Office Mania

So the SLC office market is down to a 10.8% vacancy rate. Time to throw up new towers. 720,000 sf presently under construction, and another 1.2 million sf expected to be started by the end of 2006. Is that much new business moving in? Nope. It's mostly current businesses feeling flush and moving into new space, which means that vacancy rate will be going up, and we'll have a fresh crop of office slums.

Wish I had an office lease with 1-2 years left on it. Property managers were already banging on me last Summer to get access to my clients and contacts. Sorry, I'm sitting tight right now and waiting for all the cock-eyed optimists to build themselves into another world of hurt (How much variable-rate debt is financing these projects? Do we honestly think the Fed will do the sensible thing and stop jacking up rates before it's too late? After the yield curve inversion started uninverting already today?). In a couple of years, there may be some historic office buildings you can snap up on the cheap, and then you can OWN your office.

Remember when this place was Park West?

The ski resort formerly known as Park West and Wolf Creek[?] (Are there other names I left out?) is definitely on the upscale trail. George Smith Construction has been greenlighted for the next phase in the $40 million Silverado at the Canyons luxury condo project. Smith started the condos themselves last May and now has the permit for the $9 million lodge. Remember when this was the cheap, family resort in Park City?

As an aside:

Hey Seattle, why is it that the condos at the ski resorts work just fine but all the condos in Puget Sound leak like sieves? Could it be that the ski resort developers don't use EIFS siding and flat roofs, you cheap morons?

It Can Be Done!

I live in the Jordan School District, and one of the things the district constantly complains about is the new housing developments that don't provide for new schools. Well, Park City seems to have some sort of grip on it. Hamlet Homes donated 10 acres of the Bear Hollow Village development for a new school and also donated nearly $2,100 cash for each home sold. Art of the deal, baby.

West Side action

Hot news out at Ningret Park, a mixed use planned development south of SL International, between California and 2100 S. Natomas Meadows, LLC, a Kern Schumacher holding company, has bought a 60% share from Ninigret Group. Makes sense given that Natomas has 300 acres of raw land next to the Park.

A Little Levity

Got this from DIRT, the real estate attorneys' listserv:

THE CHRISTMAS CLOSING

'Twas an hour before closing and the agents were tense,
to close Christmas Eve just didn't make sense.
But the seller was booked on the 6 o'clock flight
and had warned "THERE WILL BE A CLOSING TONIGHT!"
The agents agreed because business was dead,
and visions of commission checks danced in their heads.
The loan was approved by the lender's good grace,
Everyone knew 'twas a borderline case.
The buyers divorced, remarried again,
Divorced once more, and now were just friends.
The loan package complete to the closer was carried,
With instructions to close before they remarried.
The title policy arrived via UPS,
From page One through Sixteen, a terrible MESS!
An improper legal, 3 judgments, a lien,
But a few lines on page seven, looked pretty clean.
The title was cleared and the closing was set,
But to finish today was not a sure bet.
The closer dashed in waving her HUD,
It was covered with whiteout, coffee and crud.
But down in the corner you barely could see,
that the buyer still owed a buck thirty-three.
So the closer extracted a bill from her compact,
And the agents agreed to the rest on the contract.
To add some interest, the seller revealed,
to everyone's horror - the well wasn't sealed.
And, oh yes, he wanted to change the disclosure,
His mother just died of RADON EXPOSURE!
Everything else in his house was O.K.
(his cracked floors and walls were always that way)
About that time the buyer chimed in,
"we'd like to continue, but before we begin,
I noticed these papers - I'm likely to blame,
But I gave my agents the wrong legal name,
And one more thing I had hoped to avoid,
Does it really matter if I'm self-employed?"
About this time the closer exploded.
She pulled out a gun and said it was loaded.
Everyone froze and sat there amazed,
She frothed at the mouth and her eyes were both glazed.
More rapid than eagles, her curses they came;
she bristled and spouted and called them BAD names.
"THE CLOSING IS OFF, DO I MAKE MYSELF CLEAR??
MERRY CHRISTMAS TO ALL - NOW GET OUT OF HERE!


Yep, more fun stuff they don't tell you about in the infomercials.

Gaaaack

Man, have I been sick. Sinus infection, 104F temp, the whole smash. And now Christmas on top of it all. But I SHALL get news posted here over the next couple of weeks.

Housing Market

Well, it's official. The housing market is cooling off, and it's happening all over. Home purchase contracts are down 8% from last year, the average 30-year fixed mortgage is now over 6.5% (up from 5.2% last year) and may hit 6.75% by the end of the year, and sellers are starting to slash their prices. Winter is always slower, but when things don't pick up come Spring, watch sellers wake up en masse, and then the party will really begin.

Brakes on the "Patriot Act"?

