Green Police

Following up on an earlier post about the USGBC and the LEED “police,” I couldn’t help but get a chuckle out of this Audi ad during the Superbowl:

 

The Economics Rap: Keynes v. Hayek

As a proud follower of the Austrian school, this was excellent:

 

Losing Green

Let me be clear up front – I do not believe in anthropomorphic climate change – the notion that man, in our industrial wonder, is ruining the earth with global warming.  I am a skeptic and my hackles come up when anyone in the scientific community (or political community) utters phrases like “it’s settled,” and “there can be no denying it.”  Science by its very nature of being “science” is always in pursuit of the truth and if data exists that challenges a theory, the theory must be re-examined.  My natural skepticism is being rewarded by the recent scandals at the University of East Anglia and NASA and now new findings that hundreds of data points that didn’t “fit the model” were left off the charts so that the global warming theory would be left intact.  The Russians have been saying for some time that we had better be buying furs and not sunscreen for several years.

Now, before I get the pointing finger, “Night of the Living Dead” outing, let me follow by saying that I heartily support “green” building practices.  I support them from the position of stewardship – we should minimize any impact we have, it is the right thing to do.  Reduce the amount of forests cleared? You bet! Re-use existing buildings? Absolutely – done that. Reduce heat impact in a neighborhood? Of course – white and green roofs.  And on it goes.  I believe this is the responsible way to develop and manage real estate. Transit oriented development to reduce man’s footprint? YES. Somewhere deep in my core is a Celtic Druidic gene that enervates my sense that trees and forests are sacred.  I am at peace paddling in a pristine river and I want those things to be there for my children, their children and beyond.  We are stewards of this incredible planet, and for those reasons, I support the green movement.

I have concerns, however, when property rights and values are jeopardized by fluctuating standards either by government or non-government organizations.  Such is the chilling case cited in an article this morning in the San Antonio Business Journal: “Risk of LEED Decertification Looms Large for Real Estate:”

As reported by the Villas County News-Review, a group of Wisconsin residents filed a 125-page complaint with the USGBC challenging the award of the LEED Gold certification to Northland Pines, which is generally credited as the first certified LEED Gold high school. The challenge was based on a little discussed provision in LEED 2009, which reserves the USGBC’s ability to revoke certification a project that fails to meet the program’s “Minimum Program Requirements,” which include requirements for minimum occupancy rates, site boundaries, and information-sharing about the project’s energy and water usage for five years after certification. It was reported that the USGBC sent independent examiners to Wisconsin to conduct on-site tests at Northland Pines to determine the project’s qualifications for LEED, and that a final determination on the school’s eligibility for LEED would be decided in early 2010.

Who are the “residents” who filed this complaint that got the ball rolling on potential decertification?  Now this is for a public high school, but consider the impact on commercial property.  This behavior opens the door for an irritated tenant to truly hurt the value of a building by filing a complaint with the USGBC over whether the owner is behaving properly green to maintain their LEED status.  It is widely viewed in our industry that there will be a premium for LEED certified buildings over time (this is unproven so far), but I believe it will be a deal enhancer as our practices become greener.  In an already badly roiled and potentially worsening market, we didn’t need this:

The ramifications of decertification pose significant threats to every party involved in a LEED project, including the owners, lenders, insurers, tenants, architects, engineers, consultants, contractors, and lawyers. As the LEED 2009 program is currently written, a project that achieved LEED certification today would never have absolute certainty that it could maintain that certification in perpetuity. That risk could threaten the validity of many of laws (like building codes), tax incentives, or financings that are currently tied to the LEED program. Given the many things that can change as buildings age — like air quality and energy efficiency — a LEED-certified building may perform as designed for years, only to lose certification many years later. This could result in buildings becoming unexpectedly out of compliance with building codes or with tax or incentive clawbacks (where incentives need to be paid back), and owners who find themselves in default under their leases and loans … overnight, without fair warning. Uncooperative tenants or failures in routine maintenance could lead to disastrous consequences.

The mission of the USGBC should be to promote responsible development, construction and operating practices for real estate.

