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Monthly Letter

March 2009

March 3rd, 2009 7:19 AM

March 1, 2009

Re: Monthly Letter

Dear Clients:

“Wars in old times were made to get slaves.

The modern implement of imposing slavery is debt.”

~ Ezra Pound 1885-1972

Ah the power of the pen! What a rush it must be to sign the largest check in the history of mankind and without a penny in your account to back it up! Now that is leverage! And now that the banks have the bail out money from you the taxpayers, we can only hope that they will be kind enough to offer it back to us as a loan…for a fee!

As the banks sail forward in uncharted water in these unprecedented times, you can be sure these times will continue to be uncertain and unpredictable. In the last 13 months, there have been 34 bank failures. Over the next 13 months, you can expect as many as 100 more to fail, merge, or be taken over. The good news is that there are over 8,000 banks in the U.S., so this really is still a small percentage.

As I have said many times over the years of writing this letter, it is all about jobs. Keeping that in perspective, January U.S. unemployment is at 7.6%. Last January we were at 4.9%. The last time we saw 7.6% was September of 1992. The worst in recent history was 10.8% in November of 1982 (which also happens to be when I got my first job out of college!). So if you ask me when we will turn around, I will tell you, “Show me the jobs!” One thing over time has held true. Creativity and aggressive innovation — in the face of hardship and layoffs and seriously tough choices — will fuel a turnaround. Right now with unemployment rising, it is hard to remember that capitalism is a creator of jobs, companies, and industries — as well as a destroyer. But I see signs of growth to come. Signs of promise that this recession will some day give way to a time of new investment and new jobs.

History shows us that between some of our worst financial panics, U.S. capitalism has built transcontinental railroads, U.S. highway systems, and the internet. The creative side of the story is hard to see in today’s moment. We’re in the middle of the crisis, and growth stories are just now putting down roots. Areas to keep your eyes open to are: bio tech, software, wireless internet, clean tech (solar and hybrid technology), fuel cells, unmanned aerial vehicles, stem cells, and regenerative medicine (that is growing back the finger you cut off or the liver you ruined).

I recently attended a conference, and one of the speakers noted that the real estate cycle is like the five stages of grief: Denial, Anger, Bargaining, Depression, and Acceptance. While I agree with wholeheartedly, I think these four quotes sum up the cycle even better.

Stage 1: “You’re wrong about the market. My property’s worth more than you’re telling me it’s worth.”

Stage 2: “OK, I agree that the market has changed. But I still won’t sell my property unless you can get me more for it than what other people have already offered me for it.”

Stage 3: “We need to sell this property. Where do we need to price it in order to unload it?”

Stage 4: “I don’t think we’re ever going to see another great real estate market again.”

And Stage 4, of course, represents when we’ve probably hit the bottom of the market, and it’s the best time to begin buying properties again.

Being as this is my third downturn, let me give you my first piece of advice. If you color your hair, stop it. We need all of that grey hair experience now! In an attempt to benefit from the collective whole of the over 1,000 readers of my monthly letter, I would like to ask you to e-mail me your ideas and past experience and successful strategies in these kind of times. Help add to my list (10 things smart people did in the last downturn).

Buy with positive leverage (cap rate higher than interest rate).
Buy A+ properties at distressed prices.
Buy notes from lenders and foreclose and obtain underlying asset.
Buy freeway visible sites
Give me your experiences

I will compile these and e-mail them back out. Remember, Together Everyone Achieves More (TEAM). The rally cry now is to survive, to thrive!

Once again as you read the story that follows this letter, I ask you to remember the power of the “pen.” (a different kind of “pen”) Also remember that Thomas Paine said, “I love the man that can smile in trouble, that can gather strength from distress, and grow brave by reflection.” Better yet, my favorite — “Annoy your government — work, succeed, and be happy!”

Regards,

Don

Don S. Zech
CDC Commercial
Real Estate Services

Do you know how to catch wild pigs?

You catch wild pigs by finding a suitable place in the woods and putting corn on the ground. The pigs find it and begin to come every day to eat the free corn. When they are used to coming every day, you put a fence down one side of the place where they are used to coming. When they get used to the fence, they begin to eat the corn again, and you put up another side of the fence. They get used to that and start to eat again. You continue until you have all four sides of the fence up with a gate in the last side. The pigs, which are used to the free corn, start to come through the gate to eat that free corn again. You then slam the gate on them and catch the whole herd. Suddenly the wild pigs have lost their freedom. They run around and around inside the fence, but they are caught. Soon they go back to eating the free corn. They are so used to it that they have forgotten how to forage in the woods for themselves, so they accept their captivity.

Posted by Don Zech on March 3rd, 2009 7:19 AMPost a Comment (0)

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April 2009

March 31st, 2009 7:02 AM

April 1, 2009

RE: Monthly Letter

Dear Clients:

Sales taxes rise by 1% today, April 1st, and that is no April Fool’s joke! In looking for humor these days, I did have to laugh at a bumper sticker that read, “Honk if I pay your mortgage”. I will tell you that never in my 24 years in the business have I worked so hard for so little. The glimmer of hope is that our call volume is slowly returning, but it is still a struggle to get deals closed because of fear, lack of credit, and people’s general uncertainty.

This is a time of resetting who wins and who loses. This is a time when leadership must shine not just management. To illustrate my statement, let me give you a better definition. Management is the efficiency of climbing the ladder of success. Leadership determines which wall to lean the ladder up against. Today’s survivors are the new winners.

As promised, here are some of the responses to last month’s request for advice/vision going forward.

