room In the - Clark Schaefer Hackett...The People to Know ‘In the Room’ Initiative At Clark...

A lite paper on what we learned in a room full of People to Know.

The Real Estate Edition

roomIn the

Jonathan Beard CEO Columbus Compact Corporation

Christine Beckman Broker Classical Realty

Randy Best President Best Corporate Real Estate

Rev. John Edgar Executive Director Community Development for All People

Catherine ErneySenior Regional DirectorCOCIE powered by Xceligent

Jean Ferrell Brokerage associate, commercial leasing and sales / Mark F. Taggart Company, AMO

Benjamin Johnson Brokerage senior associate Colliers International

Pat Kearns-Davis Agent, owner Re/Max Capital Centre Inc. Realtors

Richard Kruse President Gryphon USA Ltd.

Shawn Parker Sr. Broker-owner; receiver for the Courts of Common Pleas / Parker Realty Associates and New Perspective Asset Management

Randy Sokol Owner Sokol & Associates

The People to Know‘In the Room’ Initiative

At Clark Schaefer Hackett, we’re proud to be industry specialists. We strive to know everything we can about the industries we serve, and to share that insight for the good of our clients and communities. When we gathered the 2013 Real Estate People to Know around one table to talk, we were privy to profound thought, unique perspectives, and intelligent understanding. Here, we share their wisdom with you.

Public Funding and Regulation

Banking and Finance

Landlords and Leases

Market Trends

What we learned

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pg 10

Public Funding andRegulation

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Federal, state and local government decisions shape a good deal of real estate development. Offering resources for gap financing, like incentives, abatements and other avenues, is one example.

Streamlined permitting and efficient regulatory processes can be very appealing to the professionals who know that time is money.

Developers are keenly aware of the time and money they lose in dealing with bureaucratic red tape.

We need gap financing to get projects done. And those federal sources are declining. The federal budget sequester will affect the affordable housing industry Probably the best thing the City of Columbus has done in the last 10 years is put together the Affordable Housing Trust Fund, which, for the first time, capitalized a locally derived source of gap financing. In the last 8 or 9 years we saw nearly $70 million in federal Neighborhood Stabilization Program (NSP) funds, which are going away. So there have been a lot of positive things that have happened in the last 5 years, and unfortunately the pipeline for those has mostly dried up. From our standpoint, I would say that maintaining and expanding locally derived sources of gap financing are the keys to any growth that might happen. But I foresee slowdown and decline compared to what we’ve been doing in the last five years.

In Ohio, Low Income Housing Tax Credits are brokered through the Ohio Housing Finance Authority. We are doing one project right now in partnership with a for-profit group, building 40 new houses in the south part of Columbus where other homes that were blighted have been torn down. And the bulk of the money that makes that deal work comes through these tax credits. Another source of public funding for affordable housing projects is the City of Columbus’ land bank. Basically it takes stressed, vacant properties that nobody else wants, holds them and tries to find somebody interested in redeveloping them.

And quite frankly, the city land bank has been a big help to groups like ours because they help us to acquire the real estate to redevelop.

Insight from roundtable participants...

Jonathan Beard Columbus Contact Corporation

Rev. John EdgarCommunity Development for all People

Developers may find fault with the city and red tape. But part of the problem is that developers don’t always understand the building process and there are a lot of us who lean on the construction guys or the supervisors. We really don’t know what’s real or not real. In Columbus, the Chief Planning Officer at Building and Zoning will conduct a plan overview for free. If you have a plan or development idea, you can go to the building department and they will go through the whole process, discussing how it will work, how it will look, and details about inspections. It will help you understand the process you are undertaking. I’ve been impressed with Tracie Davies, the Director of the Department of Building and Zoning Services for the City of Columbus. She’s done a pretty incredible job of developing a service minded department. I think they’re a hidden gem that a lot of people just don’t know about.

The Franklin County Land Bank is an emerging and effective governmental entity. It’s interesting because it has a designated source of income through the penalty and interest paid by delinquent taxpayers. So it’s going to have an ongoing source of money. I currently serve in a volunteer role as the President of the County Land Bank. Its goal, the idea of the county treasurer, is not to be the Franklin County demolition company, but rather to employ the funds to leverage various redevelopment deals. I think we’ll see some interesting opportunities, particularly with stressed commercial properties. The Land Bank could help provide gap financing, or in various ways hold the land, or clean title on the land. There are a lot of things that can be done on a technical side, as well as providing cash for gap financing. It’s one tool that folks are just beginning to think about what it could do.




