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Guest Blogger

Home» Guest Blogger

Why Banks are Cutting Back on Commercial Real Estate Lending

Posted on January 17, 2020 by Mike Kushner in Commercial Real Estate, Construction, Guest Blogger, Local Market, Trends No Comments

Commercial real estate lending, the bread-and-butter business for many smaller and regional banks, could further decrease in 2020. The cause is a combination of a few different factors – intense competition from non-bank lenders and rising delinquency rates to name a few. Mortgage lending is also predicted to be impacted by rising interest rates and tight housing supplies in many major markets.

This trend is not new, but rather has been slowly creeping in for years. In 2017, U.S. banks reported that demand for commercial real estate loans weakened in the second quarter, though foreign banks reported strengthened demand. Furthermore, loan growth slowed to 4.2 percent in 2018, down from 5.6 percent in 2017, according to bank call reports and Federal Deposit Insurance Corp. data.

Why exactly are banks cutting back on commercial real estate lending? And should this call for concern that a potential economic downturn is in the near future?

Rory Ritrievi, President and CEO of Mid Penn Bank

To lend some expertise on this topic, Omni Realty Group turned to Rory Ritrievi. Rory has more than three decades of experience in banking, specifically in Pennsylvania. For the last 11 years, Rory has served as President and CEO of Mid Penn Bank. Under his direction, the bank has grown from $550 million in assets and 14 retail locations to over $2 billion in assets and 39 retail locations.

Throughout his banking career, Rory has gained deep insight into when and why banks provide commercial real estate loans – and when they do not. Let’s learn what he thinks is going on in the current market, and the pending economic impact.

Omni Realty: How has commercial lending changed in the last 5 years?

RR: In the last 5-10 years, we have seen, for the most part, a return to credit fundamentals that seem to have been abandoned in the years leading up to the Great Recession. Back then it seemed like almost any deal made sense to Bankers. Now, the focus has been returned to analysis of absorption rates, discounted cash flows, borrower experience, reasonable cap rates, and strength of guarantors.

Omni Realty: In your opinion, what are the main causes of these changes?

RR: Losses. Loan losses of 2008-2012 gave a renewed focus to bankers on the true meaning of credit fundamentals.

Omni Realty: What changes would need to take place in the commercial estate market, or economy as a whole, to further improve commercial lending?

RR: Lenders need to evolve their underwriting and analytics to keep up with the evolving demographics. Baby Boomers are aging out so there is a need for more senior housing, multifamily rentals, luxury apartments, and assisted living. Additionally, high student loan balances are making the need for affordable housing in urban areas more prevalent. There is also a growing focus on renewable energy and green spaces. Finally, work from home is more prevalent which challenges the demand for traditional office space. When we look to retail, the shift toward online decreases the demand for mall space, while increasing demand for warehouse space. And we can’t overlook technology. Bankers need to not only know about emerging technology that stands to impact the market, but they must embrace it as a highly valuable tool to help them “keep up.”

Omni Realty: What do you anticipate the trend to be for commercial lending in 2020?

RR: In my opinion, 2020 will be a positive year in the lending business, particularly in Central Pennsylvania. We are in a good credit cycle and the interest rate yield curve is in decent shape compared to last year. There are geopolitical issues such as the impact of the general election, instability in the Middle East, and trade with China but I do not believe any of those issues will halt the progress of our local economy in 2020. Challenge it, yes and maybe slow it a bit, but not halt it entirely.

Omni Realty Group thanks Rory for sharing this valuable information and helping us to further understand the factors impacting how banks view commercial lending. Though banks are, for the most part, treading lightly in the market since the Great Recession, it’s encouraging to hear their renewed commitment to credit fundamentals, and helping both individuals and businesses make well-educated lending decisions.

Amidst a year that will no doubt bring change, it’s important we remain aware of the lasting impact factors such as elections and geopolitical issues may bring to our economy, both immediately and for years to come. Rory provides sound reason as to why we should not fear such changes, but rather maintain confidence in the banking economy, particularly here in Central Pennsylvania.

Do you agree with these insights, or have others to share? We welcome your feedback in the comments below!

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Ancillary Income Opportunities for Commercial Real Estate Property Owners

Posted on November 12, 2019 by Mike Kushner in Blog, Commercial Real Estate, Guest Blogger, Local Market No Comments

When businesses and individuals consider commercial real estate development as an investment opportunity, often the primary focus is on the potential income from tenants who will lease the space. However, given the growing demand for outdoor advertising and the increased revenue opportunities that digital billboards can provide landowners in terms of rent, there is an extra revenue opportunity that should not be overlooked.

To further explain, Omni Realty Group spoke with Pat Lyons, Owner of Premier Media and a leader in developing outdoor advertising income opportunities for commercial landowners. Headquartered in Harrisburg, Pennsylvania, Premier Media assists real estate investment trusts (REITs) and landowners grow ancillary revenue streams by identifying, permitting, building, and managing outdoor advertising assets within their company portfolio.

When we asked Pat to share with us how he works with commercial real estate properties to develop streams of ancillary income, here’s what he had to say.

Omni: Describe the core services do you provide to commercial real estate clients. 

Pat Lyons: There are four main components to the services Premier Media provides and they’re designed to flow in a process. First is asset review. We approach every new project with a complete asset review of the client’s property portfolio conducted by our fulltime team of researchers who do a comprehensive review of both the local and state sign ordinances and provide a full on-site evaluation.

Once we identify opportunities within the property owner portfolio, we present them with a proposal of what they can expect in land lease revenue from a digital unit on sites that we feel are potential candidates to move through the permitting process for approval.  If our proposal is accepted, then we move to a signed land lease agreement.  In essence, Premier Media leases a portion of the property that is mutually agreed upon by both parties for the billboard installation.

