Today’s Seattle Times’ Retail Report featured a story on dwindling occupancy in the downtown retail core. Vacancies are up 3.4% and so are rents – from $31.50 to $31.80. Who would increase rents – even thirty cents a square foot – when vacancies are increasing at the same time with no end in sight? Owners and managers who want to offset the negative impact of rising cap rates (a income multiplier used to value commercial real estate) on pro forma operating statements for valuing real estate investments for one. There are other reasons too. But that is an incentive. At $31.80 PSF, a independent retailer needs to generate sales of $636.00 PSF to “make it” according to conventional wisdom and published statistics (ICSC) as a 5% rent load factor is optimal for most retailers. I said most. Food operators – double that. So, a typical 1,000 square foot boutique needs to generate $636,000 annual sales. In this business environment, that’s a tall order. Get out to your suburban strip center and mini-strip center, the numbers are a little less harsh as rent is quite a bit lower, however, same math applies. And foot traffic is lower, or non-existent, with sales much lower as well. In my client mix, I represent small retailers, the “moms and pops.” I’ve put them in business, and helped them shut ‘em down. It’s painful to watch years of savings and hard work, go down the drain in an economy like this. I’ve also helped many save themselves from themselves, by pointing out the flaws in their business plans, and advising to hold off for another day. I only digress to save my reader from thought that I may have been dishing on small business last week. I wasn’t. As to the recession benefitting “big retailers,” from the onslaught of bankruptcies this past year, I think the jury is still out on that one. Please support your neighborhood mom and pop stores. They stepped out and took the risk. Independent retailers need and deserve our business. Have a great Memorial Day Weekend. Enjoy the sunny Seattle weather.

This morning NPR featured a piece on the National Association of Realtors’ annual convention in Washington DC. The upshot is that the ever-optimistic Realtor group sees a ray of sunshine in the otherwise gloomy real estate market. Thanks to government programs, first time home buyers may qualify for products that may help the battered market. Not so lucky are the commercial real estate brokers, or investors for that matter, as the lending market continues its deep freeze. That with today’s report of lower than expected retail sales, I thought I’d revisit commercial real estate investment grade cap rates and sales.

Ouch… Deals that were going out a few years ago at 5% cap rates are now in the mid-sevens. What does this mean? If you had purchased a commercial property, say a Walgreens Drug Store with $300,000 net operating income (“NOI”) at a 5% cap rate, back around 2004, 2005, you would have paid around $6MM. A conventional take out loan at 75% loan-to-value would require $1.2MM equity investment. That same credit tenant lease and NOI today at a 7.5% cap rate is worth a mere $4MM. In other words, that brilliant 2005 addition to the portfolio is now upside down to the tune of two million bucks, rounded. You’ve not only lost all your equity, but your loan is upside down too. Worse for the rest of us, your lender is south in security in the neighborhood of $1.5MM (the difference between the $4.5MM he or she could have underwritten then, versus the $3MM that could otherwise be underwritten today). If you bought a little strip center to go along with your mini-anchor, filled or partially filled with zero-credit tenants (mom and pop coffee shops, dry cleaners, hair, nail and tanning salons, struggling franchised five buck sandwich shops, etc.), then that part of the portfolio is in even worse shape, if that’s possible. It certainly is on paper if you’re being honest. There are tons of those deals out there too. And I don’t think their impact has really hit public consciousness or pocketbooks yet. No question, however, that cap rate increases have hit the valuation of REITS, and private retirement portfolios; and increased illiquidity in capital markets, hence the freeze.

There is a title wave of commercial real estate foreclosures ready to hit. It is being held off in some measure, but who knows for how much longer. There is anecdotal evidence in the market that many developers and investors, particularly local and regional mom and pops, are still living in dreamland, grossly overvaluing their portfolios. Lender complicity in these dreams only postpones the pain. Will it turn around some day? Maybe. It always seems to, eventually, but that sunny day is not on the horizon just yet.

Last month the Department of Financial Institutions released an Interpretative Statement related to the Mortgage Broker Practices Act (“MBPA”) and the Consumer Loan Act (“CLA”). The statement was in response to inquiries as to whether or not loan modification service providers must be licensed in Washington State to offer services to Washington residents involving their Washington real property. Anyone exploring Craigslist, the Pennysaver or other compilations of classified ads knows that the sharks run thick in those waters trolling for the unwary looking for shelter from bad loans. Interestingly enough, companies from California and Florida seem to lead the pack. Some are looking for lawyers and former real estate agents to partner in the loan modification business.

The short answer is yes. In order to offer loan modification services in Washington State requires licensing under the Mortgage Broker Practices Act RCW 19.146, or Consumer Loan Act RCW31.04, unless a specific exemption applies. Significant excerpts from discussion section of the Interpretative Statement follows and makes for good reading for anyone seeking services from a loan modification specialist:

The Division has received many inquiries regarding the regulation of loan modification services. According to callers, individuals are communicating directly with borrowers and brokers offering to provide loan modifications services. Many callers inquire about what restrictions are applicable to loan modification services.

In addition to any applicable licensing requirements under either the MBPA or CLA, all individuals who offer or negotiate loan terms for borrowers are prohibited from directly or indirectly employing any scheme, device, or artifice to defraud or mislead borrowers or lenders or to defraud any person; engaging in any unfair or deceptive practice toward any person; obtaining property by fraud or misrepresentation; soliciting or entering into a contract with a borrower that provides in substance that the mortgage broker or loan originator may earn a fee or commission through “best efforts” to obtain a loan modification even though no loan modification is actually obtained for the borrower.

There seem to be new companies coming into, or forming in Washington State, on a weekly basis, offering loan modification services. Many are legitimate; however, many are simply out for a quick buck. And that buck quickly heads south and out of state. We’ve seen too much carnage in this area already. This interpretative has been circulated by the NWMLS and the WSBA Real Property Listserv to advise brokers and lawyers practicing in this area as to what the guidelines are for compliance. Consumers need the same information to make informed choices. As always, it makes sense to shop around before committing. Before you shop, make sure you know the rules of the road.