INTERESTING TIMES
My team just put another $3.5m office building into contract at 3645 Grand Ave, Oakland, a $3.4m mixed-use building at 1015 University Ave, Berkeley, and we just closed a $900k multifamily at 1004 60th St in North Oakland and two buildings for over $3.4m at 1128-30 Bancroft Ave in Berkeley. Busy times.
What makes these days interesting? For starters, I sold both 1004 60th St and 1128-30 Bancroft Ave two years ago and now just sold them again for more than 100% return to the owners. That’s interesting. Another interesting fact is that interest rates have been lower for longer than at any time in the past century. I think people are getting used to that and have adjusted pricing and cash flow expectations accordingly. Result: high prices based upon current returns on equity.
What this all may mean is that prices over the next several years begin to overshoot long term sustainable trends. Read “we may see prices go up and then down from here.” What strategies might offer protection against a peaking or plateauing commercial property market? Here are some ideas:
• Obtain longer-term fixed rate loans

• Sell at a high price to lock in gains

• Do a combination of these things by selling at a high price, purchasing a larger more diverse, higher income portfolio and financing it with relatively longer fixed-rate debt
My most successful clients are pursuing paths similar to the combined approach above. They are growing their portfolios steadily and carefully through opportunistic sale, purchase and finance.

Call or email me for a consultation.

DID YOU KNOW?
Property values in Berkeley, Oakland, and throughout the Bay area have continued to increase, but much of the recent increase is driven by rental rate growth with low overall inflation. One of the drivers of continued real estate transactions at this time is real estate’s perceived resilience in both low and medium inflationary environments. If inflation remains low real estate provides a steady cash flow, if inflation increases somewhat, rents increase with inflation as do immediate cash flows from the property. Win-win.

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VELOCITY OF CAPITAL

We’ve discussed recent transactions by my team that have given the Sellers 2x return in 18 months. Why is this important? Why not hold the real estate for fifteen, twenty years, or forever? Because your return from all your hard work depends upon how you manage the portfolio.

Sure, you can hold real estate without a loan through thick and thin. However several factors conspire to re-duce your return if you do that, including:

More equity in one asset makes your portfolio less diverse and more vulnerable to a problem that occurs

in that one location

• Loan terms generally allow for the owner to gain cash flow from every dollar of loan–the more equity you

have in a building, the less hard each dollar of yours is working

…and here’s the kicker, ask yourself if it’s true for you, I know it is for me:

• When you have owned a property for a long time you start to get into a rut with maintenance and especially upgrades; the vision diminishes and your best attention goes towards new projects

These are a few reasons why Velocity of Capital can be important. If you put your effort and attention into a project for a few years and then sell it to a motivated buyer you’ll be able to buy something new that better suits your goals: bigger, better area, much more cash flow, whatever you want. If you hang onto it after you have given it your best shot, then let’s be honest you’re holding what has effectively become an illiquid bond with lots of risk each year to your time, energy, emotions and pocketbook.

Velocity Of Capital is how quickly your money moves from one job it is doing for you to the next. If you don’t give your money (and yourself) challenges it (and you) will underperform.

DID YOU KNOW?

• At a given purchase price a building will produce far better cash flow if it is separately metered for all utili-
ties, including water.

NEXT STEPS

Several of our clients are seeking purchase properties from exchanges they are executing now. This means they are motivated to buy now, even though the market is somewhat constrained for buyers. A good opportunity if you want to sell.
And some of our clients have decided to sell into this market, including one who is selling his 220-bed student housing asset in Berkeley for over $30 million. Another has decided to sell his North Bay property for $10 million.
A year ago, both of these properties were available off-market at low market cap rates. Now (assuming 75% LTV interest-only loan) they are selling at 10% and 15% cash-on-cash return, respectively. What about the supposedly tight market for sales? Sometimes it takes a serious offer to get a deal done.

DID YOU KNOW?

• The Berkeley Rent Board supports tenant buy-outs

• You can usually get more total rent by charging for utilities that the landlord otherwise would pay for, even trash collection and landscape maintenance

• Water and utility districts are offering large rebates for energy and water saving measures

• Buyers are willing to purchase “soft-story” buildings again because retrofit costs are better understood

Relationship

Getting good real estate deals is all about relationship: with the broker that finds you a property purchase that will work for your needs, with the broker who helps you negotiate the best price amidst all the variables of a purchase transaction, with the broker who helps you sell that same property when it’s time to trade into something larger and easier to manage.

It’s good to have a relationship with a great broker because a great broker is constantly building bridges between buyers and sellers, keeping his or her ear to the ground, and reaching out into the community to find out what is going on.  Getting the benefit of all this hard work is as easy as…letting one of these great brokers know what you want.

 

How To Recognize a Great Broker

1. Works for a regionally dominant firm (hint: there are only a handful in any given area)

2. Leads a team of brokers that support each other in serving you

3. The cohesive team makes several hundred calls per week (ours makes 600-700)

4. Team has proven success closing many millions of dollars in transactions per year for years running

…AND most important

Listens to you and understands what you want.

