It has been some weeks since my last blog….for a good reason. In some weird turn of fate, I found myself deeply involved in a deal which challenged every rule I had about business and the relationships associated with it. The deal has caused me to work day and night, put my reputation on the line, created anxiety and had me get personally involved in the life of one of the deal’s owners. On top of all of that, it is still on going. For obvious reasons, I can not divulge many details surrounding the deal, but I can give you great insight as to the challenges, rewards and pitfalls of crossing the boundaries from business to personal life.

Let’s start from the beginning. About a year ago, I was asked to provide a valuation for a mixed-use project in The South. This project is an award-winning property which was a complete redevelopment of a historic industrial site near a major university. It contained roughly 600 apartments and two hundred thousand square feet of retail and office space. Future plans are to develop more apartments, condos, townhomes, a hotel, and more retail and office. Initially, my job was to value one phase of it for a possible sale. The developing entity is a group of high profile individuals. I was recommended to one of these individuals by a friend. Let’s call him “Ted”. At our initial meeting, Ted was very personable. For someone of his status, he came off to be very down to earth. Our conversation and initial bonding went well. A few weeks following our meeting, I provided Ted with my valuation. Unfortunately, at the time Phase I of his property was worth a little more than the debt. This was not a surprise since the economy was officially in a depression, banks were not lending and worries of pending loan defaults were looming. It was my recommendation that it was not a time to sell.

Months passed while I, like the rest of the industry, struggled to obtain business and get transactions going. Slowly, opportunities began to rise. One project I was working on was within a half-hour drive of Ted’s project. I decided to take the opportunity to visit the project and see how things were going since my previous valuation. I was impressed how well the property performed during the continued struggles of the economy. I decided to give Ted a call to tell him how pleased I was with his project. My timing was perfect for Ted. He told me that he and his partners were considering selling the entire project and needed my help. Yes! It was on! This was a great opportunity for me to be involved with a high profile sale, with high profile investors, and clearly make a mark in a market where my presence was nil (or so I thought).

Since Ted lived locally, he and I began to meet on a regular basis. We found out there was only one degree of separation between our lives and our personal connection grew. I began to really like and respect Ted. I believe the feeling was mutual. This connection was extremely important because Ted trusted very few people and tried to keep as low of profile as possible. He was a true family man with a beautiful wife and kids, far from what people would think of someone with his background and caliber. Ted revealed to me that as successful as his project was, the underlying ownership and financial structure was in shambles. To put it bluntly, too many cooks had spoiled the broth. On top of that, one of the undeveloped buildings, a major component to the site, was in jeopardy of being foreclosed upon. Ok…not such a big deal, right? All the owners had to do was to put this successful, awarding property on the market, sell it through a highly competitive bidding process, pay-off the partnership and outstanding debt, and everyone will be happy. Wrong! Remember when I told you the partnership was made up of high profile individuals? Well, several of these individuals had personal guarantees attached to the property’s debt, including Ted. This meant that in the case of loan default, the owners could be responsible for nearly $100 million. To make matters worse, the news media would be all over their troubles. Furthermore, there were also a couple of ill-advised refinancings which incurred more debt and contractually made a sell extremely difficult. Lastly…..a sell would require consent from all partners, who couldn’t agree on anything, and had high profile personalities to match their high profile status. Obtaining mutual consent would be a challenge to say the least!

So, here’s where it gets personal. Ted calls me and tells me (in so many words) that his livelihood depends on this deal. It wasn’t too hard to read between the lines. In commercial real estate, things are slow to mature. Although, get caught up on the wrong side of timing, things can get bad real quick. Like Ted and many others, I’m a victim of that, too. It’s par for the coarse (subject of a future blog). Now, Ted has put me into a dilemma. Should I treat his deal like any other deal where I would simply uphold my professional obligation to him or should I go the extra mile to help save him personally and professionally?

Here are the outstanding facts of the deal:

1. The underlying financial structure of the deal is a disaster. Any investor I recommend to get involved has to be willing to spend an enormous amount of time working through an extremely complicated deal.

