From a small northwestern observatory…

Finance and economics generally focused on real estate

Back in the USA….

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I’ve been gone for a while — took a wonderful trip to Egypt in late January and early February and I’m just getting back in the swing of things.  One of the big items on my agenda right now is the creation of Opportunity Zone Funds.  This portends to be very real shot in the arm for disadvantaged neighborhoods across the U.S.

In short, certain census tracts have been designated as Opportunity Zones under the new tax laws passed in 2017.  Opportunity Zone Funds can be created to invest in those zones.  Investors in those funds may defer gains on the sale of businesses and stocks by reinvesting the proceeds in a qualified Fund.  In a way, this is similar to 1031 exchanges which have been available for real estate sales for many years.  However, unlike the 1031, any business gain can be invested.  Further the creation of a Fund alleviates the burden on the taxpayer from identifying specific new investments — that will be the responsibility of the fund.  Further, 1031 exchanges carry a 180 day time clock for identifying and closing new investments, but these new Funds have much more liberal — and reasonable — time frames.

At Greenfield, we’ve identified over 100 potential new funds which are being organized around the country.  As with any new investment, the likelihood is that most of these will never get off the ground.  However, Greenfield has identified several already which are both well-organized and backed with serious money. We will continue to keep you apprised of these projects as they move forward.

Written by johnkilpatrick

February 20, 2019 at 3:55 pm

Posted in Uncategorized

The shutdown at a micro-econ level

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As the madness of this Federal shutdown continues, the lead news story every day features obvious pain and suffering faced by hundreds of thousands of government employees, an unknown (but probably much larger) group of federal contract workers, and the general citizenry who depend on those government workers.  Compared to the very real problems this is causing so many hard-working Americans, whining about the real estate industry, and business in general, may seem to be superfluous.  That said, the economy as a whole — and by that I mean working people, their jobs, their savings, and their lives, will be impacted for quite some time by this stupidity at the highest levels of our government.

A few random points, just to illustrate:

  1.  Local schools depend heavily on Federal support for school lunches.  Even schools with few students receiving free lunches will receive significant dollars each month to subsidize the school lunch program.  This money immediately trickles into the local economy to pay for food and cafeteria salaries.  Interrupting this for even a short period of time can really impact school districts that already have problems paying teachers and providing school supplies.
  2. Many Federally-produced business reports, which are necessary for business intelligence and decision making, have been delayed.  For example, the international trade report was not released last week, as was the January 11 agricultural supply/demand report.
  3. JP Morgan lowered its GDP growth estimate by a quarter of a percentage point.  That may not sound like much, but it represents a materially large impact on our economy and its ability to provide private-sector employment.
  4. Mass transit systems throughout the US — on which many workers depend for their daily commute — have temporarily lost financial aid that supports maintenance and repair costs.
  5. Federal courts are increasingly having to delay or defer litigation, including almost all civil cases.
  6. Cyber security at many Federal agencies is handled by outside contractors, who are not being paid and thus legally cannot provide those services.
  7. College students applying for student loans cannot verify parent income through Federal sources.
  8. Department of Agriculture loans to farmers and rural dwellers are on hold.
  9. Wildfire prep work and firefighter training, a needed preparation for the 2019 fire season, are on hold.
  10. The FCC, which licenses and regulates TV and radio, plus private radio licenses (such as the radio in an airplane or a boat) has shut down.
  11. The Federal government missed paying its $5 million monthly water bill to the District of Columbia.
  12. IRS staffers cannot answer consumer questions about the new tax law.
  13. Employers cannot use the Federal E-Verify system to check if workers are in the US legally.
  14. The National Hurricane Center is now off schedule for badly needed upgrades to the main American weather model.
  15. Some states are delaying contracts for road and bridge maintenance.
  16. Mergers and IPOs are being delayed because the SEC cannot issue approvals.
  17. The FDA has stopped many food inspections.

Sigh….

 

Written by johnkilpatrick

January 21, 2019 at 9:39 am

Posted in Uncategorized

Sears, I’m gonna miss you…

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Yeah, I grew up in one of those households.  Mom would pack me in the car and drive 40 miles to the nearest Sears to be at the door when they opened at 9am.  Christmas shopping always involved The Catalog (THE Catalog).  Except for a car, a house, and a dog, if Sears didn’t sell it, we probably didn’t own it.

As of this writing, it appears that they may — or may not — emerge as a shell of their former self.  Many (most?  all?) of the stores will close.  Every retail pundit in the universe is trying to explain why the business went into bankruptcy.  I have my own ideas, but that’s not the issue here.

One of the more interesting stories, though, is how badly Sears has apparently managed its real estate holdings in the last few years of its life.  There are a lot of claims on the assets out there (one argument is that Sears’ expensive defined benefit retirement program is taking it under).  Intriguingly, however, Sears owns a very valuable asset which, in bankruptcy, it will simply throw away.  That asset is a nationwide network of below-market leases on very valuable real estate.  The current Board Chair, Eddie Lampert, is making a $1.8 Billion bid for this real estate, although there is some question as to whether the court will accept his bid.  In fact, many of the landlords are clamoring to evict Sears and turn the assets over to more profitable tenants.

Imagine you own a shopping mall, and you can rent 140,000 square feet of Sears space (the average size of a Sears store) for $15 per square foot.  Instead, however, Sears currently rents that space for $5 per foot, due to a favorable lease they negotiated when the mall was first built.  Imagine that Sears still has 20 years remaining on said lease.  At a 7% rate of return, the difference is almost $15 million in present value.  In real estate terms, that’s called a Leasehold Estate.  Multiply that by hundreds of stores, and… well… you get the picture.

