A Broker's Blog

Owensboro – 11th Best City to Open New Restaurant

Bo Barron, CCIM — Mon, 06 Apr 2009 15:30:58 +0000

Location Matters: Top 25 Cities To Open New Restaurants

April 2nd, 2009 Posted in Consumer, Nielsen News

While big cities are often thought to be the best locations for new restaurants, budding restaurateurs would be well-served to focus elsewhere, namely, college towns and vacation spots, according to the 2009 Nielsen Claritas Restaurant Growth Index (RGI). The steady population of students, faculty and other employees, and the flow of visitors make these two types of towns optimal for new restaurants.

For the sixth year in a row, the top location is Myrtle Beach, South Carolina, despite its index ranking falling more than 100 points in the last year. Hot on its heels is Fort Walton beach, Florida, where restaurant spending has increased over the last 12 months. Rounding out the top five are Flagstaff, Arizona, Atlantic City, New Jersey and Ocean City New Jersey. Top movers – up and down – were Corpus Christi, Texas, which jumped up 25 points, and Napa, California, which dropped 14 spots.

“Obviously, one must consider a range of factors when determining where to locate a new restaurant. But the RGI can be a valuable tool that provides a data-based way to evaluate and compare different towns and cities. One must look at the ranking and the size of the market and then decide which metro area might be best suited for a particular concept,” said Terry Munoz, Vice President at Nielsen Claritas.

The RGI uses a formula to identify restaurant spending and gaps in spending per capita compared to a national average. The score is calculated on an area’s total restaurant sales and sales as a percent of income, at a per capita level, compared to the nation as a whole.

Top 25 Cities to Open New Restaurants

Rank	City/Town
1	Myrtyle Beach, SC
2	Fort Walton Beach, FL
3	Flagstaff, AZ
4	Atlantic City, NJ
5	Ocean City, NJ
6	Las Vegas, NV
7	Honolulu, HI
8	Panama City, FL
9	Valdosta, GA
10	Lafayette, LA
11	Owensboro, KY
12	Orlando, FL
13	Springfield, IL
14	Hattiesburg, MS
15	Barnstable Town, MA
16	Brunswick, GA
17	Missoula, MT
18	Anchorage, AK
19	Santa Fe, NM
20	Casper, WY
21	Corpus Christi, TX
22	Charleston, SC
23	Great Falls, MT
T-24	Burlington, NC
T-24	Billings, MT
Source: Nielsen Claritas 2009

Opportunity for Doctors in Today’s Commercial Real Estate Environment

Bo Barron, CCIM — Tue, 31 Mar 2009 16:06:03 +0000

In an economy lacking of them, doctors who own their own medical office buildings (MOB’s) have an incredible opportunity. Here’s why…

Every practice has two values – the value of the practice and the value of the real estate. Doctors work extremely hard to care for their patients and maximize the value of their practices but may not focus on maximizing the value of their real estate. The missed opportunity is the real estate is often more valuable than the practice – potentially much more valuable.

Here is a scenario. Dr. Smith has been practicing for 30 years and is ready to retire. He brings in a new doctor to take over his practice negotiating a fair price for the sale of the practice. Unfortunately, Dr. Smith has reduced the potential buyer pool for the real estate to 1 – the new doctor. We estimate that doctors can lose 30-40% of the value of their property in this scenario.

The alternative is a sale/leaseback transaction. A sale/leaseback is just what it sounds like. A doctor will sell his or her property and then lease it back from the new owner. This allows the doctor to maximize the big value – the real estate – without harming the value of the practice.

Now why on earth would a doctor go from owner to tenant? First, instead of selling to a buyer pool of one (the incoming doctor) or worse, trying to sell the property vacant, this turns the MOB into an investment property that produces income backed by a doctor and an established medical practice. This strategy allows the doctor to sell at top dollar while maintaining complete operational control of the property by use of the right kind of lease.

