BFP Management Blog

Making Green While Going Green!

Recently I received a call from WASH Laundry and was asked if I believed in “going green.” I told them that I do and my management company is currently undergoing big changes to make us more electronic to use less paper. The response was “excellent since we are taking the Apartment Reporter on-line and won’t be printing it anymore.”

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After hanging up, I thought about what that one change would do. Each month, there are about 40,000 Apartment Reporters printed. In 25 months, 1 Million pieces of paper or just over 11 trees (according to WikiAnswers) will have been saved. I don’t think anyone would argue that WASH is both being better with our planet’s resources and saving themselves money in the process.

The contagion spread as I asked if WASH would direct deposit the checks to our many accounts and notify us via e-mail. They responded that they certainly do this upon request. Why does this make sense to me? I have people that are paid to open the mail, get the checks to the right people in the company who can deposit into their respective building account. The managers then make the deposit to the bank which is later entered by the accounting team. Using technology to cut a few steps out will allow my team to be more efficient which translates into their being able to service more properties and at the end of the day, our company will be more profitable.

WASH in turn would not have to print checks and pay for postage. This will make my accounts more profitable for them.

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Who are the casualties from our “going green”? Less paper will be purchased. Less business for the printing company. Also the US Postal Service will continue to lose business.

The other way to view “going green” is as a byproduct to keeping up with the use of technology. The publishing and music industries, respectively are reinventing themselves very quickly or will die off as end users are choosing to download content directly on wireless devices. Bookstores, video rental stores and record stores are quickly becoming history. If one of these companies wanted to rent space at one of retail properties, I would need to be convinced of their particular long-term viability before signing a lease.

For apartment owners, our consumers are expecting to be able to use those same wireless devices to find vacant units and to pay their rent. I was told a long time ago to “never fight technology because you will always lose”. This presents an opportunity for you to get ahead of your competition that is slow to recognize or embrace the changes happening. This can improve your top line.

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If you thoughtfully look for ways to set-up the system to maximize efficiency, it can save you time and money. This will improve your bottom line.

At the same time, one of the nice benefits for all of us earth inhabiters is a smarter use of natural resources. While I respect those whose primary goal is to help the planet, I must confess that I check my bottom line first when making these considerations. No matter which camp you find yourself, there are benefits to periodically reviewing other ways of doing what you do.

I applaud WASH and am happy that my writings will be available to you as always but am proud it will be produced with “green” in mind!

In coming issues, I will discuss the massive problems not being addressed in Europe and how we will feel their pain.


Kyle Kazan


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Deciphering the Noise

Lately, lots of conflicting economic information has come our way in a hurry. Our national government makes California’s disfunction look sane as they wrestle with the “debt ceiling” debates which if all sides had recently maxed taxes and cuts, it still wouldn’t have slowed the massive borrowing. Standard and Poors cut the AAA credit rating on US bonds. The stock market swings by hundreds of points in a day. Gold is hitting record levels on a daily basis. Unemployment is still extremely high by historical standards while the housing market continues to worsen. Apartments however in many markets are seeing a cap rate compression while NOI’s are growing.

Where should you invest your money? Savings, stocks, currencies, bonds, real estate?

It is clear that there is widespread panic which is causing these swings. There are also some serious undercurrents that must be considered. For one, the sovereign (most countries in Europe, the UK, Japan and the United States) debt issue continues as countries are drowning in red ink yet they still need to borrow more. At the same time investor confidence in loaning additional money wanes. If a country (i.e. Greece) defaults, it will force banks in other countries into bankruptcy and show that if judged by the collateral of their outstanding loans (forget “the stress tests”) with any measure of adequate cash reserves then nearly every major bank in Europe, UK and the US is insolvent. The fear of cascading collapses of sovereigns and banks is very real.

Another undercurrent is the Federal Reserve Bank of the United States deciding to keep interest rates at zero through mid-2013.

 Figure 1

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Clearly the strategy in Europe, the UK and especially the US is to essentially tax savers for the benefit of the banks. Those who have money market or savings accounts are being punished for their frugal ways by being paid almost 0% to help build bank balance sheets from use of this cheap money. At the same time we are being encouraged through policy to invest since any yield seems attractive by comparison.

