February 2020 - Commercial Real Estate South Florida

Two Sides Of The Eminent Domain Coin on morrissegroup.com

Heads or tails, there’s an impact on commercial real estate (CRE)

Most people are familiar with the term “eminent domain”—a phrase that can instill fear and panic in residential and commercial property owners. It can also stoke impassioned protests and, naturally, lawsuits in neighborhoods around the country. In the collective mind’s eye, it’s often viewed as a public battle of David and Goliath proportions.

That, however, is only one side of the coin. Flip it over, and eminent domain can easily be something property investors don’t even think about. But if it’s ignored and you’re caught off-guard, it could suddenly place an entire investment at risk.

What is eminent domain?

Also known as condemnation, eminent domain is a process by which the government—from the federal level down to the local level—or its agent can condemn and seize private property for the “public good” in exchange for “just compensation.”

The basis for it is found in the 5^th Amendment of the United States Constitution. While condemnation laws have slight variations from state to state, every single piece of property in all 50 states is subject to being completely taken or damaged to support a public project.

While that seems like a very straightforward explanation, it is, in fact, a gray area. Just what is the “public good?” Traditionally, most people think of the public good as big infrastructure improvement projects, such as a runway expansion at the airport, a new highway interchange to ease traffic congestion, or, in the case of Miami, a 10-foot wall to protect the coast from a storm surge.

The ruling that changed “public good”

“Public good” became less clear following a 2005 Supreme Court ruling. In Kelo vs. City of New London, a Connecticut woman sued the city after it deemed her remodeled home as blight in an effort to condemn her property. The city was making way for an expansion of a private company to realize ensuing tax benefits and an economic boom in her neighborhood. The Court ruled (5-4) that economic improvements can be interpreted as being for the “public good.”

The result of this controversial decision was that more county and municipal governments embraced eminent domain and partnered with developers in efforts to ignite economic development. Many of these initiatives were met with legal challenges. The court system examined each case for condemnation with a very fine-toothed comb, often resulting in the gavel falling on the side of the property owners over governments.

The bottom line for CRE developers

Following Kelo, many states re-examined their own eminent domain rules and regulations in an attempt to protect property owners from the government’s potential abuse of condemnation. In Florida, for example, then-Governor Jeb Bush signed off on legislation that gave the state an “A” rating for protecting the rights of Florida property owners.

For developers looking to work with local governments that utilize eminent domain, it’s imperative to know the regulations in a specific state and to ensure that “public good” or “public purpose” is firmly established. Otherwise, the project can quickly become bogged down in lawsuits.

The bottom line for CRE investors

The impact of eminent domain on developers is only one side of the issue. The other side affects anyone who is looking to invest in commercial properties.

The risk of eminent domain must be incorporated into an investor’s due diligence checklist. Very often, this aspect is forgotten, and the consequence is a surprise that reveals itself after the deal is done. For example, consider a buyer who failed to check for any projected public projects in the area of his or her newly purchased strip mall. After the sale is complete and tenants move in, a road-widening project results in the loss of prime parking spaces. There is no “buyer beware” clause.

It’s essential for anyone—developers, investors, and sellers—to work with professionals who are knowledgeable in the processes of eminent domain and condemnation—and the due diligence required to mitigate these risks.

To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Understanding the accounting factor in leasing decisions

For nearly 10 years, the Financial Accounting Standards Board (FASB), which regulates accounting standards in the United States, has been in negotiations with its international counterpart to bring a key standard into alignment. The result is ASU 2016-02, which the FASB formally introduced in 2016.

The regulation change is meant to increase transparency through the disclosure of lease assets and lease liabilities on balance sheets. It also satisfied the requirements of the International Accounting Standards Board (IASB), plus gets the FASB and the IASB on the same page.

Public companies implemented the new accounting standard in 2019, and 2020 will see private companies come into compliance. Although the regulation is specifically geared toward the accounting profession, it’s important for real estate investors, tenants, and brokers to understand the changes. These updated regulations directly affect business decisions when leasing or purchasing everything—from equipment to property.

The critical component of ASU 2016-02

Generally speaking, there are two types of leases: capital and operating. Most people are familiar with capital leases. It merely means that to own an asset (such as a building), an individual is taking on debt, like a mortgage. At the end of the mortgage, that individual owns the asset. Capital leases, now referred to as financial leases under the new regulation, always have and will continue to appear on balance sheets.

Operating leases, on the other hand, mean that the individual never owns the asset. Essentially, it’s a rented property. And as such, it was an off-balance-sheet item—until now. The ASU 2016-02 standard requires operating leases with terms longer than 12 months to show an asset or a liability—and this information must be recorded on the balance sheet.

