July 6, 2009


The following is the fourth in a series of newsletters designed to foster a healthy dialog. I hope you enjoy it and encourage your feedback and discussion.


Take a look around http://www.caswell.org for prior articles, access to resources and information on what I can do for you. If you know someone who would benefit from this piece, please forward it, or just let me know and I'll send it to them directly.

Please drop me a line and let me know your thoughts: ward@caswell.org




Ward S Caswell


(617) 304-2689


Finding Value


Initiative is the starting point for any venture. If you want to catch a fish, you can hire a guide, or buy your own equipment, or even tie your own flies. But first, you have to decide you want to catch a fish. The importance of will power can not be over stated in analyzing successful enterprises. Proponents of Zen suggest that letting go of ego driven ambition will help you succeed by allowing you to better recognize patterns in life, allowing for a more direct path to your objectives. Imagine playing the old video game of asteroids,and being able to see all the objects in motion so well that you could steer and move with the minimal effort to glide through the asteroid field without ever firing your blaster. The alternative strategy of shoot everything and fly

© Copyright 2009 Ward S. Caswell

fast is much easier on the brain, but creates a lot of rubble which eventually makes it impossible to fly without getting hit by the debris of your own destruction. Perhaps the Zen enthusiasts have it right. In either case, it takes a sense of purpose to care enough to fly, or to fire. Applying the analogy to today's commercial real estate markets, there is clearly a lot of flying debris. Turning that debris into lucrative assets is how we turn the game around and how we define winning. To see the game clearly, you need good information and a clear head. In this edition we will explore some of the sources of information on distressed properties and see how to use them to find opportunities.

"The Great Recession" is not over quite yet. Many of the "green shoots" of Spring have shriveled in the continued debt drought and the consumer has yet to pull out their wallet and spend. Still, confidence

has turned from record lows and the majority of economists expect a recovery by the end of 2009. The national savings rate pulled from negative 2.7 to values not seen in over sixteen years. At the same time, mortgage and other lending rates are relatively low. In this environment, there is certainly plenty of capital to invest or lend. The trick for the deal maker is in convincing others to part with their cash.

Tighter lending standards require much higher cash outlays when purchasing real estate. That means lower debt levels and with them, lower leverage of earnings. In essence more of the risk is shifted to the property owner and less risk is taken by the lender. The chart to the right shows the return on investment for a property owner with a loan to value ratio (LTV) of 80% at different levels of property value changes. The returns are then show for a 60% LTV. As an example, what if you borrow $80, add $20 of your own money, to buy a building for $100, what is the return on your investment of $20 if that building is later worth 10% more? From the table, you can see the return would be 50%. If instead, you had to put in $40 of your own money and borrowed just $60, the return would be cut in half. This makes it easy to see why so many were willing to invest in

real estate when the LTV's were so generous, and why they are having so much trouble now when LTV's of 60 or even 50 are demanded by lenders. With these challenges however, there are also great opportunities. As distressed properties hit the market at prices well below the amounts paid only a few



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