2012 Year-End Review from CCIM

Throughout the past year, CCIM Institute had three top priorities: increase liquidity, prevent burdensome regulations, and create awareness of how federal tax policies impact commercial real estate. Read more.

Federal Tax Policy with Fiscal Cliff Updates

Federal tax code has not substantially changed for over two decades. 2013 brings a new set of rules and guidelines for all U.S. tax payers. Keep in mind that filing for 2013, is not due until April 2014. Individuals, families and businesses across the board (not only higher-income individuals or households) will be to some degree, impacted by federal tax rate changes negotiated through the fiscal cliff deal. Capital Gains/Carried Interest The capital gains/carried interest rate will increase to 20 percent for individuals with and adjusted gross income more than $400,000 and married couples with AGI more than $450,000. Individuals/couples below the $400,000/$450,000 AGI level will still pay 15 percent. 3.8 Percent Healthcare Tax Passed under the Affordable Care Act in 2010, the 3.8 percent healthcare tax will affect some real estate transactions. Individuals with AGI more than $200,000 and married couples with AGI more than $250,000 may be subject to the 3.8 percent healthcare tax. Payroll Tax In February last year, the payroll tax cut was extended until Dec. 31, 2012. Payroll tax includes Social Security payments that were cut to 4.2 percent instead of 6.2 percent. Without language included in the fiscal cliff deal, the payroll tax reverted back to the pre-recession level, 6.2 percent. It is estimated that the average worker will pay about $1,000 more in taxes annually, or about $42 per pay check. Alternative Minimum Tax Under the fiscal cliff deal, the AMT received a permanent fix and will adjust for inflation. The AMT will be less burdensome on lower-income levels with more exemptions for credits or tax deductions whereas higher-income levels will receive less exemption opportunities.  Exemptions and Deductions Individuals with AGI more than $250,000 and couples with AGI more than $300,000 should expect a phase out of the personal exemption of $3,800 and itemized deduction write-offs. Direction on the "Pease" provision was included in the fiscal deal ("Pease" is named after Congressman Don Pease (OH) who created an itemized deduction phase out in 1990). The itemized deduction phase out was avoided with the recession and Bush-era tax cuts. As clarified by the fiscal deal, the "Pease" provision will now eliminate up to 80 percent of deductibles for $300,000 AGI couples or $250,000 AGI individuals: including charitable donations and mortgage interest. Estate and Gift Tax Estate or gift taxes will be taxed at or above the $5 million (per person) level but the tax rate will increase from 35 percent to 40 percent in 2013. Depreciation ("bonus") Businesses may deduct up to 50 percent of expenses (property and equipment), not including real estate for the 2013 tax year. Leasehold Improvements There is a 15-year straight-line cost recovery for qualified leasehold improvements on commercial properties that extends through 2013 and is retroactive for 2012. Income Tax Rates The greatest change will be for individuals with AGI over $400,000 and married couples with AGI over $450,000; a new tax rate of 39.6 percent applies to this income level. For incomes below, the Bush-era tax rates became permanent. On January 3, 2013 the Internal Revenue Service released a guide on new federal tax rates, Updated Withholding Guidance for 2013. Read more. The fiscal cliff negotiations did not produce changes to federal tax policies on depreciation recapture or passive loss.

Final Fiscal Cliff Stages

CCIM Institute's summary of the fiscal cliff negotiation stages and final details preventing the U.S. economy from going over the cliff can be reviewed online. Read more.

Regulation

FASB Lease Accounting Proposed Rules The Financial Accounting Standards Board’s lease accounting proposal has the potential to reduce the U.S. GDP by $27.5 billion annually and cause a loss of approximately 190,000 U.S. jobs. It is expected that FASB will release more information by April 2013. Read more. Basel III/Dodd-Frank Act The Dodd-Frank Act requires federal agencies to protect consumers. Basel III is a proposed rule under Dodd-Frank. Basel III is overly complex and has the potential to hurt local economies. Read more.

Healthcare/Affordable Care Act

Individual Healthcare Mandate By 2014, the individual mandate upheld by the U.S. Supreme court will go into effect. Read more. CCIMs (and all U.S. citizens) will either continue having coverage through their employer, purchase insurance coverage through a health insurance exchange, or pay a tax penalty. Health Insurance Exchanges will be set up through their state or the federal government. States had to determine by 2012 whether they will create their own exchange or use the exchange the federal government creates.

