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Monthly Letter

July 2009

July 1st, 2009 6:05 PM

July 1, 2009

RE: Monthly Letter

Dear Clients:

Happy 4th of July! I’m very reflective this year. I’ve seen outdoor grilling go from my first Hibachi to the Weber to the gas grill, and now I see outdoor cooking centers that include chrome, refrigerators, and even dishwashers! I’m afraid it is a bit like our economy has been, great growth and improvement until we lost focus, overbuilt for our needs, and now need to find our direction again. I hope for your sake and our economy that we can once again find one of the great joys of summer, that easy going, lazy family time, the old picnic table with the plastic tablecloth, the kids carrying bowls of potato salad and chips, and Dad slaving over the hot dogs and hamburgers on the barbecue with a spatula in hand.

As you read this, 77-year-old GM is going through bankruptcy, the US economy has gone through its worst decline in 50 years, economists are predicting hyper inflation, North Korea is suspected of trying to launch a 4th of July missile at Hawaii, the Taliban is trying to join the nuclear club and Israel is looking for an excuse to turn Iran into a glass parking lot, California is so in debt that it has to close state parks, and, oh yeah, the swine flu is predicted to come back in the fall. Closer to home, your retirement portfolio is worth 40% less than 2007, your house is worth 20% less, and you’re scrambling to stay afloat because your friendly banker has cut your credit line. Did I get everything?

I’m reminded of the words from the movie Network: “I’m mad as hell, and I’m not going to take it anymore.” More often than not, we can’t control what happens around (or to) us. We do, however, have total control of how we respond. Constant worry and fear is our brain’s way of “preparing us” for the worst. It causes us to be on guard and brace for impact. Wow, what an exhausting way for us to go through life. No one can predict what is going to happen in the next few years. We can say with absolute certainty, however, that every person has inside them the ability to cope and adapt to just about anything life can throw at us. And that is one thing we can never lose.

Here are a couple of ways to channel your outrage:

1. Speak up. There is an urgent need to follow how members of Congress are voting: http://www.congress.org lets you sign up for updates and forms to e-mail them your opinions.

2. Fight the spin. The airwaves are filled with spin and misinformation. Our country is undergoing unprecedented change. Use Google to learn more. Try http://www.sunlightfoundation.com to see the text of the bills and where earmarks go. Be a watchdog.

Despite growing unemployment, continuing home foreclosures, and a crippling state budget deficit, there are growing signs that the economic slump in San Diego could be approaching a bottom. The University of San Diego Index of Leading Economic Indicators has had its first uptick in two years. If this trend continues, we should hit bottom by year end or early next year. UCLA Anderson Forecast reports that California is moving out of “intensive care” but is still “very sick.” The biggest problem ahead is probably the weakness of the recovery ahead.

The Fed will probably control the road ahead with one of two scenarios:

1. Ease interest rates higher to curb inflation. However, higher rates will curb economic growth and housing, thus prolonging the recession and speed of recovery;

2. Keep short-term rates low to encourage economic growth and higher employment. This would create easy borrowing, and the Fed would be forced to either accept higher taxes to lower the deficit or monetize it by printing money to buy Treasures. This could place enormous upward pressure on inflation not unlike the 1970s and scare China and other foreign investors who we rely on to finance our debt. Neither scenario offers a pretty choice.

Jay Leno reported that the price of a postage stamp has gone up to 44 cents. The government says they have to because fewer people are using the mail. That’s government thinking for you. Hey, nobody’s buying our product — let’s raise the price!

Here’s what we’re seeing in the market battlefield:

1. We are working 2-3x harder for every deal.

2. Lenders involved in more deals - pre-foreclosure decisions.

3. Jittery tenants proposing cheap deals.

4. Need for creative deal making.

5. Weak and fearful existing tenants.

I am glad that our banks have apparently survived their stress tests. I hope you realize I survive a stress test every morning when my alarm goes off for me to go to work!

As you settle in around the picnic table this weekend, please enjoy your friends, your family, and your freedom. Hopefully, you’ll also be able to share this month’s story…a little bit of our patriotic history.

Regards,

Don

Don S. Zech

CDC Commercial, Inc.

Real Estate Services

TAPS

We in the United States have all heard the haunting song, “Taps.” It’s the song that gives us that lump in our throats and usually tears in our eyes. But, do you know the story behind the song? If not, I think you will be interested to find out about its humble beginnings.

