Value; Value…anyone? Value…?

Ferris Bueller’s Day off remember? The Dean was paging the school looking for Ferris!    Anyway the newest problem; well actually a long-term problem in the RE industry is determining value.  So lets mix in an economic meltdown fueled by poor lending practices and political oversight and now you want me to advise you on value?  RRRiiight! 

Who wants to know value?  Well lets see there’s the property owner and user (occupies the space to operate his business); who is being asked by his long-term bank to reduce his mortgage to a number.  Okay whats the number and who says so and how did they get to that number?  Then there is the bank who is looking at its toxic loan portfolio and then it’s good loan portfolio and wondering when and which of those will go bad. 

 So they start tightening lending with the good loan holders as a result.  We can cover this in another edition.  then there is the vulture who has cash and has the complete upper hand with these lenders and their huge toxic portfolios.  It is becoming an almost insider trading environment when the lenders are making fast side deals on bad loans to get them off the books as soon as possible.  Not an environment that is conducive to value determination; all of the deal points are not about an arms length transaction but cleaning up a mess.  Value?  Value?  Anyone value? 

The answer to the value question is no body knows.  The lenders are hurting value to protect and comply with the new federal guidelines.  The vultures are using the prices they pay to determine future value.  Now here is the crux of the problem: the predominant method to valuation is market pricing which at its core is the historic price paid for similar properties.   So this is how value is being established for the future.  This may be the perfect storm folks.  There is a lot of money wanting to buy deeply discounted property.  What is their motivation in these transactions?  Deeply discounted purchase prices and more importantly in the sole view of the buyer.   Again, there are forces at work in this negotiation that prevents any of these transactions being at “arms length“.  How can you compete in this new real estate market? 

See you next week!

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Our company helps business and property owners understand, create and maximize value in commercial real estate portfolios.

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