#1 Thanks for the news letter. Here is my advice in the eyes of a downturn: “You never cut quick enough and you never cut deep enough.” It has to be painful to operate at that level until you adjust to it. Most companies that follow this motto survive a downturn instead of using all of your assets trying to prop up a ship taking on water, robbing Peter to pay Paul and soon find themselves too far in debt to survive.

#2 I say, use your available cash to pay down debt with a higher interest rate than banks are offering on savings, CD’s, etc. I will be paying down my mortgages to get a good return on investment and increase cash flow and at the same time have a secure investment in myself and my own property.

#3 At 33, this is my 1st down cycle as a building owner. I feel that were it not for equity, this would be a trial by fire.I feel homeowners are in Stage #2 and #3. Commercial seems to be just entering stage #2.

#4 What an exceptional newsletter. My addition to the list of what to do in this kind of market is to get above the trees at all costs so as not to be blinded by all the trees in the way. “Where there is no vision, the people perish.” (Proverbs 29:18). The long view is critical so we can see our way out of this particularly dark forest.

As spring blooms and opening day for baseball arrives, I reflect on turning losing seasons around, changes of ownerships, disappointing steroid eras, yet a new season springs with hope eternal. When I coached baseball, I used to say the best two days of a coach’s life were draft night when you were sure you had the best 12 players in the world and the team party when you could finally say goodbye to those unruly kids and their parents!

One of my favorite things to watch in baseball was the turning of an unassisted double (or even a triple) play. Well don’t look now, but our economy is starting to turn (maybe unassisted!). After months of nonstop bad news, there are hopeful signs on the horizon. They include:

a broad rally in stocks
back to back jump in retail sales (ex autos) for January & February
upward sloping yield curve
Swedish clothing store H & M plans to open 225 new stores around the world
22% surge in February housing starts
a return to profitability of several major banks
housing affordability at all-time high
Microsoft revealed plans to open retail stores
Game Stop expects sales increase of 22% over last year
a 4^1/2year high in the dollar
the Navy has added $758 million to its already planned expenditures in San Diego. All to be spent by September 2010

The National Association of Realtors – Commercial Alliance has proposed to Washington the following three goals for the Commercial Markets and the solutions to achieve them.

I. GOAL: Stabilize and Provide Liquidity to the Commercial Real Estate Credit Markets, including Mortgage-Backed Securities.

Solutions:

a. Make mark-to-market accounting rules more flexible, including use of discounted cash flow analysis for valuing assets in illiquid markets.

b. The Treasury and Federal Reserve should exercise their authority to implement and/or expand the Term Asset-Backed-Securities Loan Facility (TALF). The TALF should be encouraged to purchase commercial mortgage-backed securities and conventional commercial real estate loans.

II. GOAL: Maintain or Enhance Federal Tax Policies that Strengthen the Commercial Real Estate Market.

Solutions:

a. Retain current capital gains rules as they apply to appreciated property, like-kind exchanges and carried interests, in particular by keeping the capital gains tax rate at the existing 15%. Suspend passive loss rules.

b. Improve the depreciation, depreciation recapture and leasehold improvement rules without triggering the Alternative Minimum Tax.

c. Reduce the investment impediments caused by the passive loss rules by providing a temporary suspension of the rules for designated investments.

d. Attract new investment in existing real estate by providing higher income limits and expenditure limits to the so-called “small investor” provisions of the passive loss rules.

III. GOAL: Stimulate and Support the Commercial Real Estate Industry through Investment.

Solutions:

a. Provide federal funding for capital improvements to our nation’s infrastructure (transportation, roads, energy grids, etc.).

b. Encourage the commercial real estate industry’s investment in energy efficiency and “green” building initiatives through tax and other incentives, and not through legislative and regulatory mandates that artificially raise the cost of construction and operation of commercial real estate properties.

Our advice in the short run is as follows:

Work hard to make the deals on the table. “Time kills all deals.”
Make your existing tenants feel appreciated.
Start on renewals early.
Keep low rents and concessions short (3 years or less). Buy yourself into the future.
Give the tenant something rather than a rent reduction if possible.
If you have a loan refi coming up in the next 2 years, start work immediately. They’re all taking longer.
Be ready for inflation or at least re-flation.

If you are interested in learning more about what the future holds for Commercial Real Estate, you might want to attend the following breakfast meeting on April 15, 2009 at the USD Burnham Moore’s Center for Real Estate. “After the Fall: What’s Next for Commercial Real Estate.” www.sandiego.edu/breakfast

Remember what the great baseball wordsmith Yogi Berra once said, “The future ain’t what it used to be.”

Regards,

Don

Don S. Zech
CDC Commercial
Real Estate Services

FLORIDA COURT SETS ATHEIST HOLY DAY

In Florida, an atheist created a case against the upcoming Easter and Passover holy days. He hired an attorney to bring a discrimination case against Christians, Jews and observances of their holy days.

The argument was that it was unfair that atheists had no such recognized days.

The case was brought before a judge. After listening to the passionate presentation by the lawyer, the judge banged his gavel declaring, “Case dismissed!”

The lawyer immediately stood objecting to the ruling saying, “Your honor, how can you possibly dismiss this case? The Christians have Christmas, Easter and others. The Jews have Passover, Yom Kippur and Hanukkah, yet my client and all other atheists have no such holidays.”

The judge leaned forward in his chair saying, “But you do. Your client, counsel, is woefully ignorant.”

The judge said, “The calendar says April 1st is April Fool’s Day. Psalm 14:1 states, ‘The fool says in his heart, there is no God.’ Thus, it is the opinion of this court, that if your client says there is no God, he is a fool. Therefore, April 1st is his day. Court is adjourned.”

Posted by Don Zech on March 31st, 2009 7:02 AMPost a Comment (0)

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