Translated into numbers, the average sales price per square foot (sf)of vacant medical office space in this area is about $70/sf. With a sale/leaseback, the amount the doctor is willing to pay in rent determines the price. Today, the top of the market for medical office leases is $16/sf per year. I know that MOB’s are selling at an 8.25% – 9.0% cap rate (a cap rate is simply the multiple applied to the annual income of an investment property to establish value) nationally depending on the size of the MOB and the length of the lease. So, a 5,000 sf MOB leased at $16/sf annually for five years at a 8.75% cap rate (5,000 x $16 then divided by 8.75%) equals about $915,000 or $182/sf. If the doctor only wants to pay $12/sf in rent annually, the value equates to $137/sf. You can see how the rent determines the value giving the doctor a tremendous amount of flexibility in choosing the value of their office building.

Aside from generating a higher price per square foot, many other reasons exist to perform this type of transaction. First, while a practice can deduct interest on a mortgage if one exists, 100% of a commercial lease can be expensed in the year it occurs. I am not an accountant, but this could have a big impact on the bottom line of many practices. Second, this type of transaction can release equity tied up in the real estate. We have seen doctors use this equity to expand and open additional offices, pay off debt, or take advantage of a tax-deferred exchange (this is an intriguing option to expense the full amount of the new lease while still taking advantage of depreciation in the new property). Third, a sale/leaseback removes a huge barrier in recruiting new doctors. No longer do incoming doctors have to incur large amounts of debt to join a practice. They can simply share in paying their portion of the rent.

So the question remains – why sell now? Are we not in a depressed market for investment grade real estate? While it is true that real estate values have fallen sharply since last October, MOB sale/leasebacks are the shining stars in an otherwise bleak real estate environment. We are seeing an incredible “flight to quality” in the investment real estate market. This makes sense when we consider that medical practices are thought to be recession proof. Regardless of economic conditions, people need medical care to get healthy or remain healthy. Furthermore, think about the last time your doctor moved locations. My sons go to a pediatrician in the same medical complex as I did 30 years ago. Investors crave stability in a market devoid of it, and they are willing to pay for it.

With interest rates still at all-time lows, opportunity for doctors to take advantage of this environment to maximize the values of both their real estate and their practices has never been better.

Getting Your Commercial Property Financed

Bo Barron, CCIM — Mon, 16 Feb 2009 01:02:13 +0000

GETTING YOUR PROPERTY FINANCED

Getting Your Property Financed Being Capital Markets Savvy in a Down Economy by Bo Barron, Advisor Sperry Van Ness

I rarely have a conversation these days where the topic of financing doesn’t arise as a serious concern for my clients. When the economy is robust, and the capital markets are frothy, financing a commercial real estate transaction is a relatively simple matter. However during today’s recessionary times, the commercial capital markets are severely constrained. Not only is the supply of capital tight, but the demand may be near all time highs as well. Depending on which industry source you quote there is between $150 and $200 billion dollars of CMBS debt maturing in 2009 alone. This figure doesn’t include maturing loans from insurance companies, banks and other lenders, which means that many borrowers will be forced to secure financing in a market that presently offers little liquidity. Given the current lack of liquidity and financing options described above, only the savviest of sponsors with solid projects will be receiving attention from lenders and investors. In the text that follows I’ll provide you with an overview of the information you need to possess in order to speak fluent finance and to increase the odds of getting your project financed. The first thing to keep in mind is that financing serves multiple purposes beyond rate and term considerations. The proper financing strategy can allow you to increase project velocity, improve operating efficiency, conserve internal capital, increase leverage, and lower the overall cost of capital. Good sponsors focus on developing an integrated capital formation strategy surrounding acquisition, development, construction, refinancing and recapitalization initiatives. The following items are just a few of the things commercial borrowers need to address when seeking capital:

• The selection of the appropriate capital provider;

• Level(s) of the capital structure to be addressed;

• Operating considerations;

• Control provisions;

• Rate, term, pricing and structure;

• Closing time frame;

• Third party requirements;

• Certainty of execution;

• Recourse provisions;

• Exit and pre-payment options;

• Inter-creditor or other multi-party agreements;

• Post closing servicing issues;

• The effect of the capital acquired on tax, balance sheet, future projects or portfolio considerations, and;

• A whole host of other value-added considerations.

