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Why, When, Where, What & How to Make A Deal

Position – Connect - Close. Why, When, Where, What & How to Make A Deal. January 7, 2013. Today’s subject matter expert. Fred B.C ó rdova, III Executive Vice President Los Angeles, CA.

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Why, When, Where, What & How to Make A Deal

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  1. Position – Connect - Close Why, When, Where, What & How to Make A Deal January 7, 2013

  2. Today’s subject matter expert Fred B.Córdova, III Executive Vice President Los Angeles, CA Fred Córdova joined Colliers in May of 2002. He was previously with Cushman Realty Corporation from 1999 to May of 2002. He has 30 years of experience in real estate transactions and development as a principal and agent across multiple product lines, including office, industrial, residential, retail and hospitality. He has purchased, sold, leased and development more than $5.9 billion of real estate.“fredcordova.com”

  3. Transacting Commercial Real Estate in 2013 • CRE Analysis – Determining Market Pricing • Why.. Invest in CRE? • When.. Does it make sense to invest / build? • Where.. Should one invest / build? • What.. Should be built? • How.. Should it be built / financed? Position – Connect - Close

  4. 1. Why …..invest in CRE? • The role of commercial real estate as an investment class • History – REIT Act of 1960 • Equities • Bonds • CRE Investment Spectrum – Core, Core+, Value Add, Opportunity • CRE Core Investors & Risk / Return Parameters • Pension funds • Insurance companies • Fund advisors • REITS • Corporate investors • Hybrids / TIC’s / Syndicators • Private Capital • Owner / Users

  5. 1. Why …..invest in CRE? • Why does CRE make sense as an investment class? • Yield performance • Income sustainability • Inflation hedge • Diversification • Visibility / image • Scale / size • Risk adjusted returns • Liquidity • Income growth • Leverage • Competitive advantage

  6. 1. Why …..invest in CRE? Core buyer investment attributes

  7. 1. Why …..invest in office buildings? Core buyer yield targets Historical Average Yield Premiums (Cap Rates) vs 10 year T = 1.5% - 2.5%

  8. 2. When….does it make sense to invest / build? Timing / Timing / Timing?

  9. 2. When….does it make sense to invest? Key office value drivers • Supply side • Existing inventory • Functionality • Age • Type / market fit • Building vacancy • Location • Submarket fundamentals • Demographics • Development Pipeline • Market rents • Anticipated rent growth • Historical relevancy • Capital markets • Benchmark rates (10 yr T) • CRE Return parameters • Demand side • Space drivers • Job growth • Office utility • Functionality • Technology • Demographics • Government • Inventory • Utility – Tenant needs • Cost / Market rent • Amenities mix • Capital markets • Return on costs • Exit pricing / risk • Responsiveness

  10. 2. When….does it make sense to invest / build? • When will market rents exceed replacement cost rents? • The Investor’s guide – The Broker Opinion of Value (“BOV”)

  11. 2. When….does it make sense to invest? • The Investor’s guide – The Broker opinion of value • The role of Argus in market pricing • Key assumptions that drive the Argus pricing model • Capital costs for restoration • Market rents • 10 year rent growth • Expenses / inflation projections • Stabilization costs • Lease up costs (TI’s, Commission, Concessions) • Downtime • Retention rate • Releasing costs • Exit cap rate

  12. 2. When….does it make sense to build vs. invest? When will market rents exceed replacement cost rents? BOV Market Analysis Rent Growth Drivers • Location Attributes • Livability • Amenities • Labor pool • Transportation • Visibility • Housing • Investment Attributes • Current NOI • Stabilized NOI • Tenant Mix / profile • Cap ex needs • Operating expenses • Yield profile • 0 • Submarket Attributes • Size of submarket • Position in submarket • Barriers to entry • Business environment • Absorption / Vacancy • Demand drivers