Next is permitting. We work through all aspects of researching and securing the appropriate local and state permitting applications necessary to build the desired advertising displays.  This includes all engineering, survey work, building permits, electrical permits and sign permits.

Once permits are secured,  we assume the responsibilities of marketing and operating the billboard displays or work to find a regional or national billboard operator as a credit tenant for the property. This revenue stream is truly ancillary revenue for our clients and adds additional lease and sale value to the property itself. We can permit, build, and operate the advertising unit.  Simply put, landowners receive increased property value and ancillary income in the form of monthly or yearly lease payments on a long term, secure lease.

Omni: What type of clients do you most commonly work with?

PL: Though we have and will serve a wide variety of clients, we tend to focus on clients with industrial space, such as large warehouses and distribution centers along the highway. These are very desirable locations for digital displays because they are highly visible and in many cases zoned Industrial, which is also a common zoning for billboards. Another core client group is commercially zoned real estate investment trusts (REITs).

Omni: What is the general range of ancillary income your commercial clients receive from the signage you place? 

PL: As you might imagine, this is extremely subjective to each and every client, depending upon their property, how it’s zoned and the terms of the agreement. To give you some rough estimates, the base income for our clients is $10,000 per year, growing up to $200,000+ per year in some cases! I would say average is about $30,000 per year. What’s most important to keep in mind is that this comes with no capital expenditure and no upfront cost. Plus, we typically sign 20-25 year land leases, with income increasing every 5 years.

Omni: Let’s debunk the biggest myths or misconceptions that hold clients back from embracing these ancillary income opportunities you offer. 

PL: Honestly myths or misconceptions that actually prevent businesses from taking advantage of this new income opportunity is rare. Once they understand the agreement and the potential value to their property, it’s a no-brainer. However, if I had to think of a few it would be potential tenant restrictions in their own tenant leases regarding billboards and competitive language.  Most of these concerns however can be alleviated in the billboard lease agreement.

Also people mistakenly think once a billboard is placed they can never relocate it. Again, that is all addressed in the lease agreement. A final misconception is that placing digital signage could be a detriment to the value of the property.  This couldn’t be further from the truth as we have seen a tremendous increase in property value due to the long-term lease agreements and higher rents for digital billboards.. In reality, digital billboards create a great opportunity where landowners have the flexibility to use some of this ad placement to promote their tenants, advertise available space for rent – or to donate it to local nonprofits as pro bono advertising.

Omni: In your opinion, how has the outdoor advertising industry changed since the introduction of digital signage?

PL: Digital billboards give commercial landowners the ability to earn exponentially more on these types of investments. Where some real estate investment deals may be seen as only marginally profitable on what you’ll make off of traditional tenants, leasing part of your property for digital displays explodes your income potential as well as the value of the property overall while only using a 42” diameter portion of the property to place the pole.

Omni: Do you have any other advice you’d give to REITs or CRE property owners/investors?

PL: The best advice I have for commercial landowners is to think outside the box with your investment. Whether you own one property or have a large portfolio, ancillary income opportunities like digital billboard displays can open up a significant revenue stream for you and greatly increase the value of your property. And it truly is ancillary. If you work with a company like Premier Media, we handle absolutely everything from start to finish with transparency and a partnership mentality throughout the entire process. Simply put, there’s nothing to lose and everything to gain.

***

Omni Realty Group is very grateful for Pat’s insight into this fascinating industry. One of the smartest things any business owner can do is to seek opportunities for ancillary income. Not only does this grow profits needing minimal or no additional resources, it also greatly increases the overall value of your business in the eyes of prospective buyers.

No matter the industry in which you work, what ancillary income opportunities could be available to you right now?

Ancillary, Ancillary income, billboards, blog, central pa, Commercial Real Estate, CRE, development, digital advertising, digital billboards, digital displays, digital signage, harrisburg, income, income opportunity, investment, Leasing, Mike Kushner, Omni Realty Group, pat lyons, pennsylvania, permitting, premier media, revenue, signage, signs

Beyond the Bio with Mark Disanto from Triple Crown

Posted on October 21, 2019 by Mike Kushner in Blog, Guest Blogger No Comments

For more than four decades, Triple Crown Corporation has shaped Pennsylvania real estate through construction, land acquisition, and residential and commercial property management. The company has built an impressive portfolio of properties ranging from warehouses, office and retail space, rental communities, and even vacant lots that can be developed into just about anything to need.

At the heart of Triple Crown Corporation is its people. As part of the senior leadership team, Mark Disanto, the company’s CEO offers valuable insight into the industry, and the vision for the company.  Mark has built a successful career from a blend of hard work, knowledge, and experience. But beyond his professional resume, there is a lot we can learn from Mark on a more personal level.

Take a look as Omni Realty Group goes “beyond the bio” and asks Mark for answers to questions you’re not likely to read on his Linkedin profile.

Omni: Describe a “typical” work day for you.

Mark Disanto: A typical day for me starts around 5:30 or 6:00 AM. I either exercise at home or play tennis in the morning. I am usually at the office between 7:00 and 8:00 AM and very rarely leave before 6:00 PM. Throw in a couple nighttime meetings with municipalities and extra time on Saturdays and in the evenings and the work week is usually 60 to 70 hours.

Omni: What is the best part of your job?

Mark Disanto: I have great flexibility in my job. I have time in the office. I have time inspecting job sites and looking at new acquisitions. I like the flexibility. However, the best part of my job is watching the company grow and seeing the new leadership expand the company both in the property management and construction divisions as well as our geographical footprint.

Omni: What has been the most difficult part of your job?