What does ASU 2016-02 mean for CRE?

The FASB regulation change has had and will to continue to have a lasting effect on the CRE sector. ASU 2016-02 impacts tenant and landlord business decisions, lease agreements, accounting data, and mindsets.

In some cases where tenants had lease debt—if they were renting several properties at once, for example—that debt would not appear on their balance sheet. It would, however, be on a financial statement, thereby creating the illusion that the tenant had less debt. The new standard corrects that.
The new operating lease regulation applies to leases longer than 12 months. As a result, potential tenants may be reluctant to enter into long-term leases. Instead, they may be more interested in short-term arrangements, and this environment could have significant impacts on the capital markets and the way lenders make CRE loans.
In essence, ASU 2016-02 creates a new mindset for tenants. On the one hand, they may be hesitant to enter into too many lease arrangements for fear that their lease debt will be too apparent. But while a long-term lease allowed tenants a sense of stability while they worked on growing their business, short-term leases may interfere with that. As a result, tenants may want to weigh the benefits of a “capital” or “finance” lease (owning their property) over an operating lease (renting).
Impacts don’t begin and end with the tenant. Building owners, for example, will also have to adapt to the FASB change. Specifically: how to market their property to make it a more attractive long-term or short-term lease option for potential tenants.
For everyone involved in the CRE equation, ASU 2016-02 could mean higher operating and administrative costs. This results in greater scrutiny while making business decisions.

Working with a CRE team to navigate new regulations

Ultimately, the FASB regulation change has made the leasing process more complicated for all parties. Therefore, it’s essential to work with experts who can advise owners and tenants on how best to proceed, no matter if it’s a lease or a purchase.

Morris Southeast Group has a long and successful history of working with investors, owners, and tenants. To learn more about what we can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Will the Fed Cut Interest Rates? The 2020 Commercial Real Estate Outlook on morrissegroup.com

We’re in “steady as she goes” territory for rate cuts—what this may mean.

It’s safe to say that when the Federal Reserve chairman talks, investors listen. Consider what happened in July 2019. About an hour after Fed Chair Jerome Powell announced lower interest rates to stimulate an economy made sluggish by a trade war between the US and China and cautious consumers, the S&P lost 15 points, and the Dow dropped 99 points. At the same time, 22 out of 28 real estate stocks saw falling prices.

Of course, the market corrected and rebounded in a big way—but the Fed followed this announcement with a 3^rd lowering in October 2019. All of this brings us to 2020, and the Fed’s decision—after a 4^th quarter meeting—is that low inflation will mean a “steady as she goes” course. There should be no major actions for the coming year.

What does steady mean for CRE?

Generally speaking, CRE makes excellent use of low interest rates. When the cost of borrowing money is low, investors can take advantage of the savings, and this translates into more opportunities.

The difference, though, between 2019’s lowering of interest rates and 2020’s holding steady is the level of confidence. While the Fed’s actions in 2019 were borne out of economic inconsistencies—such as unemployment rates reaching a 50-year low while business and household spending were below average—remaining steady for 2020 translates into a more predictable market and consistent capitalization rates for CRE investors.

How do interest rates impact cap rates?

The first question in most CRE investment opportunities is the end result. In other words, the “capitalization rate,” or cap rate, which is the expected return on that investment. To achieve an estimated answer, you use a formula that looks like this:

Calculate the annual gross income of the investment property.
Subtract the operating expenses from the annual gross income to determine the property’s net income.
Divide the property’s net income by the current market value or purchase price.
That answer is the cap rate.

Generally speaking, a higher interest rate means it costs an investor more to borrow money. And this, in turn, eats into expected profits from the property. Lower interest rates, on the other hand, have a more profitable return—most of the time. The cap rate should never be used as a solitary tool because other variables can play with that number, such as:

The age and location of the property
The market and available inventory
The creditworthiness of the investor or tenants

Also note that this is an election year after a divisive impeachment trial, and disturbing news stories of coronavirus are causing serious concerns, including some about international trade. National and international events could have significant implications for the stock market and economy, and the Fed may feel compelled to respond.

Putting it all together

Whether the conversation is about interest rates or cap rates, at the end of the day, it’s all about finding the best CRE investment opportunity for you. Working with knowledgeable professionals, such as the team at Morris Southeast Group, can help bring all of this analysis together. In addition to knowing the local market, our team can help do the due diligence required to make your money work long term.