This has been the economic strategy that Japan has employed for over 20 years after their massive asset bubble (tripling of land and stock prices in the 1980’s) burst and it has resulted in the “lost decades” which has meant little to no growth. The official interest rate has been 0.1% for many years and the government is actually running a larger deficit (as a percent of GDP) compared to the United States. While many would argue that this has been a slow moving train wreck which staved off a collapse of the Japanses banking system, this will end up being a very long kick of the can.

Figure 2


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In figure 2, we see that everytime GDP drops (year-over-year) by more than 2%, we have had a recession. We are at 1.5% year-over-year which is like an ominous dark cloud above our heads.

Figure 3

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In figure 3, the jobless rate in California has started moving up again. The White House recently forecasted high unemployment through 2012 nationally.

I’m predicting a continued soft economy with shocks and swings in the bond and equity markets. The government through FHA, Fannie, Freddie and Ginnie will tinker with allowing refinances of the federally guaranteed loans and ignore the current loan-to-value requirements so that homeowners can refinance (or basically lower their interest rates). While this would put billions of dollars back into the pockets of homeowners, it won’t put a significant dent in foreclosures. We may also see those same entities start renting homes instead of putting them on the market to sell. As there are over 2 million vacant foreclosed homes with as many at 10 million more in the pipeline, it will be interesting to see if the government becomes a massive REIT.

Ultimately, there will be a lot of distressed commercial and single family real estate coming available over the next few years. While in no real hurry, my vulture wings are beginning to flap!




Kyle Kazan


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A Breath of Fresh Air

For apartment owners in many markets in California, I have some very good news to report! But as I like to receive information in a “worst first” approach, I too will share it in this manner.

As you know I have been closely following and writing about the debt crisis’s that have been popping up over the last few years in Europe. The so called PIIGS (Portugal, Ireland, Italy, Greece, and Spain) are having the biggest problems with volatility in their bond yields. Last summer I took my wife and son on a trip to Italy, France, and England and spoke to many people along the socioeconomic spectrum to receive unfiltered information from the ground. Italy was most interesting in its dysfunctional way while France had wonderful wine and many fine Brits shared their huge concern about the austerity measures being put in place. The visit offered excellent perspective of problems in the old world.

This summer we traveled to Portugal and Spain. While we were overseas there were much publicized riots in Greece and at the same time, there were protests and clashes with police in Barcelona and Madrid which received very little fanfare in comparison. Unlike last year, the protesters were easy to find as they were marching up main thoroughfares or were camped in main city squares.

To be clear, I understand that each country has different entitlement programs and tax structures but like the United States, expenditures significantly outpace tax collections. The majority of the protesters in Spain are under 30 years of age which isn’t a surprise given that unemployment is over 40% for that age demographic. The protesters disputed that number as far too low and said it is actually between 50% – 60%. In any case, there is palpable anger at the government as they realize that increased borrowing to solve a debt problem is simply a bailout for the banks. All the while social programs are being cut and debt holders are currently being made whole from new bond issuances. I’m not making policy arguments, just observations from the grass roots level.

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The author in front of a mural that mocks bankers in Barcelona.

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A large protest in the Plaza Mayor in Madrid.

While each country will eventually be forced to find a way to live within its means, the path will be extremely difficult and that seemingly quarterly bond/debt crisis will get worse and worse. It reminds me of a Eurozone whack-a-mole only each time the mole gets a little bigger and the club gets a bit smaller. As said before, adding debt to a debt problem is simply delaying the inevitable and growing the problem.

Now for the good news. I recently wrote that concessions were burning off in many submarkets around California and now I can report that rents are rising. While this is not true for every submarket (in other words, conduct a rent survey of your respective area for accuracy), we are seeing a tightening.

My advice is to move cautiously since unemployment is still hovering around 12% in California. Being nimble and lowering rents in hard times to keep units occupied is necessary–albeit painful–but when the slack tightens, take advantage of it. I’ve started by raising the asking rents on vacant units before pushing revenue on existing residents. As always, this is the alpha garnered from good property management so be diligent or hire someone who is.