You may have heard that Congress re-extended the "Patriot Act." This egregious curtailment of civil rights may finally have hit a stumbling block, though, and you can thank the lawyers. The Gramm-Leach-Bliley Act regulates financial institutions and contains some significant privacy provisions. The Federal Trade Commission wanted to enforce those provisions against lawyers, especially in real estate settlements. Since lawyers already operate under a pretty strict set of privacy rules, and since those rules are not always consistent with GLB, the American Bar Association took the FTC to court, challenging its authority to enforce the privacy provisions. Tuesday the DC Circuit ruled that the FTC has no authority to regulate the practice of law and so may not enforce the GLB against attorneys.

Where does the "Patriot Act" come in? The Treasury Department is trying to enforce the Section 352 money-laundering provisions against lawyers by using the same sort of jurisdictional logic as the FTC used, and Treasury shouldn't be any more successful than the FTC was. Expect this challenge to come shortly.

Construction stuff

"Alright Rife," I hear you say, "Enough ranting. How about some hard stuff?" Your wish is my command.

The International Building Code (IBC) has a brand new 2006 edition. There have been a number of significant changes to the wind load provisions, but you wouldn't know it from reading the IBC itself.

Back when the International Council of Building Officials became the International Code Council and started pulling all the codes together to make the 2000 IBC, the ICC wisely decided to start incorporating the various engineering societies' standards by reference. This became even more pronounced in the 2003 edition. The 2003 IBC incorporated the ASCE 7-02 wind load standards and then set out some additional provisions. The 2006 IBC has cut back further on the additional provisions and again incorporates the ASCE standards. The big change is that ASCE revised its standards last year and is now operating with version 7-05. These new standards have some significant changes, including new criteria for calculating wind speed in non-hurricane-prone areas (e.g. Washington and Utah).

I can't even begin to go into all of it here, but your structural engineer should have parsed this out by now. If you ARE an engineer, structural or otherwise, get parsing. Wind shear has traditionally been a fuzzy area that construction defect claimants have made a lot of hay with. If you can show you followed code and standards, you're in much better shape.

The Reason

No, not "The Reason Why." That's redundant. I realize email, blogs, rap, and general stupidity and sloth have effectively eradicated spelling, capitalization, punctuation, grammar, syntax, sense, and meaning from the English language, but the rules are still in force in MY little world. Just ask my kids after I smack them alongside the head when they say, "My bad," and admonish them, "In my house, 'bad' has not mutated from an adjective into a noun."

Anyway.

You may wonder why I wax vitriolic over the explosion of sub-prime real estate paper, the "We'll Buy your House" scammers, the growing role of speculators in the real estate market, and the...well, whatever it is The Fed thinks it's doing. After all, it doesn't affect me, right? Quatsch. Here's the reality check: All these things are costing us (i.e. you, me, and all ordinary folks) money and will keep on costing us money for years.

Let's start with The Fed. There has been one thing that has kept the economy above water since the Dot Com Bomb, and that is the real estate market. That market has been made possible by low interest rates. The Fed decided the market was getting a little too hot and that long term rates were not reflecting reality (which frankly was true) and raised rates.

What has happened since? First, let me note that there are two kinds of growth: healthy growth, which should be left alone so it can continue; and speculation growth, which makes bubbles and needs stopped before it pops. The Fed maintains there are no bubbles, so what we must have is healthy growth. Yet it keeps raising rates, which is something you don't want to do to a healthy growth cycle. Why is The Fed engaging in such seemingly counterproductive behavior? To stop inflation, it claims, and that inflation is the run-up in oil prices.

Will someone please tell The Fed that an increase in the price of oil is not inflationary. Oh, oil-related prices make short term spikes after an increase, but when oil increases to a new plateau, the economy ends up deflating correspondingly. By the time The Fed acts to head off the "inflation," the spiking prices are already heading back down in a general contraction, and the higher interest rates just exacerbate things. And you and I end up with more expensive financing for everything.

Next, the speculators. I can't really take issue with what they themselves are doing, namely squeezing the last few bucks out of a rising market before it stagnates or heads back down, which really is what speculators do. I just wish people would admit that this is a speculation market instead of continuing to pretend that it's a healthy, growth market. Instead, we keep pretending, and prices keep getting run up, and increasingly costly capital gets even costlier because piles of it get siphoned off to finance speculation moves. That costs us now, it will cost us still more when prices fall farther than they should simply because of the extra momentum of falling from speculation-fueled levels, and it will cost us even more when things should rebound but investors keep their capital locked up because of the snake bite they received this time.

Scammers? Easy. Where scammers go, regulators follow. Regulations cost money, not just for the con men but for the rest of us as well. Think that, because the Republicans control DC, we have entered into some magical era where regulations are cheap? I have one hyphen for you: Sarbanes-Oxley.

Sub-prime paper? It's life blood is an expanding market. When the economy contracts, that paper turns instantaneously from negotiable instruments into foreclosures and bankruptcies and work-outs. These make capital more expensive. The more such paper there is, the worse the fall-out. As capital becomes more expensive, the economy contracts. As the economy contracts...well, you get the picture.