Randy SokolSokol & Associates

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Banking and Finance

The real estate market is heavily reliant on the banking industry. As provider of mortgages and decider of foreclosure action, the banking industry can seem like a puppeteer pulling the strings of the real estate market from behind a metaphorical curtain.

The commercial and housing sectors bend to the expectations of lenders, and respond to changes in the financial world. Of course the opposite is true, with tremors in the real estate markets being felt deeply in financial institutions.

The housing crisis of 2008 revealed to us all that housing and finance are warp and weft of the same economic cloth.


Richard KruseGryphon USA Ltd.

The bankers’ attitudes have changed since the recession. Before the recession, bank presidents considering a delinquent mortgage owner, thought “this person put their name on this piece of paper, and they have to pay me back exactly as it says on the paper; 10% interest rate, 5 year term on a loan. Don’t they have the integrity to get into their retirement funds, to do whatever they have to do to make that loan payment?” Then the mortgage crisis became apparent and regulators showed up. I would walk into a community bank of eight employees and see nine regulators in there for a week. They examined every file, looking for justification, asking “why did you make this loan, what’s the ratio?” And the bankers took it personally. I think the bankers had to evolve emotionally through that, to the point of where they are today. They are starting to realize that they are in the people business and they are making loans to people. The bankers are back to making good decisions. That is going to help us all because good people should be able to get loans.

When I got into the distressed asset industry in the 1990’s, it was before anyone even thought about real estate fold. Back then, if a bank had 1% defaulted loans, it was distressing to them. Their first reaction to a non-payment on a loan was to threaten to foreclose. And about two or three years ago I began to see bankers pushing that out a little bit further. They now go into forbearance agreements, and do some creative things to negotiate a better alternative than foreclosure. Now that money is coming back into the market, that is a really good thing.

Shawn Parker Sr.Parker Realty Associates and New Perspective Asset Management

I’ve noticed that the banks, over the past three years, have adjusted to be more in tune with where the property market is. And that shock they experienced with the wave of foreclosures in 2008 has worn off. So banks seem to be more responsive, and more responsible. They are better able to handle disposing of these assets and dealing with the people who owned them, who were also caught off guard by the recession.

The distressed asset industry is always going to be in business. But nothing like the last five years. It is starting to get back to a pre-recession pace. The projects seem to be getting financed faster, and the banks are more likely to try to negotiate with a troubled borrower. But now a lot of loans are termed out. We are seeing foreclosures and receivership actions on loan term outs because the property can’t be refinanced. I am heavy loaded in that right now, where a couple of years ago I was more likely to see people who made a mistake, couldn’t refinance, and just put the keys on the table because that was the best thing for them to do.

We’ve seen financing challenges due to regulatory pressures: people are unable to get financing and unable to restructure a loan. People who have made on-time payments for years have had loans called because their reserve ratios were out of balance. So all of a sudden the banks are calling the note. When we get there, it is already a disaster scene.

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Richard KruseGryphon USA Ltd.


The distressed asset industry is always going to be in business. But nothing like the last five years. It is starting to get back to a pre-

financed faster, and the banks are more likely to try to negotiate with a troubled borrower.

seeing foreclosures and receivership actions on

where a couple of years ago I was more likely to see people who made a mistake, couldn’t

6


Landlords and leases

Property owners are in a tight spot in the current market, trying to turn a profit while meeting the needs of potential lessees and balancing the expectations of their lenders.

As economic constraints ease, owners, investors and tenants are all breathing a bit easier. In residential and commercial sectors, both rents and property transactions are beginning to better align with the current market.

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Residential real estate in most Central Ohio areas is doing much better. I constantly get clients asking me if Commercial Real Estate is back yet. It’s slowly getting there, although not as fast as Residential. We are to the point where leases that were executed five years ago and longer, are now up, and tenants are able to readjust their rental rates downward. From an investment standpoint, this brings the value of the real estate back in line with the current market conditions. The good news, is that occupancy has had a slow steady increase over the last couple of years in all categories: industrial, office, and retail. But

there are still properties that are overleveraged, and will need to be sold below what the current mortgage is before the market can become fully healthy again. The “todays” market rent on these properties is not enough to get the value needed to cover what is owed to the lender. These properties will need to be “flushed” through before we can come to a more “normal” healthy market in Commercial Real Estate.