Small Business

SBA’s 504 Refinancing Loan Program The Small Business Administration’s 504 Loan Program provided another refinancing opportunity for small business expansion plans, the program expired in 2012 but Congress is considering extending the program. Read more.

State Tax Policy

Internet Sales Tax Online retailers put brick and mortar storefronts out of business because there is an unfair advantage when tax season rolls around. Read more.

Summary of the Deal

Below is a brief summary of the key provisions of the compromise law which is formally entitled The American Taxpayer Relief Act. 

·                     Income tax rates: Current income tax rates are extended for families earning $450,000 or less and individuals earning $400,000 or less annually. Taxpayers earning more than these thresholds will be taxed at 39.6%, up from 35%.

·                     Investment tax rates: The top capital gains and dividend rate remain at 15% for those below the $450,000/$400,000 income thresholds, and are increased to 20% for those with incomes above those amounts. Current law remains in place for carried interest.

·                     Estate tax: The current $5 million per-person estate tax exemption remains (with the $5 million indexed for inflation) but the rate is increased to 40% from the current 35%.

·                     Tax extenders: Individual and business tax extenders are extended seamlessly through 2013.

·                     Allows businesses to recover the cost of certain leasehold improvements and restaurant and retail property over a 15-year period, rather than over 39 years

·                     Bonus depreciation: The 50% bonus depreciation provision is extended for one year.

·                     The Research and Development (R&D) tax credit was extended through 2013 and made retroactive for 2012

·                     Work Opportunity Tax Credit extended one year; Section 179 – keeps in place the 2010/2011 levels of a maximum amount of $500k and $2 million phase-out for 2012 and 2013;

·                     Accelerated Depreciation —provides for 50 percent expensing for qualifying property purchased and placed in service before January 1, 2014 (and January 1, 2015 for certain long-term assets and transportation).

·                     Alternative Minimum Tax (AMT): The individual AMT is patched permanently.

·                     PEP and Pease: The personal exemption phase-out (PEP) and overall limit of itemized deductions (Pease) is reinstated for families with incomes over $300,000 and individuals with incomes over $250,000.

·                     Other credits: The American Opportunity Tax Credit, the enhanced Child Tax Credit, and the enhanced Earned Income Tax Credit from the American Recovery and Investment Act (the "stimulus") are extended for five years.

·                     Doc fix:  The patch on the 29% cut in Medicare provider payments is extended for one year.

·                     Sequester delay:  The $109 billion spending cuts mandated by the Budget Control Act are averted for two months due to $12 billion in spending cuts split evenly between defense and non-defense spending and $12 billion of increased revenues applied as an offset.

·                     Extended unemployment insurance:  Federal extended unemployment insurance will continue for another year.

Additional details may be found in these two documents.

·         The full text of the compromise law can be found at: http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf .

Ironically, the net result of the compromise is that President Barrack Obama effectively embraced the preponderance of the Bush tax cuts.

Looking Forward

Because the deal simply moved the trigger date for the “sequester” of automatic spending cuts totaling $1.2 trillion over nearly a decade from January 1 to March 1, expect renewed debate to begin with the start of the 113^th Congress on a long-term plan for deficit reduction.  By most estimates, the U.S. government will reach its $16.4 trillion borrowing limit by the end of February – so wrangling will also renew the debt ceiling, entitlement reforms, and spending cuts.  Additionally, the current stopgap spending measure expires on March 27, setting up either an additional catalyst for a broader brinksmanship scenario or yet another moment in a series of showdowns that continues from last year.

Prospects for comprehensive tax reform and entitlement reform remain uncertain, with both sides appearing unwilling to reach meaningful compromises without an imminent deadline with severe consequences. Since Congress is now likely to be consumed by a series of short-term budget battles, such partisan wrangling may distract Congress from the complicated process of achieving comprehensive tax and entitlement reform.

Update on Fiscal Cliff: What's at Stake for Real Estate

As we go into the final weekend of 2012, Congress continues to wrestle with what to do about the fiscal cliff, the hundreds of billions of dollars in automatic tax increases and federal spending cuts that take effect at the end of the year unless Congress acts to avert it.

NAR is monitoring the situation closely. To help explain the real estate interests at stake, NAR Chief Economist Lawrence Yun and NAR Director of Tax Policy Linda Goold sat down today for a short discussion on the issues.

With Congress and the White House expected to negotiate through the weekend, NAR will be sending out another update on the fiscal cliff situation next week.