Possessing knowledge and understanding of the commercial capital markets is a critical factor in not only determining the eventual success of a single transaction, but also an entire portfolio or operating business. The first thing that borrowers must understand is that all capital providers are not created equal. There is a definite hierarchy within the world of capital providers, and understanding the value-ads offered by different capital providers is important in choosing a relationship. Understanding how to use different types of capital providers for different types of solutions/needs will be important to structuring the proper outcome. Approaching a lender for high leverage loan in today’s market without having your ducks in a row will prove to be next to impossible. With debt service coverage ratios (DCR) nearing or even eclipsing 1.3 for many asset classes, advance rates on senior debt have certainly constricted requiring more mezz and equity investments for most sponsors to put a deal together. Making matters even more complicated is that there is no longer a clear division between debt and equity in the commercial capital markets. Given the ever increasing complexity of financially engineered structured finance solutions, it is essential for borrowers to develop a detailed understanding of the capital markets, and the structured finance options available to them. With the conservative advance noted above, it is critically important that you understand how to fill the increasing equity gap with the most affordable and effective capital markets solutions available. The optimized use of structured finance solutions is one of the few arenas that allow commercial real estate owners to dramatically impact leverage, efficiencies and economies of scale across all business lines including acquisitions, financing ventures and operating activities. Structured finance is best defined as financially engineering the proper blend of debt, equity, synthetic, derivative, and hybrid capital in order to resolve particular transactional needs that cannot readily be met by conventional senior financing alone. Structured financing allows for an engineered design and pricing of situation-specific financing instruments. Representative examples of typical situations that call for structured finance solutions include the following:

• Working around balance sheet or capital constraints;

• Shifting a higher percentage of the capital structure up or down in the leverage curve based upon current needs or market conditions;

• Attaining greater amounts of leverage at a lower blended cost of capital;

• Adding value and increased leverage to buyouts, yield-plays, recapitalizations, repositionings, and stress-induced financial restructuring;

• Shifting risk and better managing control at both the project and entity levels;

• Releasing trapped equity in single assets or portfolios;

• Conversion of illiquid assets into tradable securities;

While many would choose to define structured finance in narrow terms, it is rather the limitless ability to engineer hybrid, synthetic or derivative instruments. This level of flexibility makes the engineered solution provided by structured finance so valuable. While current capital markets conditions have restricted the use and/or availability of some products, typical structured finance instruments include the following:

• Senior and Junior Mezzanine Debt;

• Straight, Convertible and Participating Second Mortgages;

• Preferred Equity Structures;

• Bond Placements, Tax Credits and other Municipal Finance Alternatives;

• Index or Currency Linked Strips;

• Swaps, Options, Caps, Collars, Swaptions, Captions, etc;

• Credit Enhancement, Financial Guaranties, Standby Commitments;

Understanding how to maximize all levels of the capital structure through the use of structured finance techniques when developing the capital formation plan on your next transaction will help you create a much more effective and efficient execution. The following items are just a few of the benefits of understanding how to engineer the right capital structure:

1. Use all levels of the capital structure to move up the leverage curve: By using the proper combination of senior debt, subordinated debt and third party equity, even in this market it is still possible to aggressively climb the leverage curve and still maintain control of the project.

2. Use different levels of the capital structure to prevent project ownership dilution: By using subordinated debt (seller financing or mezzanine financing) to fill as much of the equity gap as possible you will lower your overall cost of capital while not being forced to give up as much ownership in the project as you would by closing the entire equity gap with a joint venture equity partner.

3. Work the Lenders: In today’s market, lenders will often negotiate with borrowers where there is a benefit for doing so. It is quite possible to get a lender to write down or restructure the current financing on a property or portfolio to keep from taking back non-performing assets.

4. Negotiating the proper type of equity joint venture can be critical to the financial success of a project: If you move up the leverage curve with the proper combination of senior and subordinate debt the amount of equity needed from outside investors is minimized. Using the right preferred equity investment structure can leverage the sponsor co-invest to a smaller percentage of the project equity requirement while still leaving the sponsor with the majority of project ownership.