Figure 1

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Source: California EDD

When asked how the rental market has begun gaining traction in the face of such high unemployment numbers, my theory is that it is a combination of foreclosed homes being taken off-line and much stricter guidelines for potential buyers. This has forced more people into becoming renters. In any case, after several difficult years, I’m enjoying the better climate for however long it lasts.



Kyle Kazan


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Slow Moving Train Wreck

In the October 2009 issue of the Apartment Reporter, I posted Figure 1 and predicted that the housing market had yet to find a bottom (remember the $8,000 first time home buyer tax credit from the US Government that could be monetized was going to stabilize the market?). The graph projected 48% of borrowers owing more on their homes than it would be worth in the 1st Quarter of 2011. As discussed, the market has continued to fall and the tax credit was one of the first kicks at the can.

Figure 1

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While I take pride in seeing my predictions come true, I’m sorry that the housing market continued and continues to fall. Currently in Las Vegas, 65% of all homes listed for sale are short sales (where the bank will need to forgive debt for the property to be sold). As the prices have continued downward, we see in Figure 2 that the value of home equity is at a 64 year low.

Figure 2

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Source: GaveKal

Federal Reserve Chairman Ben Bernanke has stated that QE2 will come to an end as planned. One can argue that without the interest rates being pushed down by the Fed’s Treasury purchases that real estate prices would be even lower. There is no question that the low rates has been a boon to Fortune 500 companies who have been borrowing as much as possible. Unfortunately for the economy as a whole (and I’m thinking about people like our tenants on whom we depend), food and energy prices have been going up while there has been little to no wage growth. In other words, our residents have less money to pay more rent when they have to pay more to eat, fuel their cars and heat / cool their apartments.

The government has been quick to use the US Express card and simply add the liability to the nation’s balance sheet. While I predicted the real estate crash and severe recession, I did not see the massive government intervention given past official statements railing against that action when other countries pursued that course. To many economists, the bail-outs / stimulus was and is necessary to prevent an even worse calamity while I believe it simply makes for a slower moving train wreck and likely an even bigger one at that.

Let’s take stock of how the US keeps our books for us given that we as taxpayers and theoretical beneficiaries of entitlement programs (at 44, I’m pessimistic on my chances of cashing a Social Security check in 20+ years and benefitting from medicare). When a corporation takes on a liability (i.e. a medical benefit given to its employees), it is required to show it as a loss. Our government doesn’t count the entitlements as a liability until it actually has to write the check.

$1.5 Trillion of new debt was added last year to finance the governments real time operations. That took the deficit to about $14 Trillion; which is money actually borrowed from foreign countries, bond funds and individuals. According to USA Today who calculated federal finances using standard accounting rules, there are $61.6 Trillion of unfunded obligations or over $534,000 owed by each American household.

It is easy to see that the US will not go down the current path of borrowing $.40 of every dollar spent and paying entitlements and programs (social security, medicare, military, schools, roads) at current levels. A weak dollar policy is already being pursued although no US politician will admit it and this will cause inflation. I share these staggering figures to make the point that the current path of borrowing and promising is simply unsustainable.

Given the interventionalist policies over the last few years, I have no reason to believe that a more hands-off approach is in store in the near term. In coming issues, I will discuss not if there is QE3 but what it will look like and how trading in ever cheapening greenbacks for brick and mortar will make very good sense. You are in the right place and it will be the right time!


Kyle Kazan


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Brother Can You Spare Some Amnesia???

I’ve recently visited 4 of the 5 worst hit states in the country (my home California, Nevada, Florida and Georgia) for real estate and have noticed that apartment cap rates are now within 100 basis points of the peak of the market. When did yesterday’s weeds turn into today’s flowers?

I certainly understand that rents have declined from the peak so operations are lower than they were during the boom. This factors into the numbers through a lowered Net Operating Income (NOI). That said, the nation’s economy isn’t roaring back so NOI growth has yet to occur.

Single family houses and multi-family housing (apartments) have remained decently tethered over the last 30 years. When value in one sector goes does up or down, so does the other. Of late however, we are witnessing a temporary phenomenon, housing continues to fall while pricing of apartments is going up.