 

Next step, call me or wait for my team to call you.

 

Kent Mitchell: 510-548-2554

 

Did You Know?

The way that my clients have closed the really best off-market transactions is by following these steps:

– Tell me what would be an ideal purchase for you (or sale price for several of your buildings)

– Give me clear feedback when I discuss a prospective purchase with you (or describe a prospective buyer)

– When the right buy/sell opportunity comes along, execute, stick with the transaction and get it done (make me work hard for you!)

 

There is enormous value for owners in the *transaction* process.  Proceed step-by-step to get every ounce of value out of the years of work you put into these properties!

Berkeley Investors Group Lunch Wednesday, November 10 at 12:00 noon

– this one is close to the freeway for those of you out-of-towners! –

La Mediterranee
2936 College Ave.
Berkeley, CA 94705

Tel: 510-540-7773

Chicken Cilicia, Grecian Spinach and Feta, Pomegranate Chicken and Lule Kebob, Hummus, Baba Ghanoush, Tabuleh, Armenian Potato Salad, Dolmas, Levant Sandwiches.

Cost is $15.95 per person plus tax and tip, so count on bringing a $20 bill (cash please) to cover lunch. I took out the quip about having a glass of “recession-approved” water with your lunch this time around. Why not splash out for a glass of iced tea or a beverage of your choice? Bring an extra few dollars for that. Last time we met it really was a fun lunch, with all sorts of Middle-eastern dishes being passed around, along with local market assessments.

Parking is available in a lot behind the restaurant.  Just drive past the restaurant going north on College, take the first left, then left again into the first driveway.  The meters there take credit cards.

The meeting is coming right up so let me know whether you will be there and we’ll reserve you a spot:

Kent Mitchell: kent@sagepropertysolutions.com, 510-548-2554

The North Oakland rental real estate market has been hot for some time. Because it is a core Bay area neighborhood next to the pricey neighborhoods of Rockridge and Temescal, the Paradise Park area of North Oakland is prime for rentals. Because it is just outside the boundary of Temescal, purchase prices are lower. This presents an ideal combination for the savvy real estate investor: low purchase price, high rents, and price appreciation.

For investors seeking immediate cash flow plus long-term return, an area such as North Oakland thus presents an excellent opportunity.  The last piece of the puzzle is immediate upside potential from purchase rent levels.  Because the parts of North Oakland that are appreciating rapidly are being discovered both by owners and renters at this time, much of the real estate available there has not been fully improved.  There are many classic 1920s era homes and small multi-units in need of cosmetic and/or structural rehabilitation.

The cosmetic rehabs are a key opportunity.  While a significant return is also possible from performance of a major structural rehabilitation on a building, this is a capital-intensive undertaking made more so because it is quite difficult to obtain a loan on a property with such major structural needs as roofing, foundation and other major functional systems.  However, if a building only needs some paint and cleanup of its interior, while it may look really bad inside and out it actually might not need much work to make it both rentable and salable.

As investors and brokers, we at Sage Property Solutions have kept an eye on North Oakland, particularly the Paradise Park neighborhood, for the past nine years.  Kent Mitchell has performed two major projects on one of the larger properties in the area, resulting in an enormous return on investment.  Kent and Sage Property Solutions are keeping a close watch on properties now coming onto the market in this area.  You may view these on the Sage Property Solutions web site, here: http://www.sagepropertysolutions.com/opportunities.asp.

Please feel free to contact Kent with further questions about investing in this key Bay area sub-market.

Kent Mitchell, Principal Broker, Sage Property Solutions:

kent@sagepropertysolutions.com, 510-548-2554.

The excerpt below is from a post to the Berkeley Investors Group — join us on line at http://www.BerkeleyInvestorsGroup.com.

As we approach the final hour of 2009, we’re scheduling the first Berkeley Investors Group lunch of the New Year. Has anyone mentioned that 2010 is going to be an *amazing* year, both personally and financially, for each of us? At the January 21st meeting of the Berkeley Investors Group, we’ll look at how to take the opportunities that are coming:

(find Lunch time and place below these discussion points)

Example Opportunities coming…now:

Investments outside the US are becoming popular. Just one case of this is the change to my son’s administered 529 plan: they’ve increased the international portion from 20% to 30%. That’s big for an institutional investor. Investors large and small are looking outside the US. We’ve purchased land in a development which is still selling on a quiet coast near my favorite vacation area, Puerto Vallarta.

Corporate acquisitions heat up. There is a range from big to small here, too, as the large players begin consolidating in earnest in 2010, and those of us nibbling at the small startup opportunities (Angel Investment) see a run for good deals as well. I’ve seen several enticing opportunities recently, culminating in a current offering by nationally recognized green countertop maker, Vetrazzo (you can Google it).