This is best achieved with training and certification.  They will hurt their reputation immensely if they decide to go into the snitching and inspection business.  It also becomes enormously problematic if the rules are going to change year to year…that’s what “grandfathering” is for.  Perhaps the solution is to date the certifications so the consumer will know, i.e. “LEED Silver 2009.”  We don’t need shadowy figures taking tips from the neighbors on a foggy night – we need advocates and training to help us build a better product that has less impact on the environment…USGBC can do that.

 

The Weekly Grill

Folks, this time of year I am up to my elbows in teaching over at the Owen School of Management at Vanderbilt.  I am blessed with the opportunity to work with some truly wonderful minds over there and I have to work very hard just to keep up.  This year, I have adjusted the syllabus a little to reflect the real world.  The course I teach is “Real Estate Finance,” and in times past, the focus has been on learning the basics of the craft with models and cases centered around real estate development.  In honor of the current times, I am shifting the discussion and case work to look more at the acquisition business.  Having done this now for five years, I have to admit I have a lot of respect for those teachers that energized a class room when I was in school…I am embarrassed they had to put up with me!

So, with my whining preamble, I must tend to matters at hand and share  some links for you to slap on your grill (or at least the screen of your laptop).  Put on a bib, these are juicy!

1. Ever wonder why man started planting and harvesting grain?  Don’t tell me you thought it was for bread!  Why it was for good old Pabst Blue Ribbon!  Now you know why beer is so good.  Just think, we can attribute by proxy all our current real estate problems to beer: a)man started farming for beer  b) man needed to establish property rights to protect his crop so he could have his beer c)modern real estate evolves so we can have our beer!

2. I am hearing a lot of gloom and doom these days – various interpretations on the general theme that America is finished.  I don’t think so, and neither does James Fallows over at the Atlantic magazine.  Read his thoughts here, it will cheer you up.

3. A corollary to the “America is finished” meme is that China is going to eat our lunch.  There is no question that China is an emerging international force and that we will be engaged with the Middle Kingdom for as long as both our systems survive.  But China has serious problems, not the least of which is an environmental nightmare they are creating.  Take a look at these pictures – not for the faint of heart – and you will start to understand that our problems are pretty manageable by comparison.

4. Do you feel guilty if you don’t recycle?  If so, then you need to peruse this article: “Green Guilt.”  I am all for protecting the environment and developing responsibly, but honestly, some of the green movement folks are starting to act like jihadis…environmentalism has replaced their religion, if they ever had any.

5. Here’s a little inspiration for you – if you think times are tough, imagine if you had no arms or legs.  How would you cope?  Here’s a video that shows the power of the human spirit:

Have a great weekend everybody!

 

The Numbers Don’t Lie

As I am scribing this, the Dow is taking another header – down over 100 points at mid day East Coast time.  While uber-optimists and folks from the White House continue to crow about the recovery, my monthly talk around with bankers, equity players, small business owners and some insurance company execs tell another story.  The sentiment that bubbles up from this random survey that I do is reflected in the following chart:

Find the “You are here” dot in the lower right hand corner and it shows that the current recovery in the equities is well  below average in both duration and strength.  To wit, here are some summary comments from the folks I spoke to:

• “Last year was just terrible for us, and with unemployment being what it is, we don’t see any improvement in 2010.  There’s so much uncertainty with what healthcare will cost and what the cap and trade legislation will do, that all our guys are just sitting tight.”  (Manager of a diversified holding company)
• “We are seeing more not fewer foreclosures coming, people are out of gas and don’t see much hope down the pike.” (Commercial lender at a local bank.)
• “In 2010, our focus is going to be on our existing assets.  The emphasis is on the cost side, we see no upside for income.” (Portfolio manager, large insurance company)
• “They are telling us it’s 10% unemployment…try more like 18-20%.  There are no jobs out there, they didn’t stimulate anything but themselves.” (President, mid-sized construction company)

You get the picture.  These are man-on-the-street impressions, but provide valuable intelligence on the real state of affairs.  Turning back to the chart above, my sense is the only reason the equities are moving at all is because the cash in the mattress thing is uncomfortable.  Here’s another chart to consider:

This sort of points to what may lay ahead.  Those loans are either going to get reset or the assets behind them are going to find a new home.  The Fed is in a bind.  They have relaxed the accounting rules on the banks…from my friends at Casey Research:

Unfortunately, it has always been difficult to rely on reported financials as they are not forward looking, and a bank’s balance sheet can deteriorate quickly. To make matters worse, in the last year, changes in GAAP accounting measures make it much harder to evaluate the soundness of financial institutions. Banks are no longer required to report the value of their MBS (mortgage-backed securities) at market and can avoid write-downs that would affect their capitalization.