Reportedly, it all began in 1862 during the Civil War when Union Army Captain Robert Ellicombe was with his men near Harrison’s Landing in Virginia. The Confederate Army was on the other side of the narrow strip of land. During the night, Captain Ellicombe heard the moans of a soldier who lay severely wounded on the field. Not knowing if it was a Union or Confederate soldier, the Captain decided to risk his life and bring the stricken man back for medical attention. Crawling on his stomach through the gunfire, the Captain reached the stricken soldier and began pulling him toward his encampment. When the Captain finally reached his own lines, he discovered it was actually a Confederate soldier, but the soldier was dead.

The Captain lit a lantern and suddenly caught his breath and went numb with shock. In the dim light he saw the face of the soldier. It was his own son. The boy had been studying music in the South when the war broke out. Without telling his father, the boy enlisted in the Confederate Army.

The following morning, heartbroken, the father asked permission of his superiors to give his son a full military burial despite his enemy status. His request was only partially granted. The Captain had asked if he could have a group of Army band members play a funeral dirge for his son at the funeral. The request was turned down since the soldier was a Confederate. But out of respect for the father, they did say they could give him one musician. The Captain chose a bugler. He asked the bugler to play a series of musical notes he had found on a piece of paper in the pocket of the dead youth’s uniform. This wish was granted. The haunting melody we now know as “Taps” which is used at military funerals was born.

Posted by Don Zech on July 1st, 2009 6:05 PMPost a Comment (0)

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June 2009

June 3rd, 2009 9:36 AM

June 1, 2009

RE: Monthly Letter

Dear Clients:

Well with summer upon us you noble swingers of golf clubs can stand proud. A recent study found the average golfer walks about 900 miles a year. Another study found golfers drink an average of 22 gallons of alcohol a year. That means the average golfer gets about 41 miles to the gallon. Makes you proud – almost feel like a hybrid!

Unfortunately, as we begin Summer we are watching the end of the car industry as we knew it. Not only do we the tax payers now own G.M., but dealerships and used car lots are coming on the market throughout San Diego County.

First the good news. The USD index of leading indicators turned upwards for the first time in several years. Yes, the economy is improving…but don’t get carried away just yet. The gains are small and the recession will linger at least through the end of the year before beginning to recover in 2010. Slow growth, inflation and higher taxes are on the menu for the next few years.

The biggest observation I continue to make is the “zombie” state that seems to hang over Tenants, banks, politicians and landlords. We’re living in a zombie economy. People are frozen by fear for their jobs, their savings, their future and are trying to march forward one step at a time while they digest what has happened and might be next.

The lesson we must learn from this “great recession” is the vital importance of simplicity in business, banking and government. Next to honesty, it is the most important virtue. More often than not, the two are interconnected. Too often the clouds of complexity hide bad judgment, incompetence, unconscionable risk taking and sheer dishonesty. It is one of the reasons I like commercial real estate so much. It is pretty simple; Tenants and landlords, income and expenses, property and loans. With a little diligence you can smell a rat or at least see it coming.

Looking at the numbers, you might think that California was in pretty good shape. General fund revenues of nearly $86 billion are nearly $4 billion more than 5 years ago. Despite our current crisis, Governor Schwarzenegger’s budget is larger than his first budget 5 years ago. California government spending has increased by 20% in 5 years! Raising sales tax has only resulted in less sales. Our national economic revival is being impeded because one-eighth of the nation’s population lives in a state that is driving itself into permanent stagnation. California must once again become the incubator of America’s future.

Peter Druker, the famed business guru, said it best… “Because its purpose is to create a customer, your business has two purposes and two purposes only: marketing and innovation. Marketing and innovation make you money, generate sales, produce profit. Everything else is an expense.”

To that degree, I remember being told that a down market creates a shift in demand to expert brokers who are smart and innovative. Well, we certainly are seeing a spike in demand for our services. However, some days I feel more like a social worker after hearing all of the sad stories. Know that we are working 6 and 7 days a week, pulling out the stops on marketing and we’re forewarning you to be prepared as we get as creative as we can to put deals together. We believe that if we have a “warm body” there is a way to get them into your space. Watch for the following ideas and strategies:

free rent
half rent
99¢ teaser rate first year
stepped rent
tenant improvements
percentage rent
option to buy
pay moving expenses
buy out old lease
short term leases
early termination option
offer start up financing
1^st right of refusals
expense caps

Like the Fed and Treasury, we are going to throw everything we can at a deal to get some movement.

Speaking of innovation, San Diego managed to buck the downward turn of venture capital investment. US Venture capital investment dropped 35% from the fourth quarter, yet San Diego saw a 22% increase. This is a good sign or as the “talking heads” say – “these are green shoots”. Now I just hope somebody talks to the banks about putting some water in the watering can!

If you want to keep up with the latest business going on in San Diego, feel free to click through to our website: http://www.cdccommercial.com where we have a live feed of San Diego business news courtesy of the San Diego Business Journal.

