Saturday, February 6, 2010

Winter Wonderland.....

“I used to be Snow White, but I drifted.”
-Mae West

"Nature has no mercy at all. Nature says,
'I'm going to snow. If you have on a bikini
and no snowshoes, that's tough. I am going
to snow anyway'."
-Maya Angelou

I'm constantly amazed........

by the parking lot at the Texas Road House
restaurant on Church Street. Good economy or
tough economy, drive by any evening of the week
and the parking lot is full.

It has been like this since the day they opened.

Wonder what their secret is? Great location?
Good food at reasonable prices? Comfortable
seating? Attentive, attractive, young and plentiful
wait staff? Maybe its the peanut shells on the floor

Whatever it is, I hope they are doing it on purpose
and that they keep doing it.

Prospering businesses make me feel good.

Friday, February 5, 2010

Screen Machine

In talking about economic development the other day
we discussed "primary industries". These are businesses
that sell their products outside of our trade area, thus
bringing new wealth into our community. Among the
many "primary industries" I did not mention is the Screen

Located along Interstate 70 near the State Route 310 exit,
Screen Machine Industries is a welcome addition to
Licking County. We will talk more about their story later.

For now, those who think that we don't make anything
cool in the United States anymore, watch this.

Thanks for the heads up Pat

The most photographed building

in Newark............if you don't count the County
Courthouse at Christmas.

It is a fairly common sight to see out-of -town students
and architectural enthusiasts setting up to take
pictures of the building at the corner of West Main and
Third Street.

Louis Sullivan, "widely considered America's first truly
modern architect" and mentor to Frank Lloyd Wright,
designed the Home Building Association bank in 1914.
It is a gem worthy of our appreciation and enjoyment.

Just for fun, here are some pictures of other Sullivan
designed banks in small towns in the Midwest.

Merchants National Bank Grinnell, Iowa

Design feature in Sidney, Ohio

Peoples Federal Savings & Loan Sidney, Ohio

National Farmers Bank Owatonna, Minnesota

Thursday, February 4, 2010

Cap Rates- Real Estate and Risk

Capitalization (Cap) Rates have been around investment
real estate for a long time. Much longer than me. My
teachers taught that the Cap Rate is the key to determining,
and understanding, the value of an income producing
property. The formula for determining said value is
extremely simple, which is probably why I like it so much.

Income divided by Rate equals Value (or using an
acronym IRV)

The first key to this equation is knowing that Income means
net operating income (NOI). The NOI of a property is found
by subtracting from the actual income all of the expenses of
property ownership. These expenses include property taxes,
insurance, utilities, maintenance, management, cleaning,
repairs, snow and ice removal, landscaping, etc. It is important
to note that debt service, i.e. mortgage payments, are not part
of the equation in determining the NOI.

The not so simple part of this equation is the Rate. It is
really Cap Rate not Rate, but we just use the shorthand R for
Rate so that our acronym works.

The way I was taught, a cap rate should be an accurate
reflection of the amount of risk involved in the investment
real estate. The lower the risk, the lower the cap rate. Lower
cap rates make the V for Value in our equation higher. The
higher the risk, the higher the cap rate. Higher cap rates make
the V for Value in our equation lower.

What this means is that all cash flow streams are not
created equal.

It all made perfect sense to me. A forty year land lease
to McDonald’s has very low risk and thus should have a low
cap rate and a higher value in relationship to income. A beat
up old house converted to a four unit apartment in a
depressing neighborhood may generate lots of income, but
it is also fraught with risk and management issues,
thus it should have a higher cap rate which lowers the value
in relationship to the income stream.

If you have read previous posts, you may suspect that all this
verbiage is another attempt to lay out yet another cause of the
current mess in the real estate world. You are correct.

For the time period between 2001 and 2005 my business
partner and I became very confused by the investment real
estate market. We grew up with the idea that an 8% cap rate
was low, that a 15% cap rate was high, and that your basic
average real estate investment should be capped at 10%.
All of a sudden we were seeing cap rates at 7%. What was
up with that?

Since investors really make their money when they buy,
how were they going to make any money by overpaying so
much? For a while, we suspected that these were very smart
people who knew something that we did not. When cap rates
dropped to 6%, we suspected these were very smart people
who did not have a clue what they were doing.

The last two years should give indication about which one
of those suspicions was correct. Confirmation arrived
via e-mail yesterday.