The Fed has also kept interest rates at historic lows for a historic length now, they don’t see that there’s much they can do – from the Wall Street Journal this morning:

Although Federal Reserve officials expect the economy to grow too slowly this year to bring the jobless rate down substantially, they are likely to conclude at their Jan 26-27 meeting that there isn’t much they can do about it.

That means sticking to their stated plans to end purchases of mortgages at the end of  March (!), roll back emergency lending programs in February and maintain interest rates exceptionally low for at least several more months.

I am reminded of the Admiral Stockdale quote in the VP debate back in 1992: “Out of ammo!”

Look, the way out of this is to reduce the fear that every producer of value, aka businessman, feels.  We have done such a poor job teaching economics, that there seems to be a plurality of people that now genuinely believe that the government creates jobs.  Ahem, the jobs that they do create are paid for by the private sector!  The government is not a “for profit” entity.  There are estimates that up to $4 Trillion worth of private capital is sitting on the sidelines.  We need to get that money into the system, circulating with that magical multiplier effect.  That money is a whole lot better than the printed kind coming out of Washington right now.  So how to do it?  Here is my humble “five points to fix the economy” strategy:

1. Suspend the capital gains tax for the next three years or until GDP growth goes north of 5%, then bring it back in gradually.  This will facilitate the movement of assets and movement of capital to higher and better uses.
2. Shelve the current healthcare bill and start over.  Start with a bi-partisan commission that arrives at an agreed upon list of problems that need to be addressed and pledge that any legislation will address those problems.  If Washington wants to handle problems, take on the ones they have already created: Social Security and Medicare which are both going in the red at a precipitous pace.
3. Shelve the cap and trade legislation. Just end it, period.  There is a growing body of evidence that the earth is actually cooling, the climate debate is not “settled.”
4. Cease government insurance for private entities.  This is a distortion of market economics and encourages irresponsible behavior.  One need look no further than Fannie Mae and Freddie Mac to see that this is true.  These two entities were at the core of the housing melt down, and need to be wound down immediately.  Let’s reinsert some personal responsibility into economic decision making.
5. Reduce corporate income taxes to 20%.  At present, the 35% rate coupled with an average state tax burden of 10-12% puts U.S. corporations at an enormous competitive disadvantage.  Restricting profitability and growth.

These are modest proposals, but any one of them would be enough to mitigate the sense of doom that is almost palpable in the business community.

 

Day(s) of Reckoning

When you have this:

You will end up with this:

As a column over at Investors Business Daily points out, the ponzi scheme that is “Social Security,” is collapsing far ahead of the original schedule for 2019.  This is extremely serious and yet no one in Washington is even talking about it right now.  Yet, in secret, they are crafting some kind of takeover of the medical system and increased expenditure from the Federal Treasury.  Either we start creating jobs (aka “funding source for the gov’ment”) or we will have to sharply curtail benefits.

 

Cities Helping Developers

Recognizing that all developers are not a sordid, greedy lot, some cities are jumping in with private/public partnerships to rescue deals that make sense.  From Reuters:

Las Vegas’ city council voted last month to move its city hall, a decision Mayor Oscar Goodman called a “mini-stimulus.” It is a complicated deal that frees up the building’s attractive current location for the development of a district anchored by a sports arena, since Vegas hopes to attract a Major League franchise.

“The city needs something like this right now,” said Eric Louttit, Vice President of Finance at Forest City Enterprises Inc, a national developer of retail, office and apartment properties.

Louttit, the project developer of Forest City’s Las Vegas land, said that, without the move, downtown development could remain stalled for years.

The Las Vegas experience is a good model of a public-private partnership, said Thomas Powell, CEO of ELP Capital Inc, an investment advisory firm that buys real estate debt and equity, mostly in the western United States.

