Commercial Real Estate Finance

Posts Tagged ‘risk’

This week, the Senate began debating amendments to the much talked about, and much anticipated financial services reform bill (Senate OTC Derivatives Bill - S. 3217). Since the vote to proceed with debate passed last week, more than 100 amendments have been put forward by both parties (God Bless bureaucracy!).  There are a number of positive elements in the proposed legislation, but there are also elements that could substantially change, and maybe harm how companies manage their risks while putting their capital to work in the economy. The point of the bill is to address the problems revealed by the economic crisis…but they need not hurt the overall economy. With most legislation, specific groups are hard to define because definitions are loosely given.  This is an issue because if we cannot separate the little guys (small CPA firms, real estate owners etc.) from the big Wall Street firms like Goldman Sachs who are systemic risks to the broader economy, then not only will the little guys be subject to the same oversight, but the whole point of reform will have been missed.  So what do we think the Senate should be focused on? Read the rest of this entry »

You Snooze, You Lose

If the corporate bond market is any indication of what is to come for real estate debt, it’s clear that non-bank lenders will make an attractive risk adjusted yield this cycle.  The window for putting that money out, however, could be short-lived.  Many in the corporate bond market feel that both extremely high yield and extremely good credit bonds are overpriced.  Since the end of 2008, corporate bonds at both ends of the credit rating spectrum have made a huge rally.  It’s the better quality credit junk bonds (the bonds in the middle of the credit spectrum) that look attractive still.  These bonds still have a decent yield for their default risk.

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In past banking crises in Sweden, Britain, the U.S. and Asia, taxpayers picked up the cost of bailing out troubled institutions because the government had to act quickly to contain the problem and the banks had been so battered they couldn’t repay the money. Now, regulators want to tax banks to avoid the worldwide catastrophe that was the credit crisis from ever happening again.  More importantly, should such a thing happen again, governments want to avoid having to go to their constituency and explain why they are using taxpayer dollars to bail the banks out. A plan is gaining momentum both here and abroad.  The bigger question might be: in what form will the tax take, and are there any advantages/disadvantages?

Basically there are four different options: Read the rest of this entry »

Reuters reports that two-year notes sold by Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity. In school I learned that investing in international real estate is risky because of differences in property rights; political risk including layers of taxations; and financial risk such as foreign exchange risk. There are several ways one can try to adjust account for international investment risks. One way is to use the adjusted NPV model proposed by Hayden and Musa (1990). Unlike the standard DCF model which discounts the cash flows by the discount rate, the international DCF model multiplies the Cash Flows by the Forward Exchange Rate in the numerator, and uses a discount rate that incorporates political risk, labor risk, and un-hedged currency risk. Read the rest of this entry »

Three articles and three mini blogs:

1) “Public Pension Funds Are Adding Risk to Raise Returns”

Uh, What?!  Raising risk to raise returns!?  That’s like losing at the $25 black-jack table and then trying to make your money back buying lottery tickets.  Or, in real estate terms, trying to make back losses on a core deal, by speculating in vacant land.  The only thing you get with more risk is more risk!

This sort of ridiculous thinking, of course, rests on an equally ridiculous assumption: stocks, in the “long run” will always go up.   You would think the people who are trying to make up for losses in stocks, might think twice about the inevitability of equity gains.  Alas, no such luck for the policy holders.

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Editor’s Note: As the second installment in a three week blog series, Questionable Brokers will  posit questions regarding Types of Capital. Last week, the first part of the series examined questions regarding Real Estate Metrics. Next Week week we will wrap up the series with questions Deal Structure. These are real questions from real real estate brokers. Enjoy!

Q: What is the difference between mezzanine debt and preferred equity?

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An analysis of the housing crisis by Karl Case:

For the last few years, we have shed many tears
Living through a recession.
The economy’s broke and it’s not a joke,
When we talk of another depression.
Fifteen million without a job,
Foreclosures and banks that fail,
401K’s became 201K’s,
And everything’s up for sale.

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In her latest blog entry, a woman named Megan McArdle took a brave stance!  She said that Tishman and Blackrock’s collective decision to buy Stuyvesant Town for $5.4 Billion was a “…breathtakingly stupid deal.”

Well, if it was the largest commercial real estate trade of all time, then she’s about the biggest Monday-morning-quarterback of all time.

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The last asset you want to hold during an inflationary period is cash. While you won’t lose any zeros in your savings account, your buying power will slowly get eroded. Here’s a great list of the top 10 best hedges against inflation, courtesy of www.egold.com :

10) Stocks. Investors seem conflicted on whether or not stocks provide a good hedge against inflation. Most studies have tracked major indexes against inflation, and they still find that stocks perform decently during inflationary periods – at least as long as inflation stays under 4-5 percent per year. Higher than that, and you’re going to have to pick your stocks carefully. However, some stocks will likely do well no matter how bad inflation gets. If you believe the dollar’s doomed, try an ETF that tracks the dollar in an inverse relationship. Or stick with companies well-positioned to profit from inflation. Investment banks, for instance, are generally pretty savvy at protecting their money, so they’re going to make it their business to ferret out inflationary hedges. That means you can ride off on the coattails of their profits. Read the rest of this entry »

Bloomberg published an informative article yesterday highlighting the reasons why debt financing is so much more expensive for governments than private companies.  You would think that governments that NEVER default on debt issuances and have unlimited tax revenue could issue debt at a cheaper cost than private companies.  Municipal bonds, however, are often issued at rates anywhere from 100 to 150 bps higher than private companies.  What’s the reason for this?  Moreover, what lessons can an owner/investor of commercial real estate learn about debt financing from the municipal bond market?

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