  13. 2. When….does it make sense to build vs. invest? Analyzing rent growth

  14. 2. When….does it make sense to build vs. invest? Sales comp analysis

  15. 3. Where..should one invest or build? • Capital return parameters => Sustainable market rents • High job growth cities • Creative technologies • 24/7 livability – global cities • Entertainment / media • Trade centers • Education • Natural resources – oil, gas, agriculture, minerals • Catalytic / High growth cities (ICEE is hot; FIRE is not) • San Francisco, CA • Los Angeles – West L A • Houston, TX • Seattle, WA • Austin, TX

  16. 4. What…..should be built? New office product & new discipline • Supply constraints • Aggregate demand growth • Submarket fundamentals • Labor supply / quality • Competitive demand • Capital flows • Government actions • Macro – Capital markets • Micro – Submarket • Demand constraints • Space utilization/efficiency • Sustainable business models • Technology • Business drivers • Capital flows • Government actions • Macro – Capital markets • Micro – Submarket

  17. 4. What…..should be built? The new office user • Needs • Open floor plans • Fewer private offices • Me space => We space • Collaboration • Flexibility • Quality employees • Proximity to clients • Technology / connectivity • Less government • Desires • Flexible hours • Comfortable environment • Safety / security • Nearby amenities • Easy access • Public transportation • Affordable housing • Proactive business environment • Efficient / less expensive space

  18. 5. How ……should it be built / financed? Risk & the use of debt Manage cash flow risk and the ability to repay the loan • Pros • Higher equity returns • Less equity required • Managed financial risk • Concerns • Less development flexibility • Third party oversight • Personal liability • High external / beta risk • Greater market risk • Greater capital market risk • Greater execution risk Is Spec Dead?

  19. The Clues – Why – When – Where – What - How Key indicators to monitor The Aggregate Watch – Alignment of Capital Flows and CRE Investor Demand Government Macro Policy – Flow and direction of interest rates Government Micro Policy – Flow and direction of capital toward users & markets Submarket Fundamentals – Supply & Demand of Space Replacement Costs – Labor / Land / Steel / Concrete / Drywall / Copper Entitlement Requirements – EIR’s, Barriers to Entry, Soft Costs Tenant Space Drivers – Labor / Customers / Location / Costs / Productivity

  20. Positioning Analytics => Positioning => What’s the Story? The Pitch => Opportunity What is it (Product type) and what condition is it in A,B C (cap ex) Where is it located – Primary, Secondary, Tertiary market How is it expected to perform – risk / yield profile What is the yield opportunity – core, core+, VA, opportunity What type of investor would want to own it

  21. Connecting Awareness => Understanding => Who cares? Delivering the Message => Target Buyer => Action Buyer segmentation – Product type Product quality Location Risk profile Return parameters (core, core+, VA, opportunity) Engaging the buyer E Teasers Offering Memorandums On line platforms Auctions Mailers Phone calls - getting personal

  22. Closing Risk Management => Buyer Selection => Disclosure => Due Diligence Picking the right buyer => who closes at the best price Who actually can say “yes” to the deal Source of funds Timing Approval process Team members Gaming Achieving Commitment => Building Trust Validating the story Proving out the underwriting (Due Diligence) What can go wrong- anticipate challenges The Purchase and Sale Agreement Environmental – Phase I Title / Survey Property condition Tenant estoppels

  23. Conclusions – Transacting CRE in 2013 Macro Forces Shaping CRE Investing CRE is a mature and accepted investment class with unique risk / yield profile Investing in CRE has become much more transparent Value does not equal pricing Government Macro Policy => Capital Flows => Yield Requirements => Pricing Government Micro Policy => Capital Flows => Fundamentals => Value Technology is changing the industry – capital, supply of CRE and demand for CRE Liquidity is the ultimate risk and debt magnifies liquidity risk

  24. Contact Us Fred B.Córdova, III Executive Vice President Los Angeles, CA “fredcordova.com” Twitter: @FredBCordova thenewnexus.blogspot.com The Aggregate – Subscribe through “fredcordova.com” fredcordova@colliers.com O: 213.532.3281 License No. 01279582

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