It is with sadness that I announce that Rob Pew has left CDC Commercial, but we’re having our own “greet shoots” as I am pleased to announce my oldest son, Nick Zech, has joined CDC Commercial, Inc. (nzech@cdccommercial.com 858.232.2100 ).

As we watch the auto industry and our economy evolve, I hope my story below gives you a glimpse of history and a lesson in good negotiating.

Regards,

Don

Don S. Zech
CDC Commercial
Real Estate Services

The Four Goldberg Brothers

The four Goldberg brothers, Lowell, Norman, Hiram, and Max, invented and developed the first automobile air conditioner. On July 17, 1946, the temperature in Detroit was 97 degrees.

The four brothers walked into old man Henry Ford's office and sweet-talked his secretary into telling him that four gentlemen were there with the most exciting innovation in the auto industry since the electric starter.

Henry was curious and invited them into his office. They refused and instead asked that he come out to the parking lot to their car.

They persuaded him to get into the car, which was about 130 degrees, turned on the air conditioner, and cooled the car off immediately.

The old man got very excited and invited them back to the office, where he offered them $3 million for the patent.

The brothers refused, saying they would settle for $2 million, but they wanted the recognition by having a label, "The Goldberg Air-Conditioner," on the dashboard of each car in which it was installed.

Now old man Ford was more than just a little anti-Semitic, and there was no way he was going to put the Goldberg's name on two million Fords.

They haggled back and forth for about two hours, and finally agreed on $4 million and that just their first names would be shown.

And so to this day, all Ford air conditioners show Lo, Norm, Hi, and Max on the controls.

So, now you know.

Posted by Don Zech on June 3rd, 2009 9:36 AMPost a Comment (0)

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May 2009

May 1st, 2009 9:17 AM

May 1, 2009

RE: Monthly Letter

Dear Clients:

Well, tax day has come and gone, and I am in hopes that you all have enough left to take you and your friends out for a pizza.

In the meantime, we are in the midst of “The Great Recession.” For a historical sense, below is a chart showing you how we stack up with previous recessions and time.

Since last April, our economy has ground to a crawl. Millions have lost their jobs, nest eggs have evaporated, our financial system has been brought to the brink, we’ve mortgaged our future with bailouts, wars, and stimulus spending. Let’s hope the economy turns soon so the growth takes up some of the slack, and it is not all shifted onto our tax bill.

I like to think that I am not that old, but I do remember James Earl Carter, our President, along with 21% prime interest rates and 20% inflation. I remember Paul Volker attempting to strangle inflation by strangling the money supply. With Mr. Volker returned to a quasi-official capacity, I’d guess we’re in for a bout of inflation, and his job is to minimize it. But with the money supply increased by 20%-30% of GDP, inflation must result. That means fixed assets will rise to keep pace with the devaluation of the currency. At first it will be called “re-flation”. I’m not formally schooled in these matters; I’m just a guy who has seen this movie before. The side effect of saving our economy will be a robust increase in inflation. I believe that inflation will regain all the value we have lost over the last couple of years in the next five years or less.

Warren Buffett on CNBC while praising President Obama’s efforts to stimulate the economy said, “The current course could trigger higher inflation when demand rebounds. We are certainly doing things that could lead to a lot of inflation. In economics there is no free lunch.”

In my never-ending quest to keep your toolbox full so you can be well educated about your commercial real estate, you will find below an excellent summary of the real estate cycle by The London Group. At this point, I’d put us right at about 4 pm. However, armed with this you should almost be able to predict the future!

Close to home, getting a loan continues to be the bane of investors and tenants alike. Activity remains fair, but deal closure is rare. We might finally be reaching capitulation as tenants and owners throw up their collective arms and make deals rather than go in circles any more.

So as you sit around eating pizza with what you have left from your taxes and contemplate the future looking at the real estate cycle chart, I hope you enjoy the tax story attached as it explains paying for your pizza and those that depend upon you.

Regards,

Don

Don S. Zech
CDC Commercial
Real Estate Services

Suppose that every day, ten men go out for pizza and the bill for all ten comes to $100.

If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do. The ten men ate at the pizza parlor every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.

“Since you are all such good customers,” he said, “I'm going to reduce the cost of your daily pizza by $20.” Eats for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still eat for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to eat his pizza. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so the fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now paid $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 ( 22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man, "but he got $10!"

“Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too ... It's unfair that he got ten times more than I did!"

"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up. The next night the tenth man didn't show up for eats, so the nine sat down and had pizzas without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start eating overseas where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D. Professor of Economics University of Georgia

Posted by Don Zech on May 1st, 2009 9:17 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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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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Monthly Letter & Gold Report

January 26th, 2009 5:58 AM

January 26, 2009

RE: Monthly Letter & Gold Report

Dear Clients:

“If you don’t read the newspaper you are uninformed; if you do read the newspaper you are misinformed.”

