Wednesday, November 14, 2012

Time for Owner's to Get Paid?

I assume, most owner's will tend to agree with the headline.
Any replies and input are ALWAYS welcome as all owners bring experience to the discussion.

Many owners of commercial properties who did the, now dreaded 1031 exchange?–esp. through Sun1031 (add DBSI and For1031)– have either lost their entire investment(s) through foreclosure or have not received any distributions for years.

For those who lost their properties, it's more than a shame because it's so close to a crime, that it should be a crime. People go to jail for a lot less in the USA.
it's amazing that this has gone on almost unnoticed by government. Many of us HAVE contacted government entities, but I do not know of any help that's been proffered.

There was the Idaho Attorney General's prosecution of DBSI, but through bankruptcy. You can search on the web to see some interesting information. But, I've also personally spoken to some former DBSI property owners.

Most of us realize that bankruptcy basically benefits lawyers and usually the people at the company (defendant) are shielded personally. SOME properties survived the bankruptcy hearings, but were saddled with attorney fees. In addition, high property management costs (PM's were chosen by the court) for at least one year before owners could change property management if they choose.

The marketing gem for DBSI–and other 1031 sponsors/brokers (Sun1031 included, but they then changed their language later to say one year return for the stated %) was not only the lure of high returns, monthly income, hands-off management, deferred capital gains, etc. BUT the GUARANTEE of those lures. But, as we know or learned, a guarantee is only as good as the company/people behind them. And the adage still stands true: there are NO GUARANTEES. right?

Owner Expenses Have Not Declined
Which brings us to the present. Generally, commercial vacancy rates are still on the high side keeping lease rates low, as much as 60% lower. This will hold true until the economy improves a bit more and vacancies decline. Some good news is that new commercial building has usually not occurred because of the glut of space.

IN MOST CASES, what has NOT declined are owner's costs.

This is a major problem and concern. It's also where some properties were lost entirely because they could not manage positive cash flow long enough to keep the properties alive.

This was due to, among other things:
> property tax rates based on the buying prices of 2005-2007
> inflated property values and faulty pro-rata data from the 1031 sponsors
> high, leveraged debt against the property by 1031 sponsors, who stripped any equity the property did hold and pocketed the cash.

Owners who are still hanging on, are treading water or accumulating red ink as they pay all expenses but enjoy no returns. They also have continued losses and/or declining equity.

Many entities ARE getting paid
There's money coming in, but not to owner's in the form of distributions.
Property Managers get paid, real estate leasing company's get paid, advertisers, utilities co., landscapers, lawyers (if needed), construction companies, all get paid. The Local municipalities get paid via various taxes. And most tenants have benefited by lower lease rates or some even skipping out on their leases sticking owners.

NOW, I do have to say, these people EARN their money. I do not mean to begrudge anyone for making money by working their respective fields. Some like PM's and leasing company's may even have seen some revenue decline as lease rates dropped.

And… the Vultures Benefit with Help of Government?

Vulture asset buying companies have bought a bulk of distressed 1031 notes for @ .23 on the dollar but get paid 100% on their $ for the existing note! But, owners have been slow to get or are denied a note reworking, etc. That is, IF there's a mortgage.
If there's not a loan, owners are facing a declining asset. But, perhaps absent the albatross of a mortgage helps.

The Vultures buy notes from the FDIC who seized failed banks. As I understand it, SOMEHOW, this is an insider's game as owner's were not allowed to bid/purchase their own distressed notes. This would have/could have saved owner's and added instant equity to help right the ship. Instead, owners hold the same onerous deal. The FDIC have for some reason I don't understand, held on to a % of the notes. I guess this is capitalism?

Many have benefited except owner's of many properties. In these cases something has to change. The status quo is a slow death.

Needed Immediately: A new Business Model
What is needed is a new business model which will return owner's into the paid mix. But, the people getting paid by us via our properties, are not in a hurry to create one. Mainly because it may mean less money for them.

So, we continually find ourselves in survival mode.
My following opinion is not aimed at any ONE entity. Everyone works for their piece of the pie.
But, ALL involved have to accept some sort of "redistribution" of the money OWNER's are bringing to them. EVERY expense HAS to be looked at and considered for cuts/restructure, no matter how small.


This may mean doing landscaping work only when absolutely needed versus a monthly contract. Other vendors may also fall into that category.

Local counties HAVE to lower tax rates to reflect current values, basically 50% of the real estate highs. If not, they WILL be lowered when the Vultures take over ownership at their .23 note buy rates. Or, when they re-sell the notes or properties at lower values, but still a profit for the Vultures.

If a new structure is not soon created, vendors may lose their base customers–the owner's–when we resume more control and we MAKE the needed change(s).

Some properties have made changes for their benefit. I'm in one property in which we pursued and obtained a property tax rate decline saving us about $17,000 a year. That's an infusion of pure positive cash flow added to our books.

Ask Yourself This
When you owned a business, if cash flow was not correctly balanced, you HAD to make changes (usually quickly) or the business would fail. This may have meant raising prices, cutting advertising, retail operations may stay open longer or cut hours, etc. The SAME principles apply here in my opinion. The property IS our business.


The now old sales pitch of a "hands-off" investment is, no longer a viable business model for owners. It was a selling tactic. Most owners have allowed the current structure to continue for years. The questions arise: how much longer? Is the investments dead money? Is it time to sell and use any cash for new investments?

If nothing changes soon, the only winners will be the Vultures picking the bones of our sweat equity.

Have you done something to better a property? I relish any owner's input, ideas or opinions on how to change/restructure the current model to benefit everyone. Even if you support the status quo.

I hope this finds everyone healthy.