Morgan Stanley Research, smart people if there ever were,
published their Commercial Real Estate 2010 forecast
paper back in early January. Such things take their time
getting to Newark. In their forecast is the following quote:

“Impact of interest rates on commercial real estate. Commercial
property cap rates are benchmarked to spreads over the 10-year

These are Wall Street people who live in a world that revolves
around securities; paper products with widespread market
acceptance like stocks, bonds, Treasuries, etc. Using their prism,
they have come to see real estate as a “security”. But… is
not a security. Real estate is bricks and mortar, sticks and steel,
concrete and glass, and dirt. It is fixed in place, tied to a
geography, subject to all sorts of risks and hazards that it cannot
escape from, plus its value is derived by its use over a long period
of time. The whole purpose of the cap rate is to judge the risks
and hazards over that time period. To benchmark it to anything is
to ignore the uniqueness of every real estate investment.

Smart people misjudged risk and thought that buying a real estate
investment was like buying a paper product. This led smart people
to pay way too much for, and more importantly borrow/lend way
too much money on, a whole bunch of real estate. We are enjoying
the fruits of those decisions now.

As a side note, in the calculation of value using a cap rate the whole
issue of financing is moot. Debt service is not part of that equation,
so interest rates and cap rates speak different languages.

We will talk about the impact of low interest rates and easy money
at a later date.

But for now, we add the mistaken assumption that real estate can
be valued and treated like a security as one of the many paths that
have led us to our current economic situation.

Tuesday, February 2, 2010

Speaking of property taxes......

I paid some yesterday, visiting the offices of Treasurer
Michael L. Smith (a good guy who is good at his job).

I appreciated seeing on the billing how my hard earned
money is being distributed between the schools, mental
health, and fire/safety. Never noticed that before.

Funny thing about property taxes, when a levy gets
approved it establishes a specific amount of money that
it will raise annually. No more, no less (well, maybe there
is a small fudge factor to attempt to account for projected
delinquencies of 5%, but that is beyond my grasp).

Using a complex formula that takes into consideration
the total market value of all of the real estate within the
taxing district, the County Auditor and the State
Department of Taxation figure out the effective tax rate
that will generate the prescribed amount of revenue.

The effective tax rate then gets applied to my taxable
value (which is 35% of my market value), which gives me
my annual gross tax bill. The gross bill gets reduced by
rollbacks and reductions, which is why the aforementioned
formula is described as complex.

Anyway, the important thing to remember is that if the
total of all of the property values in the taxing district
increases, then the effective rate becomes lower and
maybe my tax bill as well.

It is this balancing act between the total of all property
values and the effective rate that makes me want to
nominate the Medical Center of Newark as HERO
of the Month.

I love Licking Memorial Hospital. It is a tremendous
asset to our community (a later post will detail some of
the reasons why this is so). However, as a tax exempt
non-profit organization, every time they bought out a
doctor's practice and with it the doctor's office building
(which they did a lot of), the real estate value of that
office building came off the tax rolls.

The Medical Center of Newark is not a tax exempt
non-profit organization. If I am reading the public
records correctly, their medical complex on the east side
of Tamarack at West Main Street created over
$10,000,000 in real estate valuation. That real estate
will generate around $175,000 in property taxes this year.

Next time you drive by Medical Center of Newark
complex, honk your horn and send them some love.

The Mad Bluebird

You may already know this story, but if not read
about what happens when preparation meets
opportunity here. Entrepreneurialship 101.

Order your very own copy here

Economic Development

Four or five years ago Cheri Hottinger asked me to chair the
economic development committee of the Licking County
Chamber of Commerce. It is easy to say yes to Cheri. The
harder part was figuring out what “economic development” is.
There are lots of good definitions that are really not all that
helpful, because they don’t tell you what your committee is
supposed to do that will actually benefit the community.

A good analogy for a local economy is provided by Bill Fruth
of Policom. (Fruth just made an interesting career/life
path change here)

“..imagine that all the wealth of an area is contained in a bucket.
It swirls around and around…..It goes from person to person,
business to business, person to business, and is constantly
moving….But, there is a hole in the bucket, and all the wealth
in the community is leaking out….money leaves the community
and goes to the area in which the purchased product was made
or the service was performed…..Money is continuously leaving
the community through the hole in the bucket….There is
nothing that can be done to stop it….So what can be done?
A community needs to add money to the bucket, replenishing
its supply…with fresh rejuvenating wealth.”

Money is added to Fruth’s bucket by the business activity of
“primary” industries. “A primary industry is one that sells
its goods or services outside of the geography of the local
economy, importing money to the local economy.” Owens
Corning, Dow Chemical, THK, Longaberger, Kaiser, Boeing,
Park National Corporation, the State Farm Insurance
operations office, and OSUN/COTC are a few examples of
our “primary” industries.

The good news is that economics is not a zero sum game.
A community can trade in its current leaky bucket for a
bigger one. Bigger buckets will hold ever increasing amounts
of wealth. To do that however, the community needs to be
canny about its economic development.