Mark Disanto: The continued regulation of our industry is probably the most troublesome and difficult part of our business. There are so many regulations in the building codes, the land development and subdivision codes, other state permitting processes, as well as federal regulations. None of these take into account the reasonableness of the burdens placed upon the builder and developer, cost versus benefit and time delays. We continue to hear about a shortage of affordable housing and the reason for this is strictly due to the regulatory environment we live in today.

Omni: If your career never took you into real estate, what else would you likely be doing?

Mark Disanto: I would probably be on Wall Street running a hedge fund and giving Ray Dalio a run for his money.

Omni: What has been your favorite Triple Crown project, and why?

Mark Disanto: I think I have two. The first was done about 17 years ago in Silver Spring Township. Georgetown Crossing was our first large apartment community containing 400 townhome and flat stack apartments. It is a beautiful property off route 114 in Silver Spring Township and our premier community. We still own it and will probably never sell it.

More recently Blue Ridge Village tops the list. This is an exciting mixed use community in lower Paxton Township that combines retail, commercial, apartments, townhomes and single-family homes along with a 32 acre park. This is a true livable, walkable community. The approval process was collaborative and respectful of the community and the Township. It took a lot of effort on our part, but I can assure the residents that this will be a premiere community that will significantly enhance the township.

Omni: What project has been your biggest failure or disappointment?

Mark Disanto: We bought a property out of market about 20 years ago at an auction and did not have sufficient due diligence completed upon it. When we went to the township for the first time it was like walking into a hornets’ nest. We eventually decided to cut our losses and re-sold the ground at auction for a loss. Out of the hundreds of developments and projects that we have done, we’ve only lost money on two deals. We are pretty proud of this.

Omni: What motivates you?

Mark Disanto:  I just like to be engaged and like to see the company and the employees succeed. We set our strategy for three-year time frames and have quarterly meetings with our strategy review team and make sure we are all rowing the ship in the same direction. When everybody has purpose and they are all heading to the same goal line and supporting one another along the way, it makes for a very fun journey. I don’t need to work as hard as I do, I just have too much enjoyment with it to slow down.

Omni: Do you have any pet peeves?

Mark Disanto:  I don’t think so. I get very frustrated when my volleys are not crisp on the tennis court!

Omni: When you’re not in the office, where can you most likely be found?

Mark Disanto: When I am in Harrisburg, it is usually with the family which includes the five grandkids, or working around the house and in the garden in the summertime, or in a tree stand in the fall trying to find the elusive big buck, or on the tennis court 2 to 4 days a week. If out of Harrisburg it could be anywhere in the world!

Omni: And finally, what career advice would you give to your younger self?

Mark Disanto:  I would say, do not doubt your abilities. If you have an idea you want to execute then write it down and write a plan on how to achieve it. Review the plan both upstream and downstream with your staff. If you don’t have a staff, take it to people you respect and really try to poke holes in it. Once it’s well vetted, then work diligently and hard at it. A lot of people say this person was “lucky.” That’s usually not the case; a lot of strategic thought and hard work creates what people call luck.

Omni Realty Group thanks Mark for such candid and thoughtful answers to these questions. There is a lot of inspiration that can be found “beyond the bio” and on a more personal level. You can learn more about Triple Crown Corporation and its services by visiting them at https://www.triplecrowncorp.com or on Facebook and Twitter @TripleCrownCorp.

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How Opportunity Zones Could Impact Central PA Real Estate

Posted on December 26, 2018 by Mike Kushner in Blog, Commercial Real Estate, Construction, Guest Blogger, Local Market, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.


Opportunity Zones are being referred to as “real estate’s most exciting new investment vehicle,” but what are they and can they really live up to this title?

How this type of investment works and why it stands to be so beneficial is essentially this: capital gains are invested in Opportunity Zones, taxes are deferred, the basis is lowered, taxes are then paid in 2026 (at the same nominal value as in 2018), and after 2028 the Opportunity Zone holding can be sold with no capital gains tax due.

Better yet, there are very few restrictions on the properties in which one can invest. It’s estimated that there are $2.3 trillion worth of unrealized capital gains in the U.S. Even if only 15 percent of this is invested in Opportunity Zones, this will exceed the 2017 corporate income tax revenue and almost match the Medicaid spend of that same year.

The potential benefits don’t stop there. Opportunity Zones can also provide a tax deferral on gain that investors invest in a fund, and the elimination of gain in the new Opportunity Zone investment if it is held for more than 10 years.

This should paint a clearer picture as to why Opportunity Zones have real estate investors abuzz. To answer the most essential questions related to Opportunity Zones, and specifically how they stand to impact Central Pennsylvania real estate, Omni Realty has asked Silas Chamberlin to share his expertise and insight on this topic.

Silas Chamberlin, PhD is the Vice President, Economic & Community Development at York County Economic Alliance. Prior to joining YCEA in fall of 2018, he served as CEO of Downtown Inc. Chamberlin has also served as executive director of the Schuylkill River National Heritage Area, an organization promoting economic revitalization in five counties of southeastern Pennsylvania. And he has held leadership positions in the non-profit sector and state government. Throughout his career, Chamberlin has focused on helping communities leverage their unique assets to create opportunities for economic development and a higher-quality of life.

Mike Kushner of Omni Realty and Silas Chamberlin jump right to the meat of things starting with the local impact of Opportunity Zones, using the Greater York Area as a sampling.

Omni: How many census tracts in York County were approved for the Opportunity Zone program? And where?

Silas Chamberlin: York County has five designated tracts. All tracts are located in the City of York and are the tracts which encompass most of the city’s brownfield sites. Tracts in Hanover and Wrightsville were eligible for designation, but were not selected by the state.

Omni: Specifically, how will this program benefit the Greater York Area and how soon do you expect to see an initial impact?