5. Individual Investors vs. Institutional Investors: Decide early where you choose to seek your capital partners and investors and be willing to live with your decision. With rare exception if a sponsor can meet institutional suitability tests they will be better served by accessing commercial capital markets rather than dealing with individual investors. Institutional investors have more knowledge and flexibility when structuring transactions giving owners more operating flexibility. Institutional investors have deep pockets and can provide the appropriate level of financing to allow sponsors to engage on multiple projects at one time thereby creating the ability to grow their business with greater velocity when contrasted to the leverage provided by individual investors. Additionally most institutional investors prefer passive investments and will only exercise dilution or control provisions in the rarest of circumstances. Lastly, institutional investors often times can provide tremendous non-financial value adds in the form of knowledge base, intellectual capital, market contacts and the like.

6. Resist the temptation to do “one-off” project level financings: Disparate financings at the project level can at a minimum restrict a borrowers future ability to cost effectively monetize on value creation by subjecting the property to pre-payment issues in the case of refinancing or disposition prior to the expiration of lock-out periods. Worse than trapping equity at the project level may be the fact that one-off financings restrict the ability to pool the asset with the balance of the portfolio creating a lack of optimized leverage and timely access to credit which in turn can create capital constraints by slowing acquisitions activities or operating initiatives. Lastly, large portfolios or even smaller sub-portfolios created by a multitude of one-off financings can create a management nightmare. This is due to constantly maturing debt rollover which will subject individual assets to credit, interest rate and market risk. This type of risk is not present when financing at the portfolio level due to the ability to trade in and out of collateralized pools where pricing, sizing and structural aspects are known constants.

The year ahead will definitely be challenging with regard to capital markets issues. Understanding how to access and maneuver within the commercial capital markets, and effectively leveraging the many benefits of understanding how to work the capital stack to your advantage may be the defining difference in optimizing the scalability and efficiency of your commercial real estate venture.

Downtown Redevelopment

Bo Barron, CCIM — Fri, 09 Jan 2009 15:27:26 +0000

At this morning’s Rooster Booster breakfast, the Judge-Executive and the new Mayor gave their states of the City/County addresses. As they pledged their support for unity of purpose between the two governments – not to be confused with the unification of governments – they both pledged their support on moving forward with the downtown redevelopment plan as proposed by the Gateway Planning Group.

Pricetag: $80 million in public funds

So how does Owensboro/Daviess County come up with this money? Good Question. Mayor Payne is proposing that the city double the Insurance Tax from 4% to 8%. He says this is the most equitable way to spread the cost to all citizens of Owensboro. Are there other means to raise this money? Has their been much public discussion? I’m not sure. I’m also not sure that this insurance tax isn’t the best way. However, there is a way that the City and County governments could raise some of the capital needed for these projects without raising taxes.

Stay tuned for how…

Opportunistic Retail

Bo Barron, CCIM — Tue, 06 Jan 2009 17:54:17 +0000

By Bo Barron

“Opportunistic Retail” – Sophisticated investors refuse to be fooled by the news and the naysayers. As we move into a new economic cycle and a flight to safety mentality drives asset class rotation, opportunistic retail investments abound. In today’s post I’ll share my thoughts on why opportunistic retail is where the smart money is being invested…

You’re probably wondering “Bo, what are you thinking…Opportunistic Retail?” Nary a day goes by when we don’t hear about poor retail earnings, store closures, and bankruptcy filings associated with name brand retail chains. The largest retail REIT in the market General Growth Properties (GGP) has been arm-wrestling with lenders negotiating loan extensions to remain solvent, so why am I recommending retail investments? If you’ve read my recent white paper you’ll know that I believe that adversity creates opportunity, and nowhere is this more true than in the retail asset class.

Savvy investors are now beginning to feed off the gluttony of investors who bought into the retail space at the top of the market by paying unprecedented premiums on buy-side cap rates. Think about all the properties ripe for repositioning and big NOI lifts that were completely unattainable for the average investor only a matter of months ago. Bottom line…If you’re interested in buying into the market as it turns upward now is the time to act.