Alternative Access - October 2019
THE 8 REASONS WHY COMMERCIAL INVESTMENT PARTNERSHIPS GO BUST
Development and Rehab Costs Do not overimprove the property. Improvements must add value. Adding value means increasing the rent charged or occupancy of the property through these improvements. If the improvements don’t add value, they should not be underwritten. Not all expenses and improvements are considered to add value. Everyone expects to have lightbulbs and toilets in their apartments. Adding value means New-Skin bandages, a paved parking lot, and perhaps a new lobby for your tenants to brag to their friends about. Expert Tip: Don’t be surprised to see property taxes on multifamily dwellings perhaps double, as local politicians are desperate to close their widening budget gaps. The fourth reason real estate can become distressed is capital structure : The investment structure should align interests and reward those taking the risk. This is simply asking the operator how much money he or she has in the deal, meaning hard-cash equity. And is that equity the same as your equity? If an operator has no skin in the game, then you know for sure there is nothing preventing them from walking away from your investment. Always remember going forward that aligned capital is the best kind of capital. The fifth reason for distress is the absence of key leasing or sales . In value-added transactions, operators perform a lease-up on occupancy. These numbers should be reviewed via a sensitivity analysis to understand the magnitude of the risk that will be involved if they are not achieved. Again, only an experienced operator who knows how to look at these numbers dispassionately will understand to do that. The sixth reason for distress is that the property may have been overleveraged . Here is a very important question to ask: “What
There are many potential reasons why a perfectly performing real estate deal could become distressed. This article will discuss those warning signs to look out for. The first reason is bad operators . Bad operators are always weak and inexperienced. They manage the real estate/asset themselves, usually under the banner of saving expenses. Frequently, these first-time operators don’t know how to value these multifamily buildings and are emotionally driven to overpay, desperate to get their first deal done, which is why they can’t afford a professionally licensed and insured property management company. These bad operators usually make their debut well into a market cycle just before it collapses by being the highest bid. By comparison, good operators have experience. They’ve been through two economic cycles and can turn bad deals into good ones. They look at investing dispassionately, driven mostly by the numbers.
The second reason a deal could become distressed is too much time . This is specific to those “rehab and flip” value- added deals, which are meant to be started and finished in a short amount of time. Routinely, the term runs out on their loan or the repairs and expenses have been going on far too long so the operator can never get out from underneath it. Whether the operator knows it or not, they have passed the point of profitability on the deal. They can’t get another bridge loan. Time and expenses ruin all deals and send them to the graveyard sooner rather than later, and this is why having an experienced operator who has been through at least two cycles is so critical. An increase in costs without an increase in revenue raises the asset’s cost basis and reduces returns. The operator must have control of all costs, including these: Acquisition Costs Do not pay too much on day one of the deal. The purchase price is where the money is made on real estate deals. From my experience, operators who have bought toward the top of the market because a lender was willing to lend them the money almost always have The third reason is that the costs were underestimated .
problems later. Markets work in cycles, and the worst time to buy anything is when you feel as though you need to. That false sense of pressure has killed many operators.
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percent of the business plan needs to be achieved to pay off the debt?” Putting too much debt on a property can cause an asset to go into distress. If revenues fluctuate or underwriting criteria change, you can be left with a building that is no longer worth the debt amount. The seventh reason is rising interest rates . As far back as Moses, the lower the interest rates, the higher the price. If interest rates increase for commercial loans, that will affect the ability for the operator to refinance out of a bridge loan into a permanent loan. The industry’s term for this is “capital restraints.” So, when capital to refinance debt is constrained and the loan matures, you may be unable to refinance the property. When markets fall, banks and traditional lenders become more selective, almost prohibitively so. The home run in commercial is refinancing all of your equity out and keeping the cash-flowing asset. However, when that emergency door is slammed shut, you sell. And here’s the risk: Can the other guy get financing to buy it from you? The eighth and final reason is operating costs . The property must be operated at a market cost. Over-operating the property causes returns to decline. The profit and loss (P&L) is the soul of the asset. It talks about how it’s being managed. First- time operators not only overpay but usually redline their P&L very high on the expense side. Of course, there are good operators who can turn troubled, distressed opportunities into winners. This is how the wealth transfers between market cycles. However, when the market becomes unstable due to some chaotic events happening in the marketplace, the problems already caused by distressed deals can further be exacerbated. For instance, in August this year, President Trump started the first domino of student loan forgiveness by pardoning completely or permanently disabled U.S. veterans. In principle, this could affect multifamily dwellings, as it may force millennial students to buy homes and vacate apartments and shared-living spaces. This unexpected jolt can bring some instability to a market that appears relatively stable and growing.
