In the retail world of Commercial Real Estate, what was big and fat is now being honed down in size, shape, color and message.

For most of my career retail centers, gerenally speaking, all looked the same. All shopping malls have been essentially the same and all open air centers were all the same. Town centers…same! Strip centers…yep, same! With few exceptions, there existed little or differentiation in the marketing or the appeal. With the exception of Outlets and higher end centers, retail has been essentiall the same, tame and lame story.

Design is free when you get to scale. The riskiest thing you can do now is be safe…safe is risky. — Seth Godin

One of the most important ingredients in retail today is the ability of a location to “stand out” as a unique place that delivers a constant stream of products that are remarkable and irresistible to “unique” people and groups. Emphasis on “REMARKABLE” and emphasis on “UNIQUE.”

Listen to Seth Godin from TED on the topic of standing out.

In the world where being grunge is often applauded and rewarded, I remain convinced that being tacky is a cultural statement about one’s point of reference.

Is it just me or have you also noticed some of the creeping influences of grunge within the world of CRE?

Of late, I’m becoming more acutely aware of the relationship between cracked stucco, peeling paint, potholed parking lots, leaking roofs and the level of an owner’s commitment to creating and maintain property value through capital improvements and dedication to property management.

I See Ugly Properties

My recent observations of properties in the metro Phoenix, Arizona commercial real estate market have led me to the conclusion that something grungy is happening. Once pristine properties are now left to the elements. The same grunge is becoming more and more apparent in the Prescott, Flagstaff and Sedona, Arizona commercial real estate markets.

There appears to be a deliberate draw-down on capital commitments and property management. It’s obvious, it’s annoying and it most certainly can impact a commercial property’s actual and perceived value. Capital is tight and owners are hesitant to spend.

In a market with negligible, if any, appreciation, some owners are choosing to tighten their financial belts by commiting the unpardonable sin of withholding capital and maintenance improvements necessary to the value equation. Some of this is being forced on owners under the principle of too much property, too little capital.

More than ever, those scant investors who are looking to buy or exchange are digging deeply into the maintenance history of a targeted property and insisting that value adjustments be made for improvements during the initial 36-month their ownership window.

Tenant Perceptions & the Grunge Factor

Retention is now as important as leasing itself. The most clostly and devestating loss a property experiences is vacancy recovery. In fact, I’m finding that in some cases retention is the only path owners can take to sustain their already threatened values.

Grunge shrinks values and contributes to poor leasing and negative tenant retention rates.

• Grunge = concerned, nervous and even angry tenant.
• Grunge = lower lease price per square foot.
• Grunge = a position of weakness in the renewal process.
• Grunge = refinancing problems reflected in appraisals.
• Grunge = diminished public percention of a property.
• Grunge = all sorts of ugliness…that’s why it’s called “grunge.”

The tenant issues stemming from CRE Grunge are myriad and they create value objections on the front end of the leasing process as well as retention problems. When a property enters a cycle toward physical decline the market responds with like-kind perceptions.

Quality maintenance = perceived and actual value.

Retail tenants are more keenly aware of the relationship between quality properties, price per s.f., NNN charges and more importantly, in their minds, consumer traffic.

We can cheat on maintenance, but not for long. Tenants are shopping the market, constantly looking for an edge on cost, a better location, a cleaner look and an owner committed to upkeep.

Grunge may be a prevailing desease we have to live with during the overbuilt, under-capitalized commercial real estate market. But, rest assured, grunge eventually extracts its toll.

The growing demand for health care is a reflection of the demographic factors resulting from the regional growth of Central and Northern Arizona in the last 25 years.

The CenterPointe Medical Plaza is ideally situated in the heart of the medical community in Prescott, Arizona.

CenterPointe is adjacent to the Tri City Surgery Center and in proximity to Ponderosa Pediatrics, Desert Hand Therapy and just minutes from Yavapai Regional Medical Center and Bradshaw Mountain Laboratory, the area’s premiere testing center.

The Plaza offers three complete build-to-suite medical suites, each customizable within the pre-planned development. From ±2,000 s.f. to ±9.000 s.f. Additionally, each suite has a private entrance, private offices and dedicated Physician and staff parking.