Click the link below to access a 6-minute video of their conversation and a short post summarizing their remarks.  

http://speakingofrealestate.blogs.realtor.org/2012/12/28/update-on-fiscal-cliff-whats-at-stake-for-real-estate/

Homer Soda Company Has a Legacy to Live Up To.

Kate Boyer (of Homer Soda Company) comes from a long line of entrepreneurs

Kate Boyer has only known life as a part of a motorcycle entrepreneurial family.  Starting with her great-grandparents, her entire family has been motorcycle enthusiasts for more than 100 years.  Her grandfather, Clyde "Bud" Vetter, was the first one to be an entrepreneur.  He opened a Schwinn bicycle shop in Rantoul, and later opened Champaign Cycle, on Mattis Ave in Champaign.  Her uncle, Craig Vetter, founded the Vetter Fairing Company in Rantoul.  He began with an idea to produce quality fairings for motorcycles.  He started making a few in an old meat locker building in Rantoul.  The business grew exponentially and he built it to be a large facility on the east edge of Rantoul.  

Her father, Bruce Vetter, started a little different in 1967 while living "in a van down by the river".  He painted peace symbols on rocks and sold them to the college kids in Champaign.  It was very successful and he moved into a building in downtown Champaign, making artistic leather goods with his hands.  In the late 1970's, Bruce decided to go bigger and started "Bagman", making motorcycle luggage.  His factory on north Prospect was very successful and provided jobs for 80 employees.  He sold the business in 1983 to Bell Helmets in Rantoul, intending to retire, but 3 years later Harley-Davidson asked if he could design and produce a saddle bag to go on a style of bike as it came off the assembly line.  25 years later, we are still producing products for Harley-Davidson in our small factory with about 10 employees in Homer.  

Rob Boyer, Kate's husband, has been running the facility for the last 14 years.  He has grown the company significantly since he first began.  Bruce now spends his time producing the artistic products that first propelled him into business.

Kate has done almost every job over the years.  She started with shipping/receiving when she was 13, payroll when she was 15, and then managing the office by the time she was 19.  After working for more than 15 years in manufacturing, Kate was a little bored by it.

In 2008, her and her mother, Kelly Vetter, opened "Village Wardrobe" a children's consignment boutique in downtown Homer and then another one on the square in Monticello.  In 2009, they bought the Homer Soda Company from Ray and Christine Cunningham.  They have expanded the soda business from just a retail location in downtown Homer, to distributing their varieties all across the country.  

The unexpected success of the Homer Soda Company has caused them to sell their retail stores and focus just on the sodas.

Bruce and Kelly, Rob and Kate, and their 5 children all enjoy working together in the family business.

To watch the entire TV interview with Kate Boyer CLICK HERE

Terrorism and Real Estate Update

On September 11, 2012, Linda St. Peter, Operations Manager for Prudential Connecticut Realty in Wallingford, CT, testified on behalf of NAR at the House Financial Services Subcommittee on Insurance, Housing, and Community Opportunity hearing on “TRIA at Ten Years: The Future of the Terrorism Risk Insurance Program.”  In her testimony (attached), Ms. St. Peter urged Congress to extend the Terrorism Risk Insurance Act (TRIA) beyond its current December 2014 authorization to ensure that adequate insurance coverage is available for our nation’s businesses.

Following the Sept. 11 attacks private insurers backed out of the terrorism insurance marketplace prompting Congress to enact TRIA in 2002, a federal insurance backstop that allows the federal government and private insurance companies to share losses in the event of a major terrorist attack. The program has since been reauthorized by Congress twice – in 2005 and 2007.  TRIA helped stabilize commercial real estate markets by making terrorism coverage available and more affordable over time.

While the cost and availability of terrorism insurance has generally improved, currently there is concern that the uncertain future of TRIA may cause insurance prices to fluctuate and prompt insurers to drop coverage.  This became evident in both 2005 and 2007 when private insurers became reluctant to offer terrorism coverage due to the uncertainty regarding the program’s extension.  Ultimately, the uncertainty of insurance pricing impacts the net operating income of businesses and property values.  The potential unavailability of terrorism coverage could impact financing agreements and potentially hurt the fragile commercial real estate recovery.

Yesterday’s hearing is just the first step in a much longer journey to extend the federal government’s role in the terrorism risk insurance market.  Despite our successful legislative efforts in 2002, 2005 and 2007, and the fact that terrorism remains a clear and present danger, most anticipate this next effort to extend a federal program will be the most challenging.  While the program does not sunset until 2014, efforts to reauthorize the federal program will begin in earnest in 2013.  