2. An investor would also need to be willing to risk tens to possible hundreds of thousands of dollars between underwriting and legal bills to find out that a deal could not be reached.

3. If any one of the owners decides to hold out on a sell (for whatever reason) the deal is off.

4. The undeveloped building in default would need to be negotiated back from the lender. This would be an ongoing problem after a sell of the other components.

5. This deal would consume my life for some period of time hampering my efforts to obtain future business. It would also consume my personal life and the time I have to spend with friends and family.

6. My own mental well-being would be tested as I would feel somewhat responsible for the out-come of this deal and the repercussions on Ted’s personal life.

7. My professional reputation would be at risk if the deal falls through from the buyer and seller side.

So, what is my upside?

Here it is… If I am able to successfully navigate this deal… Personal Satisfaction. You see, I measure myself by the value I add to this world, not the value of what I take from it. However, like most others, I work hard to accumulate wealth so I can provide security for myself and family. Here lies the dichotomy. How can adding worldly value and personal accumulation of wealth exist at the same time? I believe it depends on one’s definition of wealth.

For me, “wealth is a state of consciousness, an expanded awareness of having. When you have right understanding of who and what you are, you recognize that you already have all that you need.” (Michael Beckwith) By this definition, my Personal Satisfaction comes from 1) knowing that I have all that I need, 2) my ability to add value to others (the world) using my abilities, and 3) additional rewards may come in the form of accumulation of that which brings me and my family security. For that reason, even with all of its personal attachments, I choose to take on this complex deal. I believe that I can live with the consequences for I already know that I have everything I need.

I am wealthy.

What would are your thoughts? What would you do?

With over 18 years of experience in commercial real estate, I have come to learn one thing which many investors (savvy or otherwise) overlook. Real estate (or real property) is not only about the asset, it is about people. We can not create it (higher power has done that for us). We can not destroy it (although lately it seems like BP has done a good job of trying). All we can do is improve upon it. 

The attraction to a particular piece of property is ALL subjective. This applies to commercial as well as residential property. A person chooses a place to live based on many factors; location (urban/suburban), proximity to transportation, physical aesthetics, budget and simply how a property makes them feel. The same is true with office and retail. An owner of a business will lease space based on many subjective parameters besides location and functionality (cache of surrounding neighborhood, interior design, etc.). We also shop at particular retails centers for similar reasons. 

As a consultant and broker, one of the primary skills I need to have is to know how to “read” a property. A read is the ability to get a feel for how a property is positioned in: 

• its surrounding location
• physical presence and build quality 
• functionality, and
• the emotions the property induces from its users

It is relatively easy to figure out that a Class A property, in a great location, will be desirable to most users. The trick is to figure out the not so obvious. 

Like many brokers I strive to obtain the crème-de-la-crème assets to sell. I have had my fair share. However, it should be pointed out that great assets are not always wrapped in a pretty package. Many successful investors know this and have become wealthy by being able to read a property and know its potential. For example, I am selling an apartment community located in Langley Park, Maryland. Its location is known as an older, blue-collar neighborhood, with a high population of immigrants. The property itself is post WWII construction with mostly flat roofs. From an aesthetic standpoint, it ranks pretty low on the list as compared to other apartments in the DC area. So, what makes this such a great property? What’s the read? 

Can You Read This?

On the surface, most would drive by this property and say to themselves, “why would I want to own that?” I’ll tell you why….first, look at its resident base. They are mostly immigrants. Most work in some sort of service industry. They are cleaning people, construction workers and caretakers. They work hard. They are paid in cash and have little debt. They work for the opportunity to help their family. Many send most of their earnings back to their native countries to help family members left behind. These residents want clean, affordable living with NO FRILLS. The more money they can save and send home, the better. 

Secondly, because these residents are paid in cash, so they pay rent in cash (or money order). This property has little to no “bad debt”…in other words, no bounced rental checks. Also, because many of these residents do not want to cause trouble (for obvious reasons), they pay on time. 

