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Jeffrey Thomas, a Seattle-based senior vice president in the net-leased properties group of CB Richard Ellis, talks to GlobeSt.com about what deals he and his group are getting done in today’s tough market. Debt continues to be the overriding factor either helping—or hindering—transactions, says Thomas, and investors are putting new focus on cumulative cash flow.

GlobeSt.com: Despite this being a slow market, you’ve been logging some pretty good volume this year. What are your numbers so far?

Thomas: 2009 is off to a good start. The year started off with closing a relatively large zero-cash flow investment in Oak Brook, IL, a $63-million transaction. From there we’ve completed about $430 million to date, for the first half. In terms of my personal production this is by far the best year for me for this point in any year. We’ve got another about $135 million that we’re working on that is in some stage of contract. I have pretty good confidence that those will close. And that would take our total first half to somewhere around $560 million, which I feel good about given what’s going on in the market, from a broker’s perspective.

But I’m still, like everyone else, trying to figure out what the rest of the year is going to be like. I would say the visibility, from my perspective, is about as cloudy as I’ve ever seen it. I’ve always felt that I could pretty much gauge what the next six months was going to look like based on my own business, but at this point it’s very reactive. We’re doing everything we can to reach out to the people we know. It’s still very murky looking forward. I’m optimistic—I hope that we’ll continue on and have a good second half—but I just don’t know.

GlobeSt.com: Do you see any comment characteristics or elements to the deals that you have closed this year that exemplify what transactions are do-able in today’s market?

Thomas: The characteristic is any deal where debt is not a factor. That’s what people will be focused on. Because the capital markets are so challenged right now, people are focusing on things that either have assumable debt in place—which is a big part of what I’m doing right now—or things that just don’t need to be financed because they’re small enough bites and they’re good enough yields, credits etc. that they can trade all-cash. So the main characteristic of what seems to be liquid right now is anything that doesn’t need to have new financing placed on it.

I was just speaking with some of our capital markets folks a few days ago and I’m hearing some pretty amazing things. Essentially, 30-year amortizations are completely gone and probably have been for quite some time. It sounds like people who are looking at placing new debt are considering 20 and 25-year amortizations. I think 25-year amortization schedules are the new best-case scenario, which further illustrates the trend. Most lenders are requiring recourse, loan-to-values are in the 50-to-65% range. You put the whole story together and your debt constant is in many cases above the cap rate. Most investors, obviously, find that to be a no-go. It further illustrates that wherever you can find a deal that doesn’t need new debt, it’s going to get greater-than-average response from the market.

Another characteristic I’m seeing is people being so focused on the details of every transaction now. In the past few years a lot of deals got done where most of the story made sense but potentially there were a couple of aspects of the transaction that didn’t quite hold up but people would overlook certain aspects and took a little more risk. In today’s environment, every single aspect of a transaction is getting scrutinized and if any one part of the story doesn’t make sense it’s not going to get done. One of the things I’m seeing a lot of people do is focus on cumulative cash flow. If you’ve got an asset structured with debt in place already, there’s an after-debt-service cash-flow number that people are really looking to. They’re saying, ‘If I’m buying a given transaction for $10 million and I’ve got a refi point and a maybe a lease expiration that’s eight years out…’ I’m seeing people be pretty focused on wanting to get, and needing to get, all their money out of the investment before the maturity. That illustrates how skittish people are. They just want to make sure that if the maturity comes or the lease expiration comes they’ve gotten all their equity out of the transaction. I’ve never really seen that before.

But I don’t mean to sound all doom and gloom. There are interesting scenarios where someone needs to sell for some reason—it may be distressed, it may not be, but there’s a desire to sell—and if you can accomplish those two things where you’ve got good cumulative cash flow and where one can get most or all of their money out before maturities and from that point forward the risk looks manageable, then I think those assets are liquid. Also, there are fewer equity dollars in the market right now, actually active and playing, so with that there is a build-up of supply. And those limited equity dollars can be much more selective. Naturally they gravitate towards the highest quality stuff. And that flight to quality is one of the characteristics of what’s going on in the market.

GlobeSt.com: Can you tell us about one of your recent deals?

Thomas: Without getting into much detail because my clients have requested confidentiality, but the flavor of some of the assets are investment-grade tenants, class A office, good markets—I say good meaning not necessarily core but markets that are well established and have some sort of appeal—good cumulative cash flow, nonrecourse assumable debt that’s been placed within the last two or three years and quite large cash-on-cash. To get all of your money out of an investment like this that’s been structured in the last two or three years clearly you have to be getting very big cash yields, and that’s exactly what I’m seeing on properties that are actually moving right now.

GlobeSt.com: So what’s the worst-case scenario deal that could land on your desk right now—it will never get done?

Thomas: If you took the perfect storm of specialty use, distressed credit, tertiary market. If you piled on top of that a tenant’s involvement in a business that’s considered to be consumer discretional. If you put all that together, you’d have a tough time.

GlobeSt.com: So what’s your outlook for the net lease market and what are you looking for to signal that the market is turning a corner?

Thomas: It’s been so debt driven that I am going to be looking to when people can start getting new debt that’s somehow in line with the sell-side expectations of people who have assets to move. That’s the main thing I’m looking for to really see transactional volume go again. What’s going to create a situation where new loans can be placed—there’s a bunch of things that can potentially happen, but just from talking to the capital markets folks, I’m not hearing a whole lot of optimism about the rest of this year. I sure hope that they’re wrong and I hope that things do pick up soon, but I’m not hearing a lot of people say that it’s right around the corner.

For the past four or five years, talking to investors and sellers, you would hear people saying ‘This is not a sustainable track that we’re on of cap rate compression. This can’t go on forever.’ So in one respect everyone knew this was coming, but what they didn’t know and what they didn’t predict was how bad, how quick and how deep. And everyone knows that this won’t last forever, but I think the reverse of that is they don’t know how quick, how deep until we get out. I don’t think it’s really predictable.

As for sale-leasebacks, we’re having lots of conversations with corporates that are thinking about ways to create liquidity. But again we’re running up against the same problem of how do we get these financed if we were to get to market. But there does seem to be a lot of activity and talks in that sector.

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