~ Mark Twain

It is my hope that you are neither uninformed or misinformed after reading this years CDC Commercial Gold Report 2009 — a silver lining…your mileage may vary.

(If you have any problems, just e-mail me, and I will e-mail a copy to you. If you prefer a mailed copy simply let me know.)

I am pleased to present you with our 13^th annual forecast report. Since the Gold Report will give you plenty to read, I will keep this month’s letter short.

As I have mentioned to many of you, the last quarter of last year was perhaps the worst I have seen in 25 years in the business. On a positive note, we have seen a small bump up in activity since the first of the year. I am hoping we can convert this activity to deals and gain some traction in this market. My New Year’s motto is, “Fixing the market one deal at a time.”

I would also be remiss if I didn’t tell you that I am getting lots of calls from landlords and property managers telling me that tenants are crying, failing, and asking for rent concessions. Here is some of the advice I’ve been giving out.

Do almost anything to retain good existing tenants.
Make concessions small, short term, and try to simply defer the concession to the end of the lease or later in the term, i.e., give a rent reduction for 6 months but tack it on to the end of the term.
Try to get something in return for the concession.

have them extend the term or exercise option early.
eliminate an onerous option from the future (make a fixed rate option a market rate option).
get a unilateral right to terminate with 6 months notice so you can re-tenant later.
can you barter with the tenant for their product or service (i.e., free meal every week from your restaurant tenant)?

Try to avoid any permanent or long term rent cuts. This hurts value. Give free rent, deferred rent, or short term reductions.
Make sure you get into their books and business. Understand what is really happening to their business and why they can’t pay rent. What event will allow them to pay full rent again? Do they have a manageable plan to get there?
Be flexible but firm.

If you are not able to retain the tenant and will have to legally serve them a 3-day notice, you will no longer be able to use the Sheriff’s department as we have for years — another casualty of budget cuts. You will now need to use a private process server like:

Vista Courte Services — 888-838-8845

Buena Vista Process Server — 760-758-1669

I thought you would enjoy this list of the six phases of our economic cycle:

Enthusiasm.
Disillusionment.
Panic.
A search for the guilty.
The punishment of the innocent.
Praise and honor for the politicians.

Despite the humor above, it is time once again for our great nation to stop being red and blue and once again be Red, White & Blue!

I hope you enjoy this year’s Gold Report.

Regards,

Don

Don S. Zech

CDC Commercial

Real Estate Services

Posted by Don Zech on January 26th, 2009 5:58 AMPost a Comment (0)

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December 2008

December 5th, 2008 12:15 PM

December 1, 2008

Re: Monthly Letter – Holiday Letter

Dear Clients:

What a year! We’ve gone from a time where anybody could get a loan to a point where it seems nobody can get a loan! We at CDC Commercial are scanning the horizon for new opportunities and solutions to age old problems. We continue to work hard to bring you transactions we believe in. Deals that are worthy of both your time and investment. We like to say that we live at the intersection of problems and solutions.

I have told many of you this is the worst and fastest drop off I have seen in over 23 years. Our inbound call volume has dropped by 30%. There are days we have more calls from landscapers or contractors looking for work than we do from tenants looking for space! We are finally on the other side of the election and expectantly waiting to be on the other side of the financial meltdown. The TARP program is in place but the only tarps I’ve ever seen work cover things up! There is no limit to the amount of funds that Congress and the President can spend. The ultimate burden is borne by the taxpayer, either directly in higher taxes, or the reduction of purchasing power through inflation.

I will tell you that since the election people have become more decisive. Unfortunately, many more tenants and buyers are saying “no” but at least we’re not hearing “maybe” or “we’ll see”. Our job as brokers now is to weed through all those “no’s” and find the “yes’s”. There are people who want or need to do business right now and it is our job to find them.

The best commercial real estate brokers are, first and foremost, excellent communicators and impeccably honest. They negotiate with confidence yet never forget the emotional implications of a sale or lease. The best brokers are flexible and creative yet practical. They respond to challenges quickly, deliver disappointing news gently and never lose sight of those pesky details that can loom large if left undone.

