12A — May 11 - 24, 2012 — Financial Digest — Mid Atlantic Real Estate Journal
F inancial D igest
continued from page 2A What investors need to know about fair value . . .
Also closes sale/positions financing for NJ portfolio HFF arranges $66.25m Phila. construction loan
ers’ skepticism about the market and the availability of financing. Factors that distinguish the CAP rate for properties include location, age, size, features, exist- ing tenants, etc. The IRR is the rate of return that an investor expects to receive on their investment. Riskier investments, for example, investments where cash flows are volatile or construction is not complete, will require a higher IRR. It is the owner’s responsibility to review the market transactions and determine which rates most closely line up with the char- acteristics of their real estate. Since there is a significant amount of subjectivity in this area, owners should clearly document all of the informa- tion received, how the infor- mation compares to their property, and the reasons for ultimately choosing the IRR and CAP rates utilized in the final valuation. As you can see, Level Three valuations are based on cur- rent market conditions and a projection of events to oc- cur in the future, i.e., lease renewals, absorption rates on vacant spaces, inflation rates, capital expenditures, etc. Even a small change in the cash flows, IRR or CAP rate could change the property’s fair value by a significant amount. The key for inves- tors is to understand the un- derlying inputs and assump- tions utilized in determining the fair value and realize this is the owner’s estimate as of the measurement date. The increased transparency required by ASC 820 will help investors understand the inputs and assumptions utilized in determining the reported fair value of the real estate. As investors become more familiar with the finan- cial statements and disclo- sures explaining the owner’s estimates, the understanding of fair value accounting will increase. Joyce Price is a princi- pal and Karyn Tasker is a manager in the Balti- more, MDoffice of Reznick Group. n This publication contains only gen- eral information and is not intended by Reznick Group to be a rendering of accounting, business, financial, investment, legal, tax or any other professional advice or services. This publication is not a substitute for any professional advice or services.
example, current stock price for shares owned. Level One is the most accurate level of inputs and does not have sub- jective components. The use of Level One inputs is rare in property valuations since no two buildings or parcels of land are identical. Level Two inputs are quoted prices for similar assets in ac- tive or inactive markets. For example, actual recent sales data for properties that are similar to the subject prop- erty. Level Two requires more judgment from owners and those determining fair value. In the last few years, the market for real estate sales has fluctuated significantly, reducing the availability and reliability of Level Two in- puts. In addition, many real estate transactions that have occurred were based on dis- tressed circumstances, such as forced or foreclosure sales or properties with inadequate working capital. ASC 820 provides that fair value mea- surements are to be based on an orderly sale and should not consider forced sales or distressed circumstances. Volatility in the real es- tate and capital markets is pressing owners and those estimating the fair value of real estate to utilize Level Three inputs. Level Three inputs, which are the most subjective, are based on un- observable inputs. Determining Fair Value Using Level Three Inputs A common valuation tech- nique utilized in determin- ing fair value under Level Three is a discounted cash flowmodel. The typical model uses a financial forecast con- sisting of projected cash in- flows and cash expenditures for the real estate over the next 11 years. A presumed sales price is determined based on the eleventh year net cash flows and a capital- ization (CAP) rate. Net cash flows for the first 10 years and the presumed sales price are then discounted to the present value using a market internal rate of return (IRR) to determine the fair value of the real estate as of the measurement date. Owners typically use third- party brokers to provide a range of IRR and CAP rates. Concurrent with the fluctuating real estate sales, CAP rates have fluctuated significantly due to buy-
hiladelphia, PA — HFF arranged a $66.25 million construction loan
for The Granary, a mid-rise multi-housing development in Center City, Philadelphia’s Logan Square neighborhood. HFF worked on behalf of the borrower, Pearl Properties, to secure the three-year construc- tion loan through Wells Fargo Bank. The HFF team represent- ing Pearl Properties was led by managing director Jim Cadranell. “It was a pleasure to repre- sent Pearl Properties on this assignment to help create a first class property in one of the hottest apartment markets in the country,” said Cadranell. In Nutley, NJ HFF closed the sale of and arranged financing for a three-property, 126-unit multi-housing portfolio. HFF marketed the offering on behalf of the seller, AIG Global Investment Group. Balt Investments LLC purchased the assets for $15 million free and clear of debt. The portfolio is 94% leased overall. The properties include NewYork, NY—Mortgage brokerage firm Eastern Union Commercial has arranged $34 million in refinancing for a four-building, 580-bed skilled nursing portfolio in New York and New Jersey. Provided through M & T Bank, the $34 million loan was financed at 5.03%. Abraham Bergman, managing partner of Eastern Union, negotiated the loan on behalf of the bor- rower, a privately held nursing home owner and management Morristown, NJ — G.S. Wilcox & Co. announced that Gretchen Wilcox, Al Raymond and David Fryer, president and principals of the firm arranged $35.5 million in financing in the month of March. The two retail transactions, one of which was on Long Island and the other in South Jersey, involved key market players including A New Jersey based real estate fund, Arlona Limited Partner- ship, Prudential and Genworth Financial.
The Granary in Center City
Greylock Apartments, Lincoln Apartments and Ambassador Apartments. The properties are the second pool of assets HFF has sold for AIGGlobal Investment Group. In July 2011, HFF closed the $241.5 million sale of a 2,185- unit multi-housing portfolio in central New Jersey. The HFF team representing AIG Global Investment Group included senior managing di- rectors Jose Cruz and Andrew Scandalios, directors Jeffrey Julien and Kevin O’Hearn and associate Mike Oliver. Bergman explained that while financing of medical fa- cilities has become increasingly difficult given the numerous medical and healthcare cuts in today’s market, he was able to close this transaction by work- ing with M & T Bank to help mitigate the risk, packaging the four buildings together. “With volatility in the Med- icaid and Medicare rates being paid to facilities, forecasting projections are extremely dif- David Fryer, principal of G.S. Wilcox & Co., originated the Long Island transaction for $26 million involving Arlona Lim- ited Partnership and Genworth Financial. The loan is secured by Mayfair Shopping Center in Commack, NY. This transac- tion provides favorable terms for both parties including an interest only amortization for the full 11 year term of the loan. Levin Management manages the asset for the ownership and was instrumental in helping
HFF senior managing direc- tor JonMikula represented the borrower. “The buyer was able to capi- talize on an opportunity to purchase quality assets in Nutley with upside, where he already owned real estate so there are economics of scale,” said Cruz. “AIG obtained solid pricing and was able to take advantage of a strong demand for that submarket.” “The properties are well- positioned for an upgrade and will provide good long term growth,” added O’Hearn. n ficult,” he said. “The chal- lenge in closing this loan was compounded in that we were working with properties in two different states and thus two different rate systems.” Bergman noted that Eastern Union faced a key hurdle in closing this transaction. One of the loans being paid off with the refinance was due December 31, 2011. But despite reluctance from the lender to do so, East- ern Union negotiated a 3 month extension. n
Eastern Union organizes $34m multi-state refinancing for a four-building portfolio company.
with the refinancing. Gretchen Wilcox and Al Ray- mond, president and principal of the firm originated the South Jersey transaction involving A New Jersey based real estate fund and Prudential for $9.5 million. The loan is secured by Towne Square, a multi-ten- anted 88,380 s/f retail center located in Mount Laurel, NJ. This transaction offered fa- vorable terms to both parties including a 7/25 amortization schedule and low LTV. n G.S. Wilcox & Co. closes $35.5m in March
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