Hans Hansson | January 9, 2012
As we enter 2012 we already have a number of doomsayers that are predicting a poor 2012. Economic uncertainty throughout Europe, the slowdown of economies in China and India and an election year in the United States with a split Congress unable to pass any real legislation to create jobs are all legitimate concerns. As salespeople we are always optimistic – we are the rallying force for the economy. We succeed if we sell. Great salespeople don't focus on the negative; only the positive and I believe that there are many positive things that could make 2012 a very good year.
Our economic downturn officially started in September of 2007. Although we supposedly ended our recession in 2009, the realty is that most of us feel the recession has never ended. Historically, long recessions such as this end because consumers pay us out of these downtowns; this has not happened because most Americans are simply tapped out and do not have the cash or the credit to buy. In 2012 things will begin to change and salespeople will be leading the change.
Consumers are going to be forced to buy which will lead to natural economic growth. Essentials have to be replaced – one can only drive on bald tires for so long, a stove and refrigerator are necessary household items and clothes wear out. Four years of waiting to purchase essentials is too long and consumers en masse will be forced to find money to buy necessary items. This increase in expenditure will start in 2012 and will lead to job growth and economic gain. The same principle applies to businesses. Old furniture will have to be replaced, servers, phone systems and updated wiring will be required even though businesses do not have the cash reserves to do so, they will have no choice.
What is interesting about this prediction is that it is not based on anything new nor is it profound; it is based upon history that is staring us in the face. Yet economists and doomsayers are not talking about it, politicians are not talking about it; no one seems to grasp its importance. More importantly, as we start a new year we need to understand and appreciate how this prediction can be viewed as a bright spot in this gloomy beginning of a new year.
Our economic downturn officially started in September of 2007. Although we supposedly ended our recession in 2009, the realty is that most of us feel the recession has never ended. Historically, long recessions such as this end because consumers pay us out of these downtowns; this has not happened because most Americans are simply tapped out and do not have the cash or the credit to buy. In 2012 things will begin to change and salespeople will be leading the change.
Consumers are going to be forced to buy which will lead to natural economic growth. Essentials have to be replaced – one can only drive on bald tires for so long, a stove and refrigerator are necessary household items and clothes wear out. Four years of waiting to purchase essentials is too long and consumers en masse will be forced to find money to buy necessary items. This increase in expenditure will start in 2012 and will lead to job growth and economic gain. The same principle applies to businesses. Old furniture will have to be replaced, servers, phone systems and updated wiring will be required even though businesses do not have the cash reserves to do so, they will have no choice.
What is interesting about this prediction is that it is not based on anything new nor is it profound; it is based upon history that is staring us in the face. Yet economists and doomsayers are not talking about it, politicians are not talking about it; no one seems to grasp its importance. More importantly, as we start a new year we need to understand and appreciate how this prediction can be viewed as a bright spot in this gloomy beginning of a new year.
Hans Hansson | January 5, 2012
Garcia Architects & Advisors assists companies assess their commercial real estate portfolios to determine how to gain efficiencies. Companies with a lot of office space usually also have a lot of wasted space which they may not be aware of. This presents an opportunity to reduce real estate costs. Once the extra space is identified, it can be determined if it can be subleased, or if a "restack" of one or more buildings allows for giving back some space that is up for lease renewal in the near future.
The most simple type of consolidation is when a single location is partially empty or underutilized due to employee or technology contraction. These days, many employees are mobile and not everyone needs a designated office or large workstation anymore. "Hotelling" offices or smaller workstations have become common. A layout can be reconfigured in order to create space that can be subleased. Not only is this an opportunity to design a more efficient layout that responds to the company's current needs thus increasing productivity, it's an opportunity to bring in additional revenue.
Of course, there are some upfront expenses to creating a separate sublease space. A demising wall must be constructed, the electrical and mechanical systems must be separated, and the required exits must be added. A permit must be obtained. Even for the smallest of projects, the minimum cost to accomplish this is about $10,000. Keep in mind that these costs can be depreciated. Spending the money to create a separate suite is a risk. A subtenant may not be found for many months after construction is complete. Why not wait until a subtenant is found before the costs are incurred? This is possible, however, many tenants, especially subtenants, are looking for space that is immediately available and the timeframe to permit and demise the space can take anywhere from one to three months depending on the city.
It is also possible to sublease space without creating a separate suite if security is not an issue and tenants are willing to work within the same suite. However, this drastically reduces the possible rental rate and the number of prospective tenants. It's important to check your lease to determine if a subtenant is allowed, and what the limitations are.
A more complex scenario is a company that occupies multiple locations or a very large building. Instead of assessing each location separately, it's important to look at the system as a whole. If 15 out of 50 locations each have a little bit of wasted space, groups can be rearranged and consolidated to create one or two large sublease or give-back opportunities. But it's important to understand how each group works, what their needs are, and who and what they should be adjacent to. Productivity must be evaluated along with real estate opportunities.
There are many factors that affect productivity. The time it takes for groups to travel between collaborating groups' locations should be calculated to determine if any additional time spent travelling will cost more than what is being saved in real estate. Some employees might leave the company if their office is moved and their commute increases. Moreoever, some clients may be lost due to an office relocation. Often, having a "vanity address" is important for a company's brand. Also, it is common for a company to own some of their locations, and lease other locations, and this becomes a factor in deciding which spaces or buildings to dispose of. It's typically desirable to give back the leased space and consolidate into the owned properties. However, we have also helped some companies free up their owned properties that were in high-rent neighbhorhoods in order to lease out the owned properties and maximize revenues.
The larger the portfolio, the more complex and time consuming the assessment is. The assessment phase of a one million square foot restack we managed for Bank of America took about 6 months. Department heads must be interviewed to not only determine their known needs, but to fully understand their work process and determine possible improvements they may not have considered. It's our job as professionals to vet out the hidden potential. There are always ways to improve a company or individual department's productivity through rearranging space.
Starboard TCN is posting this article on its website and blog with the approval of Garcia Architects.
Garcia Architects specializes in commercial interiors & construction management.
The most simple type of consolidation is when a single location is partially empty or underutilized due to employee or technology contraction. These days, many employees are mobile and not everyone needs a designated office or large workstation anymore. "Hotelling" offices or smaller workstations have become common. A layout can be reconfigured in order to create space that can be subleased. Not only is this an opportunity to design a more efficient layout that responds to the company's current needs thus increasing productivity, it's an opportunity to bring in additional revenue.
Of course, there are some upfront expenses to creating a separate sublease space. A demising wall must be constructed, the electrical and mechanical systems must be separated, and the required exits must be added. A permit must be obtained. Even for the smallest of projects, the minimum cost to accomplish this is about $10,000. Keep in mind that these costs can be depreciated. Spending the money to create a separate suite is a risk. A subtenant may not be found for many months after construction is complete. Why not wait until a subtenant is found before the costs are incurred? This is possible, however, many tenants, especially subtenants, are looking for space that is immediately available and the timeframe to permit and demise the space can take anywhere from one to three months depending on the city.
