Rick M. Bean

It is my opinion that Grace Hill Training has many competitors, but no peers. They offer both free and affordable courses on every aspect of profitable multifamily asset management. Bare in mind that every dollar of concession reduced without losing a tenant drops straight to the bottom line as profit. The same is true every dollar of extra revenue generated. Every dollar of reduced maintenance. Anyone who reads this column regularly will know that one of my biggest rants is that we have property managers running $40 million assets that have little or no training. Don't go cheap on training your staff. And if times are tough...at least do all of the free stuff.

For a free asset review call us at 503.577.1034 or email us at rick@rosecitycre.com. We'll review your expense ratios. We will show you how to lower your key expenses, and how to organize your books to facilitate a faster sale. Free is our last and final offer.

Free training for multifamily pros: www.gracehill.com Presented By: Anne Sadovsky, Rebecca Rosario, Russ Sandlin, Charlie Dismore, Donna Hickey & Shirley Robertson

Date: Thursday, May 27, 2010 Time: 4pm ET, 3pm CT, 2pm MT, 1pm PT

Session Description: Keeping hundreds of residents happy in their homes can be extremely challenging. Add difficult co-workers to the mix and stress levels can rise off the charts! Unfortunately, ignoring disagreements won't make them go away. Conflict must be addressed head on, so RSVP now for this month's chat event and let our panelists show you how to maintain emotional control and objectivity while dealing with difficult people.

COST: None, thanks to their sponsor, Spherexx.com.

RSVP: Visit them at www.gracehill.comand look for the details of this event. Click the RSVP link to sign up and receive Chat Event Instructions. Then, login to the Grace Hill website about 10-15 minutes prior to the event and click on the Chat Room link, under the chat description, to be delivered to the Chat Room.

*Please note that space is limited to 350 attendees. Be sure to login to the chat room 10-15 minutes prior to the event.

When investors buy any commercial real estate they are acquiring a revenue stream. Admittedly there are a few signature buildings that are so iconic that they are a "pride of ownership" acquisition, but most properties are valued solely for their future economic potential. There are four primary ways in which investors benefit from their acquisitions:

1. Cash Flow

is the sum of: Cash In - Cash Out. The primary source of inflow cash is rent. Pet rent, late fees, laundry and owner contributions are also part of the cash in stream. Cash Outflows include taxes, expenses and distributions to owners.

Owner types vary widely on the importance they place on distributions:

• Residential Multifamily properties (2 to 4 units) and smaller Commercial Multifamily properties cast off little cash. Their owners tend to focus more on equity gained at the time of disposition.
• Investors of larger properties often use cash flows (distributions) as a primary source of spendable income. They certainly expect gains at sale, but they often will use that gain to step up in basis to acquire a larger asset in the hope of increasing the monthly cash-flow.
• The bane of all investors is the much dreaded Cash Call. When cash out ‹ cash in to the extent that operations are impacted, the property owner(s) are forced to add new equity to keep expenses current. Be aware that cash call inputs wreak havoc on IRR Calcs.
  Because of their focus on maintaining regular, dependable distributions, the owners of larger properties tend to have lower LTV loans. This doesn't eliminate cash calls, but it does make operations inherently more stable, reducing the likelihood of requiring additional cash.

2. Appreciation

is Future Disposition Price - Original Acquisition Price. A 53 unit complex that is purchased for $3.2 million is 2007 appreciates $700,000 if it is sold for $3.9 million several years down the road.

• Appreciation gains can occur from (external) market forces such as a downward trend in Cap rates, or from increases in rent relative to expenses due to high demand.
• Gains can also be "forced" by internal forces. This occurs when we reposition a property. Renters will pay more for upscale amenities and newer looking accommodations. Success requires having the amortized costs of improvements be exceeded by the increased rents. In some cases we merely seek to raise the rents on the existing renters; other times we are using the upgrades to attract a new tenant profile.

3. Loan Paydown

is determined by subtracting the initial loan amount from the remaining loan balance at any given time. Suppose a $3,200,000 property is acquired with a roughly 65% LTV loan at 6% with a 30-year amortization. Day one the beginning loan balance would be $2,000,000. 42 months later (3-1/2 years) the loan balance would be $1,909,649. The loan paydown amounts to $90,351 for that period. Using interest only loans eliminates loan paydown...but does increase cashflow.

4. Tax Shelters and Tax Avoidance Benefits

The final benefit to investors is the tax sheltering of income. Cost Recovery (Depreciation) is the primary example. Industrial and retail properties are depreciated on a 40-year basis; housing is depreciated using 27.5-years. Note: Land is not depreciable. Using our previous example of a $3,200,000 community, let's assume that land was 25% of the value, leaving a depreciable amount of $2,400,000 to be depreciated over 27.5 years, or $87,27.73 per year. That will act as a tax deduction to reduce profits by that amount for tax basis purposes.

A more rapid depreciation methodology is provided by Cost Segmentation, or familiarly, Cost Seg. This is performed based on findings of a cost engineer during their on-site inspection and review of the property. There is great acceptance of this approach by the IRS, but it is not fully understood by investors and many Tax Accountants. Cost Seg. on Assets under $1 Million is not always cost effective due to the fixed costs of the on-site inspection. Savings on multimillion dollar properties are substantial, and can change a 1.1 DSCR property into a 1.25. That means that Cost Seg utilization can impact approval outcomes.