See the Location on a Map.

Contact Bebe Wright, CPM, CCIM at (928) 710-1783 or by email.

There has been a lot of talk about pent-up demand, cash on the side lines and investors in the wings. So far we have not seen the long awaited collision of reduced prices and pent-up demand.

We travel down the road, wearied and parched, as months go by without our seeing a passing vehicle.

Small and intermediate investors, those most strapped for cash reserves, are running low on fuel waiting for the collision of buying power with what they fear is their last price adjustment they dare make before the notes are called and new refinancing is required. The NOI isn’t there, neither are the tenants or the buyers.

The good news is that we are seeing the dust of approaching vehicles just over the hill. There is the noise of oncoming traffic.

Those of us in the Northern Arizona commercial market are seeing a measurable increase in traffic. We are seeing more tenants, slight increases in rental rates and in general more activity on the retail and industrial fronts.

Although we are not yet ready to pop the corks on the Champaign bottles, we are least sipping some cheap wine in anticipation that perhaps 2011 will bring the collision between lower rates and pent up demand.

Barring any overreaching government intervention and further reluctance of lenders, I am now finally ready to at least acknowledge the prohibited collision is predictably logical.

Cost Segregation Studies can provide a range of significant benefits to businesses. These studies can be applied to buildings that have been purchased, constructed, expanded or remodeled since 1987.

In order to realize the maximum available benefits under current tax law, the IRS requires Engineers, CPAs, and possibly other professionals, to perform a Cost Segregation Study using the Detailed Engineering Approach.

Reclassification – Bonus Depreciation

The most notable benefit of this study is to maximize tax savings by adjusting the timing of deductions. This is accomplished by allocating eligible building costs from a 39 or 27.5 depreciable property classification to a 5, 7, or 15 year classification. These reclassifications may also allow for bonus depreciation, such as a §179 deduction, that would further increase savings. The present value of these savings is contingent upon the type of property evaluated, effective tax rate, and the rate of return used for the calculation. This spreadsheet can be used to estimate the amount of savings that could be realized. Please note that this spreadsheet excludes bonus depreciation, thus using a conservative approach.

A Cost Segregation Study can be completed at any time during the life of the building, so long as it has been placed in service by the taxpayer during or after 1987. However, it is more beneficial for the taxpayer to complete the study early in the asset’s life as opposed to later, due to the nature of present value calculations. If a taxpayer does choose to do a study later in the property’s life, recent tax law amendments have allowed for any retroactive tax benefits realized from the study to be recognized in their entirety during the year the study is completed. This, in turn, could produce or free up significant cash flow depending on the magnitude of the adjustment and/or whether a NOL carry-back or carry-forward occurs as a result of the adjustment.

Cost Segregation Study – The Audit Trail

By performing a Cost Segregation Study, an audit trail is simultaneously created, providing sound documentation regarding asset capitalization. As a result, IRS inquiries can be easily resolved and unfavorable audit adjustments can be avoided. Reduction of real estate tax, sales & use tax, and transfer tax can be another favorable advantage of completing a study. It can also provide great benefit to estate planning and like-kind exchanges by freeing up considerable cash flow.

Here is a list of some of the building types that may undergo a cost segregation study:

• Amusement Parks
• Apartment Complexes
• Automobile Dealerships
• Casinos
• Distribution Centers
• Fast Food Restaurants
• Food Processing Facilities
• Gas Stations
• Golf Courses
• Manufacturing Plants
• Medical Centers
• Nursing Homes
• Office Buildings
• Retail Chains/Franchises
• Shopping Malls
• Self Storage
• Sports Stadiums
• Supermarkets

Cost Segregation studies are among the most significant and effective tax saving strategies available to taxpayers, and should be considered by those that qualify.

See what the IRS has to say about Cost Segregation.

Note: This post was originally written by Donald Teel for residential Broker-Owners. It is syndicated from REALonomics because of its relevance to commercial brokerages and investors. “REALonomics” is a registered trademark ® of The Teel Group, Inc.

