiling away in his grave. A few days later I read another article about how much online holiday sales have increased, (I don’t recall the number but it was in the billions).  These two facts have been festering in my mind for the last two weeks. What is the current economic realities of brick & mortar retail and how will brick & mortar survive the internet.

Not to overstate the obvious, there is a strong trend towards online purchasing and away from brick & mortar. I don’t think anyone sees this trend abating anytime soon. I’ve noticed this trend in my own buying habits and the buying habits of those around me.  This year I have made online purchases of clothing; the type of purchases I would have never done, previously. 

For example, this year I stocked up on two new business suits, a few casual slacks and shirts and a few new pair of shoes, all of which were purchased online.  To be fair, I didn’t even consider the suits until after I had seen them in a brick & mortar store and I first saw the shoes in a print catalogue. I’ll let you in on a well known secret; I have a thing for men’s saddle and spectator shoes.  A style not widely popular and a style that has been pretty difficult to get unless you wanted to play golf in them and were willing to walk around your home and office with spikes on. So I was pretty interested in getting a few new pair.

Sometime in September, I received a print catalogue, showing saddle shoes, manufactured by Cole Hahn, in larger sizes.  While I liked what I saw, I was reluctant to purchase shoes online, sight unseen. Later, in October, my wife and I stopped by a Cole Hahn, brick & mortar, store in a mall in Phoenix.  To the delight of my wife, there on display were the saddle shoes. At the urging of my wife, I tried several pair on. Although I would have liked to wear the shoes out of the store, the store did not have my size in stock and I had to order them, to b delivered to my home.  The shoes arrived a week or so later. At the time that I ordered the shoes in the store, they seemed a bit narrow. However, since Cole Hahn made it brain dead easy to return, I felt comfortable ordering them.

After the shoes arrived, it was very clear that they were too narrow so I returned them and received a full credit. Although disappointed, I remembered that the same shoes were being offered by a major big man, brick & mortar retailer with a large, (no pun intended) online marketing presence. There, on their website, were the same shoes but in wider sizes. Not only that, some of the shoes were being heavily discounted. Without further ado, sitting at my desk, I ordered a few pair.  Within a week, I had shoes that fit and it cost me less money. I saved money by having the shoes shipped to their local store. 

Offering free shipping to their brick & mortar store was a brilliant piece of marketing on their part.  The store wasn’t that far away so it was easy for me to pick up my shoes and when I was in the store, I bought three shirts, two pair of slacks and tried on two, three piece suits.

A few weeks later, I received an email newsletter indicating that the suits were being offered at a 30% discount, if purchased online by the end of November. Since I liked the suits and knew what size to order, I purchased them online, saved 30% and had them shipped to the store again, saving the shipping charge.  You know where I am going with this. When I went to the store to pick up my suits, I also bought two more dress shirts and two ties, spending more money.  What a surprise.  Brilliant, sheer brilliance.  There is no doubt in my mind that somebody with brains really thought through their strategy, coordinating their online and brick & mortar marketing. I love it when people use their head.

So what is the point of my “shoe & suit” story?

Trust.  I am gaining a greater trust of online purchasing; and

Thoughtful marketing and the effective coordination of online stores with their corresponding brick & mortar stores.  How to have both work in tandem and help each other out rather than cannibalizing the sales of the other.

More on these topics and the effect of online taxation on brick & mortar sales in later posts.  You can leave comments in to this post on Commercial Property Herald below or comment on twitter @creradio.

 

Do Real Estate Brokers Owe a Minimum Wage to Their Agents

At least one court and now the California Labor Commissioner thinks that agents are owed a minimum wage despite the traditional practice of paying agents as outside sales people on a commission only basis.

California's Labor commissioner recently has filed a lawsuit seeing back wages, unpaid overtime and damages and penalties exceeding $17,000,000 against ZipRealty.  The suit seeks enforcement of California's minimum wage law. ZipRealty has denied the minimum wage claims arguing that minimum wages and overtime were not owed, due to the fact that the people involved were not employees, but outside salespeople.

To be fair, I don't know enough of the facts to give a clear analysis of, not only what has been alleged, but what the key legal issues are.  However, at first glance from the news articles, the actions taken by the labor commissioner and a recent September court ruling in a Kern County Superior Court has the potential of putting the entire real estate industry on its ear.

Before all you brokers out there start running in a panic though, you should double check with you own legal counsel in your own state to make sure that your payment practices are in accordance with your own state law and you are not trying to cut corners with your agents. Remember, laws do vary from state to state.  Additionally, upon further review, I may discover that the allegations of the insurance commissioner are limited to the particular facts and acts of ZipRealty and not a wholesale attempt to change a common payment practice within our industry.

At this point, this is a story that seems worth following and which I will be reporting on in coming weeks and months.

CMBS Delinquencies Decrease for Third Month in Past Four. Does paying attention to the monthly changes make any sense?

DS News reports that after rising in July, the CMBS delinquencies have again started dropping in July.

That can't be bad news, but is it good news?

Does it make any sense to pay attention to the month-to-month changes to anything if you are looking for trends?  I say no.  Just as I say no to a day or two days of ups or downs on the stock market although, admittedly, monthly trends in in the CMBS delinquency rate is more indicative of where the economy is goiong than the stock market.

This news does not encourage me because I know that there are a lot more defaults coming our way over the next two years.  But defaults alone are not determinative of the health of the commercial real estate market.  What I want to see is a steady and growing decrease in delinquency rates over at least 6 months for me to see an encouraging trend.

Changes to Prop 13 - help or hinderance to commercial properties?

