This Time Is DifferentHaving lived through several majordownturns, including the eighties interest rates of over 20%, it isinstructive to compare and contrast. This time is very different.While the S&L industry imploded in 1989, the rest of the worldwas not so affected, nor did the US financial system collapse. TheS&L's were a small sector in terms of dollar impact. This timewe have the entire world financial system nearly ceasing tofunction and suffering enormous long term damage. Foreclosures willnot be mitigated by the modification plans and it is entirelypossible that the problem will be with us for a considerable time.Home equity lines are mainly a thing of the past. Unemployment willtake 4-5 years to recover to more normal levels of 5.5%, andreal estate loans will not permit high leverage on inflatedprojected values.All of this indicates that the over inflatedvalues of 2007 will not possibly be recaptured for probably atleast a decade on an inflation adjusted basis. There will not bethe ability of consumers to over leverage to buy things they can'tafford including homes, take trips they can't pay for, andspeculators will not get the absurd funding to take what amountedto options on assets they intended to flip.Just because the 1990and 2001 recessions happened does not mean they are relevant tothis time. Almost all the metrics are different. The politics arevery different, the regulations will be different, and the riskofficers and auditors will be under enormous pressure to restrainthe free wheeling over leverage of investment banks and others.Real estate has returned to fundamentals finally, and it will notbe the trading vehicle it had become over the past 15 years.Whatdoes this mean. You need to be a lot more careful on the buy thistime. Values are not going to take off. Net effective rents willremain constrained for many years. Leverage will remainconstrained. In about two years inflation will begin to drive upoperating costs but leases signed in 2009-2011 will be at lowerrates than had been the case in 2007-8. Interest rates will go up.Most importantly, property taxes will have to rise to cover themassive deficits at the local and state levels where the budgets ofthese levels of government are simply unable to pay the bills. Thefederal budget will continue to rise unrestrained to dangerouslevels. It is clear Pelosi cares nothing about fiscalresponsibility and neither does Obama. They will do anything topass healthcare and all of their agenda no matter the damage it isdoing. That has to mean higher taxes for all of us who actuallystill pay taxes-which is just a little over 50% of the population.Those of us who are able to earn high incomes will be paying farmore.The bottom line is you need to take all of these issues intoconsideration when pricing an asset for acquisition. Discount ratesand terminal values need to be adjusted to take these metrics intoconsideration. Your risk adjustment when making assumptions aboutdiscount rates and cap rates need to be cognizant of these futurerestraints on value over the next 5 years. It is all in the buy.Don't let a few recent deals where too much money was bidding onjust a couple of properties let you get lulled into making amistake that cap rates are low again. They are not indicative. Whena lot of assets are finally put to market, so supply of deals isagain normal, cap rates are likely to rise a little at that time.Don't buy at any price just to spend those available funds- youcould regret it later. Stick to old time fundamentals.

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Joel Ross

Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.