SC: Opportunity Zones will attract additional investment to qualified projects in our five opportunity zones. The tax break should help draw investors’ attention to projects that have not benefited from private investment in the past. YCEA is a working partner to help identify viable projects within the zones to market to Qualified Opportunity Fund investors. We are also vetting the creation of local and regional funds focused on the city’s zones.

In theory, we could see funds begin investing in qualified projects at any time. Opportunity Zones are intentionally driven by the free market and individual investment decisions, so it is difficult to tell how much investment will end up in York. Observers at the national level have noted that there may be more private capital available than viable projects, so York should certainly position itself to take full advantage.

Omni: Are the tax breaks provided through this program enough to incentivize private investors and spur activity?

SC: The short answer is yes. But it would be inaccurate to view Opportunity Zones as a panacea that will turn vacant buildings into viable investment opportunities overnight. The most competitive projects will be those that are already viable without Opportunity Zone funds, but would benefit from additional investment.

Unlike New Markets Tax Credits or other popular programs, Opportunity Fund investments are unlikely to subsidize a project because the project must be able to grow in value and return an investment to the fund. YCEA’s strategy is to identify viable projects within Opportunity Zones and then use the designation to attract investors’ attention. We see this as yet another tool in our economic development financing toolbox.

Omni: Are there any drawbacks to the Opportunity Zone program?

SC: Opportunity Zones rely on a self-certification process for creating a fund, which means that investors have lots of autonomy. This also means that economic development organizations and municipalities may not always be aware of investments being made in their zones. Because the zones are distressed areas by definition, there is a higher risk that outside investment could change neighborhoods and business districts without any local engagement or controls. There are potential controls that could help guide development in Opportunity Zones—such as zoning overlays—but these tools are not yet well developed, especially in smaller cities.

Finally, there is the risk for disappointment. Opportunity Zones absolutely provide another tool to attract investment, but there is a risk in promoting them as transformational and raising the hopes of residents and developers that untapped capital will begin flowing into the census tracts that need it the most. While there is reason to be hopeful, the reality of matching qualified investors to viable projects may narrow the scope and impact of the tax break.

The Bottom Line

Experts predict that after an initial wave of Opportunity Zone fund offerings in early 2019, there may be a pause that coincides with the issuance of additional regulations during which market participants will evaluate fund and project structures. After that, barring the rise of general economic headwinds, it should be full steam ahead for Opportunity Zone funds moving forward.

From a real estate perspective, Opportunity Zone projects need to be viewed as development projects because the requirement is to create new property or substantially improve property. To reemphasize Silas Chamberlin’s point, there is surely reason to be hopeful that Opportunity Zones will flow capital into census tracts that need it the most. But we must remain cautiously optimistic about how quickly and substantially this capital will come about. Much like anything related to real estate, and especially real estate investment, most outcomes remain at the mercy of the market and ever-changing government regulations.

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Growing Demand for “Live-Work-Play” Communities in Central PA

Posted on December 4, 2018 by Mike Kushner in Blog, Commercial Real Estate, Community, Guest Blogger, Local Market, Trends No Comments

Photo: Walden in Mechanicsburg, PA

If you’ve been a resident of Central Pennsylvania for more than a few years, you’ve likely seen various live-work-play (LWP) communities – maybe you even live in one. What we’re talking about it mixed-use commercial and residential real estate where people have the opportunity to live, work and play (shop, dine, etc.) all in a relatively close distance to one another. A great example is the Walden community in Mechanicsburg, but there are many others that we will examine in this article.

To help us explore this growing trend, we turned to Chris LeBarton who is a Senior Market Analyst with CoStar Group. Chris covers commercial real estate data in Western Maryland, including the Baltimore metro area, up through Central Pennsylvania for CoStar’s Market Analytics platform.

Chris joins Mike Kushner of Omni Realty Group for a Q&A series where we specifically look at the growing demand for LWP communities in Central PA – and what this means for CRE professionals. Here is how Chris answers our most pressing questions.

Omni: When did the LWP trend begin and how has it grown?

Chris LeBarton: The earliest usage of LWP spaces I can find was in 2005. The trend really started to grow in popularity leading up to the market crash, but there’s no correlation between the two that I can see. The term “live-work-play” was very likely used prior to that, but I’m guessing the branding of mixed-use development really took off as concepts of ‘walkable urbanism’ and ‘Transit Oriented Development’ (TOD) exploded across the country.

According to the Urban Land Institute’s Mixed-Use Development Handbook, which was published in 2003, mixed-use development: provides three or more significant revenue-producing uses (such as retail/entertainment, office, residential, hotel, and/or civic/cultural/recreation); fosters integration, density, and compatibility of land uses, and; creates a walkable community with uninterrupted pedestrian connections.

Omni: Describe a LWP community in Central PA.

Chris LeBarton: First, let’s clarify what a LWP community really is, and what it is not. Some economic development entities and marketing types play pretty fast and loose with the term. An area can be a really nice place to live, work and play in, but if there’s over a mile or so between one element of the triad and the other two legs of the stool aren’t in the same building/development, it’s not really a LWP dynamic. Of course, the likelihood that most people who live in one of these communities also works in the same office/industrial park nearby is fairly low. But being able to do all three and be largely reliant on public transportation or your own two feet is really the spirit of the LWP concept.