Bloomberg reports that Los Angeles Mayor, Antonio Villaraigosa has recommended revisions to California's Proposition 13 to increase property taxes on commercial properties.

I could write all day in response to this article and will probably post several posts over the next week. However, the first questions that came to my mind after hearing about the honorable mayor's suggestion was:

• Wouldn't this greatly increase costs of everything in California? and
• At this time, how many properties and tenant's are really going to be affected by a change like this?

But first, a little primer on Proposition 13 or also affectionately known as Prop 13, which I understand, similar laws have been passed in other states:

Prop 13 limits tax reassessments on any property in the state of California except when the property is transfered or a 2% annual increase when there is no transfer .  There are some exclusions.  For the most part, Prop 13 applies to both residential and commercial property.

My knee jerk conclusions are as follows, (knee jerk because I think that this really requires a lot more analysis):

1. It will increase spending and employment by counties due to the immediate need for qualified appraisers.  Of course there will be further increased costs due to a flood of appeals and problems with the appraisals because there will likely be a great shortage of qualified appraisers so the reassessments will probably be done in a hurry and by unqualified appraisers and "just because";

1. A significant increase in compensation for qualified appraisers, who will be hired by the smart and deep pocket commercial property owners, which higher paid appraisers will beet up on the lesser qualified, lower paid public employee appraisers, (this is meant as no disrespect to public employees, but the economics of the situation and shortage of qualified people will likely cause this disparity, at least on a temporary basis);
2. There will also be an increase in business for some tax lawyers and accountants;
3. Taxes will increase dramatically for commercial property owners, whose leases probably require, to a great extent, for the tax increase to be passed on to the tenant, who may be forced to go out of business, but first try to pass on the tax increase to their  customers and clients.

But then I asked, will the change suggested by Mayor Villaraigosa really have the immediate devastating effect on Californians, that I first thought?  Well, maybe no.

Commercial property values have dropped significantly over the past 2 years and during that time, many commercial landlords, who had purchased their properties at the higher assessed values should have been seeking lower assessments more in line with current market conditions.  This should be true, particularly for those landlords who pass on their tax liabillity to their tenants. So, for the shorter term landlords, a reassesment, probably will have little or no effect nor will there be an effect on their tenants.  The greatest effect will be on those landlords who have held onto their property, long term, and currently hold their property at lower assessed values, for tax purposes.  My guess is that these will be the smaller owners.

What Congress can learn from real estate professionals

Last Wednesday we aired our radio show on the topic of CAM Charges & Building Operating Expenses.  It was an "open forum" born from a discussion topic that I started on LinkedIn.  The "open forum" concept for the radio show was a new format that I wanted to try out and in essence was and open invitation to anyone who wanted to participate in the conversation.  We had 7 highly knowledgeable, intelligent and articulate featured guests and a number of equally intelligent listeners called in to participate.

The point of this post is not to discuss the substance of the radio discussion and CAM charges, but to focus on the interaction between everyone who participated in the show, despite some clear and vigorous disagreement.

So far, every comment about the show from guests and listeners focused on how great the open forum format was, in great part as a result of the courtesy, maturity and intelligence of all who participated in the discussion.  Some vociferously disagreed with statements made by others, but there was no apparent animosity and very little if any "stepping on toes," or shouting over others.  As a matter of fact, at times during the show, when two people started talking at the same time, they both stopped and there was a moment of silence while each stopped talking to allow the other to speak.  Imagine that?  Imagine that kind of courtesy in Congress.

I might add that every comment included the word, "fun".  How much fun is it to participate in a conversation with other people who are every bit as smart and experienced as you, if not more and can disagree without attacking each other personally.  I dare say that each one of us walked away from  the show a little bit smarter and knowledgeable than when we started the show.

So what does all of this have to do with congress?  Well, from my perspective, Congress and the electorate would benefit from respectfull and intelligent discourse on very complicated social and economic issues without visciouis attacks on others and without blamming each other for everything that has gone wrong in our lifetime.  It seems that our energy would be much better spent trying to solve problems with a healthy repect for the opinions, attitudes and paradigms of others even though they might disagree.  I think that you would better understand what I am saying if you listened to the radio show.  Click the above link or go to www.creradio.com.

Tics another seemingly good idea gone south

Jonathan Lanser & Jeff Collins report in the Orange County Register that Daymark Realty Advisors, a subsidiary of Grubb & Ellis, has been sold to a joint venture controlled by Sovereign Capital Management Group of San Diego and New York-based Infinity Urban Century, an investment affiliate of The Infinity Group.

I can remember getting a call from Aaron Weiner sometime between 2001 and 2005 asking me if I knew much about Tics, Tenant-in-Common investmenets,  Although I obviously knew what a tenant-in-common was, I didn't know much of the term as it was used as an investment vehicle rather than simply a way of holding title to property.

I immediatly began doing some research on the matter and discovered what seemed to be an incredibly smart way to get smaller investors into real estate and serve as an incredibly useful vehicle to develop business for real estate developers and brokers.  Instead of selling real estate, you sell shares.  Sounded like a security to me so I stayed out of it. Thank goodness I did.

I have this conservative, fatallist attitude that is, if I have heard of it, it is already to late to invest in it.  So it turns out that TICs turned out to be a bad idea, whcih flaws were not exposed until the real estate market starting going bad, catching a lot of small, mom & pop investors in the crash and ruining their retirement.  I don't think that, for the most part, there was anything malicious or conniving about it, just a good idea that didn't turn out as well as everyone hoped.

So what is the next big investment vehicle on the horizon?