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Boil and Bubble, Toil & Trouble?
Welcome to our scary season edition of the
CapHarbor Newsletter. Not that we want to frighten
the faint of heart, but this seems like an appropriate
time to discuss some of the more worrisome aspects
of the real estate market. It’s not that we think that
this is a bad time to invest. But, as the days get
shorter and the nights get longer, it certainly makes
sense to be extra careful! We do believe that being
forewarned is to be forearmed (unless those being
forewarned are characters in a horror flick). In that
vein, please turn on the lights, stay out of the
shadows and enjoy our Newsletter.
Securities offered through OMNI Brokerage, Inc.
Member NASD/SIPC.
Financial Engineering in TIC Transactions
By Jim Shaw, CapHarbor |
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As cap rates continue to decrease,
while interest rates increase, cash on cash returns
for new offerings must decline when compared with
offerings that were available only a few short months
ago. Unfortunately, many investors are still hoping
for the higher cash on cash yields that were, but are
no longer, available. This is known in the industry as
yield chasing and it often leads to un-happy
conclusions.
Equally unfortunate is that some
sponsors of TIC offerings are assisting investors in
their yield chasing by the use of excess financial
engineering. Simply put, financial engineering is the
use of debt products, or the manipulation of
reserves, to increase the cash on cash return above
that which would be naturally produced by the
property. The four most common forms of financial
engineering are interest only financing, bought-down
interest rates, irregular use of reserves and master
leasing of vacant space. While none of these
techniques are inherently bad and they can
legitimately improve returns, an investor must
understand the implications of each of these
techniques in order to be able to determine their
impact on a potential investment and, especially, the
ability to exit the investment with a
profit.
Let’s take a look at each of these
techniques and see how they impact risk and returns.
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What Does a Credit Rating Actually Mean?
This article is written by ING and comes via FundSource (www.fundsource.com) |
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Every weekend in the business
pages of our newspapers, we are bombarded with
advertisements from finance companies advertising
debentures, capital notes and other similar
investment offerings, with very attractive headline
returns.
Often this high return is
accompanied by a credit rating or ‘investment grade’
claim. Does this mean investment nirvana, i.e. high
returns and low risk? This article from ING looks at
what a credit rating actually means and how it
relates to the returns being offered.
Credit rating equals default risk
Essentially, a credit rating
represents a possibility of default. The following table
shows the various ratings offered by the two main
international rating agencies and the expected
default rates over a five-year period.
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CapHarbor Rocks FEA! |
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Each year, the Federation of
Exchange Accommodators, an organization that was
formed to represent professionals who conduct like-
kind exchanges under Internal Revenue Code §1031,
holds their Annual Conference in Las Vegas. The
Annual Conference is organized to promote the
ethical and legal standards of the industry as well as
discuss and educate the members on any new State
or Federal legislation, court rulings, IRS and treasury
rulings. This years Annual Conference took place
October 7-8 at the MGM Hotel and Casino. CapHarbor
was honored to be a Silver Sponsor and the sponsor
for Friday night’s entertainment, providing the musical
talents of Red Rhythm. With 45 new members, 15
new affiliate members and a record-breaking 515
attendees, this year’s meeting proved to be the
largest and most beneficial thus far.
Read On....
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