The Dixon-Magenheimer-Sisler Report Semi-Monthly Newsletter

Smoke & Mirrors – April, 2011

Did anyone notice that in November 2010 they received a real estate tax bill that showed that they were being assessed for less but being taxed for more?  What’s up with that?

Example 1 – Using North Bay Village Actual Millage Rates
2009 Market Value $500,000 x Millage Rate .0209155 = Taxes $10,458
2010 Market Value $475,000 x Millage Rate .0231724 = Taxes $11,007

What’s up; is that your tax bill conveniently excludes the real problem THE COUNTY BUDGET.  What happened in this case is while your property values have decreased by $25,000 the county’s budget did not, or at least did not decrease by the same amount.  So in order to collect the taxes needed to pay for the government, some of us were greeted with a MILLAGE RATE (TAX RATE) increase greater than our property value decrease.  A problem which is only further exasperated by Florida’s overcomplicated and misguided real estate policies. [Link to Law]

Example 2 – Property with Homestead Exemption Benefit – Using North Bay Village Actual Millage Rates
2009 Market Value    $500,000
2009 Assessed Value $330,000 x Millage Rate .0209155 = Taxes $6,902
2010 Assessed Value $339,900 x Millage Rate .0231724 = Taxes $7,786

Policies proposed and supported by people who seem to forget that every real estate transaction includes both a buyer and seller.  And these policies only marginally encourage buyers but heavily discourage sellers.  Some relief for this unequal reward/punishment system for homeowners was achieved with enacting of the homestead portability laws [Link to Law]  But what did this ultimately achieve?

We now have a system that requires an enormous database (880,000+ individual folios in Miami-Dade County alone) for each county that not only needs to properly assess each property (Market Value), but in addition it must track and calculate each properties Assessable Values, as well as the $25,000 Homestead Exemption for the School Board portion and $50,000 exemption for the City/County/Region portions of the tax bill and now must track the amount that must be transferred upon the sale of the property and how much needs to be applied to the new property.  (Good luck figuring out the formula used to calculate this amount.)  But evidentily did nothing to spur real estate sales or price recovery, so now in 2011 they have a new plan.

With the equalization effect of the portability laws, the incentive of buying has been neutralized, our wonderful politicians have proposed new laws to once again encourage buying and discourage selling.  [Link to Law)  (Did we not learn anything the last go around?)  This new law will on one side lower the assessment increases of ALL properties residential and commercial regardless of ownership to a maximum of 3%, thus creating the exact same disparity that caused the uproar and subsequent creation of the above portability law, but this time every piece of property will be affected instead of just homesteaded homes.  In addition it will give buyers who have had no had a homestead exemption in the last 3 years a 50% reduction in their property assessment (up to $200,000) that decreases by 20% each year until it disappears in 5 years.  After which they will still retain the 3% increase cap and $25k/$50k homestead exemption.  So go ahead and add those new elements to the data that needs to be properly tracked for each property in the State of Florida to the database described above, that will likely need to be completely recreated to handle the calculations.  And in case you aren’t aware a database this complex is not cheap to create or maintain.  And the cost will be passed directly on to the tax base through high millage rates and or fee’s that won’t be based on value.

On the surface these changes may sound good, but again what will they actually achieve?  Will potentially lower taxes for 5 years truly inspire people to start buying like crazy again?  Or is it the extremely high un-employment, still declining home prices, or near impossible borrowing standards that are discouraging home buyers.  Take your pick, all though for some reason I think the property taxes are a bit low on the list of reasons NOT to buy a home right now.

I say potentially above because this new law says absolute ZERO about reigning in County Budgets or Millage Rates!  So regardless of how much of a discount you think you might get from these assessment discounts, the county will still need to collect the same amount of money (or more) and will just raise the Millage Rate in order to collect it.  Furthermore we will have created a system that no longer taxes owners based on the values of their properties on a yearly basis, so why not just simplify the system instead of making it more complex and just dissolve the Property Appraiser’s office and base all Real Estate Taxes on the price paid at purchase and standard yearly increase for the CPI.