Truly, brokers need to be nearly superhuman! With typical aplomb, the best salespeople don’t linger on this fact. They just go out and do the work, day in and week out. Perhaps that dedication is most important of all. Some say “passion” is an overused word. However, it is critical in commercial real estate sales and leasing. Passion – not money – is the fuel that keeps us going and is the thing that pulls us out of bed each morning

We are in the midst of a worsening economy that threatens vulnerable families. As we count our blessings this Holiday season, I would like to draw your attention to Interfaith Services. Interfaith is a nonprofit that has been helping people help themselves for more than 25 years. We helped more than 28,000 people in extreme need this year and demand is growing. 90% of every dollar given goes directly to those in need. Interfaith partners with over 400 faith communities to help those in our community in need. I am on the Board of Interfaith and will be helping on Christmas Eve to serve in the soup kitchen. If you can or want to help by donating food, support a housing unit, or make a donation call me or go to their website www.interfaithservices.org.

And while you are filling out your Holiday cards this year, add one to the following address for recovering soldiers:

Holiday Mail for Heroes
PO Box 5456
Capitol Heights MD 20791-5456

And finally, a great big thank you and blessing to you and your family. It is during times like these that we appreciate our clients and their enjoyment of the company of people who understand them, and who appreciate their goals, values, and passion for life’s important matters.

I hope you enjoy this year’s Christmas Story and appreciate the freedom we have.

Happy Holidays!

Regards,

Don

Don S. Zech

CDC Commercial

Real Estate Services

I put my carry-on in the luggage compartment and sat down in my assigned seat. It was going to be a long flight home for Christmas. Just before take-off, a line of soldiers came down the aisle and filled all the vacant seats, totally surrounding me. I decided to start a conversation. ”Where are you headed?” I asked the soldier seated nearest to me. “Chicago - to Great Lakes Base. We'll be there for two weeks for special training, and then we're being deployed to Iraq.”

After flying for about an hour, an announcement was made that sack lunches were available for five dollars. It would be several hours before we reached Chicago, and I quickly decided a lunch would help pass the time. As I reached for my wallet, I overheard the soldier ask his buddy if he planned to buy lunch. ”No, that seems like a lot of money for just a sack lunch. Probably wouldn't be worth five bucks. I'll wait till we get to Chicago.” His friend agreed. I looked around at the other soldiers. None were buying lunch. I walked to the back of the plane and handed the flight attendant a fifty dollar bill. ”Take a lunch to all those soldiers.” She grabbed my arms and squeezed tightly. Her eyes wet with tears, she thanked me. ”My son was a soldier in Iraq; it's almost like you are doing it for him.” Picking up ten sacks, she headed up the aisle to where the soldiers were seated. She stopped at my seat and asked, “Which do you like best - beef or chicken?” “Chicken,” I replied, wondering why she asked. She turned and went to the front of plane, returning a minute later with a dinner plate from first class. ”This is your thanks.”

After we finished eating, I went again to the back of the plane, heading for the restroom. A man stopped me. ”I saw what you did. I want to be part of it. Here, take this.” He handed me twenty-five dollars. Soon after I returned to my seat, I saw the Flight Captain coming down the aisle. When he got to my row he stopped, smiled, held out his hand, and said, “I want to shake your hand.” Quickly unfastening my seat belt I stood and took the Captain's hand. With a booming voice he said, “I was a soldier, and I was a military pilot. Once, someone bought me a lunch. It was an act of kindness I never forgot.” I was embarrassed when applause was heard from all of the passengers.

Later I walked to the front of the plane so I could stretch my legs. A man who was seated about six rows in front of me reached out his hand, wanting to shake mine. He left another twenty-five dollars in my palm. When we landed in Chicago I gathered my belongings and started to deplane. Waiting just inside the airplane door was a man who stopped me, put something in my shirt pocket, turned, and walked away without saying a word. Another twenty-five dollars!

Upon entering the terminal, I saw the soldiers gathering for their trip to the base. I walked over to them and handed them seventy-five dollars. “It will take you some time to reach the base. It will be about time for another sandwich. God Bless You and Merry Christmas.” Ten young men left that flight feeling the love and respect of their fellow travelers. As I walked briskly to my car, I whispered a prayer for their safe return. These soldiers were giving their all for our country. I could only give them a couple of meals. It seemed so little...

As we fret over our share of the US debt and if we’ll have enough money for Christmas just remember that “a veteran is someone who, at one point in his life wrote a blank check made payable to 'The United States of America' for an amount of 'up to and including my life.' That is Honor, and there are way too many people in this country who no longer understand it.''

May God bless you and may you have a safe Holiday and a Happy New Year!
Don, Candy & Nick Zech, Nancy Murphy, Rob Pew, & Rebekah Jones
CDC Commercial

Posted by Don Zech on December 5th, 2008 12:15 PMPost a Comment (0)

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November 2008

November 1st, 2008 2:26 PM

November 3, 2008

Re: Monthly Letter

Dear Clients:

“…public credit depends on public confidence… The financial crisis in America is really a moral crisis, caused by the series of proofs …that the leading financiers who control banks, trust companies and industrial corporations are often imprudent, and not seldom dishonest. They have mismanaged…funds and used them freely for speculative purposes. Hence the alarm of depositors and a general collapse of credit…”

These words were written on November 2, 1907

The mortgage securitization idea is not a new one, in fact it has been tried and failed six times from the Civil War to World War II.