Another key element to understand is that LWP is not at all relegated to a city environment. In fact, part of these projects’ collective appeal is that they can recreate a city environment without being in the hustle and bustle of a CBD. Specifically in Central Pennsylvania, there are a number of LWP developments. Here are just a few:

  • Lime Spring Square (Lancaster/Hempfield Township): A multi-phase, mixed-use campus being developed by Oaktree Development Group, the end result will include over 100,000 SF of retail, several hundred high-end apartments, and components of office, medical and industrial space. Penn State Health has a 76,000 SF medical office building there, while PDQ Industries is expanding operations into an 80,000 SF building.
  • North Cornwall Commons (Lebanon/North Cornwall Township): Another phased project that has been delayed off and on since being proposed in 2004, North Cornwall Commons is finally seeing movement at what would be the largest mixed-use development in Lebanon County history. A retail strip center with at least one confirmed tenant (a local coffee business) is underway at 148-acre site that includes plans for roughly 165 townhomes, office space and a hotel.
  • The 1500 Condominium (Harrisburg): An example of how you don’t have to have everything in one place, 1500 has 43 units (mostly rentals) that sit over top of two restaurants and is within walking distance to the Broad Street Market and several small-to-medium sized employers.
  • Wyomissing Square (Reading/Wyomissing Borough): A quintessential brownfield redevelopment, Wyomissing Square now consists of 250 4 Star apartments, a Courtyard by Marriott, small-scale retail, restaurants, and a 60,000 SF medical office building.

Omni: Who is the target demographic for this type of community?

Chris LeBarton: As with anything that deals with where people live, shop/eat or work, I think the answer is “All of the Above.” We hear all too often about Millennials, or Boomers, or Downsizers, or Divorcees. Honestly, the more conversations I have with leasing agents and brokers the more I’m convinced the rule is diversity and the exception is homogeneity. Granted, most of these LWP sites cater to the more upscale or educated among society, but that doesn’t mean there can’t be families with two working blue collar parents who make a decent living and who want to save money on a car/parking and live close to work.

Omni: What advice could help commercial real estate professionals capitalize on the LWP trend?

Chris LeBarton: I don’t give investment advice, but here are a couple thoughts. First, find a way to make it authentic. Be it the retail mix, or a unique concept to the green space, or simply having the “town center” not look boiler plate, be conscientious of that buzz word “place making.” If you’re going to basically spend the majority of your waking life in a small area, it can’t be boring or cookie cutter.

Next, think ahead. What will you need to provide 3-5 years from now? Who would have thought that cities would be crawling with scooters?! Or even just electric vehicles. People looking to walk or be publicly transported or drive as little/cheaply as possible will likely demand options and flexibility. Things to consider are multiple charging stations, bike share platforms, car-share parking lots, etc.

Finally, identify fairly gentrified but not-yet-there locations that are retail/grocery deserts. LWP in the middle of a depressed community won’t work in many places (there are exceptions, of course). But cool/changing areas that are the next ‘it place’ often still need the food and fun to complete the shift.

Omni: Looking to the future, how do you predict LWP communities to evolve in Central PA?

Chris LeBarton: I think you can expect to see more of these types of projects turn up around dying malls or outlet centers that have to repurpose big blocks of space. Another interesting new trend that I could see taking off is the rise of co-living and co-working spaces in the same building.

The LWP trend stands to have a significant impact on Central PA’s commercial real estate market. Because LWP communities rejuvenate the local community, drive business and create employment opportunities, Central PA should be encouraged that so many of these communities are popping up across the region. Additionally this type of real estate appeals to a wide variety of demographics, making it a valuable investment opportunity for commercial real estate professionals. Looking to the future, LWP communities could be among the most powerful tools to breathe new life into struggling areas, and spur a burst of new economic activity that is greatly needed.

What are your thoughts on the growing demand for live-work-place communities in Central Pennsylvania? Is this type of community attractive to you? Why or why not?

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How to Identify the Best Commercial Tenant Agent (Guest Post by William Gary)

Posted on June 18, 2018 by Mike Kushner in Blog, Commercial Real Estate, Guest Blogger, Tenant Representative/Buyer Agent No Comments

Note: This article was originally published by William Gary, MBA, MIM on MacLaurin Williams, LLC. Permission to republish has been granted. Click here to read the original version. 


How to Identify the Best Commercial Tenant Agent

Commercial Tenants and Buyers often complain that “their” supposed Real Estate Broker seems more interested in depositing a commission check than in helping them to find the right workspace at the best price. Sadly, they are quite correct. Far worse, do Occupiers understand what’s wrong when Brokers try to “double-end” their deals and pocket commission checks on both sides of the table? In commercial real estate parlance, this is aptly known as “double-dipping” and it’s not good for Tenants and Owner-Occupants.

Even Landlords and Sellers may feel pressured by their Listing Brokers, Landlords’ Agents or Sellers’ Agents to make price reductions or to accept offers that are less than what they wanted. On the other side of the table, Tenants and Buyers can feel their arms painfully twisted by “their” Brokers to pay more than they had budgeted to lease space or purchase a building.

So whose Broker is whose and what’s really going on? And why does it matter so much?

DIRTY SECRET NO ONE WANTS TO TALK ABOUT

Shockingly, in many transactions in the US, Commercial Real Estate Brokers have no (zero) legal obligation to look out for the best interests of the Tenants or Buyers they work with. However, many Tenants and Buyers are woefully unaware of this troubling fact.

Laws in at least 25 US states now allow a Commercial Broker to work with a Tenant or Buyer as a Transaction Broker, Facilitator, Intermediary, Dual Agent or Subagent. All but the last of these are pure middlemen. None of them have any legal fiduciary duties of loyalty or obedience to the Tenant or Buyer they work with.

In some states, Texas as one example, the “Client” legally is not even a Client of an Intermediary, Transaction Broker or Facilitator; he or she is merely a “Customer.”

Such Brokers might work “with” you as their Customer, but certainly not “for” you as your advocate. That’s a critical distinction. They’re definitely not your Tenant Representative, 100% Tenant Rep, Tenant’s Agent or Buyer’s Agent.