It is also possible to sublease space without creating a separate suite if security is not an issue and tenants are willing to work within the same suite. However, this drastically reduces the possible rental rate and the number of prospective tenants. It's important to check your lease to determine if a subtenant is allowed, and what the limitations are.
A more complex scenario is a company that occupies multiple locations or a very large building. Instead of assessing each location separately, it's important to look at the system as a whole. If 15 out of 50 locations each have a little bit of wasted space, groups can be rearranged and consolidated to create one or two large sublease or give-back opportunities. But it's important to understand how each group works, what their needs are, and who and what they should be adjacent to. Productivity must be evaluated along with real estate opportunities.
There are many factors that affect productivity. The time it takes for groups to travel between collaborating groups' locations should be calculated to determine if any additional time spent travelling will cost more than what is being saved in real estate. Some employees might leave the company if their office is moved and their commute increases. Moreoever, some clients may be lost due to an office relocation. Often, having a "vanity address" is important for a company's brand. Also, it is common for a company to own some of their locations, and lease other locations, and this becomes a factor in deciding which spaces or buildings to dispose of. It's typically desirable to give back the leased space and consolidate into the owned properties. However, we have also helped some companies free up their owned properties that were in high-rent neighbhorhoods in order to lease out the owned properties and maximize revenues.
The larger the portfolio, the more complex and time consuming the assessment is. The assessment phase of a one million square foot restack we managed for Bank of America took about 6 months. Department heads must be interviewed to not only determine their known needs, but to fully understand their work process and determine possible improvements they may not have considered. It's our job as professionals to vet out the hidden potential. There are always ways to improve a company or individual department's productivity through rearranging space.
Starboard TCN is posting this article on its website and blog with the approval of Garcia Architects.
Garcia Architects specializes in commercial interiors & construction management.
Hans Hansson | December 21, 2011
RealUp, a national commercial real estate listing website, has announced a new partnership agreement with TradeAddresses.com, a referral property listing network. This partnership will allow thousands of RealUp.com commercial listings to automatically appear in TradeAddresses’ property catalog via the RealUp API web service.
"RealUp is very pleased to announce this new agreement with TradeAddresses.com," said Brian Randy Funk, President of RealUp. "This is an additional way RealUp will help get commercial property sold and increase exposure for real estate listings."
The RealUp commercial listing API provides an XML web service which automatically imports property listings into TradeAddresses. The RealUp API allows other websites to import and export RealUp property listings and has been customized for TradeAddresses. The RealUp API is currently used by CCIM, Century 21, Sperry Van Ness as well as the RealUp iPhone app.
"We are confident that our relationship with RealUp will prove to be synergistic for both of our companies," said Hans Hansson, president of TradeAddresses. "Our marketing of many of RealUp's listing will greatly expand the reach for those listing and provide more opportunity for RealUp members to close more transactions."
TradeAddresses is a website listing site for commercial, luxury residential, and luxury vacation properties around the world. Customers can search for properties for sale, for lease, or for vacation rentals. TradeAddresses also offers free assistance to connect customers to a licensed Commercial Real Estate Agent who specializes in their desired market.
About RealUp
RealUp.com, LLC is a commercial real estate website offering property listings. A subsidiary of TerraServer.com, the leader in online aerial/satellite imagery, the company is based in Raleigh, NC and services the nationwide commercial market. RealUp is committed to providing commercial real estate professionals with property listings and marketing options at the best value with guaranteed results.
www.RealUp.com
About TradeAddresses
TradeAddresses was founded in 1990 by a highly experienced group of San Francisco commercial real estate veterans. TradeAddresses has traditionally focused strictly on commercial real estate listings and has offered no additional services to listing agents. In 2009, Hans Hansson, Jim Osgood, and Carl Bosse worked together to expand Trade Addresses by combining commercial and high-end residential real estate listings.
www.TradeAddresses.com
"RealUp is very pleased to announce this new agreement with TradeAddresses.com," said Brian Randy Funk, President of RealUp. "This is an additional way RealUp will help get commercial property sold and increase exposure for real estate listings."
The RealUp commercial listing API provides an XML web service which automatically imports property listings into TradeAddresses. The RealUp API allows other websites to import and export RealUp property listings and has been customized for TradeAddresses. The RealUp API is currently used by CCIM, Century 21, Sperry Van Ness as well as the RealUp iPhone app.
"We are confident that our relationship with RealUp will prove to be synergistic for both of our companies," said Hans Hansson, president of TradeAddresses. "Our marketing of many of RealUp's listing will greatly expand the reach for those listing and provide more opportunity for RealUp members to close more transactions."
TradeAddresses is a website listing site for commercial, luxury residential, and luxury vacation properties around the world. Customers can search for properties for sale, for lease, or for vacation rentals. TradeAddresses also offers free assistance to connect customers to a licensed Commercial Real Estate Agent who specializes in their desired market.
About RealUp
RealUp.com, LLC is a commercial real estate website offering property listings. A subsidiary of TerraServer.com, the leader in online aerial/satellite imagery, the company is based in Raleigh, NC and services the nationwide commercial market. RealUp is committed to providing commercial real estate professionals with property listings and marketing options at the best value with guaranteed results.
www.RealUp.com
About TradeAddresses
TradeAddresses was founded in 1990 by a highly experienced group of San Francisco commercial real estate veterans. TradeAddresses has traditionally focused strictly on commercial real estate listings and has offered no additional services to listing agents. In 2009, Hans Hansson, Jim Osgood, and Carl Bosse worked together to expand Trade Addresses by combining commercial and high-end residential real estate listings.
www.TradeAddresses.com
Hans Hansson | December 13, 2011
With the holiday season fast approaching along with the end of 2011, we as salespeople are trying to conclude our last deals of the year to get our end of year numbers up. We are also thinking about all of the things we said we were going to accomplish at the beginning of the year that may or may not have worked out. We are also starting to pay attention to ways to improve production for next year. So here is my Christmas list to you the salesman:
1) An iPad or any tablet - The tablet is a game changer; I own an iPad and I make all my sales presentations on it. I connect to my office regularly and have integrated all aspects of my business and personal life into this machine. You will not be able to live without it I promise you that.
2) A 4G phone - I own the new Android Bionic from Verizon, this smart phone functions at 4G speed and coupled with the enhanced camera features has made my life far more efficient. It is worth making the upgrade even if you have to pay full price.
Now, a dose of education to improve your skills: For all of the top-notch trainers that are out there, the one program that remains on the top of the list is Dale Carnegie Training. As their web site says they "produce behavior change, build essential competencies, and tune up business skills". I took my first Dale Carnegie course over 30 years ago and after all of the courses I have taken I still regard Dale Carnegie the best. No matter how successful a salesperson may be, everyone needs to spend time each year retooling his or her skills to continuously improve.