A year ago we paused as we watched the homes in our neighborhoods burn. This year we again took pause as we watched our hard earned savings burn on Wall Street. The ugly thing is that the federal government providing the “solution” is the same entity that has been asleep at the wheel while Freddie, Fannie and the Investment Banks stole us blind. I find it fascinating that on the way up we espouse free enterprise, but socialism is the preferred method on the way down. If there is a silver lining in this mess it is that we are wringing out the inflation/oilflation that was creeping into our system. As I tell my wife, the good news is I’ll be able to afford to drive my SUV to work. The bad news is that I’ll have to drive it to work for another 25 years so I can afford to retire!

It is time to think and rethink. Will you exploit this situation or will the situation exploit you? Buy low, sell high is still a good idea. A penny saved is more than ever a penny earned. A fool and his money are soon parted (although they may be reunited in a government bailout). Warren Buffett has a simple rule, “Be fearful when others are greedy and be greedy when others are fearful.”

Some of you thought I was crazy when last month I said we were nearing the bottom (I said bottom, not end). Now it is time to look for a solid uptick. Residential has started to show promise with less foreclosures, more houses sold etc… However, that trend may reverse for a little longer due to this month’s financial crisis. The commercial market was going to make it through relatively unscathed, but tight credit and tight-wad consumers will now impact commercial more. Remember that the stock market is about a six month leading indicator…so they’ve already voted for President. I still say we’re at the bottom and while I thought the turn was going to be by May 2009, I think it is closer now to this time next year.

It is easy to give in to excessive pessimism these days. But the US model – based on productive labor, free trade, fewer rules, lower taxes and rewards for entrepreneurial effort – is still sound. We’ll soon emerge stronger and better for our current tribulations.

We’re now entering an age of accountability. People now pay attention to quality, not just throw their money at junk. Banks are loaning their money (not Wall Street’s), automakers are selling cars – not financing. And we’re in the real estate business, not speculators.

At CDC, we’re looking at this time as if we’re in “the red zone” in a football game. We’re expending exceptional effort to find and push deals across the goal line. We are now in a time where Buyers and Tenants are king again. For us, negotiation is back in style. Now, more than ever, it is time for all of us to keep our eye on the ball.

Below you will find a story my dad gave me 20+ years ago that his dad had given him in the 1930s. We’re glad to have you as our customer and continue to strive to bring customers to your properties.

Regards,

Don

Don S. Zech

CDC Commercial

Real Estate Services

I am your customer

I am your customer. Satisfy my wants – add personal attention and a friendly touch – and I will become a walking advertisement for your products and services. Ignore my wants, show carelessness, inattention and poor manners, and I will simply cease to exist – as far as you are concerned.

I am sophisticated. Much more so than I was a few years ago. My needs are more complex. I have grown accustomed to better things. I have money to spend. I am an egotist. I am sensitive; I am proud. My ego needs the nourishment of a friendly, personal greeting from you. It is important to me that you appreciate my business. After all, when I buy your products and services, my money is feeding you.

I am a perfectionist. I want the best I can get for the money I spend. When I criticize your products or service – and I will, to anyone who will listen, when I am dissatisfied – than take heed. The source of my discontent lies in something you or the products you sell have failed to do. Find that source and eliminate it or you will lose my business and that of my friends as well.

I am fickle. Other businessmen continually beckon to me with offers of “more” for my money. To keep my business, you must offer something better than they. I am your customer now, but you must prove to me again and again that I have made a wise choice in selecting you, your products and services above all others.

Posted by Don Zech on November 1st, 2008 2:26 PMPost a Comment (0)

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October 2008

September 30th, 2008 12:34 PM

October 1, 2008

Re: Monthly Letter

Dear Clients:

As you know, I often say that as a salesman I’m paid to be an optimist. So I tend to look for the silver lining in most clouds. It’s just hard this month to think of much good to say about this economy and I can’t see clearly enough to tell you when the carnage will end. Through all the smoke and clouds and distressed voices of the financial battlefield, I hope to give you some pause for thought.

First, what is the word for an “un-bubble”? It appears that we have a vacuum of optimism. People are irrationally depressed. Granted, we are in the midst of the greatest realignment of the US financial system ever in history. The greatest question is will they be successful in saving your street or only Wall Street?

At no time in commercial real estate has it been more difficult to nail down trends. We are seeing repricing of debt and equity. The market place is influenced more by fear and panic than by underlying fundamentals.