Back in the heyday, when every restaurant was a winner, restaurants and bars signed such horrific leases. Times were good so they could make the payments. But when the economy turned a little bit, the restaurants couldn’t afford the rent. So there were a lot of restaurant closings, which left a lot of available space. And I’ve found that landlords haven’t adjusted their expectations to fit the economy. They would rather have their space remain empty until they get the lease rate they want. But that rate is so high that the tenant can’t run a profitable business, and is gone in a year or two. I really don’t understand why landlords want that turnover and that headache of having it empty, rather than having a good, paying tenant at a reasonable rate.


Randy BestBest Corporate Real Estate


When building rents are forced down, owners and banks face technical default on the loan because the ratios are no longer in compliance with the terms of the loan.

There is pressure on property owners to refinance out of short term bank loans to more permanent debt instruments such as CMBS “conduit” loans. These lenders consider lease terms shorter than 3-5 years as vacant space with zero value. Although, property owners may have accepted shorter terms lease deals in the past,

they are now pressing for longer term deals to satisfy these lender’s requirements.

There was a period of time when everybody wanted to own real estate. They didn’t realize it’s a job, a responsibility. Whether it is investment property rentals or commercial, they wanted to own real estate. That was the “in” thing. But it really doesn’t operate like that. There is responsibility that comes with owning property: raising rent, taking care of the property, knowing what’s going on in the area. I think the 2000’s have kind of taken care of the landlords who were dabbling in a profession they didn’t understand.

It’s difficult to speak in generalities about what a landlord’s motivation might be. Real estate professionals add value to our clients when we can determine what opportunities and threats are specific to each of the properties being considered. Negotiating the deal with terms beneficial to both parties depends on us understanding factors like when the building was sold, and what kind of debt might be on it. We need to know who owns available space, and their position in the asset. When considering a location, our clients need to know if the competing property down the street may be in a better position to fund their needed improvements. We can learn these things through our networks, or through representing other tenants within the building, or other assets owned by the same Landlord.

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Pat Kearns-DavisRe/Max Capital Centre Inc. Realtors

Jean FerrellMark F. Taggart Company, AMO

Christine BeckmanClassical Realty

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Ben JohnsonColliers International

Market Trends

Real estate is an industry heavily influenced by the personal desires, goals, whims and trends of ordinary people – the masses.

Savvy professionals keep their eye on cultural shifts and demographic changes. Societal fluctuations like these create and influence real estate trends.

From downtown revitalization, urban living, and downsizing to new construction and suburban sprawl, the tendencies of certain sub-sectors of society drive developments in both commercial locations and residential living.

I am pleased at how office space is filling up and property values are maintaining or increasing downtown, but I remain a little concerned about that area. I think we still need a lot more people to realize their businesses just can’t jump to the outside. And I see that – businesses are putting money and time in to downtown locations, and they are not moving their headquarters right out of there.

The generation before the baby boomers was very civic minded. The boomers like me, we just did anything we could to make as much money as we could. What I’ve seen and heard about the next generation coming up is that they don’t consider money their highest priority. That generation is focusing on green construction, living local, and all the trends that I think are here to stay. They care about downtown a lot. They get it and understand it. They are moving downtown and changing those areas. I think it has to do with the generation, and how they view things and how they operate.

There are suburban regions where baby boomers, the post WW II generation, moved to get the big, four to five bedroom house. Now those folks are older and are trying to sell in order to downsize, but today’s families are smaller, and don’t want to live so far from work. There is not as much demand for those big, suburban houses.


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Pat Kearns-DavisRe/Max Capital Centre Inc. Realtors



Insight from roundtable participants...We’re seeing evidence of the urban living trend, folks wanting to live where they work and shop, even in the neighborhoods that have been termed “scary.” There is a lot of evidence that there’s a whole segment of people interested in living in mixed income neighborhoods. They like the energy of the diversity, and are willing to invest if there is decent housing for them. We have found in the last four to five years that an amazing range of people, both by ethnicity and by income, are saying “yeah I would like to live there because of what is attractive in an urban environment.”