All fifty (50) states provide avenues for Commercial Brokers to double-end deals, i.e. work with both the Landlord and Tenant or both the Buyer and Seller in the very same transaction and, thereby, avoid any obligation to split or share commissions with an outside “Cooperating Broker“. A Broker (or his or her Brokerage House/Company) is legally allowed to keep the commissions on both sides of a transaction; hence the term “double-dipping“.

In such instances, detractors, including Consumer Advocates, maintain that neither a Tenant nor an Owner-Occupant is actually represented. That’s accurate because neither has an advocate nor champion truly sitting on his or her side of the table. 

A Consumer, in this case a Tenant or Owner-Occupant, should not assume that his or her Broker is obligated to represent his or her best interests, and his or her best interests alone, until one has first seen a formal, written disclosure describing the agency relationship under which real estate services are being provided. Tenants and Owner-Occupants should see this disclosure upfront, too, not at the closing table as some Tenants report Big Brokerage Houses are doing. By then, it’s usually way too late to hire a 100% Tenant Rep as an advocate and start over.

Even Landlords and Sellers looking to negotiate the best commission rates, to obtain the highest levels of service and to protect their legal rights in the event of a dispute, should start the process by making certain that they fully understand the form of representation that a Broker is offering to provide them. 

Is it a “Single Agency” relationship, which is the optimum and best relationship for the Consumer? That is The Gold Standard of Representation, especially for Tenants and Owner-Occupants.

Or is it a legal relationship that leaves the door open for a Broker or his or her company to double-end the deal and double-dip on commissions?

TYPES OF AGENCY RELATIONSHIPS

Agency relationships are created when one person or party agrees to act on another’s behalf, or to represent them in dealings with a third party.

Once an agency relationship is established, Brokers (as Agents) owe their Clients “fiduciary duties of loyalty and obedience.” In a Single Agency relationship, Agents are typically required to place their Clients’ interests above and ahead of their own. They do so by providing advocacy services with honesty and good faith, while carefully avoiding conflicts of interest or “self-dealing.”

There is confusion, though, because rules governing agency relationships between Consumers and Real Estate Brokers vary from state to state, and all have been rewritten in the last 25 years. Depending on the laws of the state in which they are licensed, Brokers provide services through one of six (6) relationships:

#1) Single Agency: A Broker represents only the interests of the Landlord or the Tenant (or the Seller or Buyer) in a transaction, either as the “Listing Agent” for the property or as a “Tenant’s Agent” or a “Buyer’s Agent” for the Occupier. Consumer Advocates maintain that Single Agency is the optimum form of representation. This is The Gold Standard of Representation, especially for Tenants and Owner-Occupants.

#2) Designated Agency: This occurs when a conflict of interest arises within a Brokerage Company and one Broker is in a position to represent both parties on opposite sides of a transaction; for example, the Landlord and the Tenant on lease. To seemingly remove the conflict of interest, the Employing, Sponsoring or Managing Broker of the Brokerage Company separately designates two (2) of his In-house Brokers, one to represent the Landlord and the other to represent the Tenant.

When states require that Employing, Sponsoring or Managing Brokers implement safeguards to protect a Client’s confidential information, academics and Consumer Advocates say that Designated Agency is the next best alternative to Single Agency. But we maintain that there’s a giant drop off between #1 Single Agency Representation versus #2 Designated Agency. That is particularly true for the Tenant, which only needs one lease at a time as compared to a Landlord that requires assistance from its Listing Broker or Landlord’s Agent with multiple leases in a single building or maybe even in multiple buildings in a portfolio. 

Colorado offers Designated Agency. In reality, it was creative wiggling by the Big Brokerage Houses and traditional Commercial Brokers to get the Colorado Legislature to exempt them with a pen from having hundreds of troubling, very inconvenient conflicts of interest. You see, when the Big Brokerage Houses and traditional Brokers were previously seeking to represent Tenants, every single one of their property listings was an actual or potential conflict of interest. So the Colorado Legislature gave them just the legal loophole they wanted. In my opinion, you can expect to see this occur in many other states, too.’

#3) Disclosed Dual Agency: This is when a single Broker or two (2) Brokers working for the same Company provide services simultaneously to both the Landlord and Tenant (or the Seller and Buyer) in a limited, reduced agency relationship, which they must disclose to the to Principal Parties to the transaction. However, part of the disclosure is that neither Broker is legally allowed or obligated to represent the best interests of either the Landlord or the Tenant (or the Seller or Buyer).

In states with no provisions for Designated Agency, the single broker or two (2) Brokers affiliated with the same Company may be considered Dual Agent(s). It’s rather like “double agents” in the world of espionage and it’s not a good situation for Landlords and Tenants or Sellers and Buyers because Dual Agents are required to be impartial and cannot act as an advocate for either side of the transaction.

Although controversial even among Real Estate Brokers and Agents, Disclosed Dual Agency does present an opportunity for experienced Landlords and Sellers to negotiate discounted or “variable rate” commissions in advance, primarily because the Landlord or Seller would have to settle for a lesser standard of representation than in a Single Agency relationship.

But for Tenants and Buyers in the US, who don’t pay the commission to their Brokers or Agents, since it’s paid by Landlords or Sellers, what Tenants and Buyers unfortunately receive in Dual Agency situations are lower standards of representation, including zero advocacy.

#4) Transaction Brokers, Facilitators & Intermediaries: Transaction Brokerage occurs when one (1) Broker or two (2) Brokers at the same Brokerage House/Company work with a Landlord or Tenant or a Seller or Buyer in a non-agency, non-advocacy relationship. It may or may not be declared in writing but a Transaction Broker owes no fiduciary duties of loyalty and obedience to a Landlord, Tenant, Seller or Buyer. 