Furthermore, a copy of the witness list is attached along with the hearing memo and a Congressional Research Service report on TRIA.  Also, the following link provides an archived webcast of the hearing:

http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=307443

It is Easy Being Green!

Steven Rosenberg is the Founder of Green Purpose LLC

Steven is the Founder of a unique company called Green Purpose.

               

"Green Purpose is an eco-minded enterprise that provides communities with innovative solutions for reducing landfill waste. The company operates on a membership business model, in which residents of Champaign County and surrounding areas can pay a nominal monthly fee to utilize their recycling services. Green Purpose is different from most traditional recycling centers; they offer the community a convenient one-stop location for dropping off both recyclable AND reusable items. With research and an attention to each customer's needs, they are developing new solutions for a world in constant change.

Green Purpose also provides B2B services for industrial clients interested in striving for zero waste.  They offer advanced solutions for assessing, designing, and implementing state of the art recycling programs for reducing expenses and landfill waste. The company’s programs and services are aimed at creating long-term, practical solutions to our community’s growing waste problem. Their experience includes working with many different industries, ranging from advertising to retail. They help their clients to develop appropriate infrastructure and procedures, while exploring the full range of appropriate options and strategies for maximizing waste reduction."

To watch the entire TV interview with Steven Rosenberg CLICK HERE!

Rental Property Rules Get Clarification

Governor signs SB3405 into law

I am happy to report that SB3406 has been signed by the Governor and is now the law.  The bill was an initiative of IRPOA and adds language to both the sanitation and building codes that requires the following also be included in a violation notice.

a citation to the specific code provision

or provisions alleged to have been violated, a description of

the circumstances present that constitute the alleged

violation

IRPOA proposed this change in the law because we had  reports  our members were receiving violation notices that were not specific and so were difficult to comply with.  The notices would include general statements like "Porch in Disrepair"  or "Plumbing not to Code".  Those types of notices seemed  more common when inspections are done in response to tenant conduct.   Also, many of our member groups operate under regulations that include annual inspections.  Those ordinances apply multiple code standards to rental properties.  It is very difficult to know where to look up a code when the city can impose regulations from nine different code books.   

With this change, you should now be able to reference a code book and read the code that is in violation.  You should also receive a description of what is wrong on your property so you know exactly what action to take to correct the violation.  We believe this will make dealing with code enforcement much easier.

State Senator Dave Syverson sponsored this bill in the Senate.  Representative Chapin Rose was our primary house sponsor and Representative Sidney Mathias was a house co-sponsor.  If you live in, or own property in, these legislators districts, please contact them and thank them for their support.  

To read the text of SB3406, now Public Act 097-1088 CLICK HERE

The Answer My Friend is Blowing in the Wind

MUTI is an INC 500 Fastest growing company

Derek Woods of Midwest Underground Technology, Inc. - MUTI as it is called shares the story of how his company was started here in the fair fields of Champaign County.

               

Founded in 2000 and starting with two employees, MUTI is headquartered in Champaign, IL and now employees over 140 people through 4 locations. In addition to wind energy, MUTI specializes in communications tower erection, multi-site maintenance, full site construction, and horizontal directional drilling, with extensive experience in the installation of tower foundations both mat and drilled shaft types, installation of access roads and site clearing, all types of excavation, tower erection, multi-site tower maintenance/inspection, installation of full grounding systems, and underground directional drilling. MUTI is also proud to be recognized by INC 5000 Fastest Growing Private companies over the past 5 years and is currently on track for continued success this year and beyond.

Mr. Woods has over 25 years of project management, construction & marketing/sales experience spanning a variety of industries including the pharmaceutical, medical devices, real estate development, & telecommunications fields.  In 2009, Mr. Woods joined the MUTI team & is currently Vice President of the Renewable Energy Division & is responsible for all aspects of the division’s development, operations & expansion within the renewable energy markets, with the main emphasis in the distributed wind energy segment.  To watch the full TV interview with Derek Woods CLICK HERE

Media Mogul Sees a Bright Future for Industry

Mark Scifres is Chairman, CEO and President of Pavlov Media, which he started while working on his engineering degree at the University of Illinois in Champaign.  Mark comes from a family with a strong engineering background.  

While at the U of I, Mark had an idea that off-campus and private certified housing could be networked together.  These were the early days of data—Netscape didn’t even exist.  Mark’s vision was a network that provided data throughout the off-campus housing area.  That project was right in line with Mark’s engineering studies.  Long story short, Mark designed a network, built it and things took off from there!