Location is another important read. Most of the residents do not have cars. The apartment community is located on a major thoroughfare with a bus stop directly in front of the property. Even with many surrounding competing communities, this property is preferred because it is a shorter walk to the bus stop in the rain. To a lot of us this would not have been a consideration. But, to the demographic the property serves, this is a huge advantage. Also, the property is in walking distance to over 400,000 square feet of neighborhood retail. Grocery shopping and convenience stores are just steps away. 

The last important read of this property is its ability to market itself. Word of mouth marketing is the most efficient type of marketing available. The property rarely has to advertise. It is commonplace for the residents to tell their friends and family of the availability of this clean affordable housing. The property stays nearly 100% occupied with no specials given.

The investor who has the ability to look deeper than the surface and reads the opportunity, is the one who reaps the benefits. I guess reading real estate is similar to reading people….don’t judge a book by its cover….dig deeper and you may just find the jewel you were looking for. Remember, real estate is not about property…it’s about people - and their needs for it.

As a native Washingtonian, I have seen DC change from a commuter city where federal government employees would scurry back to their suburban homes at 5 pm daily, only to leave a shell of a bustling city, to a metropolis where “neighborhood rebirth” is common and the streets are full of life, day and night. Today, Washington, DC holds the highest percentage of residents with post graduate degrees in the country. The City also leads the country in job growth and even in economic recovery, is expected to add 25,000 new jobs in 2010. Unlike in previous years, Federal employment in the City is now embraced by its residents.

Much of the needed rebirth in DC was due to the riots in the late 1960’s. Many DC neighborhoods remained impoverished for decades. As a child, I remember being embarrassed to admit that I was from Washington, DC. Violent crime was at a national high, crack cocaine was abundant on nearly every street corner and much of the City leadership was a joke. Times have changed, the U Street corridor being one of the most noteworthy examples.

Let’s go back…the intersection of 14th Street and U Street was the center of mass destruction during the 1968 Washington, D.C. riots. Following this unfortunate event, affluent residents and businesses sought the refuge of the surrounding suburbs. The Corridor became blighted. Drug trafficking rose dramatically, and for many years the intersection of 14th and U Streets was known as “ground zero”. To make things worse, the Office of the Mayor (named after Marion Barry) anchored this famous intersection. Over time, the growth and revitalization of Dupont Circle and Adams Morgan eventually traveled east to the U Street Corridor. A few underground clubs (Republic Gardens most notable) and the renovation of the historic Lincoln Theater began the resurgence of night life to the area. U Street once again started to become a household name and a destination location.

The Ellington (13th & U)

Today, through gentrification, all is well on U Street. More historic buildings are being refurbished. Proximity to Metro (U Street Station) is a catalyst for new residential development. An abundance of luxury high-rises can be found in the neighborhood. One of my favorite examples is The Ellington (190 apartments, developed by Donatelli Development). Donatelli took a chance on the revitalizing corridor. The building offers a mix of luxury amenities (roof top deck, controlled access, granite countertops, stainless steel appliances, 10’ foot ceilings) and 17,000 s.f. of retail. Located directly across the street from Metro made it easy for young professionals and empty nesters to fall in love with the area – while providing easy access to the entire City. The development of many other communities has followed The Ellington’s lead.

View 14 Apartments (14th & Florida Ave)

So what makes a location like U Street so popular? – I say Diversity of Cultures, Urban Grit, and Change. I will discuss this in Part II!

As mentioned in my introduction post, I am a broker with First Capital Realty (FCR), in Bethesda, Maryland. We exclusively specialize in the sale of apartment communities. Our geographic reach is primarily the Eastern Seaboard, but the Washington, DC area is our ‘backyard”. For over a quarter of a century, we have been one of the preeminent brokerage firms in the multi-family arena. Each year we complete sales assignments for institutional owners, private investors, lenders and merchant builders. We are considered a boutique brokerage firm in physical size only (including myself, there are four senior brokers on staff with no junior sales people). Our transaction volume, broad range of deal sizes and locations and extensive network have placed us at the forefront of the industry. Our small size ensures a quick response to our clients’ needs. FCR is known throughout the industry for our problem solving skills, as well as our willingness and ability to tackle complex situations.  Our MISSION: is to deliver superior results and record pricing.

