A real estate investor recently asked the following: “I’ve noticed that most if not all properties in my area offer a cap rate of 3.5%-5.5%, and when I ask the brokers why the cap rates are so low they say it’s ‘perfectly normal’ for this area. Am I missing something here?”

It was “perfectly normal” to buy mortgage backed securities without collateral before they collapsed. It was “perfectly normal” to invest with Madoff before his empire collapsed. It was “perfectly normal” to buy dot.com companies before they became worthless. History is replete with giving comfort to poor investments by considering them “perfectly normal”.

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The presumed logic behind attempting to charge a lessee whose lease expired the same or more rent is that if the space is leased for less income, then the real estate will be worth less. Herein lies the illusion. Today’s buyers or lenders base their valuations of commercial property on collected rent, not scheduled rent. Scheduled rent is a wish for rent that doesn’t exist.

...Read the rest of Commercial Real Estate’s Recessionary Illusion

The purpose of FVA is to respond to the definition of a balance sheet, which is as follows: A summary of an organization’s assets, liabilities, and ownership equity as of a specific date (where the market stands). The argument against the above is that the prevailing realizable values of many assets are ‘artificial’ given the current market’s distress, and FVA works when markets are functioning, not when there is extreme volatility.

...Read the rest of Why the fuss over mark-to-market?

Reflecting on “Investors See a Glimmer and Shares Soar Worldwide” in the March 13 New York Times, the recent one-week stock market run-up has some of the experts (the same ones that missed the whole downturn) tripping over each other telling us the worst is over. They say we’re on the way to a 4th quarter recovery. That type of thinking is analogous to a person who is being tortured by 30 drops of water dripping onto their head being reduced to 25 drops. Conclusion: The torture is on the way to being over, and it should end in three minutes. On what basis?

The overarching problem is increasing unemployment for the economy and for income property value. We are still a consumer driven economy. The employment issue has been further exacerbated by the increased federal debt. Remember, when the amount of debt being borrowed increases, your interest expense increases. NetGain has calculated that currently we have to create 10 million new (civilian) jobs to support the increased debt. Are there any recent events that support a significant number of job creations? The answer is no, but hope springs eternal. On the positive side, there have been 32 recessions since 1845, and we’ve recovered (eventually) from every one of them.

...Read the rest of Fourth Quarter Recovery and Water Torture

The Journal nailed it when they said the problem was “a horrifying collapse of due diligence.” That summarizes the core reason for the entire economic meltdown. Due Diligence is a term used for a number of concepts involving either the performance of an investigation of a business or person, or the performance of an act with a certain standard of care. It is the gathering of information, and information is the vital food needed for making all decisions.

...Read the rest of Of Bernie and Due Diligence

The answer lies within the morality of the action. With very few exceptions, all commercial property bought and financed within the range of a current 5% capitalization rate was either a greedy and/or foolish transaction. These investors, like the management team at General Motors, created a bad business model whose continuing existence should not be supported. One of the strongest investment tenets in existence is “Don’t throw good money after a bad investment.” The marketplace will make all the appropriate adjustments.

...Read the rest of The Morality of Acquiring Commercial Real Estate

And the beat goes on. On one side the politically correct feel-good. On the other side, common sense. NetGain has repeatedly stated and made the case that jobs (civilian) are the foundation to our economy. Recessions by definition are two consecutive months of negative growth in the Gross Domestic Product (GDP). The historical overriding cause of recessions has been the disproportionate adjustment of excesses and abuses. This is followed by disappearing business profits, a scaling down of capital investment, and finally workforce reduction. The greater the length of time business takes to begin rehiring, the longer and deeper the recession.

The government is spending record amounts of money on many good and worthwhile projects. But until they direct their efforts toward stimulating the hiring of civilian employees the recession will continue to get worse.

...Read the rest of Obama - Ending Economic Crisis Won’t Be Easy

“The Blind Leading the Blind” should be the title for the attached article from the New York Times. Why? The explanation of that phrase: Uninformed and incompetent people leading others who are similarly incapable. The origin is from the Bible, Matthew 15:14 (King James Version) where it says: “Let them alone: they be blind leaders of the blind. And if the blind lead the blind, both shall fall into the ditch.”

The management of FNMA and Freddie Mac has only lost billions. The Fed is far more skillful. They are losing trillions. Not a funny joke. But the fact is, if the Fed couldn’t legally print money they would have gone bankrupt long ago.

What do we need now? Leadership by the Fed with a narrow-minded focus on one objective: The creation of civilian jobs. NO government money should be given to anyone that can’t show how many civilian jobs will be created, how it will create the civilian jobs, what are the benchmarks along the way, and what is the reporting system.

...Read the rest of U.S. Likely to Keep the Reins on Fannie and Freddie

NetGain has written extensively on the subject, predicted the recession ahead of the crowd, and offers the following observations during this confusing and scary time: Our economy is designed to produce recessions. They serve a very important purpose. They flush out excesses and mismanagement. Government interference and mismanagement has caused several past recessions to last longer and be deeper. During the past 100 years, we’ve had 22 recessions. The recovery rate of all past recessions is 100%.

Regarding income property, NetGain’s advice during this time is to find value, validate (due diligence) the value, and have the financial strength for a long-term hold.

Last Tuesday, Ben Bernanke, the chairman of the Federal Reserve, predicted that 2010 “will be a year of recovery.” On Friday, Americans learned that the gross domestic product fell 6.2 percent in the last quarter of 2008, suggesting that the recession may be deeper than anticipated. So when, exactly, will the misery end? When can we expect to see the economy turn around? The Op-Ed editors asked 11 experts to hazard a guess.

Read full story: When Will the Recession Be Over?

Reading the news that General Motors and Chrysler are now lining up for another $20 billion or so in government aid — on top of the billions they’ve already received or requested — leaves me with the sick feeling that we are subsidizing the losers and for only one reason: because they claim that their funerals would cost more than keeping them on life support. Sorry, friends, but this is not the American way. Bailing out the losers is not how we got rich as a country, and it is not how we’ll get out of this crisis.

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Start Up the Risk-Takers