Such partnerships are more important because of the dearth of private capital and because city-controlled land is key at a time when many mid-sized cities are looking to revive their downtowns. The crisis, meanwhile, has made city and state government officials more willing to work with business, since they are keen for any incremental tax revenue.

Conceptually I am on board with this idea.  Win win – the city gets the new city hall that they need, the developer gets to stay alive and build projects that provide the “incremental tax revenue.”  The article in Reuters sited a couple of other examples…Cleveland for one.

The problem I have with this is three-fold.  One, this opens the door for corruption on a scale not seen before…campaign contributions lead to approved projects?  Second, the influence going the other way could be just as detrimental – Madam City Councilwoman decides she doesn’t like the color of the stucco the architect has chosen…”repaint it all or suffer the consequences” she shrieks!  Third, I am just about done with government involvement in real estate.  Government does not create jobs that are self-sustaining.  One need look no further than the shattered hulks of Freddie and Fannie that we are continuing to pour money into to realize that this is not a good idea.  Projects need to be able to stand on their own merit without disequilibriums created by fiat.

I would much rather see rational development policy emerge that uses instruments like property tax holidays and TIFF to help create projects in lieu of direct financing.  Whole neighborhoods have been created that are self-sustaining and generate millions in property taxes to their cities with this type of approach.  Harbortown in Memphis, Tennessee is a superlative example of this.  Some of the projects inside that community on Mud Island in downtown Memphis received incentives like five years of no property tax followed with five years of 50% property tax.  That can get private capital interested very quickly.

 

Coming to a Referendum Near You

NIMBY’s and BANANA’s and CAVE’S oh my!  (Not In My Backyard, Build Absolutely Nothing Anywhere Near Anything, Citizens Against Virtually Everything)  They are on the loose in the great state of Florida with the proposed Amendment 4 to the Florida constitution – slyly labeled the “Florida Hometown Democracy Land Use Initiative,” this bill is about “democracy” like North Korea is the “People’s Democratic Republic of North Korea.”  I first learned about this initiative in a short piece over at Builder Online, but a little digging brought out the real nasty bits of this legislation.

Basically, acting on the theory that sprawl is bad and we don’t want sprawl, this bill would require public referendums for any changes to local comprehensive land use plans.  One could argue that that type of participation is pure democracy – everyone gets a say!  Balderdash!  That type of participation lends itself to chaos – this is why our Founding Fathers (reverent pause with Bach note strains in the background) developed the type of government we have.   In the words of Benjamin Franklin responding to a woman who asked just that question: “A republic madam if you can keep it.”  Long time readers of my screed know that I would put more faith in a random selection of 435 names from the Nashville phone book than the entire House of Representatives, but land use policy is – ahem – dare I say it, more complex and requires some genuine expertise.  To continue my analogy, the House actually acts like a referendum force…with short terms they have to constantly go back to their constituency and do the will of the people, however passionately misguided that might be.  The Senate is there to temper the passion and provide reason.  In the combination of these two bodies, in theory, good legislation emerges.

Going to a referendum system gets you all the passion that can be whipped up by environmental groups, anti-growthers, population control kooks and the like coupled with the natural disinclination towards change that homeowners (myself included!) feel.  Here’s a partial list of groups that are supporting this thing:

Alliance To Protect Water Resources, Inc. Big Bend Biofuels Clean Water Action Clean Water Network of Florida Coalition of Concerned Citizens Concerned Citizens of Flagler Beach Concerned Citizens of Wakulla Concerned Friends of Fernandina Conservation Alliance of St. Lucie County Control Growth Now Corridor 44 Civic Association Eagle Crest Civic Association East Polk Government Watch Committee, Inc. Eastern Surfing Association – Palm Beach County District Eco-Action, Inc. Environment Florida Environmental Confederation of Southwest Florida, Inc (ECOSWF) Environmental Council of Volusia – Flagler Counties Eric Fricker – (past) Vice Mayor, City of Cocoa Beach EverGreen, the Tree Treasurers of Charlotte County F.E.A.R., Inc. (Floridians for Environmental Accountability and Reform) Flagler Beach Environmental Preservation Council, Inc Florida Bi-Partisan Civic Affairs Group Florida Consumer Action Network Florida Native Plant Society, Pinellas Chapter Florida Open Beaches Foundation,Inc. Florida Panther Society Florida PIRG – Florida Public Interest Research Group

…and a partridge in a pear tree!  The Builder article I referenced earlier identifies some of the creepier supporters of this bill including:

Among Hometown Democracy’s more controversial supporters is the anti-immigrationist Floridians for a Sustainable Population, whose founder, Joyce Tarnow, once operated an abortion clinic. In 2004, Tarnowwas quoted in the Broward Palm Beach News as saying “fertility is an environmental issue. That’s why I try to get as many people sterilized as are in my way.”