A Broker that performs Transaction Brokerage is called, as one might expect, a “Transaction Broker” in some states but a “Facilitator” or “Intermediary” in other states. In Colorado, it’s called a Transaction Broker and in Texas it’s called an Intermediary.

Transaction Brokers, Facilitators and Intermediaries share the same disadvantages as Dual Agents because neither the Landlord nor Tenant (nor the Seller or Buyer) can expect a Broker to represent its best interests during any negotiations. As a result, a Tenant or Buyer working with a Transaction Broker, Facilitator or Intermediary has little latitude to file a claim for professional negligence or ommission by any such Broker.

Another little dirty secret is that some Brokers intentionally dodge having the higher standards and duties owed to a Tenant or Owner-Occupant under a Single Agency relationship and prefer to work as Transaction Brokers, Facilitators or Intermediaries. Why? Because it affords them much more “wiggle room” and greater margin for error, plus it leaves the door wide open for a potential double-dipping down the road.

#5) Providing Ministerial Services to Unrepresented “Customers”: In real estate law, the unrepresented Tenant or Buyer is often called a “Customer.” A Listing Broker for a property may avoid splitting a commission with an outside Cooperating Broker by providing limited administrative services to an unrepresented Tenant or Buyer, i.e. to a Customer. Why? Again, it’s so the Broker can bank a commission on both sides of a transaction.

#6) Subagency: It’s pretty clear that the Listing Broker for a property represents the Landlord or Seller in a declared, usually written agency relationship, called a Listing Agreement.

But in some states, like Texas, without a written or declared agreement, all Brokers and Salespeople who work with Tenants or Buyers are actually legally “Subagents” of the Landlord or Seller’s Listing Broker/Agent for the property.

That’s right.

It means that all of the Brokers involved in a Subagency state like Texas legally owe 100% of their allegiance, loyalty and expertise to the Landlord or Seller. The Tenant or Buyer has no legal representation whatsoever.

In effect, in a Subagency state all of the Brokers can legally gang up against a Tenant or Buyer, if the Tenant or Buyer does not elect to sign up a Tenant or Buyer’s Agent to act as its advocate and to protect and advance its best interests.

Although Subagency was previously a national real estate industry practice in the US until the 1990s, this form of representation has largely fallen out of favor due to lack of protection for The Public/Consumers and the legal liability risks for Brokers, Landlords and Sellers. Nevertheless, Subagency remains the default or beginning legal relationship in a few states where nothing is in writing between a Tenant or Buyer and a Commercial Broker.

Colorado does not allow Subagency but in Texas it’s the default relationship. Unfortunately, Subagency can turn into a bad dream for unrepresented Tenants, Buyers and Owner-Occupants. To be frank, I can’t even believe that Texas and a few other states still allow Subagents.

CONCLUSIONS 

Every state in the US provides avenues for Commercial Brokers to double-end deals and double-dip on fees, which is usually the worst-case scenario for Tenants, Buyers and Owner-Occupants.

Of the eight (8) states that ban Dual Agency altogether, four (4) states still allow Designated Agency (Alaska, Colorado, Maryland and Texas); five (5) states allow Transaction Brokerage, Facilitators or Intermediaries (Florida, Colorado, Texas, Kansas and Oklahoma); and three (3) states allow both Transaction Brokerage and Designated Agency (Alaska, Colorado and Texas).

Designated Agents, Subagents, Transaction Brokers, Facilitators and Intermediaries, effectively, are all just Dual Agents and double-dipping under different legal names. Certain states’ outlawing of Dual Agency is pretty much an illusion and window dressing to assuage the legitimate concerns of Consumers/The Public.

Designated Agency, in particular, is artful window dressing that quite pleases Big Brokerage Houses and traditional Commercial Brokers, all of which seek to obfuscate and camouflage their numerous Conflicts of Interest. It still allows them to legally double-end deals as an excuse to double-dip on commissions. Dual Agents, Subagents, Designated Agents, Transaction Brokers, Facilitators and Intermediaries do little good for Tenants, Buyers and Owner-Occupants, since none of them are true advocates.

To argue otherwise is disingenuous but traditional, regular Commercial Brokers go out there and do it every day.

This troubling issue for Tenants and Owner-Occupants is critical enough for the Office of General Counsel in the New York Department of State to post a notice to The Public. The warning is titled “Be Wary of Dual Agency” and you can read it for yourself at this link.

Honestly, the more I think about it, it’s obvious that Big Brokerage Houses and traditional Commercial Real Estate Brokers believe that Tenants and Owner-Occupants are naive. And that Occupiers still won’t recognize Conflicts of Interest or do anything about them. At best, the whole thing is confusing, even to licensed Brokers.

Some traditional Brokers still argue adamantly, as long as they disclose double-ending and double-dipping to the Landlord and Tenant or to the Seller and Buyer, then it’s perfectly OK based on the “Everyone Knows About It Theory.”

Here’s a link to a stunning article titled Major US Tenant Files Suit Alleging Multi-state Real Estate Fraud & Bribery Scheme. It’s about what goes wrong when a major Tenant doesn’t take Conflicts of Interest seriously enough and engages a Big Brokerage House accustomed to serving two masters in the same transaction. Letting the fox count the chickens doesn’t usually end well and this story doesn’t.

For Tenants, Buyers and Owner-Occupants, what is the point of working with a Broker, even a friend or acquaintance, if they are not a true advocate sitting on your side of the table? It costs more or less the same to have your own advocate as it does to have a Broker whose loyalty is either totally to the other side or whose hands are severely limited and tied halfway behind his or her back. 