Maybe in our political climate this is impossibly straight forward, but it sure makes things a lot simpler for all involved and would be a starting point for a taxation system that would be predictable, manageable and easy to understand.

If you have the opportunity to alter this new law to actually address the real problem of endlessly millage rates and county budgets, and not the assessed values, please take these into consideration.

For more help navigating the murky world of Florida’s Real Estate tax system, call us.  Or maybe not, this s..t is really confusing and makes my brain hurt.
Andrew Dixon

*My apologies to those in the PA’s office that would lose their jobs, but in fairness so would we.

Sour Buildings Make Good Buildings Sweeter- February, 2011

In today’s office market in South Florida vacancy rates for most submarkets average 20% and over.  This is especially true in “C” Class Buildings or below.  Class “A” buildings are enjoying lower vacancies and less willingness by landlords to give excessive concessions to lure tenants.  Concessions can take several forms; free rent, free parking, generous tenant improvement allowances, moving allowances and the like.  Also there is less flexibility in the published rental rate and the actual effective rent finally agreed to by the landlord and tenant.

The classification of “B” buildings, plus or minus (B+ or B-) is often in the eyes of the beholder/owner/landlords/leasing agents.  Most landlords will want the newer buildings, less than ten years old, to remain in the “A” class category.  These landlords or lender/receivers want their properties to remain  Class “B” when they are by reason of financial condition, deferred maintenance, poor leasing and marketing efforts, are clearly about to fall into the dreaded “C” category.

The classification of “A”, “B” or “C” buildings should be determined by the age, location, leasing/marketing efforts by the leasing agent and maintenance of the property.  Because there is no industry wide criteria established, the classifications float, the “B” buildings tend to be the most flexible.  The plus (+) classification may include some buildings fallen from the “A” by reason of age and maintenance/condition.  The minus (-) classification in this category will include some properties that are clearly headed to become “C”.

In today’s recession period, several building have fallen into the “sour” category.  This is by reason of the negative factors set out above, they are about to fall into a lower category.  This is particularly true of “B” properties about to become “C” quality.  Many of these properties are “fractured” condominium offices which were good solid “B” building when they were leased.  After they were purchased at an inflated price by a condo converter, over financed by a unknowledgeable lender and failed after selling only a small fraction of the office units.  After foreclosure and judicial sale, tenants in these buildings are quick to recognize the changes in the maintenance, functioning of elevators/AC/ and poor marketing/leasing efforts by the owner.  Using the services of a tenant representative/broker, tenants can find out quickly what other properties in the submarket are offering.  They may discover they can improve their surroundings, lower their rent and gain the advantage of new quarters at an improved economic level.

“Sour” buildings tend to have this new designation spread faster through the market.  “Good” buildings and the office brokers representing tenants determine rapidly that new opportunities have presented themselves and they are quick to take advantage of the situation.  “Sour” buildings usually get worse before they get better, ultimately falling into the hands of a rogue buyer, who has purchased the building at a steep discount.  This buyer or his next in line can now afford to reposition the property and enter into a new leasing program which will ultimately create a healthy Net Operating Income (NOI) and a sale at a substantial gain the owner.

“Good” buildings usually get better and “Sour” buildings worse.  Office brokers know the territory.  If you are in a “Sour” building, hire a good office broker, he can negotiate good terms for you in a “Sweeter” building.  Remember the tenant representative is paid by the new landlord, so essentially you receive the services of this trusted, experienced and established professional at no cost to you or your company.

By:  Office Broker and Tenant Representative Steve Magenheimer -305-445-0916

 

2011 Industrial Market Report, January 2011

NOW AVAILABLE:

The official CIASF 2011 Industrial Market Report as presented by Tom Dixon for CIASF on Jan 14th at the Sofitel Hotel in Miami.

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If Real Estate Values Have Gone Down, Why Did My Taxes Go Up?

In Florida this is the time of year when property owners are notified of the amount of the real estate taxes to expect on the tax bill which will be sent the first of November.  This notice know as a TRIM or “Truth in Millage” notice.   In some cases, for the year of 2010 it is showing an increase in the real estate taxes, even though values have declined.