Leasehold Estates may or may not be transferrable, but often can be subleased.  Indeed, Sears in its hey-day made quite a bit of money sub-leasing portions of the store to third-party merchants (many big retailers still operate this way).  When Woolworth’s realized that they were not long for this world, rather than head down the bankruptcy path, they carefully managed their long-term leasehold assets.  Indeed, some analysts argued that Woolworths was worth more as a real estate holding company than as a retailer.  In Sears case, that may have been a possibility at one time, but sadly that ship has sailed.

I’m currently writing a book chapter on the importance of differentiating between the business value and the real estate value in the analysis of a closely held enterprise.  The melt-down of Sears is a shining example of the failure to do just that.

Written by johnkilpatrick

January 7, 2019 at 10:18 am

Posted in Uncategorized

Apartments — better than predicted

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Home ownership rates have plummeted from pre-recession “bubble” peaks, and have recently begun stabilizing around the pre-bubble levels.  Before, during, and particularly after the recession, apartment construction and absorption soared.  Many (most?) analysts feared an overbuilding in apartments, necessitating a retraction in construction until excess units could be absorbed.

The one very small black swan we all missed in that prediction was the shortage of homebuyer credit and the difficulty for buyers — particularly first-time homeowners — to accumulated down payments.  Admittedly, the zero-down world of the housing bubble was unhealthy for the stability of the market, but the job-market of the past few years has made it difficult for younger buyers to enter the homeownership market.

Diana Olick Olick wrote a great piece for CNBC over the holidays about the unexpected strength of the apartment market.  She details both the current state of the apartment market as well as the causes and trends in that arena.  You can view the original article here.

Written by johnkilpatrick

January 2, 2019 at 5:49 am

Posted in Uncategorized

Returns versus volatility

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As many of you know, I manage a small hedge fund here at Greenfield called ACCRE, which is invested in a managed portfolio of publicly traded Real Estate Investment Trusts (REITs).  My companion blog on that is ACCRE.COM.  Returns on ACCRE have been quite good — a dollar invested in ACCRE at its inception back in April, 2017, would be worth $1.40 as of the end of November, while that same dollar invested in an S&P 500 index fund would only be worth $1.17.

That said, both the S&P and ACCRE have had a couple of bad weeks, although ACCRE has not suffered as much as the broader market.  I made some comments about that this morning, if you’re interested.  You can read those comments here.

 

 

Written by johnkilpatrick

December 18, 2018 at 10:38 am

Posted in Uncategorized

Meet my new neighbors!

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The Puget Sound Business Journal just revealed that Facebook is about to lease 1.3 million square feet in Seattle’s exploding South Lake Union neighborhood.  I might add that Expedia is moving from nearby Bellevue into a new campus in the Interbay Neighborhood (to the northwest of the map below).  They will occupy the 750,000 SF waterfront site formerly used by Amgen, but will add about 200,000 SF of new space to house up to 9,500 staff.  These announcement would be huge for any other top-20 market, but Seattle has it’s 1000 pound gorilla in the form of Amazon, which occupies a stunning 8,100,000 square feet, almost 20% of the downtown office space.  By the beginning of the next decade (that’s in about a year, folks), Amazon will employ about 55,000 people in my immediate neighborhood.

Facebook and Amazon

The attached map is courtesy the folks at the Seattle Times.  It’s about a year old (I’m too lazy to spend anymore time on this — journalists do great work.) but still more-or-less valid.  It is simply astonishing how much space Amazon occupies in one city.  For reference, in NYC, the biggest single private sector tenant is Citi, with only 3.7 million SF.  As for dominating a percentage of the skyline, Amazon’s 19.2% is also in first place, with the next highest being Nationwide Insurance which occupies 16% of downtown Columbus, OH.

This is even more stunning when you think of how many brand names are in Seattle or the Seattle suburbs — Microsoft, Boeing, Costco, Paccar (they make Peterbilt and Kenworth trucks), the Russell Group, Starbucks, Weyerhaeuser, Holland America, and T-Mobile, to name a few.  Add to that the Port of Seattle, which provides thru-put for Washington’s huge agriculture industry, and the associated expeditors, and hopefully you get the point.

I try to keep this blog from being too parochial, but it’s hard not to admit that Seattle is a pretty cool place to do business.  However, this comes with some drawbacks.  Morning commutes can be brutal — we have some of the worst traffic in America, and it’s getting worse by the day.  Rents are going thru the roof.  We are geographically constrained and the soil conditions make construction astronomically expensive.  Eight or nine months of the year, the weather is retched (but truth be told, it’s the most beautiful place in the world in the summer time).   The cost of living here is awful.  That said, the Creative Class, as the urban economist Richard Florida would call them, flock here by the bus load.  There is a lot to be learned from how we do things here.

 

Written by johnkilpatrick

November 29, 2018 at 9:27 am

Posted in Uncategorized

Happy Thanksgiving, everyone!

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All of us at the Kilpatrick family, and from our extended family at Greenfield, wish you and yours the best of holidays and a great holiday season.

With that, I want to take one minute for business — here is a post from yesterday on my sister-site, ACCRE.COM.  I hope some of you find this useful.  Best wishes —

Written by johnkilpatrick

November 22, 2018 at 10:09 am

Posted in Uncategorized

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