Primary Services

There are three primary services to which First Capital Realty offers:

Market Consultation – We have vast experience with multi-family sales in both primary and secondary markets. To date, we have sold 187 communities in 14 states. We speak to owners, operators and consultants on a daily basis as to their current practices and experiences in the market. We maintain one of the industries’ most extensive transaction databases for the DC Metropolitan Area. We also track deals currently under contract, for sale and “rumored” for sale.

Valuation Services – As a function of our brokerage services, we must determine what is the True Value of an owner’s property. By True Value, we mean the “strike price” for which the property will sell after a complete marketing effort has been concluded. The pricing represents a level in today’s market, to which a bona fide purchaser will “stretch” to buy the property. Our property valuations include analysis of current operations, competitive positioning within the submarket, property observations affecting value, and replacement cost analysis.

Brokerage Services – In today’s chaotic real estate market, there are many qualified buyers who are active and flush with cash, eagerly seeking opportunities to purchase real estate at fair market pricing (to which they were precluded during the economic downturn). Other buyers are now beginning to become active as the economy recovers and opportunities arise (distressed or otherwise). In contrast, many groups are still “on the sideline” due to their inability to obtain debt/equity required to procure deals at attractive returns. FCR solely works with active qualified investors for our own exclusive listings and occasional buyer-broker relationships with proven capable buyers.

Our representative relationships range from institutions (PNC Bank, UBS Realty, Northwestern Mutual), to REITs (AvalonBay, Equity Residential, Archstone), to private investors (Bozzuto Group, JPI, Federal Capital Partners) – all of whom we have done repeat business. We love to “talk shop”. We invite opportunities to value assets or develop relationships for “off market” deals where no current owner relationship has been established.

What can First Capital Realty do for you?

Jeff Coles
Senior Broker
First Capital Realty, Inc.
4350 East-West Highway
Suite #400
Bethesda, MD 20814
(301) 907-3200
jcoles@fcr1.com

Since this is my first blog, I think it is only fair to share a little about myself and my intentions for the blog site. So….let’s start from the beginning. I am a native Washingtonian who grew up in the Shepherd Park neighborhood of NW Washington, DC. Shepherd Park is a typical middle to upper-middle class neighborhood with great diversity.  I went to St. John’s College HS, an all-male (now coed), Catholic, military school. There, I played football, ran track and was the student council president my senior year. For what it’s worth, I now appreciate my accomplishments at a young age, but never thought that I was doing much… just what I was supposed to do (I give my parents the credit for that). With my many extra-curricular endeavors (mostly in music) I wanted to stay local for college. To that end, I attended Howard University and received my BA in Architecture and later received my MBA concentrating in Real Estate and Urban Development from American University. I thoroughly enjoyed my experiences at both universities.

During grad school, I began working in asset management for Oxford Realty Corporation, a Bethesda, MD based apartment owner and manager. Eventually, Oxford sold its portfolio and I took a job as a senior analyst at my current place of employment, First Capital Realty, Inc. (FCR). FCR is a brokerage firm which specializes in the sale of apartment communities (I will go into more detail in another blog). I have now been working at the company for over 15 years. I have grown from being an analyst, to my bosses’ right-hand-man in running the company, to my current position for some time – Senior Broker.

The purpose of my blog is an informative one. I would like to detail the role of a commercial real estate broker and my related experiences, share market knowledge and give the world a little insight to “who I am”, my travels and fun experiences along the way. Hopefully, you will find my blogs informative, interesting and fun.

So, here we go! First things first…. “Nice to see you here.” : )