The real estate industry is not too unlike an organization living in a state of collective schizophrenia. Figuratively speaking, we are hearing voices that are not real.

Our hallucinations are mostly self-induced; the voices we hear are actually our own mumblings and business babblings disguised as forces we do not control.

I’m now convinced the real estate industry is delusional but not in the classic clinical sense of schizophrenia. Rather, we are deluded by the notion that what we are experiencing is beyond our control.

Since we don’t have an alternative point of reference for our dilapidated and dysfunctional (not to mention unprofitable) business models, we willingly succumb to the voices that keep telling us all will be well and in time the market will return to normalcy (whatever that is).

We have come to actually believe there is a quick cure for our collective malady. We have long ago stopped taking the medications of self-reliance that can eliminate the voices and have instead turned to a political pill that only fuels the illness and delays the inevitable.

The Great Delusional Grip

Franchisors continue to pimp and prescribe, increasing their delusional grip on Broker-Owners, convincing them, mistakenly, that their brands are necessary as a market value proposition and to their survival.

To control the delusions and squelch the voices we pretend our economic survival can be optimized by merely changing the colors of the pills we ingest. We hallucinate about technology solutions that magically produce profitability through Internet lead generation. The voices continue.

For a long time we have believed the pseudo voices and their message as they tell us to hold on, wait and believe that change is coming in the form of a market rebound that will resurrect the old models and their former but temporary profitability. In reality we are trading our collective ability to transform our industry for a hope in the return of things past, of things long dead and gone. Have we surrendered our business sanity to the collective stupor of a beautiful mind syndrome?

It wasn’t long ago that I also experienced the paranoia that comes from thinking others can and ought to control the business outcomes of my company and that there were forces out to get me if I didn’t comply with the verbal orders of quiet, shadowy personalities hiding under stairways and standing in dark corners, speaking to me and intimidating me as a Broker-Owner.

Dumping Market Meds into the Drinking Water

As we prepare to enter 2011, our illness is becoming more pronounced. Others see the progressive changes but we do not. We do not know whether to take the generic market meds being dispensed by the National Association of Realtors or to reject them while hoping for an alternative magic that can somehow stop the insanity.

NAR is dumping its generic market meds into the drinking water in a giant shift from its fundamental and historic premise that home ownership ought to be based upon the self-reliance of individuals to a new socialist real estate state where wealth is shifted from tax payers to fund the down payments for otherwise under-qualified first time home buyers. It’s the same old repackaged sub-prime pill I will no longer swallow.

Schizophrenia is my metaphor for disordered thinking that is not aligned with sound economic reality in the midst of a market platform that has shifted under the feet of Broker-Owners.

On one hand, we know we are living in a time of great delusion and we desperately want to stop the voices.

On the other hand, we continue to pander to the hallucinations because we want a simple solution to a complex industry illness. We know the voices are not real but we cannot quiet them. We drink the purple water and we pop the multi-colored but phony economic pills that will temporarily muffle the sounds but never permanently stop them.

We are becoming more and more desperate because we are on the edge and are finding it more and more difficult to distinguish reality from fiction. The market meds do not help because they create an additional layer of fog that further weakens our discipline and stifles our resolve to take charge of our individual and collective illness.

Stopping the Voices

There is coming a time when we will have to make a deliberate choice between believing what the voices are telling us and the reality that we are operating our industry from a position of economic dependency that will eventually render us incapable of recovery.

Like many Americans who are waiting for the government to produce solutions, many in our industry are waiting upon the bureaucratic solutions of NAR to deliver a cure that will stop the voices. We have yet to recognize that NAR is but one of the many voices that create the madness that engulfs us.

Some of us are now realizing we have fallen prey to a placebo that can never deliver true economic healing. A few of us are now realizing we have fallen prey to a placebo that can never deliver true economic healing and that in the end we must once again, deliver our own cure.

CAP rate pricing strategies are increasingly difficult to pencil-out these days. After we doing the math we are often left shaking our heads. Owners are facing note calls and having some sleepless nights wondering how to score lending. Lenders are insecure and uncertain about what the Feds might do next.