Finally you need to find something to do that gives back to society. Yes you can write a check to support a charity but what I am talking about is actually doing something yourself for someone else. As a salesperson you have a gift to communicate, it is such a valuable asset that can also be used to promote a worthwhile cause. Find one and get involved: this will be your very best present under the tree.
Have a wonderful holiday season.
1) An iPad or any tablet - The tablet is a game changer; I own an iPad and I make all my sales presentations on it. I connect to my office regularly and have integrated all aspects of my business and personal life into this machine. You will not be able to live without it I promise you that.
2) A 4G phone - I own the new Android Bionic from Verizon, this smart phone functions at 4G speed and coupled with the enhanced camera features has made my life far more efficient. It is worth making the upgrade even if you have to pay full price.
Now, a dose of education to improve your skills: For all of the top-notch trainers that are out there, the one program that remains on the top of the list is Dale Carnegie Training. As their web site says they "produce behavior change, build essential competencies, and tune up business skills". I took my first Dale Carnegie course over 30 years ago and after all of the courses I have taken I still regard Dale Carnegie the best. No matter how successful a salesperson may be, everyone needs to spend time each year retooling his or her skills to continuously improve.
Finally you need to find something to do that gives back to society. Yes you can write a check to support a charity but what I am talking about is actually doing something yourself for someone else. As a salesperson you have a gift to communicate, it is such a valuable asset that can also be used to promote a worthwhile cause. Find one and get involved: this will be your very best present under the tree.
Have a wonderful holiday season.
Hans Hansson | December 12, 2011
REZONING OF LOTS IN EASTERN NEIGHBORHOODS HAS MADE ILLEGAL AT LEAST A THOUSAND RESIDENTIAL, OFFICE AND RETAIL SPACES.
LEGALIZATION APPLICATIONS MUST BE IN SOON.
Until the middle of January 2012, there is an opportunity to legalize uses being conducted without benefit of permits. After this time, Planning Department enforcement will begin.
Two and a half years ago, over 1,000 lots on the eastern side of th City, which allowed a wide assortment of uses including residential, office and retail, were rezoned to industrial only (PDR).
WHAT ARE DEEMED ILLEGAL USES THAT HAVE TO TERMINATE?
The rezoning has made existing uses (office, retail or residential uses) in PDR districts into either "legal" nonconforming ones or "illegal" non-conforming ones. Illegal ones are those without permits which explicitly call out the use as office (and can show a "change of use" from industrial to office approved by Planning Department). This article deals with the office uses created without permits, but the rules apply to retail, residential, and other uses.
Those uses that are legal may continue indefinitely as long as (1) the alteration permits by which they moved in indicate on them that the proposed use is "office" (2) there is no physical expansion or intensity of use, (3) there is no period of office vacancy for three or more years, and (4) there is no change of office use to a PDR use in the future.
WHY LEGALIZE AT ALL?
Many owner and tenant alteration permits may be challenged by those political groups who want the Eastern Neighborhoods to become mostly industrial, and revert from "illegal" office use to indistrial use. Many owners and tenants left the submittal of alteration permits to contractors, who may have filled in the "proposed use" box in an alteration permit in a wrong way. Also, in the dot-com boom, the immediate needs for office space were so intense that owners may have placed tenants in spaces without going through the lengthy San Francisco permit approval processes. If selling or refinancing without this problem solved, there could be problems; and those buildings which legitimize will increase in value more than those which do not.
Any City determination to allow legalization (or not) can be appealed to the Board of Appeals.
The legitimization procedure can be used to legalize office, retail or residential space in new industrial only (PDR) areas that no longer allow such uses. The only thing you cannot legalize is live work space without benefit of permits.
SINCE LEGALIZATION IS EXPENSIVE, IS THERE AN ALTERNATIVE?
One can ask one's experienced land use advisor to prepare a Request for Letter of Determination requesting that the Zoning Administrator concede that some permits which do not explicitly call out a use as office in fact created a legal office use nonetheless. These Requests (which ask the City to determine that legalization (and its fees) is not needed) should be submitted as soon as possible, since a negative response coming from the Zoning Administrator which arrives too late can cause one to miss the legalization application deadline of January 19, 2012.
WHAT IF LEGALIZATION IS IMPOSSIBLE?
If for certain reasons a particular space cannot be legalized (for example, the user of the space has moved in after 2007 or 2008), there is another possibility for either a brand new user or tenant, or an existing one. If one has a combination of PDR space and office space (even where the office space is as much as 2/3 of the space), one can seek approval as an Integrated PDR Space ("IPDR Space"). The City has decided to allow this for only certain kinds of older buildings, and may extend it to other buildings once the City determines the success of this.
Should you have any questions on this, please feel free to contact Brett Gladstone Esq. or Susanne Kelly Esq. at (415) 434-9500 or by email to: brett@gladstoneassociates.com
M. Brett Gladstone
B.A. 1980 Harvard University, Magna Cum Laude
J.D. 1983, Duke University
Member, Lambda Alpha Society
Member, SPUR
Disclaimer: This newsletter is not a substitute for legal advice and, since the facts of all matters differ, readers are cautioned not to take actions without seeking the advice of a real estate attorney. The issues discussed in this newsletter are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein.
Starboard TCN is posting this article on its website and blog with the approval of Brett Gladstone Esq.
This is a periodic newsletter from the law firm of Gladstone & Associates, San Francisco, a real estate transactions and land use firm providing commentary on new land use trends in San Francisco. www.gladstoneassociates.com
LEGALIZATION APPLICATIONS MUST BE IN SOON.
Until the middle of January 2012, there is an opportunity to legalize uses being conducted without benefit of permits. After this time, Planning Department enforcement will begin.
Two and a half years ago, over 1,000 lots on the eastern side of th City, which allowed a wide assortment of uses including residential, office and retail, were rezoned to industrial only (PDR).
WHAT ARE DEEMED ILLEGAL USES THAT HAVE TO TERMINATE?
The rezoning has made existing uses (office, retail or residential uses) in PDR districts into either "legal" nonconforming ones or "illegal" non-conforming ones. Illegal ones are those without permits which explicitly call out the use as office (and can show a "change of use" from industrial to office approved by Planning Department). This article deals with the office uses created without permits, but the rules apply to retail, residential, and other uses.
Those uses that are legal may continue indefinitely as long as (1) the alteration permits by which they moved in indicate on them that the proposed use is "office" (2) there is no physical expansion or intensity of use, (3) there is no period of office vacancy for three or more years, and (4) there is no change of office use to a PDR use in the future.
WHY LEGALIZE AT ALL?
Many owner and tenant alteration permits may be challenged by those political groups who want the Eastern Neighborhoods to become mostly industrial, and revert from "illegal" office use to indistrial use. Many owners and tenants left the submittal of alteration permits to contractors, who may have filled in the "proposed use" box in an alteration permit in a wrong way. Also, in the dot-com boom, the immediate needs for office space were so intense that owners may have placed tenants in spaces without going through the lengthy San Francisco permit approval processes. If selling or refinancing without this problem solved, there could be problems; and those buildings which legitimize will increase in value more than those which do not.