Here is what has been interesting to us. In the last 15 years, every market study we’ve seen has said that 75% of your draw to an urban development will be from someone in the neighborhood who wants to move up in opportunity. But we don’t see it. We did condos, 13 units in a long abandoned Chicago style walkup, and we don’t have a single interested person from the neighborhood. We have people from other parts of the region, we have computer programmers from Florida, two marines from Texas, a buyer from Anthropologie out of Boston. I mean it is just amazing. This is not one of the nicer blocks in this area. It is amazing the types of folks that are

expressing an interest in what some people might call scary neighborhoods.



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In my opinion, the school system is the single greatest negative factor in trying to revitalize the city. Not that there aren’t decent teachers individually, but collectively the city schools are failing our kids. Half the kids that go to South High don’t graduate in 4 years. It is really ugly.

There’s also a shift in what industrial and office buyers and tenants are looking for. It used to be the rule of thumb that companies typically located within 3 miles of their CEO’s home. Now location decisions are made with an eye on recruitment. It’s about selecting an environment that will be attractive to top talent employees.

We had an office building that was built in the 1970’s and occupied by the Ohio Department of Corrections for 35 years. When they vacated, in 2009, there

was no market for a 46,000 square foot, free-standing office building in the back of an industrial park. We realized the building had become functionally obsolete. So we knocked it down and turned an existing parking lot into a spec office/warehouse building. The new building features concrete tilt up construction, energy efficient T-8 lighting, and ESFR fire suppression, everything prospective tenants are looking for. We leased 100% of the building to two tenants while it was still under construction. Today, you have to be innovative and meet the demands of the market to be successful in the real estate industry.


Catherine ErneyCOCIE powered by Xceligent


Jean FerrellMark F. Taggart Company, AMO

Some business location decisions are driven by where their employees will want to be. We have seen more artistic firms going back downtown. A lot of young people coming out of school like living in those urban areas, so this has become a factor for some creative firms. Manufacturing firms often choose locations near the source of their raw materials are coming in, or near their existing workforce. Distribution users, which is what makes up most of central Ohio’s industrial space, choose locations based on highway access, or in some cases rail or air transportation options. Some location decisions are available in some communities. In some cases, new developments can be built and

the improvements can be tax abated for a period of time. Generally older buildings need to be brought up to modern requirements, and it becomes somewhat cost prohibitive to retrofit an existing building. Today’s distribution businesses look for higher clear heights than older buildings, so they can pay for less square footage. There have been advances in fire suppression, which are already incorporated in new construction. Older buildings may have a wet sprinkler system, but not a high pressure sprinkler system. Similar issues like this are faced by buyers and tenants of office and retail spaces when considering older versus modern buildings. Because of these challenges, at some point it becomes more efficient and cost effective to start over and build new.


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Ben JohnsonColliers International


About Clark Schaefer HackettThe core competency of CSH is to provide best-in-class technical expertise in assurance and tax services to mid-sized organizations and their stakeholders. For 75 years, our accountants have served as the primary trusted business advisor to the organizations that form the backbone of the region’s economy. We align resources by industry to better serve the needs of our clientele. Specialization permits us to develop deep knowledge of the issues facing our clients and to anticipate needs based on our understanding of industry trends. We select a team that best fits the needs of the client from our strong bench of firmwide industry specialists. Our industry and specialty groups provide expertise comparable to a national firm but with the benefits of personalized service and a value-added fee structure found in a regional or local firm.

Learn more at www.cshco.com.

The Firm has groups strategically focused on both Construction & Real Estate as well as Affordable Housing. We take pride in our extensive understanding of the unique accounting needs of players in the affordable housing industry. We also realize that to make it in Real Estate, you need an accounting firm with the strength to support your goals, and the fortitude to help you expand your business opportunities. For several decades our advisement of the area’s most prominent real estate developers has resulted in higher profits, excellent cash-flow, attractive taxing situations, and – when needed – beneficial mergers, acquisitions, and ownership transfers. Learn more about our Construction & Real Estate and Affordable Housing services at www.cshco.com.

PICTURED:Top left: Denice Hertlein, Shareholder and Chair of the Construction and Real Estate GroupBottom left: Dan Lacey, Shareholder, Construction and Real Estate Group Top right: Ed Walsh, Shareholder-in-Charge Columbus Office, Chair of the Strategic Planning CommitteeBottom right: Todd Fentress, Shareholder, Chair of the Affordable Housing Group

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