This increase is because of one of two possibilities.  Although the Market Value may have declined the “Assessed Value” (the amount used to calculate your taxes) increased because of the provisions Florida’s “Save or Homes” or Homestead Exemption legislation.  Homestead Exemption provides that the assessment for residential properties, with Homestead Exemption, cannot increase by more than 3% or the Cost of Living, whichever is less.  For the year of 2010 the Cost of Living increase is calculated at 2.7%.  Therefore, for residential “Homestead Exempt” properties the assessment increased by 2.7%, This can happen up until the Assessed Values and Market Values meet.  But under no circumstances can your Assessed Value exceed your Market Value.

The other possibility is that the Millage Rate increased more than the property’s value decreased.  Real estate taxes are calculated by multiplying the “Assessed Value” by the “Millage Rate”. The “Millage Rate” is based on the amount of money local government needs from real estate assessments divided by the total “Assessed Values.”  For example, if government needs $1,000,000 to operate and the total “Assessed Value” is $50,000,000 the millage rate is 20 mills or more simply 2.0% of “Assessed Value”.  If government needs $1,000,000 and the total “Assessed Value” declines to $45,000,000 then the Millage rate will increase to 22 mills or 2.2%.  Therefore, when “Assessed Values” decline and government needs remain the same the Millage rate will increase.  For properties in the City of Miami, the Millage rate from 2009 to 2010 increased by 14.27%.

For example, if your property is in the City of Miami, unless the “Assessed Value” decreased from 2009 to 2010 by more than 14.27% your real estate taxes will be the same or higher.  This increase in taxes is a result of the millage rate increase because of the decline in “Total Assessed Values” without a equal decline in the Governments budget for the year.

Although the “Millage Rate” for all classes and types of properties in a government area are the same, the limitation on the increase in assessments under “Homestead Exemption” does not apply to non-homestead properties, for those properties there is now a 10% increase cap for the portions of your tax bill that are paid to the City/County/Region, but the cap does not apply to the School Board portion of which for the Assessed Value always equals Market Value, and is taxed on that amount.

In reviewing the assessment for commercial properties of our tax appeal clients, we have found moderate increases in the assessments but with the increase in the millage rates the real estate taxes have increased.  For example, if your property is in the County and the “Assessed Value” remained the same, the increase in the “Millage Rate” of 8.6% means your real estate taxes are 8.6% greater.

What can you do to make sure you are only paying your fair share of real estate taxes?  If you believe your assessment is too high you can file an appeal petition or have us appeal on your behalf.  If you believe the millage rate is too high you should attend the City and County Budget Hearing Meeting to express your feelings and demand a reduction in government spending.  One solution I have suggested is that every government expenditure, every payment and every expense should be easily available for public review online.  Our government needs to be held accountable for how they spend our tax dollars.

By Tom Dixon

The Hummer Dilemma

by Tom Dixon

Hopefully, now that we have passed through the dark time of not knowing what the financial future holds for us, it is time to consider how things can be better in the future. It seems to me that not too many years ago the belief was that if you have more, spend more and live in a bigger house you will be happier. Maybe it is now time to re-think what all this “more” has created.

My guess is that this came about because we were not content with what we had and thought more would be better. In terms of houses, this was financially possible but had a hidden trap. If you could buy a home for $100,000 with a down payment of $10,000 and a loan of $90,000 and the price of the home increased by only 10% then it would have a value of $110,000. With a $90,000 mortgage you had made $20,000, a 100% return on your $10,000 investment. If you can keep refinancing your home loan at 90% of its value will continue to double your money. Why not? The why not or risk is that if the value of your home declines then your equity is wiped out. Yes it was fun while it lasted but eventually more homes and condos were built than there were people able to afford to purchase without fraud or even to live in them. Prices declined and equity was wiped out.

The second problem became the cost for mortgage payments, upkeep, insurance, and real estate taxes. As long as values were going up it made sense. But when home prices stopped rising couples with no children began to question their need for 8,000 SF 6 bedroom 6 bath home with real estate tax bills of $4,000 to $6,000 per month. An excessive home is like a Hummer, yes to looks cool and seemed like a good idea, but do we really need to live in a monster home and drive around in such a massive vehicle.

