2009 Kootenai County Market Forum Investments Slides

Investments Wayne Burton

What Type of Investments? This Segment g will FOCUS on Income-Producing Investments.

What Will Be Covered? • • • • • •

Capitalization (Cap) Rates. C h on C Cash Cash h (R (Return t on Y Your M Money). ) 2008 Financing and its Effects Effects. 2008 At a Glance. What About 2009? Is the Herd turning?

Capitalization Rates • Considered a Common Method to determine Value. • Predicated on a Cash Purchase prior to Debt Service.

• Higher Cap Rate = Lower Property Value • Cap Rate has Direct Effect on Property Value Net Operating Income (NOI) of $100,000 9% Cap Rate = Property Value of $1,111,111 6.5% Cap Rate = Property Value of $1,538,461

• What Wh t Determines D t i Cap C R Rates? t ?

Factors That Help Set Property Cap Rates • • • •

Market Desirability and Availability Property Type Location and Condition

Example p Of 12% Plus Cap p

New NNN Lease S ld att 8.82% Sold 8 82% C Cap R Rate t

22 unit Apartment Sold At 10.5% 10 5% Cap Rate

Self Storage has been in Escrow at 9.0% Cap p Rate

Example of 7% and less Cap

CASH ON CASH • A Method to Value Your Return on g g Investment when leveraging. EXAMPLE: O EXAMPLE On a 9% C Cap R Rate t P Purchase, h with ith a: • Loan Rate @ 7.5%,, Cash on Cash is: 7.44% • Loan Rate @ 6.5%, Cash on Cash is: 9.12%

• Cap Rates and NOI does not take into account Financing. • Interest Rates • The Availability and Cost of Capital Capital.

2008 FINANCING & EFFECTS • Commercial Direct Lenders were in the 7-8% Range • Banks wanted more Owner Equity - 30% and higher • Debt Service Ratio (DSR) was higher • What is DSR?

• What were the Banks doing? • Relationship-Banking g • Much Tighter g Underwriting g • Cash Cas a and dO Owner e Financing a c g became King

2008 At a Glance • Fewer Buyers • Cost of Capital • Loan Requirements Tightened

• Cap Rate Trended up • Buyers looking for Value - 8.5% plus Cap Rates • Loan Requirements Constricted Sales

What About 2009? • Interest Rates Have Come Down 6.10% to 7.10% • Some Lending Institutions Are Lending ONLY for Owner-Occupied Owner Occupied • Strong Pressure on Interest Rates to Rise • Cap Rates Will Continue to Rise

• Possible Increase in Capital p Gains Tax • Product Makes a Difference Example.

Thi is This i a Market M k t like lik NONE W We Have Seen in Years!

Forecast for 2009 Where Is the Herd Going? g A Activity and IInquires are U Up I Interest Rates R Are A D Down Value l is i the Best it i has been in i Years Y

The Herd Has Stopped

SOME HAVE TURNED • Owner-Occupied • SBA • USDA

• How about “Sale Lease Back”? • Banks are Back to Basics. • Out-of-Town Investors. Investors

SOME ARE THINKING ABOUT IT. • Buyers will be tentative. • Gaps in the market • What Gets The Deal Done?

• • • •

Is this a STRONG Buyer? Is the Project Financeable? I Owner-Carry Is O C available? il bl ? Is the Cap Rate based on Actual Numbers? • What about Replacement Cost?

WHAT WILL THE DEAL LOOK LIKE? It will be more difficult to get the Deal to Escrow “The Altar” and even get them to sayy harder to g “I Do” 2009 will have its Challenges but it is also a Great G t Time Ti tto LEAD the Herd, NOT TO FOLLOW IT!

FROM OUR PROFESSIONALS TO YOU:

Based on Replacement Cost, Cap / Loan Rates and Availabilityy

NOW IS POSSIBLY THE BEST TIME IN YEARS TO BUY!

THANK YOU FOR COMING