US Hybrid War Against Russia Continued from Page 4
The incident of the Ukraine woke China up to see that the real purpose of the destruction of Russia was to take control of Russian natural resources as a means of exercising total control of China through the United States’ control of its access to natural resources by sea and by land from Russia. China therefore followed its strategic interest by allying with Russia. An infuriated U.S. found itself back in 1949 with a strengthening Russia, in a military sense, allied with a colossal China of its own making. If the GDPs of each were analyzed the same way, it would show that China is a much larger industrial power than the U.S. The U.S. will not believe that it is too late to stop China from becoming the most powerful economy in the world, as that’s what it is right now. And it is more advanced in commercial technologies than the U.S., which will become visible over the next two years. This accounts for the massive hysteria of the U.S. against Russia and China that must be taken very seriously. What happened with the Ukraine in the last election was not a change at all. It was clear that the Trotskyite oligarch Poroshenko had served his usefulness, and so a change had to be made as with France. After all, what can you do with a man who has a 3% approval rating? It is not too dissimilar to the creation of Macron to steal the thunder from Le Pen and create a new party on the heels of dissolution of the previous government. The problem with Marine Le Pen was that she was pro-Russian. We have to say it was done rather brilliantly as the Kiev coup. Only, as the French say, “Plus ça change, plus c’est la même” — the more that changes, the more it’s the same thing. There was no change. Nor will there be any change under Zelensky controlled by the Trotskyite Kolomoisky. The mass stealing goes on. There is a history of these moves against Russia that traces back to the end of World War II and even before it was planned by the OSS to move against Russia. Listen to the Operation Gladio video on pre-1945 plans against Russia and that of CIA Steve Pieczenik, which gives us the true picture of how 9/11 was organized into a false-flag operation to go to war in Afghanistan for the heroin and Iraq for the control of oil. There were no Arabs involved, as the boarding tapes were doctored.
To be continued in the November 2019 edition.
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US HYBRID WAR AGAINST RUSSIA
By David K. Lifschultz, CEO of Genoil Inc. and the Lifschultz Organization of New York City founded in 1899.
economic collapse of Russia is analyzed in the article entitled “Can Russia Have Peace Now?”
The ongoing demonstrations in Moscow are part of the hybrid war of the U.S. against Russia. It is very important to look at this closely, as what we see in Hong Kong is a U.S. hybrid war against China developing over a rather minor issue, and we elaborate on this subject in more detail below. I personally mingled with the crowd in Moscow, and there was no doubt in my mind: It was a farce. Incidents were created right before my eyes, with one eye on the newsreels and the other on the police, to be sure they were being filmed. There was nothing spontaneous here. One demonstrator struck the police as soon as the cameras were turned on. As another
The sanction’s goal is to undermine the government of Russia and replace it with a new Yeltsin mob to recommence mass looting and the breaking apart of Russia. The U.S.-engineered shock treatment in the 1990s was a bizarre form of Al Capone capitalism called “free markets.” There was a dose of Darwinian heresy too, with opponents being shot and the application of the survival-of-the-fittest doctrine. The ultimate objective was and is to break up Russia into 20 countries, as the Baltic States, and then loot each one for their natural resources. As in the Ukraine, oligarchs are created to loot the newly independent countries as an incentive for independence from Russia. The oligarchs were even allowed in the Ukraine to steal the IMF loans as long as they were against Russia. The Russian Central Bank has not achieved independence from the U.S. yet and is greatly undermining the Russian economy, as ordered. We can expect that if the U.S. achieves the destruction of Iran as planned, it will cut Russia off from SWIFT-CHIPS to destroy it. Once Iran and Russia are destroyed, the U.S. will turn its guns on a now- isolated China. That is the plan — the likelihood it will work is just about nil. Continued on Page 3 ...
was being taken away, a woman waited for the cameras to focus here and then started pleading with the police to let her colleague go. Then she fought with the police herself and was taken away too, screaming, kicking, and yelling. This happened over and over. Here below, this Mossad agent agrees
with the goals here despite Israel being an ally of the U.S. The planning for the
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