Look, Florida real estate is in the tank right now.  Worse than most other locations, especially South Florida.  But this has not been because of poor land planning.  It has been due to the collapse of second home purchases, declining immigration along with all the other suspects that the rest of the nation has been enduring.  This bill will do nothing to prevent this from happening again.  What it will do is drive up the costs of doing business in Florida.

There is this wonderful myth perpetuated by environmentalists and the media that all developers are enormously wealthy, greedy cads who want nothing more than to turn the trees into asphalt.  There are some like that out there to be sure, but the vast majority of the developer population are hard working, decent entrepreneurial types who really want to do the right thing.  I have said many times that I would never want to develop something that I wouldn’t be proud to take my children by in twenty years…that’s a standard that many of my fellow developers share.  Developers take on huge personal risk to achieve their dreams.  This type of legislation will add substantially to that risk and encourage the good guys who don’t have uber-deep pockets to go elsewhere.  The only companies that can survive this process will be the ones that can afford huge legal bills and costly delays.

It’s up to you Floridians!  This turkey is on your ballot for November 2, 2010 – if it passes, God help us.  It will serve as a model for interest groups that want to see us living like the Industrial Revolution never occurred.

 

Might Be Green in 2013?

No, I am not referring to climate change!  ”Green” as in “green back,” is the subject of this post.  I attended the Urban Land Institute’s “Emerging Trends Conference” last week.  As always, it is superlatively well done and the quality of the presenters and information is top shelf.  For us at the M2H Group, the message was clear and not unexpected: “Developers need to go play golf.”  Fair enough, we’ve been living off our consulting practice for over a year now, so we’re prepared to stay hunkered down for awhile.

Here are the key bullet-points of the presentation:

• Commercial real estate hits bottom in 2010 as writedowns, defaults and workouts mount. The “extend and pretend” relationship between the owners/developers and their lenders is coming to an end.  The banks’ reserves are improving giving them the strength to start disposing of their commercial deals.
• Cash is king – investors with cash should do well and properties that are flowing cash will stay off the market.  We will not see a return to the RTC 10-cents-on-the-dollar type plays, but we will see writedowns of 30-40% giving investors a chance to re-enter the market at a lower basis.
• Credit will continue to be extremely tight.  Lending for new construction virtually non-existant.
• We are in a jobless stabilization – and retail and commercial losses will exacerbate the unemployment situation.  No traction is foreseen until mid-2011 at the earliest.
• Housing and multi-family will be the strongest sectors in real estate.
• California, Arizona, Florida and Nevada continue to suffer the most.  Texas, with its business friendly environment is doing well along with “Gateway” cities (New York, DC, San Fran, Chicago) where foreign investors may look to swoop in on lower cost deals.

All of this tracks pretty closely to what we’ve been saying over here.  I would add that Federal policy right now is more of a hindrance than a help.  There is so much uncertainty among small businesses that they are not inclined to start expanding in the face of unknown healthcare and environmental taxes.  The National Federation of Independent Businesses released their December report and it finds entrepreneur’s optimism waning.  Jeff Cornwall, who heads up Belmont University’s Entrepreneurial Center notes in a blog post:

It seems that the most resilient players in our economy may be losing hope.  Entrepreneurs may have stopped digging.

The NFIB Index of Small Business Optimism lost 0.8 points in November, falling to 88.3 (1986=100).

What is particularly worrisome is that even in the depths of the 1981-82 recession, the Index never fell below 90 and quickly surged to a record high early in 1983.  In this recession, the Index has been below 90 for six quarters, indicative of the severity of this downturn and the apparent hopelessness that is creeping across the land.