How did all this happen? The combination of a belief that good times will continue, incomes will rise, home prices will never decline and more and more and bigger and bigger are better. This is not to say that there may be reasons for big homes and big cars, but just because we can borrow money to buy them is not a good reason.

So how do we overcome the “Hummer Dilemma”? A realization that perhaps the answer is in these quotes :

“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.” -Will Smith

“Wealth consists not in having great possessions but in having few wants.” -Epicurus

Or this great truism my wife Linda gave us when we moved to our new office. “The best things in life are not things”.

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2010 Office Market Report

On Thursday June 17,th we presented the 2010 South Florida Office Market Report.  If you missed the presentation or want a copy of the printed report you can find it and all the previous report under the CIASF tab of our website.

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2010 Hospitality Report

We just added a PDF version of the CIASF’s 2010 Hospitality Report compiled by Guy Trusty to our CIASF page.  Check it out.

Trying to Outrun Our Real Estate Tsunami

For those of us involved in real estate for over 20 years, we have experienced cycles which seldom took more than 3-4 years to work out. This one is much different with few experts able to forecast a time to return to normalcy.  It has been much more personal than the past because all of us have heard of the economic impacts on members of our families, neighbors and close friends.  Those involved in real estate seem to be particularly hard hit. Architects, title insurance firms, engineers and developers have suffered mortal blows. It is understandable why the government administration grasps at green shoots in order to show improvement with our dire economy.  Let’s dissect some of the most influential elements:

Here in Florida we have historically depended upon increasing population to feed our growth and real estate activity. That in turn fuels our construction employment. This growth has not occurred for the past two years and this year will show more outflow than inflow. This is causing havoc with local government budgets.

With our housing bubble resulting in serious overbuilding for single family and condos, we are still wallowing around trying to figure out when residential housing will return to normalcy. No question that bargain basement prices are assisting the sale of houses. But, this is with unusual amounts of government support such as the $8,000 credit for new home buyers and the fact that 90% of the residential financing has government backing. What will happen without this government support?

The unemployment numbers are downright scary. The present average unemployment level and length of time unemployed is the greatest since 1948. Paul Krugman, economist and writer for New York Times, says US household’s net worth has declined by $14 trillion. A large segment of our population, fearful of our burgeoning debt and feeling the need to increase reserves, is saving more and curtailing their consumer spending. Of course, this adversely impacts real estate investments.

We have yet to feel the full sledge hammer impact of commercial foreclosures, the result of commercial real estate having a 35-40 % reduction in market value. Locally and in the rest of Florida, we have a large amount of our commercial loans coming due in 5-10 years posing a tremendous challenge to both borrowers and lenders.

No rational answers have been forthcoming for these challenging elements. Against the backdrop of these daunting challenges giving advice to active investors is difficult. There will be a large group of investors who have been active in the area for years, throwing up their hands and electing not to play the game. Offsetting this will be some new players, bringing to the market large chunks of cash, attracted to buying well below replacement costs.

The great investor, Warren Buffett has several observations to remember:

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.”

And “In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”

By: Gary Sisler

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2010 Industrial Market Report

Last week Andrew and I presented the 2010 Miami-Dade County Industrial Market Study to over 240 members of the Commercial Industrial Association of South Florida. This is 15th year we have reported on the industrial market conditions in South Florida.

The Market Trends Section reported a growth in industrial space for the year of 2008 of just over 267,000 SF a decline of about 87% from the prior year. This downward trend was also evident in the industrial employment sector showing an employment decline of 7,600 to a total employment of just over 175,000. For the year of 2009 projected total freight at the Port of Miami declined by 8% while freight through Miami International Airport declined by 20%.

The Market Activity Section shows volume of warehouse sales remained the same at 74 buildings but a decline in the average sale price from $71/SF to $69/SF. The dollar amount of the sales decreased by 55% to $108,328,400. The industrial condominium market also slowed with a 25% decline in sales volume in 2009 and an average price decline from $144/SF to $122/SF.

Because of the variety of warehouse/industrial properties in various locations Miami-Dade County is divided into seven regions based on similar types of properties in each region. All regions are reporting an increase in the amount of rental space available, vacancy rates are as high as 18%-20% and rental rates have declined to as low as $3.50/SF in some areas.