Any City determination to allow legalization (or not) can be appealed to the Board of Appeals.
The legitimization procedure can be used to legalize office, retail or residential space in new industrial only (PDR) areas that no longer allow such uses. The only thing you cannot legalize is live work space without benefit of permits.
SINCE LEGALIZATION IS EXPENSIVE, IS THERE AN ALTERNATIVE?
One can ask one's experienced land use advisor to prepare a Request for Letter of Determination requesting that the Zoning Administrator concede that some permits which do not explicitly call out a use as office in fact created a legal office use nonetheless. These Requests (which ask the City to determine that legalization (and its fees) is not needed) should be submitted as soon as possible, since a negative response coming from the Zoning Administrator which arrives too late can cause one to miss the legalization application deadline of January 19, 2012.
WHAT IF LEGALIZATION IS IMPOSSIBLE?
If for certain reasons a particular space cannot be legalized (for example, the user of the space has moved in after 2007 or 2008), there is another possibility for either a brand new user or tenant, or an existing one. If one has a combination of PDR space and office space (even where the office space is as much as 2/3 of the space), one can seek approval as an Integrated PDR Space ("IPDR Space"). The City has decided to allow this for only certain kinds of older buildings, and may extend it to other buildings once the City determines the success of this.
Should you have any questions on this, please feel free to contact Brett Gladstone Esq. or Susanne Kelly Esq. at (415) 434-9500 or by email to: brett@gladstoneassociates.com
M. Brett Gladstone
B.A. 1980 Harvard University, Magna Cum Laude
J.D. 1983, Duke University
Member, Lambda Alpha Society
Member, SPUR
Disclaimer: This newsletter is not a substitute for legal advice and, since the facts of all matters differ, readers are cautioned not to take actions without seeking the advice of a real estate attorney. The issues discussed in this newsletter are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein.
Starboard TCN is posting this article on its website and blog with the approval of Brett Gladstone Esq.
This is a periodic newsletter from the law firm of Gladstone & Associates, San Francisco, a real estate transactions and land use firm providing commentary on new land use trends in San Francisco. www.gladstoneassociates.com
Hans Hansson | November 30, 2011
Kilroy, a major new player in commercial real estate acquisitions in the San Francisco Bay Area, recently paid $400.00 a foot for a near vacant office building in South of Market that has had trouble leasing in good times as well as bad.
Buildings are selling at prices up 40% in one year while rental rates are skyrocketing in areas that are attractive to tech firms.
San Francisco is considered one of the top four commercial real estate markets to invest in the United States.
Vacancy rates in core tech areas have dropped to less than 5% with overall vacancy rates dropping to the low teens for the first time since the dot-com boom.
All sounds like a real estate boom!!!!
Yet it makes no economic sense…
In 1985, I did a deal for $34.00 a foot at 33 new Montgomery Street for shell space. The term was for five years and there was a dollar increase per year. The tenant received $35.00 a foot to build out the space. The broker received a $1.00 a foot per year in fees; attorneys and architects added another $4.00 a foot. The operating expenses to run the building was $12.00 a foot and the net income to the landlord on that deal was $10.00 a foot.
Today in 2011, a deal could be done for $43.00 a foot at the same building with the same dollar increase per year. The tenant in shell would receive $70.00 a foot to build out the space. The broker would receive $2.00 a foot per year with attorney and architects fees running $5.00 and operating expenses now running $19.00. This leaves the landlord with a net income in a hot market of $4.00 a foot for the same type of deal 26 years later.
Yet the building just sold for 20% more 26 years later.
Today, new commercial buyers are thinking about replacement cost.
To build that same building today at 33 New Montgomery Street includes: buying the land, hold time to get the necessary approvals, adding in finished construction and leasing would total somewhere around $1,200-$1,400 dollars a foot. As a result, REIT buyers do not look at net incomes they look at safety and replacement costs; at $400 a foot that looks like a steal in comparison to building a new product.
The problem with looking at buildings as you would fine art is that net income still has not kept up with the value of buildings. In fact, over the years the spread between net income and building value has increased rather than decreased. San Francisco may be enjoying higher rental rates but those rental rate increases are coming because of a tech boom that is based upon speculative firms that may or may succeed. The real issue is whether mainstay businesses are able to pay higher rental rates or not. Like the rest of the country, most mainstay businesses have stabilized their business at best and are not booming. The shoe is about to drop.
Buildings are selling at prices up 40% in one year while rental rates are skyrocketing in areas that are attractive to tech firms.
San Francisco is considered one of the top four commercial real estate markets to invest in the United States.
Vacancy rates in core tech areas have dropped to less than 5% with overall vacancy rates dropping to the low teens for the first time since the dot-com boom.
All sounds like a real estate boom!!!!
Yet it makes no economic sense…
In 1985, I did a deal for $34.00 a foot at 33 new Montgomery Street for shell space. The term was for five years and there was a dollar increase per year. The tenant received $35.00 a foot to build out the space. The broker received a $1.00 a foot per year in fees; attorneys and architects added another $4.00 a foot. The operating expenses to run the building was $12.00 a foot and the net income to the landlord on that deal was $10.00 a foot.
Today in 2011, a deal could be done for $43.00 a foot at the same building with the same dollar increase per year. The tenant in shell would receive $70.00 a foot to build out the space. The broker would receive $2.00 a foot per year with attorney and architects fees running $5.00 and operating expenses now running $19.00. This leaves the landlord with a net income in a hot market of $4.00 a foot for the same type of deal 26 years later.
Yet the building just sold for 20% more 26 years later.
Today, new commercial buyers are thinking about replacement cost.
To build that same building today at 33 New Montgomery Street includes: buying the land, hold time to get the necessary approvals, adding in finished construction and leasing would total somewhere around $1,200-$1,400 dollars a foot. As a result, REIT buyers do not look at net incomes they look at safety and replacement costs; at $400 a foot that looks like a steal in comparison to building a new product.
The problem with looking at buildings as you would fine art is that net income still has not kept up with the value of buildings. In fact, over the years the spread between net income and building value has increased rather than decreased. San Francisco may be enjoying higher rental rates but those rental rate increases are coming because of a tech boom that is based upon speculative firms that may or may succeed. The real issue is whether mainstay businesses are able to pay higher rental rates or not. Like the rest of the country, most mainstay businesses have stabilized their business at best and are not booming. The shoe is about to drop.
Hans Hansson | November 16, 2011
In 2004 the Planning Commission removed from the Eastern Neighborhoods rezoning process the area of the City referred to as Western South of Market (Western SOMA). The boundaries are 4th and Folsom to 4th and Townsend; 7th and Townsend to 7th and Bryant; 10th and Bryant to 10th and Division; Division and 12th to 12th and Mission; Mission and 7th to 7th and Harrison; Harrison and 5th to 5th and Clemintina (ending at 4th and Clemintina). The Commission declared that the rezoning of Western SOMA would not be considered again until the area had undergone a comprehensive community-based planning process. The Western SOMA Citizens Planning Task Force has nearly completed this planning process.