“The biggest problem continues to be a shortage of customers,” said NFIB Chief Economist William Dunkelberg.  “Apparently, owners can’t find a good reason to be optimistic about the future of the economy or their personal future.  The legislative agenda in Washington is a major factor blunting consumer and owner optimism.”

This kind of pessimism does not bode well for the entrepreneurs (oh wait, that’s all of us!) in real estate.  So, until the clouds start to part, we over here at the M2H Group will keep repeating our mantra: “It will be green in 2013!”

 

A Contrarian View On Affordable Housing

I get the sense sometimes that our national policies are being crafted on the “ready, shoot, aim” principle.  Regardless of where you stand on the health care issue, for example, you cannot be happy with the way this process is being conducted: instead of reasoned analysis of the problem, a careful consideration of the alternatives and an exploration of what has been tried, we’re getting a kielbasi that no one is going to like.

Affordable housing is one of those catch-phrases like “green development” and “smart growth” that we all want to feel good about, and feel we are part of the solution for, but is there really a problem?  Certainly from my perspective as someone that spent a large part of his growing years in the Third World, I can vouch for the depravity of housing conditions in many countries…the worst ghetto in St. Louis would look like luxury housing to a resident in one of Sao Paulo’s favellas (slums).   I’ve done some thinking on what affordable housing is, or should be, and figured out that if I had just started Googling the term, I would have gotten an answer quicker.  Fortunately, where I arrived at upon reflection was pretty close to accepted standards nationally and internationally.  I approached the definition from the perspective of needs and decided that a person’s base needs are food (first), shelter (second), clothing and ancillaries to allow one to be a productive member of society (third).  Thus, I decided that “affordable housing” should comprise no more than one-third of an individual/family’s ability to produce income.

The folks over at demographia.com agree, and it is close to the standard we have used in leasing and selling housing these past twenty years. Here’s their formula – they call it the “Median Multiple,” and base it off of median income:

Now, with that as a standard, the folks at Demographia take a look at housing markets in the United States, Canada, Ireland, the United Kingdom, Australia and New Zealand and come up with some pretty interesting stats:

By this measure, ONLY Canada and the United States have affordable housing markets!  Fully 44% of our markets that were surveyed are “Affordable,” 78% are “Affordable” or “Moderately Unaffordable.”  Our median affordability at 3.2 is a full two points below the next most affordable, the UK.  This data reflects survey results from the 3rd Quarter of 2008 to boot, which means that the average 25-30% declines are not priced into these numbers.

Demographia’s agenda is to promote free market economy and to get rid of land restrictions and such…they are opposed to “smart growth” tagging that pattern of development with less affordable housing.  Here’s a chart they present on housing affordability versus land rationing which is interesting:

But that’s not my fight.  (To download the whole report, go to Demographia.com.)I lean towards the pattern of smart growth development as a means of being good stewards of the land although the data provided does indicate that we need to be smarter about our smart growth.  No my fight is with policy folks at the national scale that got us into the financial mess we are struggling through.  A big part of the push for exotic lending instruments came from the Federal Government under the premise that housing was unaffordable.  The inconvenience of facts is that this premise was false.  And if we apply our old syllogistic logic skills, where A=B, B=C, Therefore A=C…if A does NOT equal B, it cannot equal C and all the measures that were put in place.  Initiatives like the Community Reinvestment Act of 1977 and it’s expansion in 1999 along with the pressure put on Fannie Mae and Freddie Mac to purchase subprime loans all under the rubric of “doing good,” has led to this disaster.

We have nurtured the belief that the American dream is for everyone to own their own home.  We have structured our tax policy around this belief and now we are paying the price for the mistaken belief that housing should be made affordable to EVERYONE, and that the U.S. taxpayer would subsidize any shortfall or failure.  It is time to push for a more sane housing policy.  One that acknowledges that renting is an extraordinarily good option.  We have culturally gotten away from the notion that you have to save up to buy the house with the white picket fence on the edge of town; we have made it a right, an entitlement. If we are going to recover with a robust economy, we had better get back to the basics and acknowledge that housing is not a “crisis” that needs intervention.  Housing is a matter of local preference, let’s get back to the place where each municipality determines their own housing policies and needs.

Here’s Ellen Greene in the 1986 movie, “Little Shop of Horrors,” to take us out with “Somewhere that’s Green:”