The precedent here is terrible. Investors got paid not based on what they owned but by who they were. Sophisticated overseas central banks and investment funds got paid back 100% because the Fed and Treasury were scared of the impact of paying them less. Freddie, Fannie and Washington had allowed foreign investors to think their investments came with a US government guarantee. As in most of life, perception becomes reality and you and I as tax payers are funding the guarantee. Now the good news: avoiding the meltdown should lead to a more rapid recovery in the real estate market, a rebound in economic growth and an eventual surge from a rebuilt banking sector.

The Fed and the Treasury have no choice but to keep interest rates low until the current liquidity problems are under control. Not to do so would result in a steep recession and a threat of a financial panic. Yet, keeping rates down risks damage to the economy from high inflation. My best guess is that once the financial markets stabilize, the Fed will have to make up for lost time by raising interest rates.

Now for my GIGANTIC prognostication! While many out there are asking, “When will the other shoe drop?” (commercial real estate crash), I am going to ask – “Is it not possible we are at the beginning of a new bull market in real estate?” How many times have you heard, “You make the big money when you buy it right.”? Most people don’t notice when a market changes until it is too late to capitalize on. John Templeton, the founder of Templeton Mutual Funds, said, “Bull Markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.”

I saw this right after 9/11. If you go back and see when the last boom got its toe hold, it was after the dot.com bubble meltdown. Then 9/11 happened and the next thing we were on a wild ride. Why? Because the public became concerned with this world and where this country was headed. We saw firsthand how easy it was to lose a fortune. People want something tangible. It is a lot easier to understand real estate than a CDO, CMBS or derivative with risk traunches. If this is true, then maybe the recovery has begun and we have been beaten down enough by the media and other finance gurus not to notice.

Think about these numbers:

· San Diego unemployment was at 6.4% in August, down from 6.5% in July

· Housing sales for July were slightly ahead of August 2007 levels

· New building permits for San Diego increased in August to 672 units, up from 437 in July and 451 in August 2007.

· There were 13.7% less houses for sale in September 2008 than in September 2007

· CEO confidence has increased for the first time since 2^nd quarter 2007 according to San Diego based Vistage

· California Employee Confidence Index increased in August for the second month in a row.

· 48% of new home buyers were able to afford an entry level home compared to 24% a year ago

In the same Vistage survey mentioned above, you can see why business and politics don’t mix. CEO’s were asked which candidates – McCain, Obama, Biden or Palin – they would select to run their company. 49% said none, 29% chose Palin, McCain got 10%, Obama 8% and Biden 4%.

I hope in this down market you realize, like we do, that you need good salespeople to gain good relationships with tenants and buyers. I hope that the Optimist Creed posted at the end of this letter reminds you of why we’re paid to be optimists.

Regards,

Don

CDC Commercial
Real Estate Services

The Optimist Creed

Promise Yourself -

· To be so strong that nothing can disturb your peace of mind.
· To talk health, happiness and prosperity to every person you meet.
· To make all your friends feel that there is something in them.
· To look at the sunny side of everything and make your optimism come true.
· To think only of the best, to work only for the best, and to expect only the best.
· To be just as enthusiastic about the success of others as you are about your own.
· To forget the mistakes of the past and press on to the greater achievements of the future.
· To wear a cheerful countenance at all times and give every living creature you meet a smile.
· To give so much time to the improvement of yourself that you have no time to criticize others.
· To be too large for worry, too noble for anger, too strong for fear, and too happy to permit the presence of trouble.

-Optimist International

Posted by Don Zech on September 30th, 2008 12:34 PMPost a Comment (0)

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September 2008

August 29th, 2008 7:02 PM

September 1, 2008

Re: Monthly Letter

Dear Clients,

Well as the Olympics wrap up, the kids go back to school, and the Presidential battle heats up, I must say I am looking forward most to football season. There seems to be no substitute for the joys created within our families, friends, co-workers and community as we rally behind the competition of our local high school, college and professional teams. As “our” teams compete we seemingly live and die by those pass completions, fumbles and goal line stances. We relish in the competition even if it is from the arm chair or sofa.

We as Americans need to pay attention to our competitive attitudes and make sure they are not stuck to only the sofa. As I watched the Olympics it was amazing to watch as many of the Worlds’ nations competed and routinely win medals. The Chinese with over a 25% increase in Gold medals from 4 years ago! The Spanish competing very evenly with our own NBA all star team. We’re starting to run out of time and excuses as the world gains on us. They copy our productive methods and then compete with us. We must always be improving.

The way out of this poor economic time is to innovate (to do this we must all be life long learners) and lead. To lead we must compete in global markets. We need to export Capitalism, “Buy American” was the cry of protectionist, but now we really want the world to “Buy American” not just the U.S. We’ve got to be smarter than the competition!