Proposed Planning Code amendments for the Western SOMA plan were released this month. The documents include information on rezonings to allow residential and office use, and information on design standards and stabilization policies. New acquisition and development opportunities may result.
New commercial districts will run along 9th and 10th Streets from below Mission Street to Harrison Street. A new neighborhood commercial district will run along Folsom Street, the new "main street" of Western SoMa, from 7th Street to 10th Street. Remaining properties north of Harrison Street in the Western SoMa area will be rezoned to residential and mixed use districts. Most of the area below Harrison Street will be rezoned to SALI - an extremely restrictive zoning district similar to the PDR (industrial) districts of the Eastern Neighborhoods Plan. The north side of Townsend Street from 4th to 7th Streets will be rezoned to an office mixed-use district.
The amendments encourage residential use north of Harrison Street, but in the commercial districts few non-residential uses will be permitted above the second floor. In the area's current older residential districts, non-residential use is either prohibited or only allowed up to a 1:1 floor area ratio. The general mixed use districts limit retail space (in most cases) to 10,000 square feet. No density limits apply to residential uses in these districts.
Following the example of the Eastern Neighborhoods Plan, office use is proposed principally to be permitted in buildings designated as landmarks, contributing to a historic district, or eligible for the California Register - except in the SALI district. In non-historic buildings, office space is permitted on first or second floors in the commercial districts above Harrison Street, and without limitation in the office mixed-use district. Office use will not permitted in all other districts.
Residential and office uses will not be permitted in the SALI district. Additionally, retail uses there will only be permitted up to 25,000 square feet with conditional use authorization; industrial, entertainment and arts uses will be less restricted.
Proposed impact fees per square foot have not been established nor included in the Planning Code amendments, but it is likely that the Planning Department will apply the same fees used in the Eastern Neighborhoods Plan. Planning Staff has calendared adoption hearings for the beginning of 2012.
A "stabilization policy" would monitor (and then perhaps limit) the approval of new market rate projects, based on a maximum ratio of market rate units to affordable housing units and jobs to dwelling units. Although no stabilization policy is found in the proposed Planning Code amendments, the Board of Supervisors may choose to enact such a policy after the Western SoMa Plan is approved. We do not believe such a law would be legal without a "nexus" study and other planning work; at this time, we know of no such nexus work being planned. Some say the City Attorney's Offoce is skeptical of this policy's legality as well. Certain design standards (which are area-specific) have also been proposed for the Western SoMa area and will apply to large and small new development.
BACK YARD COTTAGES AND SMART GROWTH
As San Francisco looks to add more residential units to the City's housing stock, the City needs to embrace new and creative strategies for adding homes to existing established neighborhoods. Legalization of illegal units has been rejected by the citizens on the West Side over and over. One innovative solution (especially for single family homes lots with no illegal second unit) is to add small residential cottages (also called "in-law suites") into existing backyards. This development model is being promoted by New Avenue, a company that was started by Kevin Casey while he was earning an MBA at the Haas School of Business and which he as worked at full time as since graduating in 2009. Of course this development model will be challenging in San Francisco, as there zoning rules that typically do not allow structures to be built in rear yards. Either a rear yard variance would be needed or the current law allowing rear yard garden sheds of small dimensions could be modified to allow these new cottages in dimensions greater than sheds are allowed. The stand alone cottage offers many benefits, and the City would be wise to promote this model of small scale development.
These small cottages would allow existing neighborhoods to add new residents, and the modest size of these cottages would make them more affordable than the large homes they share the lot with. Since these cottages would be more affordable than the existing homes in the neighborhood, the cottages would help add to the diversity of existing neighborhoods. Seniors, young adults, and middle-income homebuyers are often priced out of established neighborhoods, which contain large single family homes. According to the company's website (www.newavenuehomes.com), the New Avenue homes can be built for a lot less than $100,000, which would make them available to many income levels.
Since the cottages are free-standing, they would allow existing homes in established neighborhoods to remain intact. Typically today, if a home owner wants to add square footage to accommodate aging parents, they will create an addition to their home. This process can be long, complicated, and costly, especially because many older homes require extensive historic review even for a small rear addition. And because a large number of times, neighbors fight small additions at great expense to an owner.
The New Avenue homes are designed with sustainability in mind, and they are very energy efficient. The City of San Francisco would benefit by creating Planning Code regulations to incentivize small rear yard cottages; this innovative concept is just the type of smart growth that the City should promote.
Should you have any questions on this, please feel free to contact Brett Gladstone Esq. or Susanne Kelly Esq. at (415) 434-9500 or by email to: brett@gladstoneassociates.com
M. Brett Gladstone
B.A. 1980 Harvard University, Magna Cum Laude
J.D. 1983, Duke University
Member, Lambda Alpha Society
Member, SPUR
Susanne B. Kelly
B.S. 1994 Santa Clara University
J.D. 1997 University of San Francisco School of Law
State Bar, Real Property Section Member
Disclaimer: This newsletter is not a substitute for legal advice and, since the facts of all matters differ, readers are cautioned not to take actions without seeking the advice of a real estate attorney. The issues discussed in this newsletter are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein.
Starboard TCN is posting this article on its website and blog with the approval of Brett Gladstone Esq.
This is a periodic newsletter from the law firm of Gladstone & Associates, San Francisco, a real estate transactions and land use firm providing commentary on new land use trends in San Francisco. www.gladstoneassociates.com
Proposed Planning Code amendments for the Western SOMA plan were released this month. The documents include information on rezonings to allow residential and office use, and information on design standards and stabilization policies. New acquisition and development opportunities may result.
New commercial districts will run along 9th and 10th Streets from below Mission Street to Harrison Street. A new neighborhood commercial district will run along Folsom Street, the new "main street" of Western SoMa, from 7th Street to 10th Street. Remaining properties north of Harrison Street in the Western SoMa area will be rezoned to residential and mixed use districts. Most of the area below Harrison Street will be rezoned to SALI - an extremely restrictive zoning district similar to the PDR (industrial) districts of the Eastern Neighborhoods Plan. The north side of Townsend Street from 4th to 7th Streets will be rezoned to an office mixed-use district.
The amendments encourage residential use north of Harrison Street, but in the commercial districts few non-residential uses will be permitted above the second floor. In the area's current older residential districts, non-residential use is either prohibited or only allowed up to a 1:1 floor area ratio. The general mixed use districts limit retail space (in most cases) to 10,000 square feet. No density limits apply to residential uses in these districts.
Following the example of the Eastern Neighborhoods Plan, office use is proposed principally to be permitted in buildings designated as landmarks, contributing to a historic district, or eligible for the California Register - except in the SALI district. In non-historic buildings, office space is permitted on first or second floors in the commercial districts above Harrison Street, and without limitation in the office mixed-use district. Office use will not permitted in all other districts.