Figure 1

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In Figure 1, we see that house prices have remained negative while the National Council of Real Estate Investment Fiduciaries (NCREIF) total return index has swung positive. It begs the question why has commercial real estate enjoyed a spike in returns while housing values have not recovered? It should be noted that cash on cash returns for investor owned houses has gone up much like the red line in Figure 1.

One positive for the commercial properties is that there wasn’t a huge construction boom in comparison to single family homes. There is also financing available for apartments (through Fannie Mae and Freddie Mac) while financing for investor purchased houses is very difficult (see April’s WASH Apartment Reporter – record number of cash purchases for single family homes).

More importantly, institutional investors (pension funds, REITS, hedge funds) are seeking yield and with the Fed pushing rates down, purchasing commercial real estate will generate more cash flow than bonds and money market funds. These investors need to place a lot of money and purchasing single family homes is much too time consuming and difficult.

A few years ago I was the lead investor in a joint venture with a large hedgefund which was announced in a press release delcaring that the new fund would buy large tranches of bad debt tied to single family homes. The strategy was to purchase residential mortgage back securities (RMBS) at a discount and then work out the loans with the borrower or foreclose and then either sell or hold and rent the houses. Almost immediately we were stunned to find out that there would be few to none of these large transactions because if there were a bulk sale, the underlying investors in these securitized instruments might not do as well as they would if each house were sold one by one. In any case, for fear of investor lawsuits, the dispositions happened on a per door basis and not in bulk. Sadly the best laid plans of mice, men and my fund went awry and never launched.

While there is and will continue to be opportunites for those willing to purchase houses in the inefficient manner dictated by the unraveling of the RMBS market, I remain concerned at how quickly apartment values have returned. In underwriting recent apartment foreclosures that were now for sale in both Atlanta and Las Vegas, I noted that to pull the trigger and purchase, one would need to assign very little for a risk premium and simply take the plunge and believe that there will be NOI growth. This was the very reason I stopped buying apartments in the US after 2002. I certainly may be missing the boat this round but as the philosopher Santayana said, “Those who cannot remember the past are condemned to repeat it.” Amnesia please!



Kyle Kazan


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Hedging Inflation

Sometimes it is difficult to notice trends and changes when the subject is too close. Recently my son saw some photos of me from 1987 and said, “Dad you were skinny.” During the last 24 years, I hadn’t really noticed the additional 15-or-so pounds, as they were attaching themselves, nor the graying of my once totally blond hair.

The same can be said for inflation. I recently filled up my gas tank, and it cost me almost $100. I sat in my car and took out a $100 bill from my wallet and stared at it, remembering when having one of those bills bought a lot more than a tank of gas.

In 1944, the United States agreed to the dollar becoming the reserve currency for the world at the Bretton Woods Conference. The dollar would be backed by gold at a rate of $35 per ounce (a dollar was worth 1/35th of a troy ounce of gold). When the U.S. removed itself from the gold standard (direct convertibility of the U.S. dollar to gold) in 1971, the government changed the dynamic from being backed by a precious metal to a fiat currency (monetary value backed by government decree only).

Removal from the gold standard has allowed the government to print dollars and pursue policies that weaken the intrinsic value of the money (even though politicians never admit to anything but a “strong dollar policy”).

Investors who have traded their dollars into gold during the last few years have enjoyed a handsome profit. While I believe the long-term trend will up, the steep rise might well be a bubble.

Figure 1

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I know many goldbugs who swear by and love the investment. While I agree that gold may be harder to manipulate than paper currency and has historically been a tradable currency, the investment doesn’t offer a yield while owning it.

My favorite hedge against inflation (deflating dollar) is rental real estate. The real estate itself is a tangible asset like gold and can offer a yield on the cash invested.

While there has certainly been inflation over the last few years, one asset that has been deflating is real estate. In Figure 2, we see the 20 metro areas Case-Shiller tracks. The Case Shiller indices have a base value of 100 in January 2000. So a current index value of 150 translates to a 50% appreciation rate since January 2000, for a typical home located within the metro market. Note that there are several cities on the list where houses are cheaper now than they were 11 years ago.

Figure 2

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Sources: Standard & Poor’s and Fiserv


I closely follow a number of the rental markets in the 20 cities listed in Figure 2 and am surprised by the seemingly low cap rates for which properties are trading. That said, with a long-term (at least 10-year) view and conservative underwriting, I believe that real estate will gain pricing power and value while the dollar won’t.