The National Education Association (NEA) in a recent report showed that a high school drop out earns about $260,000 less over their lifetime than a high school graduate. In our society that adds up to a loss of 1.6% of our GDP. If that does not concern you enough, how about the fact that 80% of individuals in prison don’t have a high school diploma!

Closer to home, I am seeing some interesting returns to the way things once were. Banks are now chasing deposits so as to have the capital to lend. Furthermore, banks are back to following the basic principals of banking – “don’t lend money to people who can’t pay it back.”. The car leasing market is also drying up as big car values plummet forcing more people back to owning their cars again.

High gas prices are having severe/significant impacts. First higher energy costs are acting as a tax or equivalent to an interest rate bump effectively slowing our economy across the board. Locally, we are seeing more businesses looking to locate closer to home. This trend will bode well over the long haul for the North County office market. With consumers trying to consolidate their driving trips, tenant mix and synergy are more important in retail centers than ever. Can you get the groceries, drop off the video and pick up tonight’s dinner all in the same center?

We’re hearing more and more stories of tenants struggling. Our recommendations are as follows:

1. Renew tenants early – make sure they stay committed to your location.

2. Offer incentives to renew – no increase for the first year or new carpet and paint.

3. Work to hold your rents – that way you won’t be stuck with low rents when things turn around.

4. On new deals be flexible with free rent, TI allowances, stepped rent.

In the middle of August, Alan Greenspan said the bottom of the real estate correction will occur in the first half of 2009 and the recovery process will then commence.

I believe that to be true. As I said in the beginning of the year, things will remain stagnant until after the election. After which the markets will start placing their bets and moving forward.

San Diego’s strong economic fundamentals and demographics make it an excellent market for long-term investment opportunities, as well as an attractive tenant location compared to other areas of the country…or for that matter, the world.

Given that school is starting, as is football, and my cry for us all to be life long learners and competitors in our marketplace, I thought you’d enjoy the story below.

Regards,

Don

CDC Commercial
Real Estate Services

What Would Happen If…

We Ran Our Football Teams As We Do Our Classrooms:

Everyone would have the right to equal playing times so that all could develop their athletic skills equally

Cooperation would be more important than excellence. Competition would be frowned upon.

Since star athletes are already talented, they would not need special coaching or conditioning. They could help teach other athletes since “to teach something is really to learn it”.

We could “coach to the middle”.

We would strive to develop well-rounded athletes. Thus, the star quarterback would take a turn sitting on the bench as a trainer. The student of lower analytical skills would get a turn as quarterback. The out-of-shape student who hates physical activity would get the opportunity to play running back.

Coaches would be expected to understanding when jobs, family trips or homework interfered with practice time by adapting game plans to accommodate much multiple interests.

Coaches would be assigned parking lot supervision duty immediately before and after games and during half-time. If athletes had questions about game plans, they could meet with coaches in the parking lot. Coaches would have to plan their plays before or during supervision duty.

Coaches could not demand too much of students lest they create stress or interfere with many other interests and priorities.

If the team had a losing season, new philosophies of coaching would be developed. Each new philosophy would discard all previous philosophies. It would require a two-hour training session and supply the coach with a pocket folder crammed with philosophy and objectives. Coaches could plan their strategies between supervision duties and games.

We Ran Our Classrooms As We Do Our Football Teams:

Teachers would walk into class enthused and fired up with the importance and relevance of what they were teaching.

Students would be in class because they wanted to learn and they would respect the teacher and put all their energy into the class. Class would be more important to them then their jobs or football practice.

Parents would jam the schools asking the teacher how to help their students excel.

Students wouldn’t dare miss class or skip doing homework lest they be dropped from the academic team.

Students would develop a sense of teamwork and cooperation fueled by their love of learning and challenging of each other. Students would take pride in their classes and demand that classmates give their best.

Students would clamor to be “student of the week” or make the honor roll. Other students, teachers and the community would enthusiastically and supportively be involved in student learning.

We would have rallies and bands and cheerleaders for National Merit Scholars and honor students, and they would not feel uncomfortable about receiving the attention because this would be every student’s dream.

Every night the 10 o’clock news would devote a full 10 minute segment to education issues and highlights. The morning radio stations would compete for the education audience.

Newspapers would devote several pages (or a whole section) complete with pictures to academic activities.

We would demand excellence in the classroom and teach cooperation and patience on the playing field.

Our society would clamor to build and equip learning facilities because everybody would recognize the value of well-educated citizens to the business community.

Posted by Don Zech on August 29th, 2008 7:02 PMPost a Comment (0)

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