The bad news is that much of what has passed for economic
development in our community over the past ten years is
based on the growth of retailing. It is nice to have two
Wal-Marts and a Kohls and all the newer strip centers
(disclaimer: we developed two of them), but the retail
segment of the economy puts the largest hole in the bucket,
sending ever more money out of the community in
exchange for only a fair amount of property taxes and
some low wage jobs. An economy based on consuming
does just that, it eats up wealth.

So, if one wants to be smart about economic development,
one should seek to grow the manufacturing side of the
local economy. Farming and wholesaling are primary as well,
but are clearly not as impactful as manufacturing.

This is not earth shattering news. Just watch the various
States ferociously compete for large automobile or steel plants
and you will know they understand the long term value
added-ness of manufacturing jobs.

There is more good news. Licking County is well positioned
to grow its manufacturing side. There is available and
affordable land with utilities and proper zoning. We have
skilled workforce and the ability to train and educate for
specific employer needs. The County government, the
Chamber of Commerce, the Port Authority, the
Workenomics group, and private developers (Southgate,
Mid-Ohio Development, etc.) are all working together on
multiple levels. The teamwork is actually impressive.

It is a process that takes time and focus, but it feels like a
lot of local energy is being directed at the right target- on
building us a bigger bucket.

Monday, February 1, 2010

Mortgage burning anyone?

Rick Platt and Erin Grigsby burn the mortgage

About eight years ago, the Heath-Newark-Licking
County Port Authority acquired 300 acres contiguous
to the south of the former Newark Air Force Station.
To make the acquisition the Port Authority mortgaged
the land and borrowed $4,500,000.

Our intention was to protect the Base, preserve
industrial zoned land for future industrial development,
and to be able to improve traffic flows in the neighborhood.

Occasionally a plan does come together. Boeing and its
partners at the Base continue to do important work in an
excellent manner. A new building was built for a
new-to-Licking County industrial company that now
employs about 100 folks. We still have several hundred
acres of rail served land ready for development for
manufacturing uses. The former James Parkway
cul-de-sac now connects to both S.R. 79 and Irving Wick

As of today the loan is paid off and the land is free
and clear. Feels good.

Another Poem for Monday

Robert Frost is my favorite poet, and his
Two Tramps at Mudtime my favorite poem,
especially the last verse.

"But yield who will to their separation,
My object in living is to unite
My avocation and my vocation
As my two eyes make one in sight.
Only where love and need are one,
And the work is play for mortal stakes,
Is the deed ever really done
For Heaven and the future's sakes."

For the entire poem, click here.

Sunday, January 31, 2010

Sacred Cows

The Realtors Political Action Committee (RPAC) is a fine group
of people. Their mission in life is to support, on the political front,
both Realtors and private property rights. They are effective.

For years I sent them money. After all, they had the ear of
legislators, and were speaking into those ears on my behalf as a
Realtor. Seemed like a win-win to me.

I no longer send them money (although they don’t seem to have
missed it).

Like all special interest groups, we Realtors have a sacred cow.
Ours is the Mortgage Interest Deduction.

It is our industry’s belief that the deductibility of mortgage
interest from taxable income adds significant value to home
ownership, and in fact adds to property values. It, therefore,
must and will be defended to the death.

Sacred cows abound. AARP has them, doctors and lawyers
have them, media folks have them, the NRA has them, banks
and insurers have them, Wall Street has them, unions have
them, the citizens of Nebraska almost became one.
You get the picture.

It is easy and fashionable to disparage “special interest groups”,
but our reality today is that most of us belong to more than one.

The complex web of pressure we have constructed for the
purpose of defending our sacred cows seems to be making sensible
governing (if that is not an oxymoron) difficult and making change
nigh unto impossible. Making change hard is often not a bad thing.
However, if we are on a path that is not sustainable, change will
come. Our choice is whether we do it or whether it gets done to us.

If I want your sacred cow to become negotiable, I must be willing
to let mine be too.

A little egg salad for Sunday

This all started out as an attempt to contrast the quotes by
Andrew Carnegie and Cervantes. A trip to and it quickly got out of hand.

The wise man puts all his eggs in one basket and watches the basket.
-Andrew Carnegie

It is part of a wise man to keep himself for tomorrow and not to
venture all his eggs in one basket.

This recipe is certainly silly. It says to separate the eggs, but it
doesn’t say how far to separate them.
-Gracie Allen

Lawyers, Preachers, and Tomtit’s eggs, there are more of them
hatch’d than come to perfection.
-Poor Richard’s Almanac

A hen is only an egg’s way of making another egg.
-Samuel Butler

Omelettes are not made without breaking eggs.

A true friend is someone who thinks you are a good egg even though
he knows you are slightly cracked.
-Bernard Meltzer

To eat an egg, you must break the shell.
-Jamaican proverb

Man is harder than rock and more fragile than an egg.
-Yugoslav proverb

When arguing with a stone, an egg is always wrong.
-African proverb