Since everyone needs a place to live, owning well located properties allows the owner to charge more, while the government continues to weaken the buying power of the dollar. Over time, this hard-asset investment should offer you a nice hedge against inflation and even more so, if the government continues printing paper.



Kyle Kazan


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Yields to Rise After June 30, 2011

As a real estate investor / fund manager, I focus on the apartment market but also issues which are not seemingly related but do affect purchases and holdings. In other words, I look for undercurrents which will drive market forces. It is certainly difficult enough to make sure that purchases are underwritten correctly so that the management team can achieve the goals that have been set forth without spending a moment looking beyond. Thus far those who have daringly written checks to join me in buying property in far flung locales around the world have been handsomely rewarded as much as for when we bought but also by my cautious if not paranoid search for what can ruin the best laid plans.

What has been my most recent (over the last couple of years) worry? The “Invisible Hand” of our government has manipulated treasury yields artificially low through “Quantative Easing” (QE I and QE II). This allowed the US Treasury to buy its own bonds more cheaply and punished those who choose to save money in the bank and/or who buy US Bonds. I’m sure you’ve noted the paltry interest rate that you are earning in the bank. The intent was also to spur investments into “higher yielding” assets because those savers became restless in receiving a lower return than the rate of inflation. In essence, anyone with money in the bank was ending the year with less buying power than they had when they made the deposit. Bill Gross who is one of the founders of PIMCO (manager of over $1 Trillion in bond funds) estimates that the yields are 1.5% too low.

The positives have been that borrowing rates have been artificially lowered and for those who qualify, mortgages that are fixed long term can remain low for many years to come. For sellers of property, the lowered borrowing costs have boosted values which they’ve enjoyed in higher selling prices.

The danger as I see it is making a purchase decision without factoring in the subsidized mortgage rate. Also potentially problematic is the comparison of current yields on savings and bonds with the cash on cash return on rental real estate. When the invisible hand ends its QE investment program (scheduled for June 2011), bond purchases will need to go from public to private. Should the Fed untether from the Treasury purchases and let the market dictate the price, be ready for higher interest rates along with better yields for savers.

As real estate is not a bond with a guaranteed return on investment, it is traded with a yield that is risk adjusted higher than treasuries. I would expect that Cap Rates will go up as borrowing rates will immediately be affected AND buyers will demand a higher cash on cash return.

Frequent readers know that I’ve had a keen eye towards the single family home market since it is a bell weather of real estate values. As an apartment investor, houses have been and will become a larger shadow market with which to compete for renters. February saw the nation’s median existing home price for housing drop 5.2% from a year earlier.

Even with prices dropping, total inventory of unsold homes rose 3.5% to 3.49 million existing homes for sale. That equates to an 8.6 month supply at the current sales pace (6 months represents a market in balance) and there are also an estimated 4 million foreclosed homes owned by lenders today. Couple those statistics with the fact that approximately 40% of all homes today are sold by someone who can’t pay their mortgage or will not because they owe more than the property is worth. In Figure 1, we see that new home sales hit an all-time low although given that most properties are selling well below replacement cost, it isn’t a surprise.

Figure 1

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While the employment numbers have been looking better of late (refer to Figure 2), there is still a massive inventory of homes to be absorbed. House prices that will continue to decline for the foreseeable future.

Figure 2

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Source: CA EDD


With the government treasury subsidy scheduled to end on June 30th and the huge supply of distressed real estate available, I’m becoming more optimistic of opportunities ahead.

In the next issue, I’ll discuss why real estate is my favorite trade for green minted paper.




Kyle Kazan


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The Vulture Investors are Finding Deals!

Investors are buying houses to rent and/or to flip which is an excellent sign that we may be at or near a bottom in a number of markets. Certainly on the low end, cash on cash returns from rental income are coming in at 8%+ (into the double digits). These vulture investors are picking the meat off of the bones which is good both in nature and in economics.

To get the best deals, buyers are purchasing using all cash. In fact, January was a record in California as 30.9% of all transactions did not involve any financing. Not surprisingly, the Inland Empire (Riverside and San Bernardino) recorded higher percentages.