To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

2019's Commercial Real Estate Landscape on morrissegroup.com

The pulse of commercial real estate in South Florida

Where do you go when you want in-depth information on commercial real estate? Right here to the Morris SE blog, of course. 2019 was an interesting year for CRE, from advances in Proptech and smart retrofitting and future-proofing trends to new uses for retail properties and emerging market opportunities.

Take a look at the topics Morris SE covered last year:

Strong growth, an attractive lifestyle, and a great business climate in the Magic City

No one is quite sure how Miami came to be known as the Magic City. One suggestion says that it comes from its rapid growth in the 1940s. Another theory places the blame on Henry Flagler’s advertising campaign to hide the risk of malaria in the city’s earlier, swampier development days.

No matter the reason, there is no doubt that when all of the ingredients come together, there is certainly something magical about this city that sits on the southeast coast of the Florida peninsula. To better illustrate this, one only needs to look at the number of national lists in which Miami and the rest of the South Florida region come out on or near the top.

Miami in the metrics

When it comes time to compile these lists, companies typically rely on data from the US Census Bureau and Labor Department, as well as other metrics that cover employment, population, education, and income. When these factors are all put together, the South Florida region—especially Miami—is consistently in the top tier.

According to the US Census Bureau, Miami is the second-fastest-growing city in Florida, just behind Jacksonville. Those same statistics also place Florida as the second-fastest-growing state in terms of housing units, with Texas in the top spot.
Wallethub, a personal-finance site, used 15 metrics to study 515 cities. Once again, Miami ranked second in the list of fastest-growing American cities. The same company—this time using 66 parameters—placed Miami as the number-four most-fun city in the country.
In yet another ranking, Miami—and the South Florida region as a whole—toppled New York City from the number-one spot as the best city for small business growth.
At the county level, North Miami surpassed Doral as the fastest growing incorporated city in Miami-Dade. In Broward County, Parkland took top honors.

What makes Miami magical?

When looking at the reasons why Miami is at or near the top of so many lists, the most obvious answers are climate, beaches, and palm trees. But there are a lot more, deeper factors working together to achieve these rankings:

The combination of Miami’s location and the instability in many Latin American countries are making the region very attractive for foreign investment. Location is also responsible for a bustling seaport and airport and a thriving hospitality industry, all of which have turned Miami into an international trade and travel hub.
Changes to tax codes in the Northeast have caused many businesses to look southward. Where Miami and SoFlo were once considered locations for corporate outposts, they are now prime real estate for corporate headquarters, especially in the hedge fund and financial industries. This fact alone seems to have helped stabilize the area’s economy, thereby easing the anxiety that all of this is just another boom-bust cycle. Companies and people are here to stay.
The Sunshine State’s consistent record of fiscal stability, a low overall tax rate, and no state income tax has resulted in consistent population growth. This, in turn, has led to a competitive, multi-lingual workforce and a strong residential and commercial real estate market.

Some areas could use still use a little more magic

Of course, all of this good news is tempered by some important issues that the region is addressing—but not as quickly as some would like.

Traffic congestion. While Tri-Rail and Virgin Trains have helped ease some north-south congestion, there is still much work that needs to be done for east-west travel, as well as city travel, light rail systems, and linkages.
Infrastructure. Recent sewage line breaks in Fort Lauderdale have highlighted the strain growth has had on aging infrastructure in the wider South Florida region—infrastructure that is in desperate need of upgrades and repairs.

Miami, magic, and Morris Southeast Group

The team at Morris Southeast Group has never been shy about its love for Miami and the entire South Florida area. That love is why we’ve worked, played, and raised our families here for more than 30 years. And it’s why we’re excited to connect clients to their ideal properties.

To learn more about what Morris Southeast Group can do for you, call us at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

Two Sides Of The Eminent Domain Coin

Heads or tails, there’s an impact on commercial real estate (CRE)

What is eminent domain?

The ruling that changed “public good”

The bottom line for CRE developers

The bottom line for CRE investors

Understanding the accounting factor in leasing decisions

The critical component of ASU 2016-02

What does ASU 2016-02 mean for CRE?

Working with a CRE team to navigate new regulations

We’re in “steady as she goes” territory for rate cuts—what this may mean.

What does steady mean for CRE?

How do interest rates impact cap rates?

Putting it all together

The pulse of commercial real estate in South Florida

Going Green

Multifamily

Technology

Tips and Tactics

Trends

Strong growth, an attractive lifestyle, and a great business climate in the Magic City

Miami in the metrics

What makes Miami magical?

Some areas could use still use a little more magic

Miami, magic, and Morris Southeast Group

Morris Southeast Group

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