Welcome to “ABNORMAL” where normalcy, whatever it is or was, exists no more. Welcome to normal defined by abnormality. Our CRE world is fast becoming a frenzied marathon that owners discover takes them nowhere, slowly. Yikes!

Enter Legislative Reform and No Risk Lending

President Barack Obama has signed into law a 2,300 page legislative act known as the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (HR 4173).

Download the Davis Polk Summary of HR4173

Although the bloated document’s proponents claim the new law will right the financial wrongs that created the current abnormal state of affairs in lending, others think it may create more uncertainty in the lending market.

Proponents of the legislation claim it will reduce systematic risk in lending and thus protect the banks and the lenders.

My question is fundamental to CRE investment. Can there be such a thing as “no risk” lending? And it such a creature can be created in Washington’s legislative laboratories, will it be just another Frankenstein that further wreaks havoc on the CRE investment world.

The legislation translates into a myriad of government studies (such studies typically create abnormality) designed to formulate the regulations designed to provide the framework that will enforce all of the rules that will serve as the engine that will run the new lending vehicles.

New Bureaucracy to Protect Us from Them

Obama’s legislation is essentially an outgrowth of the notion that we all need protection. It’s designed to protect “us” from “them” with the “them” being predatory lenders.

Our new “abnormal normal” will create an army of regulators, perhaps thousands of them, who report to work each day in the Financial Stability Oversight Council (risk monitors), a Federal Insurance Office (risk regulators) and a Consumer Financial Protection Bureau, a group of guys and gals who will actually write the specific laws that they say will protect us all from risks associated with unfair lending.

Download the Davis Polk Summary of HR4173

My personal take is that we are entering an Orwellian Abnormality masquerading as the new normal that will in the end, create more uncertainty than ever before. And we all know what uncertainty produces…more uncertainty and subsequently hesitation and reluctance with respect to commercial underwriting.

People who know more than I predict it will take at least a couple of years just to create the formulas and rules necessary to enact the law’s theories into a set of understandable regulations and universal standards for our new normal.

What is the predictable response from lenders going to be while the bureaucracy is assembled and the rules for the new lending environment are penned and codified? Let me see if I can guess what the response of lenders will be…hmmm, how about wait, slow down and resist? Uncertainty always creates this response from lenders.

The Orwellian abnormality in lending is simply that a cadre of government soothsayers can formulate safe, no risk lending. My contention is that the theory of such a safe environment is in-and-of-itself, the ultimate uncertainty and therefore, the ultimate abnormality.

Download the Davis Polk Summary of HR4173

Off-and-on for the past couple of years I have been experimenting with how I might use Google Docs in commercial real estate. I have collaborated with Brokers and clients on performance spreadsheets, operating budgets and even listing agreements via the document sharing and editing features of Google Docs.

The Upside. The upside of Google Docs is that I can truly control my documents…a true plus to any CRE Broker!

Another great positive feature is that I can literally control who sees my document by giving them web access.

Finally, I think the greatest strength of the Google Docs platform is that I can create a document (WORD of EXCEL), load it to Google Docs and allow others to collaborate in the creation of the final products. All of this, while I am in full control the original no one can download. This is true teamwork and excellent document centralization and control.

Here is an example. Let’s suppose I want to create a property management budget for a small 20 unit multi-family property that is being managed by an onsite manager. One of us can create the base spreadsheet, load to our Google Docs folder and edit the document collaboratively, even simultaneously.

The Downside. Yes, all good things have downsides, even Google Docs and here’s one that I would like to mention to my readers. Google Docs is not yet suited to the development of complex contract documents and leases. This is due mostly to the fact that many times Lawyers are controlling the creation and approval of the final document and, you know how lawyers can be!

Another downside to Google Docs is that we are still an industry with participants who are simply not good with editing documents or collaborative technology and even worse, the marriage of editing via technology.

Nonetheless, I will continue to utilize Google Docs for sharing and collaborating on internal documents used by my Company, Arizona Commercial and select Brokers and Clients who are comfortable with this type of solution.

Here is a video I grabbed that can explain Google Docs better than I can. Watch it and learn. Then collaborate by giving Google Docs a test drive with a friend to discover its many features.