 Figure 1

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The combination of stricter lending guidelines along with banks offloading properties through foreclosure or short sales were responsible for the upswing. The biggest reason though is that prices have continued to fall and the multiple of price to rent (Gross Rent Multiplier) has gotten into the range that makes financial sense to investors.

In figure 2, we see that existing home sales have picked up by about 25% in the last few months. While the amount of inventory currently on bank balance sheets and foreclosures still to come remains unclear, investors are voting with their wallets that prices make sense now. It should be noted that in the hardest hit markets of Miami and Las Vegas, over 50% of sales were distressed last month.

Figure 2


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Given the very low rates of return that one gets from depositing money in the bank and a genuine concern about inflation, trading dollars for a tangible asset at far below replacement cost while getting high single digit or double digit yield has become attractive. I think it makes sense, even though I haven’t jumped in yet but I may buy some houses later this year.

The downside of the investor owned homes is for the apartment owners. The houses become “shadow inventory” of rentals that compete very well against multi-family properties. Not surprisingly, commercial mortgage-backed securities (CMBS) delinquencies are rising as seen in figure 3.

Figure 3

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The worst performing of the CMBS loans in February were apartments at 16.61% being delinquent. This is an amazingly high percentage and for scale, approximately $170 billion of these commercial loans will come due over the next three years.

Recently I’ve been looking to acquire delinquent apartment loans in a “loan to own” strategy whereby I hope to purchase the underlying asset by buying the mortgage at a discount to the value of the property. While there are certainly risks in pursuing this course, one of the most difficult is to avoid catching a falling knife since I believe apartment operations and values may well continue suffering over the next few years. In other words, I am trying to predict where values (prices, rents and occupancy) are heading while my vulture counterparts are converting foreclosed houses into competition.

Clearly to acquire the best deals, “cash is king” and at least right now, houses by in large make better sense than do apartments.




Kyle Kazan


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Bubble, Bubble, Bubble

There are positives to report in the economy. The stock market recently topped 12,000. One of my bell weathers, a large company in the South Bay of Los Angeles County that manufactures paper boxes for many different industries reports that they are very busy again. The CEO told me that he is cautiously optimistic about the economy but is paying overtime instead of hiring at this point.

Statistics show that the housing market has yet to bottom out. According to the Wall Street Journal, home prices declined year over year in the 4th quarter in all of the 28 major metropolitan markets tracked. Inventory in many of those markets rose as more houses sit unsold. How many bank REO’s that aren’t yet for sale and thusly aren’t in the statistics remain to be seen.

Figure 1

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I have been told by many real estate owners, agents, loan brokers and lenders how difficult it is to obtain financing right now and if there was “reasonability,” more sales would be closing. First hand experience was foisted upon me as two of my apartment properties (one is a 49 unit building in Hawthorne, California and the other a 48 unit property in Anaheim, California) had 10 year Fannie Mae loans coming due at the end of 2010. While I was being forced to refinance, the quoted rates were 300 basis points lower than my current loans and the loan to value on both were below 40% (meaning I have 60% of equity which I was not looking to touch). My team and I are veterans of many commercial loans and these seemed like “no brainers.”.

I decided to put 10 year fixed rate debt on each property. We completed the loan applications 90 days before the balloon payments were due and to boot we stuck with Fannie Mae since they had already accepted these “C” properties 10 years ago.

The process was extremely difficult with scrutiny at every step. Eventually we completed the refinance albeit after the existing debt’s balloon payment was due and to get it done, had to agree to holdbacks that were quite frankly unreasonable. As an example, I met personally with the head of Fannie Mae loans for this national bank to negotiate away the demand of a hold-back for flooring for every unit since none of the carpets and vinyl was brand new.

My conclusion was that even in the 1990’s when credit was constrained, it wasn’t as difficult to obtain as it is today. I welcome the cautious attitude from the lenders as I was critical when one needed to do little more than fog a mirror to get a loan although the pendulum has swung too far as it often does.