Did anyone mention commodities? I personally have a significant commodity portfolio. Why? Well, there are the inflationary predictions, and then there is the return of production (already well-afoot in China) consuming resources. If you add to this factors such as the IEA prediction that oil production will peak as soon as 2020 (that’s right, peak oil, in 10 years, predicted by the *authoritative* body, not the lunatic fringe), you have a strong case for some commodities doing quite well.

Isn’t the Berkeley Investors Group a local real estate investment group? Right. With fellow BIG member Daniel Andrzejek, Sage Property Solutions has placed an offer on a six-unit building in Berkeley that has a few tenant and regulatory issues. Not so bad for us locals but apparently too much for the East Coast-based lender to deal. We expect to make over 100% profit in one year on this deal after the lender takes the property REO and our agent, Grant Chappell, takes over as seller’s agent. A double-end deal for Grant and 2x return for us. All real estate agents in BIG please take note how Sage Property Solutions supports local brokers!

353 Grand Ave. Remember this property from prior group discussions and on-site visits? We’ve continued to monitor it and have two updates: one, Rawley Nielson continues to work directly with Benyam Mulugeta in hopes of becoming the seller’s agent on the deal when Mr. Mulugeta gets it out of bankruptcy. And Ken Miller has steadily worked with Sterling Bank, the 1st lender, to negotiate a purchase of the loan. Two ways to approach the deal, yet it remains in bankruptcy, with neither the lender nor the owner ready to negotiate realistic terms. We’ll wait until they are and take it when someone’s ready to hand it over!

1176 University. This was a prime acquisition target of Sage Property Solutions a few months back. It is exactly the type of property we have capitalized successfully for owners the past eleven years. We saw the owners had lowered the price from over $3M to $2.65M. Our assessment, if you recall, was that the property could move at $2.3M, and at that price we could manage it for over 10% cash-on-cash return to owners. It happened. The property was purchased for exactly $2.3M, and someone has a cash cow now. Do you wish it was you? Congratulations to Eli Davidson for closing this deal. Wish we had managed to line up purchasers to be able to capitalize this one!

Finally, a current opportunity we observe. I’ve been down with a number of people to look at 1425 Harrison St. in Oakland. This is another property by the same motivated seller that let 1176 University go for a song. My suggestion is that we get a little coir together and bring them an offer: the property was at over $5.5M, was lowered to $5.25M, and my gut feeling is it could move for $4.35M. Shall we wait this one out on the sidelines? Someone’s going to get this beautiful, 1920s historic property in great condition (just a bit under-managed, in need of cosmetic attention, and a candidate for utility cost reductions). How does 10% cash-on-cash day one plus 2X return on the short end of 2-5 years sound, if things remain stable, or better if they improve? Have I mentioned that multi-unit residential has remained the shining star of real estate throughout the recession?

Attached are several documents, including details of the 1425 Harrison deal, description of the type of deals I look for, and a history of past and present deals I have done. Please send this type of information on yourself to the group as well, so we can get to know each other better.

We’ll see you in January for a BIG start to the new year! Let’s overwhelm La Mediterranee with our numbers this time, and then take high cash flow multi-units in Berkeley and Oakland by storm!

______________________________________________________________

Lunch Thursday, January 21 at 12:00noon.

–this one is close to the freeway for those of you out-of-towners!–

La Mediterranee
2936 College Ave.
Berkeley, CA

Chicken Cilicia, Grecian Spinach and Feta, Pomegranate Chicken and Lule Kebob, Hummus, Baba Ghanoush, Tabuleh, Armenian Potato Salad, Dolmas, Levant Sandwiches.

Cost is $15.95 per person plus tax and tip, so count on bringing a $20 bill (cash please) to cover lunch with an icy cold class of recession-approved water.

Put it on your calendar.
Seeking Purchase Opportunities

It’s an interesting time for apartment ownership in the central Bay area in California. What I find most interesting in the classic 20-30 unit apartment market in good neighborhoods of Berkeley and Oakland is our rents have held up and are as high as they have ever been.

There are few defaults in multi-family properties with strong positive cash flow.  Loans are available.  It sounds like I’m talking about a different world than we’ve all been living in for the past year…in some ways that’s true.  While we suffer a reduction in cash-out opportunities in the market, even that has not completely gone away.

We aren’t seeing fire sales; we’re seeing low market price opportunities.  Rather than high vacancies and defaults we’re seeing typically under-managed properties with solid upside potential.

Quality apartments of classic, early-century construction in the East Bay area continue to represent an opportunity to develop 10% cash-on-cash returns and doubling of equity on a 2-5 year timeframe.  That’s business as usual.  And who can complain about that?

Please feel free to join our investment group at berkeleyinvestorsgroup.com.  We’re doing business today.

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NAI Northern California
475 14th St. Suite 700
Oakland, CA 94612
BRE LIC #01870488
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