This is why true Tenant/Buyer Representatives (“Tenant Reps”), Tenant Brokers, Tenant Rep Brokers, Tenant’s Agents and Buyer’s Agents, like MacLaurin Williams and our colleagues at MacLaurin Williams Worldwide, practice only Single Agency Representation. That is The Gold Standard of Representation. We never consider representing two (2) masters in the same transaction. Just because the law allows (less principled) Commercial Brokers to double-end deals and double-dip on commissions, we strongly believe that it’s highly unethical and we won’t do it.

But, for most Commercial Brokers in the US, double-ending and double-dipping are business as usual.

Author of this article, William Gary, MBA, MIM works at MacLaurin Williams Worldwide and can be reached by +1 303-901-1108 or at wgary@MacLW.com.

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How Central PA Health Systems are Rethinking Real Estate

Posted on March 21, 2018 by Mike Kushner in Blog, Guest Blogger, Healthcare, Local Market, Trends No Comments

Major changes are taking place in America’s health systems and we are starting to see the impact of some of these changes right here in Central Pennsylvania. Hospitals are no longer the desired “hub” for healthcare, rather free-standing emergency rooms, 24-hour emergency care centers and walk-in clinics are helping to keep people out of the hospital, while expediting their care.

Additionally, telemedicine is reshaping the need for brick and mortar facilities, placing a new emphasis on health systems acquiring “virtual” real estate. These emerging trends are intended to increase access to quality healthcare while allowing health systems to reduce overhead.

To help us answer some of the most important questions surrounding the changes taking place in Central PA’s health systems, we interviewed two guests who are highly knowledgeable on this very topic.

Christian Caicedo MD, MBA, CPE, FACHE is the System Senior Vice President and President of the Cumberland Division at UPMC Pinnacle. Paul Toburen, also with UPMC Pinnacle, is the Senior Vice President of Facilities and Support Services.

With a combined, vast experience in health systems operations, Dr. Caicedo and Mr. Toburen collaborate to lend their insights into how Central Pennsylvania’s health systems are rethinking the way they use commercial real estate.

Omni: Looking at how Central PA’s health systems currently function, what are some of the biggest challenges?

Christian/Paul: One of the most critical challenges we face in Central PA is access to care – not just any access, but the right kind of access. It’s a moving target we are trying to hit. Patients want access to fairly and competitively priced healthcare, in the right setting, with quality resources and skilled staff.

The challenge stems from the fact that we are all trying to live in two worlds: the fee for service world and the value based world. We can’t have it both ways and also provide access to quality healthcare to everyone in Central PA. There has to be a compromise somewhere.

Omni: As Central PA’s health systems see more and more value in serving the outpatient market, what strategies must be implemented to make this shift?

Christian/Paul: The key to shifting our focus to better serve the outpatient market is to make simple and immediate access to healthcare available to patients right where they are. Rather than asking patients to come to us in traditional office and hospital environments, we need to have access points in the work place, malls, retail spaces, home, etc. Health systems are now trying to acquire more virtual real estate than they are brick and mortar locations. This is evident by the more than 120 rural hospitals who have shut their doors since 2005!

Omni: With the use of telemedicine becoming more prevalent in our health systems, what are the pros and cons of diagnosing patients in their home?

Christian/Paul: The pros, as we touched upon above, will be the ease of access and convenience to the patient. It will allow physicians to see more patients in a day, reducing patient wait time and reducing patients exposure to germs and infections. Additionally, telemedicine is a great option for Medicaid recipients.

The cons, well that will evolve as the technology changes. Currently there are limitations as to the level of evaluation one can conduct via the virtual encounter. As technology evolves, (i.e. Haptic pressure feedback) we will have greater ability to perform better virtual exams and arrive at an accurate diagnosis through telemedicine.

Omni: Specifically, how will telemedicine impact brick and mortar healthcare facilities?

Christian/Paul: Simply put, the growing use of telemedicine will diminish the need for brick and mortar facilities and drive the demand for virtual real estate. If done thoughtfully and strategically, this should be a win for both patients and health systems. Speaking from the health systems standpoint, we can save a lot of overhead while providing patients with faster, more convenient care. Hospitals will stay play an important role in the overall health system, it’s just going to look a little different in the future.

Omni: What Central PA health systems do you feel are leading the way in rethinking how they use real estate?

Christian/Paul: We believe all Central PA health systems are rethinking the way we use real estate. The cost of construction continues to escalate. We are now looking at lease agreements versus building-to-own along with repurposing existing buildings to accommodate our current needs, but having flexibility for future needs as well. Speed to the market is critical in today’s healthcare industry, as we must accommodate the patients’ needs.

Given the transformation taking place in Central Pennsylvania’s health systems, and health systems worldwide, how do you feel about the changes taking place and where they will lead us in the future?

Join in the conversation by sharing your thoughts or questions!

###

More about Christian Caicedo: Christian Caicedo MD, MBA, CPE, FACHE is the System Senior Vice President and President of the Cumberland Division, UPMC Pinnacle. He is the former Vice President of Operations and Medical Director for West Shore Hospital, and Interim Chief Medical Officer, Pinnacle Health System. He has served as Executive Director of Emergency Services and served as Clinical Director for Community Campus Emergency Department, Pinnacle Health System. Dr. Caicedo also served as medical director for Swatara Emergency Medical Services, and was a member of the Swatara EMS board of directors. Currently, he serves as Medical Director for Susquehanna EMS.

 

 More about Paul Toburen: Paul Toburen is currently serving as Senior Vice President for Facilities and Support Services for the UPMC Pinnacle Health System. Paul oversees fourteen departments with a primary focus on Construction Management and Real Estate. Paul has obtained his MBA and MS and is a member of the ACHE, ASHE, COAA, IFMA among other organizations.

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