Residential and office uses will not be permitted in the SALI district. Additionally, retail uses there will only be permitted up to 25,000 square feet with conditional use authorization; industrial, entertainment and arts uses will be less restricted.
Proposed impact fees per square foot have not been established nor included in the Planning Code amendments, but it is likely that the Planning Department will apply the same fees used in the Eastern Neighborhoods Plan. Planning Staff has calendared adoption hearings for the beginning of 2012.
A "stabilization policy" would monitor (and then perhaps limit) the approval of new market rate projects, based on a maximum ratio of market rate units to affordable housing units and jobs to dwelling units. Although no stabilization policy is found in the proposed Planning Code amendments, the Board of Supervisors may choose to enact such a policy after the Western SoMa Plan is approved. We do not believe such a law would be legal without a "nexus" study and other planning work; at this time, we know of no such nexus work being planned. Some say the City Attorney's Offoce is skeptical of this policy's legality as well. Certain design standards (which are area-specific) have also been proposed for the Western SoMa area and will apply to large and small new development.
BACK YARD COTTAGES AND SMART GROWTH
As San Francisco looks to add more residential units to the City's housing stock, the City needs to embrace new and creative strategies for adding homes to existing established neighborhoods. Legalization of illegal units has been rejected by the citizens on the West Side over and over. One innovative solution (especially for single family homes lots with no illegal second unit) is to add small residential cottages (also called "in-law suites") into existing backyards. This development model is being promoted by New Avenue, a company that was started by Kevin Casey while he was earning an MBA at the Haas School of Business and which he as worked at full time as since graduating in 2009. Of course this development model will be challenging in San Francisco, as there zoning rules that typically do not allow structures to be built in rear yards. Either a rear yard variance would be needed or the current law allowing rear yard garden sheds of small dimensions could be modified to allow these new cottages in dimensions greater than sheds are allowed. The stand alone cottage offers many benefits, and the City would be wise to promote this model of small scale development.
These small cottages would allow existing neighborhoods to add new residents, and the modest size of these cottages would make them more affordable than the large homes they share the lot with. Since these cottages would be more affordable than the existing homes in the neighborhood, the cottages would help add to the diversity of existing neighborhoods. Seniors, young adults, and middle-income homebuyers are often priced out of established neighborhoods, which contain large single family homes. According to the company's website (www.newavenuehomes.com), the New Avenue homes can be built for a lot less than $100,000, which would make them available to many income levels.
Since the cottages are free-standing, they would allow existing homes in established neighborhoods to remain intact. Typically today, if a home owner wants to add square footage to accommodate aging parents, they will create an addition to their home. This process can be long, complicated, and costly, especially because many older homes require extensive historic review even for a small rear addition. And because a large number of times, neighbors fight small additions at great expense to an owner.
The New Avenue homes are designed with sustainability in mind, and they are very energy efficient. The City of San Francisco would benefit by creating Planning Code regulations to incentivize small rear yard cottages; this innovative concept is just the type of smart growth that the City should promote.
Should you have any questions on this, please feel free to contact Brett Gladstone Esq. or Susanne Kelly Esq. at (415) 434-9500 or by email to: brett@gladstoneassociates.com
M. Brett Gladstone
B.A. 1980 Harvard University, Magna Cum Laude
J.D. 1983, Duke University
Member, Lambda Alpha Society
Member, SPUR
Susanne B. Kelly
B.S. 1994 Santa Clara University
J.D. 1997 University of San Francisco School of Law
State Bar, Real Property Section Member
Disclaimer: This newsletter is not a substitute for legal advice and, since the facts of all matters differ, readers are cautioned not to take actions without seeking the advice of a real estate attorney. The issues discussed in this newsletter are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein.
Starboard TCN is posting this article on its website and blog with the approval of Brett Gladstone Esq.
This is a periodic newsletter from the law firm of Gladstone & Associates, San Francisco, a real estate transactions and land use firm providing commentary on new land use trends in San Francisco. www.gladstoneassociates.com
Hans Hansson | November 14, 2011
Having worked as the landlord's architect for the likes of Equity Office Properties, The Irvine Company, and Bank of America, we have established an efficient assembly-line approach for office tenant improvements. Starting with having a master agreement with pre-established unit pricing, a structured process must be put in place to allow a landlord account to run like a well-oiled machine.
Office building landlords have a constant turnover of tenants, most of which have 5-year leases. When a suite becomes available, we meet with a prospective tenant with an existing floor plan, tracing paper, and a black felt-tip pen in hand. We interview the prospective tenant about their business needs, their "program". As part of the leasing team, our goal is to entice the tenant to want to lease space in our client's building. In the initial meeting, if time allows, we sketch some possible floor plans. If the suite is large, we might sketch the space plan options after the meeting back at the office. Per our client contract, we typically have about 1 to 2 days to complete a space plan after the client meeting.
It is our responsibility to coordinate directly with the prospective tenant to obtain their approval on a space plan. Therefore, it is most effective to sketch the plan and simultaneously get the client's approval in the initial meeting. Once a space plan is approved and the landlord approves proceeding with a preliminary pricing plan, we typically have about 2 days per the client contract to complete the preliminary pricing plan. We "field-verify" the existing conditions at the suite with a standard checklist of items to observe, measure, and document. Back at the office, we add the necessary notes to the plan. A quality review is completed and redmarks are quickly corrected, then the preliminary pricing plan is distributed to a standard distribution list that includes all of the subcontractors, so there is no lag time in getting the pricing effort underway. We call the general contractor to schedule a job walk immediately, because the general contractor, by contract, only has 1 week to provide the cost estimate.
The client's in-house leasing directors or consulting brokers eagerly await the pricing, because they cannot negotiate a lease without knowing what it will cost to renovate the space per the prospective tenant's requirements. When they receive the preliminary pricing, they can structure a deal. The leasing rate and TI allowance they offer a prospective tenant take the construction cost into account, as well as the architectural and engineering fees to complete the project. Many leases in the recent market are "turnkey", meaning the deal includes all of the tenant's desired renovations to the space. More typical in my experience, however, is a Tenant Improvement allowance. An average TI allowance is about $25 per square foot for "second generation space." If the construction and architectural costs exceed the TI allowance, the tenant must come out of pocket for the balance.
At this point, the project goes on hold from our perspective for anywhere from one to three months while the lease is negotiated. We continually check in with the client to see how close they are to executing a lease in order to predict when the next phase, construction documentation, will commence. Once a lease is signed, we proceed with construction documents. The pressure is now on, as the tenant’s move-in, rent commencement, and the brokers' commissions are all pending the completion of our services. Contractually, we usually have 2-weeks to complete construction documents, which is swift compared to a full-service tenant improvement project of the same size which has a 4 to 6 week turnaround time. Fortunately, for most of our landlord accounts, we utilize templates for each of the client's buildings. Because we're working with known general contractors that have a good relationship with the client, our construction drawing templates include only five drawing sheets, each with standard notes. Working with the same one or two contractors for all of the client's projects allows the construction documentation to be minimal. Additionally, having pre-established "building standards" for each building which outline the product specifications,which we were previously retained to author, means that products do not need to be selected, specified, or shown on the drawings.
