business trends | by charles horner

"Old Rules" No Longer Apply

More real estate industry changes occurred during the last 5 years than I witnessed during the preceding 30. Those changes include consumer demands for "one stop" shopping; the advent of e-commerce; new state laws authorizing limited liability companies; and new financing alternatives for real estate investments.

One Stop Shopping • Users of real estate increasingly demand access to "one stop" shopping. In response, many firms are consolidating into large, "full service" companies. Residential mega-brokers now blanket the region and market homes over the Internet. Venerable Kansas City commercial brokers have merged into larger companies with regional, national and international capabilities. For example, Kerr & Company recently merged with Colliers Turley Martin Tucker to form a huge regional firm with national and European affiliates. In 1997, JC Nichols Company acquired a 30 percent interest in Kessinger/Hunter & Co. A North Carolina firm then acquired J C Nichols. Consolidation of providers of investment capital has also occurred. Ten years ago, 2,400 life insurance companies annually provided $30 billion in commercial real estate mortgages. Today, fewer than 750 life companies make mortgage loans.

E-Commerce • E-commerce has revolutionized real estate marketing. For example, J.D. Reece Realtors offers properties over the Internet. Now, 40 to 50 percent of its customers use the Reece website, with over 120,000 hits daily. Colliers Turley Martin Tucker links its website to other sites, providing local, national and European property listings. Colliers' website experiences up to 2.5 million hits per month. The Internet is used daily for the instantaneous transfer of correspondence and real estate documents to regional, national and international locations. During the last three years, my firm closed approximately 925 mortgage loans. Virtually every loan document was electronically distributed.

Limited Liability Companies & Partnerships • Historically, real estate business entities have been corporations, general partnerships, or limited partnerships. Recent state laws authorize new types of entities - limited liability companies (LLC) and limited liability partnerships (LLP). Their governance is extremely flexible; they provide a liability shield to their members; and taxation occurs only at the member or partner level. In my law practice, virtually every new entity is a LLC or a LLP. We are also converting existing entities into LLCs.

Real Estate Financing • Since 1993, a major new source of real estate financing has been provided through commercial mortgage backed securities (CMBS). During the early 1990s, Resolution Trust Corporation developed techniques for the securitization and sale of assets of defunct saving and loan associations. Using those techniques, Wall Street investment firms now pool billion dollar portfolios of mortgage loans in trusts and sell CMBS participation certificates in the public markets. Since 1993, the annual market for CMBS has grown to $40 to $50 billion; and a new secondary market for mortgage loans has been created. Another trend is off-balance sheet real estate financing. When a company has mortgage debt on its balance sheet, that debt increases the debt-to-equity ratio, which lenders do not like. Today, many companies either sell their real estate and lease it back or lease in the first place. Another off-balance sheet financing vehicle is a synthetic lease. In this transaction, the user/lessee is treated as an owner for federal income tax purposes and as a lessee for financial reporting purposes. Therefore, the synthetic lease is not reflected on the company balance sheet. These recent changes have greatly enhanced the viability and growth of real estate markets.

Charles Horner specializes in real estate and commercial lending at Blackwell Sanders Peper Martin LLP. Contact Horner by phone: at 816.983.8114, or e-Mail: chorner@bspmlaw.com