PEPennington & Co Property Tax News

Bloomberg reported that the FDIC wants greater oversight over investment banks.  Additionally, they want a orderly system in place to close them if they become insolvent.  Why?  The FDIC argues if these banks are given bridge loans from the Fed they should be subject to FDIC rules and regulations.  The FDIC position comes from the Fed bail out of Bear Stearns.

As a side note an analysist speaking on Bloomberg  yesterday stated that JP Morgan’s take over of Bear Stearns at $10.00 per share was probably over valued by $8.00 per share.  Thus, the Fed backed a bad deal, in-other-words the taxpayers backed a bad bail out.  The Fed and other pudets will argue that if the Fed had not taken action other investment banks would have failed. 

My blogs have followed the economic downturn and I have attempted to tie them developments back to commercial real estate and Texas property tax valuations.  Following the economic news everyday and speaking to real estate professionals I have come to the following conclusions:

1. I have found that there many spin doctors out their giving opinions that profit them and do not necessarily reflect the true state of affairs.

2. Here in Texas it is possible that we could be spared a downturn in  commercial rea estate values, however professionals tell me that currently there exists a disconnect between buyers and sellers.  Additionally, credit is tight and the number on transactions are down from 2007.

3. Texas Appraisal districts will be looking for the continuing of double digit appraised value increases on their property tax tax rolls.  I believe that trend will end either in tax 2008 or 2009.  Property tax rolls tend to lack a year behind the reality of current economic trends.

4. After May 31 we see if the number of property tax appeals will increase over tax year 2007.

David Tic the Founder of the Prudent Bear Fund was quoted in Bloomberg today saying, “ losses from the U.S. mortgage crisis may reach $945 billion”.  That would be much more costly than the Saving and Loan Crisis in the eighties. 

Is this possible? 

Answer:  Everyday we hear the Credit crisis is over and then we are hit with news of more write downs.  Write downs are hitting all financial sectors.

Where is the economy going?

Answer:  Who knows!  Earlier this week Boone Pickens predicted #150.00 a barrel oil by years’ end.  Today oil was north of $130.00 per barrel.  We seemed to be going through a re-occurring cycle of hearing bad news then the pundits come out and say things are going to be okay.  Then a week later more bad news and the pundits return. 

How does this effect commercial real estate?

Answer:  Real estate follows employment.  If the economy take a sharp downward turn real values will fall.  In Texas I am told that there is a disconnect between buyers and sellers.  Sellers aren’t willing to take a hit on there asking price thus the number of transactions are down.  Additionally, credit continues to be a problem in funding deals.

Business owners are filing their returns and preparing to their first Margin Tax Payment (replacing the old franchise tax).  The Dallas Morning News reported yesterday that various groups representing business owners are upset with the new tax and are making their feeling known to the Texas Legislature.

Why are they so upset?  The Texas Legislature passed a bill that reduced the ISD (school) tax rate roughly by fifty cents over tax years 2006 and 2007.  Generally speaking the tax rate cut, reduced the combined tax rate which includes the county, city and schools tax rate by approximately ten percent.  Commercial property taxpayers did not see a tax savings because the most appraisal districts raised their real estate values, which ate up the school tax rate cut.  Now commercial property taxpayers are preparing to pay their Margin Taxes which paid for the 2006-2007 school tax rate cut.

What is to be learned?  First the constitutionality of this new tax will be challenged immediately after the first payments are made.  Is the Margin Tax is in-fact a state income tax which is prohibited by the Texas Constitution.  The Texas Legislature in my opinion uses the same old group of techno-crates, lobbyist, politically connected individuals and political figures to attempt to come up with answers regarding the growing problem of increasing property tax liabilities.  In my opinion fresh voices and new ideas are needed.  The people of this state are capable of understanding the needs for new sources of revenue for local jurisdictions to provide goods and services to citizens.  They also expect and deserve truth in taxation.

The Dallas morning news reported that DFW home prices fall 2.1% from the first quarter of 2007.  Bloomberg described the US Housing market as the worse since the Great Depression.  One in every 519 homes is in some state of foreclosure in the US.

Bank of America reported a distributing trend in their credit cards citing more purchases for food and other essentials.

Bloomberg:  American International Group Inc. has announced the need to  raise $12.5 billion in capital after reporting quarterly loses.   The company’s vice chairman said there’s “no assurance” credit-market losses are over.  “The financial sector is going to continue to be a drain,” said Dan Genter, president of RNC Genter Capital Management in Los Angeles. “The market had a short time period of feeling like it’s over and we escaped. Now there’s a realization that this isn’t over.”   Financial firms have experienced $323 Billion in write downs.

What effect does this have on the real estate industry?  The Dallas Morning News reported that the Urban Land Institute held a conference in Dallas this week.  Expert panels predicted a housing recovery to begin in late 2008-2009.    Additionally, commercial investors have been hurt by the lack of capital.  Commercial mortgage-backed securities have disappeared.  Small and simple real estate deals are finding funding however larger complex deals are not.  Today commercial real estate investors are looking to looking to private investors, pension funds and insurance companies for their lending needs.  Distressed properties are selling such as condos being converted back to apartments.  If the economic downturns continues the number of commercial loan delinquencies will increase.

Bloomberg reported  Josef Ackermann, chief executive officer of Deutsche Bank AG concerns over the state of commercial real estate.  “Commercial real estate was a bright spot in the economy, serving as a buffer against the declining housing market.”  New York University economist Nouriel Roubini thinks there are reasons for concern.  He believes we might be on the verge of a “Double-Bubble Crisis”.  His thinking goes follows the line of commercial real estate needing a strong housing market because of its relationship to to retail.  Additionally, if the economy continues to goes south companies will not be expanding and their need for office and industrial space will decreases.  Easy credit in previous years probably funded transactions which may not survive the economic downturn.

Commercial real estate tends to lag behind housing trends which is in crisis.   Investment in nonresidential structures declined 6.2 percent in the first quarter of 2008.  “It is quite possible that the tighter credit conditions and economic slowdown has barely started to filter through,” Merrill Lynch & Co. economists Sheryl King and David A. Rosenberg recently wrote.

Bloomberg reported that Warren Buffett stated had the Fed not intervened with Bear Stearns other investment firms would have collapsed the next day.  Banks and investment firms have taken $312 billion in write downs thus far and “there’s going to be more pain,” .

RealShare reported today that the sixth annual RealShare Net Conference that sale-leasebacks will increase due to the slow economy.  Panelist on the Town Hall Meeting titled, “State of the Net Lease Market,” made many predictions going forward:

1. “We will see a return to fundamentals with strong tenants and strong locations,” said Andrew Kroll, a director of the investment banking group at SunTrust Equity Funding. ”

2. Robert Micera, SVP and national head of net lease investments at First Industrial Realty Trust, noted that “the slower the economy, the more sale-leasebacks pick up, so I think you will see more opportunities going forward.”

3.  Lorissa Belova, a VP at Lexington Realty Trust, said that, “looking ahead one year from now, I still don’t thing we are going to be smiling. I think we will be the same.”

4. Robert Micera, also said, ”that cap rates will creep up and those who have resources will get things done.

Additionally, The Dallas Morning News reported today that J.C Penny Co. CEO Myron Ullman predicted 10 to 20 retail chains will fail before the ecomony turns around.

Finally, Bloomberg reported that Sam Zell chairman of Equity Residential said,“I believe the overall market has already started to ease,” and that   “Is it in large volumes? No. Is it the first natural step in the evolution? Yes.”