Once the construction documents are complete, we distribute them to the standard distribution list of subcontractors and general contractor, and all other interested parties. The general contractor again has a week to provide final pricing. Simultaneously, we submit the drawings to the building department for permit approval. The contractor gears up to start construction, and everyone await permit approval. It takes between one and eight weeks to get a permit approved depending on the jurisdiction.
Once construction starts, the leasing director fades away, and the client's in-house construction manager comes to the forefront to oversee the contractor, manage client changes, and deal with unforeseen problems. A typical construction time frame is eight weeks. Upon completion, we host a punch walk and provide a punch list, the list of items the contractor still needs to complete. The entire process from start to construction completion takes about six to eight months.
Starboard TCN is posting this article on its website and blog with the approval of Garcia Architects.
Garcia Architects specializes in commercial interiors & construction management.
Office building landlords have a constant turnover of tenants, most of which have 5-year leases. When a suite becomes available, we meet with a prospective tenant with an existing floor plan, tracing paper, and a black felt-tip pen in hand. We interview the prospective tenant about their business needs, their "program". As part of the leasing team, our goal is to entice the tenant to want to lease space in our client's building. In the initial meeting, if time allows, we sketch some possible floor plans. If the suite is large, we might sketch the space plan options after the meeting back at the office. Per our client contract, we typically have about 1 to 2 days to complete a space plan after the client meeting.
It is our responsibility to coordinate directly with the prospective tenant to obtain their approval on a space plan. Therefore, it is most effective to sketch the plan and simultaneously get the client's approval in the initial meeting. Once a space plan is approved and the landlord approves proceeding with a preliminary pricing plan, we typically have about 2 days per the client contract to complete the preliminary pricing plan. We "field-verify" the existing conditions at the suite with a standard checklist of items to observe, measure, and document. Back at the office, we add the necessary notes to the plan. A quality review is completed and redmarks are quickly corrected, then the preliminary pricing plan is distributed to a standard distribution list that includes all of the subcontractors, so there is no lag time in getting the pricing effort underway. We call the general contractor to schedule a job walk immediately, because the general contractor, by contract, only has 1 week to provide the cost estimate.
The client's in-house leasing directors or consulting brokers eagerly await the pricing, because they cannot negotiate a lease without knowing what it will cost to renovate the space per the prospective tenant's requirements. When they receive the preliminary pricing, they can structure a deal. The leasing rate and TI allowance they offer a prospective tenant take the construction cost into account, as well as the architectural and engineering fees to complete the project. Many leases in the recent market are "turnkey", meaning the deal includes all of the tenant's desired renovations to the space. More typical in my experience, however, is a Tenant Improvement allowance. An average TI allowance is about $25 per square foot for "second generation space." If the construction and architectural costs exceed the TI allowance, the tenant must come out of pocket for the balance.
At this point, the project goes on hold from our perspective for anywhere from one to three months while the lease is negotiated. We continually check in with the client to see how close they are to executing a lease in order to predict when the next phase, construction documentation, will commence. Once a lease is signed, we proceed with construction documents. The pressure is now on, as the tenant’s move-in, rent commencement, and the brokers' commissions are all pending the completion of our services. Contractually, we usually have 2-weeks to complete construction documents, which is swift compared to a full-service tenant improvement project of the same size which has a 4 to 6 week turnaround time. Fortunately, for most of our landlord accounts, we utilize templates for each of the client's buildings. Because we're working with known general contractors that have a good relationship with the client, our construction drawing templates include only five drawing sheets, each with standard notes. Working with the same one or two contractors for all of the client's projects allows the construction documentation to be minimal. Additionally, having pre-established "building standards" for each building which outline the product specifications,which we were previously retained to author, means that products do not need to be selected, specified, or shown on the drawings.
Once the construction documents are complete, we distribute them to the standard distribution list of subcontractors and general contractor, and all other interested parties. The general contractor again has a week to provide final pricing. Simultaneously, we submit the drawings to the building department for permit approval. The contractor gears up to start construction, and everyone await permit approval. It takes between one and eight weeks to get a permit approved depending on the jurisdiction.
Once construction starts, the leasing director fades away, and the client's in-house construction manager comes to the forefront to oversee the contractor, manage client changes, and deal with unforeseen problems. A typical construction time frame is eight weeks. Upon completion, we host a punch walk and provide a punch list, the list of items the contractor still needs to complete. The entire process from start to construction completion takes about six to eight months.
Starboard TCN is posting this article on its website and blog with the approval of Garcia Architects.
Garcia Architects specializes in commercial interiors & construction management.
Hans Hansson | November 10, 2011
We are nearing the end of 2011 and as salespeople we need to start planning for 2012. The problem is that most salespeople suffer from ADD type symptoms: We are multitaskers, we live for the moment and planning ahead is not our strength. Managers, coaches and mentors will tell us that now is the time to set goals for next year; look back at what worked for you this year and what didn't and figure out what to do differently in the coming year.
I consider myself to be fairly structured as a salesperson. I am diligent about setting up a plan of action for each year and I review what worked for me and what didn't throughout the year. Over the course of the year I review my goals and try to make adjustments, but like most, I fall short in the full implementation of my goals and each year I tell myself I will be better about sticking with my plan and letting my plan dictate my actions. Unfortunately, it never happens.
So why even go through the exercise of setting goals if it falls against the grain of how we actually do business?
The simple act of setting goals increases the likelihood that they will be achieved. It allows you to be on the same page with your financial goals and provides you with a day-to-day guide. This applies to every task you set for yourself; it's your guide to success.
Goals only work if you measure progress. If you focus on specific written goals and consistently monitor your actions towards completing them, these goals often times will be accomplished. This also means you had better pick the right goals, or the wrong ones will get done. The rule of thumb on goal setting is to check your results every thirty days. I would recommend calendaring a review every 15 days to make sure you are working on your goal set for the that month.
The most important thing needed to do to make sure your goals are in fact met, is to create a single point of accountability. If you cannot create personal accountability yourself, then you need to make sure someone else takes on that role. Finally, you need to reward yourself if you meet your goals. Figure out ahead of time what that reward should be and make sure you allow yourself that reward if your goal is met. It could be something as simple as taking yourself to a nice new expensive restaurant or planning a special weekend trip. Whatever your reward is, it needs to be important enough for you to push yourself to achieve your goal.
I consider myself to be fairly structured as a salesperson. I am diligent about setting up a plan of action for each year and I review what worked for me and what didn't throughout the year. Over the course of the year I review my goals and try to make adjustments, but like most, I fall short in the full implementation of my goals and each year I tell myself I will be better about sticking with my plan and letting my plan dictate my actions. Unfortunately, it never happens.