Today our government borrows 40 cents of every dollar it spends and is estimating a deficit this year of 1.5 Trillion dollars. There is a concerted effort by our leaders to not let the economy truly suffer from the housing crash. This is the same “kick the can” strategy employed by the Federal Reserve after the crash as they took interest rates to then historic lows which fueled the housing / credit bubble. The unsustainable today is our borrowing and when we institute austerity measures (see Ireland and UK) or when they are instituted on us (see Greece), there will be drastic changes.

While the US government is saying that the economy is improving, the Federal Reserve announced that it recently surpassed China as the leading holder of US Treasury securities. As of February, the Fed has spent almost half of QE2 and by June, it will hold $1.6 Trillion of securities which will be almost as much as China and Japan own combined.

In 2004-2006, I repeatedly publicly stated that the housing market was on an unsustainable path with dire consequences. Today our government’s borrowing is the new and largest bubble which can not and will not continue forever. What will happen when the government cuts or has its spending cut by 40%+? I’ll be discussing the consequences along with strategies to protect oneself in upcoming issues.



Kyle Kazan


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Mixed Messages Abound

Before I leave for work every day, I read the Los Angeles Times, Wall Street Journal and Financial Times along with my local paper. As I keep seeing the economy’s “recovery” heavily covered in the headlines, I note many retail and office vacancies all around Southern California. These vacancies in particular cause concern since those spaces used to employ people and many of those folks used to be renters. The juxtaposition between what I read and what I am seeing is striking.

For example the graph in Figure 1 from the National Real Estate Investor, the headline read “The 10-year Treasury yield climbed more than 10 basis points for accelerating economic growth.” I studied the chart and thought back to April of 2010 when the yield was 50 basis points higher and remember Mr. Bernanke calling for more quantitative easing because the economy was stalling and he wanted interest rates to remain low. Now because investors are selling or not purchasing US Treasuries, it is assumed that it is because of their confidence in economic growth.

Figure 1

10 year US Treasury Yields

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When bond yields rose precipitously in Portugal, Ireland, Greece and Spain, the news was greeted as a lack of investor confidence or the glass being half empty and leaking fast. In the US, that same yield spike is being reported as the glass being half filled en route to running over. Is Figure 1 really good news when higher borrowing costs put pressure on an already weak real estate market?

As a fellow owner of apartments and offices, I wanted to share what I am seeing as far as performance at my buildings in Southern California. Since I’ve owned many of my properties for over 10 years, I’ve gotten a good feel for their usual profitability which is primarily driven by vacancy and delinquency rates, respectively. This year has been extremely challenging as I’ve seen rents drop to varying degrees on all of them. I’ve also seen both vacancies and delinquencies rise with an overall increase in turnovers. On top of that I’ve had to offer concessions (lowered or free rent) to entice new residents to move to many of my properties.

A case in point is a 25 unit building in Inglewood that I bought in 1998. For several years, the property collected over 99% of gross potential rents, meaning it lost less than 1% from both vacancies and delinquencies combined for the year. In November 2010, there were 2 evictions in process with one vacancy sitting for nearly 60 days. The evictions were both caused by job losses, including a now former professor at UCLA who refused to move since she “had nowhere else to go.” The vacancy was created because that resident (who had lived there for over 10 years) took advantage of the low interest rates, 40% decline in real estate prices and bought a house. 2010 will be the toughest economically for that property since we purchased it.

Some positive news from December was that the Bureau of Labor Statistics released unemployment data and while 21 states and the District of Columbia saw unemployment rate increases, 15 states experienced declines while 14 states posted no change. Hopefully we are seeing a plateau with decreases in unemployment in our future. In Figure 2, we see that Nevada had its first decline in unemployment in October 2010 before bumping up slightly in November. The last drop previously was in December of 2005.

Figure 2

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At the same time, California’s unemployment remained the same for the last 4 months at 12.4%. While these statistics in and of themselves don’t immediately show that occupancy percentages should increase, it does say that employment is not in freefall right now as it was.

While I’m certainly hopeful that the US and respective state economies are preparing to turn a corner, a “jobless recovery” is simply an oxymoron. I watch the positive reporting in the media and note the struggles of day to day management at properties all over the place. The mixed messages blare but I believe the bottom line and not the hype. We will certainly recover but as anyone who is operating rental properties knows, it is likely not imminent.




Kyle Kazan


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