Duties of Professional Investment Brokers

It is incumbent on the Real Estate Professional assisting a client with a multifamilty acquisition to have an understanding of that client's risk profile, investment horizon plus target cash flow and appreciation rates. It is also beneficial to have an awareness of how important their client deems tax shelter options. Given that 1 in 5 1031 Exchanges fail for one reason or another...it makes sense for a broker to offer information regarding Structured Sales before closing on the inital leg of the exchange. This preserves reinvestment options.

To maximize your options, contact Rose City Commercial Real Estate today at 503.577.1034, or rick@rosecitycre.com.

What did private equity investors, including huge institutional players such as pension funds, learn most from the recent collapse in commercial real estate values? They want more of the asset class.
A new study of 90 global private equity real estate investors by London-based researcher Preqin confirms that instead of fleeing to the hills, institutional investors intend to commit more capital to private equity real estate funds in 2010 than they did in 2009. And surprisingly, none of the participants in the survey conducted in the fourth quarter of 2009 has abandoned commercial real estate.
In fact, 41% of investors plan to increase their investment in the sector, while 29% expect to invest less than last year. Another 15% say that they will maintain their allocations, and the remaining 15% are unsure as they await the bottom of the market and recalibrate their strategies accordingly.

Overall, the survey results suggest that "confidence is returning and investors are feeling more optimistic about the asset class," says Forena Akthar, co-author of the Preqin study.

Despite the apparent optimism, investors have not completely thrown caution to the wind when it comes to investing in real estate, whether making direct investments or committing capital to private equity funds. According to the survey, 55% of private equity real estate investors made no new fund commitments in 2009.
That helps explain the huge decline in private equity real estate fundraising activity. According to Preqin, the total capital raised in 2009 equaled just 31% of the levels reached in 2008. In all, 103 funds closed in 2009 with total commitments of $42 billion.

Of those investors who plan to invest in commercial real estate in 2010, only 29% could estimate the number of funds they would invest in, and only 24% had an approximate figure in mind for the amount of capital they would commit.
These figures are much lower than in previous years, when most investors could more clearly predict both the number of funds and the amount of capital they would invest over the next 12 months.
When it comes to the long-term view, however, 75% of investors surveyed remain bullish on the real estate sector. "Despite the gloom, many investors did not lose confidence in the long-term benefits of investing in private equity real estate. They simply were not investing in 2009," says Akthar, the survey's co-author.
According to Preqin, returns from private equity real estate funds topped the S&P 500 Index by 35.8% over the past five years.
One long-time institutional advisor, Ted Leary, head of Los Angeles-based Crosswater Realty Advisors, thinks investors will cautiously re-enter the real estate game. He also notes that investors will be in a stronger position to dictate terms, including a reduction in fees, with their fund managers.
"The real estate investment manager community needs to regain the trust of their investor clients," says Leary. "Some managers will, some managers won't."
When and where?
Nearly six in 10 investors (58%) plan to make their real estate investments in the first half of 2010. The remaining 42% are uncertain about when they will make a move in 2010.
And when they do pull the trigger, U.S. investors will likely stick close to home. That means potentially less capital for emerging property markets like China and India.
Not surprisingly, the vast majority of investors (73%) also are shifting their focus to target the two pillars of the commercial real estate industry - debt and distress.
"While investors are still attracted to value-added and opportunistic funds, a growing number of investors are looking to capitalize on opportunities presented by the dislocated real estate market," says Stuart Taylor, a senior real estate analyst at Preqin.
The largest of these commercial real estate investors - targeting both mortgage notes and properties - include the Abu Dhabi Investment Authority with $62.5 billion in funding. Also in the mix is U.S.-based Allstate Investment Management with $20.7 billion, the California Public Employees' Retirement System with $13.6 billion and TIAA-CREF with $13 billion.

If you're an investor wishing to re-enter the market, contact Rick Bean or Robert Poe at: 503.577.1034

Why you should sign up for the deal room

Simple:

1. Bid on off market deals. You know...the ones where you hear that someone closed on a great deal and you say: "Heck...I'd have bought that if I knew it was available at that price!"
2. The lowest proforma deal IRR currently is 20%. Others are over 50%! (By comparison...many banks are paying under 2% IRR's.
3. Currently deals are being loaded for:
   • Portland, OR
   • Phoenix, AZ
   • Dallas, TX

More cities and more deals are coming soon!

To be notified in advance of off market distressed properties becoming available, contact us to get your free pass to the dealroom!

Rick M. Bean and Robert H. Poe

Rick@rosecitycre.com

503.577.1034

The last couple of years have taken a huge toll on investment properties. With vacancy rates climbing and weakening Cap Rates, some properties have lost 30% or more of their value. Regrettably, property taxes on commercial properties have not been adjusted to reflect this new value. As such, already strapped owners are paying an even higher percentage of the revenues to property taxes.

The rule I have always given my teams is don't present me with a problem...unless you also have a solution. Having identified a problem...here's a great solution: Prime Property Tax Negotiation, LLC. Prime PTN was formed to be an advocate for property owners that have been over-taxed. They will evaluate your taxes at no charge to you and fight for a lower assessment on you part. There are no up-front fees.. Here's the very best part: There's no cost to you unless they are successful.

Contesting assessments that overstate a property's value is an extremely important component of wealth management. I worked on a multifamily project in Phoenix, AZ that had an assessment that inflated the assessed value well over what it was really worth. By contesting the assessed value we reduced taxes and created over $150,000 in additional profits in one year.

How much will you save? To find out call 503.336.6382 and ask for information about Prime Property Tax Negotiation, LLC.