So why even go through the exercise of setting goals if it falls against the grain of how we actually do business?
The simple act of setting goals increases the likelihood that they will be achieved. It allows you to be on the same page with your financial goals and provides you with a day-to-day guide. This applies to every task you set for yourself; it's your guide to success.
Goals only work if you measure progress. If you focus on specific written goals and consistently monitor your actions towards completing them, these goals often times will be accomplished. This also means you had better pick the right goals, or the wrong ones will get done. The rule of thumb on goal setting is to check your results every thirty days. I would recommend calendaring a review every 15 days to make sure you are working on your goal set for the that month.
The most important thing needed to do to make sure your goals are in fact met, is to create a single point of accountability. If you cannot create personal accountability yourself, then you need to make sure someone else takes on that role. Finally, you need to reward yourself if you meet your goals. Figure out ahead of time what that reward should be and make sure you allow yourself that reward if your goal is met. It could be something as simple as taking yourself to a nice new expensive restaurant or planning a special weekend trip. Whatever your reward is, it needs to be important enough for you to push yourself to achieve your goal.
Hans Hansson | November 2, 2011
There are two property tax increases that could happen in the near future, both of which could have devastating effects on our weak economy. Both taxes are being sold as 'taxing the rich' but if enacted, could send ripples down to every housing and commercial marketplace sector.
The first tax is a move to eliminate Prop 13 protection on commercial properties, which would affect California commercial property owners. The theory is that commercial properties do not sell as often as homes and therefore commercial properties that are kept in portfolios long term are getting special tax breaks. However, what typically happens is that users such as banks or drug store chains will buy and develop a piece of property and in turn sell that property with themselves as a user based upon a fixed rate of return for the future buyer. Property taxes are typically passed through to the tenant in the form of NNN charges, but for these deals to work from the beginning all costs have to be determined. Banks, for instance, build the store and create an investment for the future buyer by locking in set rental rates; this guarantees a set return for the future buyer while also setting the cost to operate that building at a set price. If taxes all of a sudden go up, tenants will be faced with a tremendous increase in property taxes at a time when businesses in California are just hanging on.
Commercial properties of all types typically transfer ownership on average more than residential homes; on average the typical commercial property will change hands every ten years. The segment of long-term holders is a small percentage of commercial properties overall and these investments only work because a set return was established by the rents that were signed up for originally. Also, most major corporations do not own their own properties. Typically, they build their sites then sell them when their operations are up and running so that they can move their cash and build more stores. If California did take away Prop 13 protection it would not only hurt the owners of the buildings but all of the tenants that occupy these buildings. Property taxes are passed through to tenants in the form of an operating expense so in the end this would be another tax on businesses at a time when we already have over 12% unemployment and businesses still have not recovered from this deep recession.
The next tax is the interest deduction on second homes and vacation rentals. NAR officials are becoming increasingly concerned that the current administration will have interest rate deductions on second homes and vacation rentals eliminated. Again, on the surface it appears to be a tax break for the rich; however, second homes and vacation rentals support numerous local communities that would die if the second home market further erodes. Today there is virtually no competitive financing for second home purchases therefore prices of homes are tumbling and foreclosures are already high.
I have a home in Truckee, California at Lake Tahoe where a community of 15,000 residents survives off of second homebuyers. All of the area's construction workers, service workers and retail stores survive off of a second home marketplace. Truckee has become devastated by this economy as housing jobs have disappeared; vacant storefronts are now the norm in downtown Truckee. The largest growth in homes in this marketplace occurred from 2000 to 2007. Most of these homes, like primary homes, were leveraged and home values have dropped fifty percent. If you take away the interest deduction, a homeowner that has been able to save his house (barely) may just lose his home if his deduction is taken away. This would lead to further foreclosures and will kill a major incentive to buy second homes, thereby killing communities like Truckee throughout the United States.
I understand the current administration's plan to shift the deficit reduction onto the rich but in both cases what looks like a tax on the rich is tied to the entire housing and commercial market lifeline. To now tax this sector in these difficult times will cost more jobs and further erode our lives rather than help reduce the deficit.
The first tax is a move to eliminate Prop 13 protection on commercial properties, which would affect California commercial property owners. The theory is that commercial properties do not sell as often as homes and therefore commercial properties that are kept in portfolios long term are getting special tax breaks. However, what typically happens is that users such as banks or drug store chains will buy and develop a piece of property and in turn sell that property with themselves as a user based upon a fixed rate of return for the future buyer. Property taxes are typically passed through to the tenant in the form of NNN charges, but for these deals to work from the beginning all costs have to be determined. Banks, for instance, build the store and create an investment for the future buyer by locking in set rental rates; this guarantees a set return for the future buyer while also setting the cost to operate that building at a set price. If taxes all of a sudden go up, tenants will be faced with a tremendous increase in property taxes at a time when businesses in California are just hanging on.
Commercial properties of all types typically transfer ownership on average more than residential homes; on average the typical commercial property will change hands every ten years. The segment of long-term holders is a small percentage of commercial properties overall and these investments only work because a set return was established by the rents that were signed up for originally. Also, most major corporations do not own their own properties. Typically, they build their sites then sell them when their operations are up and running so that they can move their cash and build more stores. If California did take away Prop 13 protection it would not only hurt the owners of the buildings but all of the tenants that occupy these buildings. Property taxes are passed through to tenants in the form of an operating expense so in the end this would be another tax on businesses at a time when we already have over 12% unemployment and businesses still have not recovered from this deep recession.
The next tax is the interest deduction on second homes and vacation rentals. NAR officials are becoming increasingly concerned that the current administration will have interest rate deductions on second homes and vacation rentals eliminated. Again, on the surface it appears to be a tax break for the rich; however, second homes and vacation rentals support numerous local communities that would die if the second home market further erodes. Today there is virtually no competitive financing for second home purchases therefore prices of homes are tumbling and foreclosures are already high.
I have a home in Truckee, California at Lake Tahoe where a community of 15,000 residents survives off of second homebuyers. All of the area's construction workers, service workers and retail stores survive off of a second home marketplace. Truckee has become devastated by this economy as housing jobs have disappeared; vacant storefronts are now the norm in downtown Truckee. The largest growth in homes in this marketplace occurred from 2000 to 2007. Most of these homes, like primary homes, were leveraged and home values have dropped fifty percent. If you take away the interest deduction, a homeowner that has been able to save his house (barely) may just lose his home if his deduction is taken away. This would lead to further foreclosures and will kill a major incentive to buy second homes, thereby killing communities like Truckee throughout the United States.
I understand the current administration's plan to shift the deficit reduction onto the rich but in both cases what looks like a tax on the rich is tied to the entire housing and commercial market lifeline. To now tax this sector in these difficult times will cost more jobs and further erode our lives rather than help reduce the deficit.