Summary:

First year rental rates have declined from the mid $7.00/SF to as low as $3.50/SF. Some industrial property owners in larger buildings are renting for $1.00/SF plus all expenses (NNN) for the first year of a three year lease. Existing tenants are requesting rent rate reductions, abatement of rent or other concessions in exchange for longer term leases. Property managers are reviewing these requests on a case by case basis.

Vacancy rates should continue to increase from 13% and could rise to as high as 18% as a result of no new companies moving into this market. Existing companies are relocating from older less efficient buildings to newer buildings taking advantage of the lower rental rates in newer building with better access, parking and loading areas. This is forcing properties with functional problems to become even more rate competitive.

The major issues facing commercial property owners are the burden of additional governmental regulation and enforcement. Property owners are being forced to install expensive wired fire alarm systems, re-inspection for code compliance whenever a tenant applies for an occupational license.

The encouraging news in cargo compared to other US Customs districts is that Miami’s decline of 15% in trade from June 2008 to June 2009 was the smallest of all districts except Norfork/Mobile/Charleston. With the construction of two cargo facilities, the Miami International Airport will have an additional 800,000 SF of cargo space plus a new fumigation facility. At the Port of Miami the dredging of the channel to 50’ depth will make Miami only one of three ports on the Eastern Seaboard with this depth which can take advantage of the widening of the Panama Canal. These factors will improve Miami’s international trade as the economy recovers and secure Miami’s future as a major air and sea port.

If you’d like more information about the “Commercial Industrial Association of South Florida” send an e-mail to info@ciasf.com or you can view and download the entire Market Report.

By Tom Dixon

Bend, Blend & Extend

As the Great Recession of 2008-2009 continues, its effects are felt in the commercial real estate market and submarkets of South Florida in the form of increased vacancies, lower rents, reduced income and cash flow to landlords and owners of investment properties.  If landlords, owners and their leasing agents are not agile enough or willing to bend, blend and extend existing lease agreements, then we will see this segment of the market go through what has happened in the housing markets.  However, no matter what action ownership takes the combination of short term loans coming due, the new rules of higher equity requirements, increased capitalization rates and appraisal values might still tilt the balance downward.  But no matter, the mortgage debt side of the equation is a subject of a later newsletter.  We will discuss here the ownership side.

What is a landlord and it’s representative to do when approached by a large major tenant with several years remaining on their lease term, to reduce rent and/or give up space back to the landlord?  There are various concessions and amendments that can be offered and considered.  The main element has to be to save the tenant and keep them from vacating the space and moving to another location.  Other questions are:  How much space do they occupy? How long have they been a tenant?  What is their track record in rent payments?  Also are they willing to give the landlord financial records of the past 12 to 18 months and a projection of their income for the next 12 to 18 months?  Will their request to give back seriously affect the cash flow of the property?  And lastly, what is the future of their business?  And most important are they going to survive?

Answers to these questions and the willingness to disclose their present and future financial condition will greatly affect the landlord’s ability to bend, blend and extend.   Help can take various forms:  rent abatement (free rent) for short periods to give them breathing room, rent deferrals with accrued deferrals repaid at a future date with interest, reduced or eliminated rent escalations to provide “breathing room” for a period, give back of space with or without a future take back, updating of base year for operating expense pass-thru to a current year or eliminate it entirely.  More help can take the form of paint and new carpet to “refresh” their space in return for extended lease term, say two or three years remaining extended to five to ten years.

Finally, a rent per square foot reduction and some parking rate concession for a short term (12 to 18 months) can go a long way to help a tenant survive these rough economic times.  The key is, will you as the landlord or his representative be able to make the value judgment: “Will the tenant survive?”  If you have strong doubts, do not play the bend, blend and extend game.  Let the space go vacant and find a tenant to occupy the space at a rate where you as the landlord can survive!

CALL US, WE KNOW HOW TO BEND, BLEND AND EXTEND.  WE ALSO KNOW HOW TO SURVIVE!

by Steve Magenheimer