Why do I rail? Because I see these things taking money out of my pocket just as surely as taxes.

Oh, by the way...

...one other little problem with making a fortune with the quick flip infomercial gurus. In case your CPA or tax attorney hasn't told you, if you want to qualify for that lovely 15% capital gains rate, you need to hold the property for at least one year. If not, you're stuck with the 35% rate. And if you're thinking of flipping by using 1031 exchanges, there's a laundry list of issues there that the brokers don't really know that well but your neighborhood IRS auditor does.

Bottom line, folks: Investing is a business. Treat it that way, get proper professional help up front, and expect to pay for it.

In light of the foregoing...

...this scam is only going to grow.

You must have seen the billboards, or even fliers stapled to telephone poles: We Buy Houses. These are the bottom-feeders of the real estate speculation world, preying on people who are in deep dookie and about to be foreclosed on. These folks would respond, "Hey, we're just trying to make a buck." Yeah, Jack, in a way sufficiently sleazy that it makes legislatures want to legislate, and that makes life hard for the rest of us.

As an experiment, I sent one of these outfits the specs on a couple of lots I wanted to sell. They sent me an offer (with a boatload of conditions) in a letter that tried to convince me how magnanimous their bid was. I ignored them. A month later they had the audacity to send me a nasty letter saying that, since I had not responded, they were withdrawing their offer. I continued to ignore them. Six months later I received another letter from them saying that even though I was still ignoring them, they were renewing their offer. Sorry boys, that train had already left the station. I'd already sold the lots for over two-and-a-half times what they had offered.

Bottom feeders indeed.

And a bit more on speculation

"So how are people still buying houses in the face of increasing prices and interest costs?" you ask (and if you aren't, you ought to be). Ever-riskier financing arrangements, that's how. Adjustable rates, interest-only payments, balloons, low documentation, lots of sub-prime paper floating around. I swear there must be a bunch of underwriters having trouble keeping their rubber stamps inked.

What happens when interest rates go up? What happens if prices don't go up fast enough or (horrors) go down? A lot of people in a world of hurt, and I go back to the early days of my career and start doing bulk foreclosures and trustee's sales again (I won't be doing as much bankruptcy work this time, though. Bankruptcy protection has been severely curtailed, courtesy the recent bankruptcy "reform.").

On top of it all, adjustable rate mortgages will start getting bad just as people's other loan payments go through the roof, also courtesy bankruptcy "reform." Sounds like we may have a larger than usual Christmas hangover come January.

More on speculation

Still think we're not seeing growing speculation in the real estate market? This year has seen a continuation of one of last year's most notable trends: The locals are selling. Local real estate owners are continuing to do some profit-taking by selling property to out-of-town outfits. What do the out-of-towners stand to gain? Typically, they're just better positioned to squeeze the last drops out of the margin than the locals are. Sounds like speculation from here.

A bit of catching up

Well, let's see what's accumulated in the sack...

I keep getting questions about investing in real estate. My first thought is usually, "You're a bit late, mate. The big run-up has already happened, and cheap financing is going bye-bye." I try to avoid being this glib, though, on the outside chance that the questioner has done some homework and simply wants to add sensible real estate investments to a balanced portfolio.

Never happens. The queries always seem to come from folks who channel-surfed all night through the endless procession of infomercials from quick flip gurus. "No money down, make millions in nothing flat!" People, if it sounds too good to be true, it IS too good to be true, no probably about it. I don't want to traumatize anyone here, but just because it's on TV doesn't mean it's true.

Start with financing. If you've only bought your own residence, prepare for a shock, because commercial financing is a whole 'nother world. More expensive, too. Then you have to find property. A lot of time and effort there, including figuring out what properties can rent for. Likely to need some professional help there. Then you need to close the deal. Lots of variables on commercial property, and lots of details to be hammered out. If you've never been through a sit, bring your antacid; just don't let the other side see you use it.

OK, you bought the place. Now comes the hard part. You need to fix this fixer-upper up, which requires finding the contractors (Oh the joy of finding a reputable contractor! Someone should write a book on the process and call it Valley of the Flakes. It's almost as bad as finding a decent lawyer.) and then ramrod the project. You should consciously strive to avoid beginning drinking before sunrise.

Now find tenants. Tenants? Oh yes, any buyer down the road will want to see what the fixed-up property can bring for rent and occupancy, so you'd better fill it, at least if you're planning on recouping your construction costs.

Now sell it. With any luck, you've timed the market right.

So simple, so easy. Yeah, right. Ask yourself this: If there's so much money to be made from this, why are the hucksters spending their time selling this "advice" instead of acquiring properties? You get the picture.

The powers that be, especially that collection of smiley-faces at the Fed, keep claiming there is no real estate bubble. Well, I've watched the number of homes owned for purely investment purposes double over the last few years, and to me that means the big speculators are on the board, which translates as "bubble." And they are speculating that people who watch too many infomercials will take these turkeys off their hands before the whole thing goes South.