That was more than 17 years ago and Pavlov Media has grown into a multi-million dollar operation, providing television, broadband and telephone services in more than 140 markets in 34 states.

The company has grown to more than 90 employees and has deployed network facilities to more than 70,000 registered users.  Along the way, Pavlov Media has acquired Wavelength Broadband—a major player in the emerging broadband industry—and made other acquisitions, as well.

In addition, Mark is a patent holder on specialized network processes.  

As part of Mark’s work as CEO, he led the construction and deployment of a network that provides television, broadband and other services to tens of thousands of apartments, hotels and other MDU’s (Multi-Dwelling Units).  He also led the wireless mesh deployments in Champaign, Illinois and New York City, which includes the free downtown wireless project in Champaign.

Under Mark’s leadership, Pavlov Media has become an industry leader in serving MDU’s and private cable operators.  To watch the entire TV interview with Mark Scifries CLICK HERE.

Apartment Market Shifting Focus To New Supply

CoStar article by: By Randyl Drummer May 16, 2012

Current Lull In Multifamily Fundamentals Expected To Be Overtaken by Demographics, Jump In New Construction

The ongoing recovery of the U.S. apartment market is entering a new phase, one marked by an increasing level of permits and construction starts for multifamily development projects. The upwelling in new development is expected to increase supply across many markets starting in 2013 after years of almost zero growth.

The new phase follows the dramatic vacancy declines and strong apartment rent growth that has occurred in the tightest and more desirable coastal markets, and a rare moment of solid income growth even in vacancy-challenged markets.

The rising supply pipeline, coupled with the gradually improving market for single-family housing, is expected to help bring some equilibrium to an apartment market which experienced strong renter demand and plunging vacancies from late 2009 through middle to late 2011.

Demand has tapered off somewhat since last summer due to slower seasonal leasing -- and perhaps some sticker shock among tenants that have watched asking rents eclipse pre-recession highs in some supply-challenged metros, according to Michael Cohen , head of advisory services for CoStar Group’s economic and market forecasting company, Property and Portfolio Research (PPR).

Cohen, along with PPR’s new director of multifamily research Luis Mejia and senior real estate economist Erica Champion, made the observations during CoStar’s First Quarter 2012 Multifamily Review and Outlook.

"Vacancies have been slipping in the apartment sector for several years due in large part to favorable cyclical demand factors and little-to-no new supply," Cohen said. "But the next chapter in the apartment recovery is going to look pretty different, particularly on the supply front."

Overall, the national apartment vacancy rate has dropped by a precipitous 170 basis points through the first quarter of 2012 since peaking at 8.3% at the end of 2009, with the lion’s share of occupancy gains recorded during the six-quarter period between fourth-quarter 2009 and second-quarter 2011. That's equal to demand for about 270,000 additional units, two-thirds of them occupied in 2010 alone, the single strongest year for multifamily demand since 2005.

Rent Hikes Bring Sticker Shock

But demand has eased in the last six months, with the year-over-year vacancy closing the first quarter at 6.6%, down only 60 bps. Several tight coastal markets have already reached or are approaching pre-recession vacancy lows, however, and it’s likely the seasonally weaker pace of demand over the last two quarters will pick up over the rest of 2012, the analysts said.

Four of the top five rental markets that experienced the sharpest vacancy declines are fast-growing southern metros, led by Charlotte, Austin and Raleigh, NC. Detroit, with its surprising auto industry rally, ranked an impressive fourth place, followed by San Antonio. Apartment vacancies have not dropped as sharply in markets like Washington, D.C. and Seattle, where new supply is already starting to come on line.

The recovery has shifted away from the southern metros and toward West Coast markets in the last six months, much of it driven by strength in technology sector. Los Angeles was ranked first in the nation in the first quarter in year-over-year nominal demand growth with about 12,000 units, followed by Dallas, Chicago, New York and Houston.

Ranked by the percentage rise in demand growth, Richmond, VA, led all markets with a year-over-year gain of over 4%. Charlotte, Raleigh, San Antonio and Houston garnered the other top five spots.

Salt Lake City and the San Francisco Bay Area metros saw the largest declines in vacancy. But at least 30 of the top 54 U.S. metro areas have seen their vacancy rates increase at least slightly over the last six months.

"I’m not suggesting that’s indicative of the health or the trajectory of the market, but it’s not a straight line down in absolute vacancy improvement. There is a little bit of a lull," Cohen said.

Although job losses and the housing collapse are still fresh in the minds of 20-to-34-year-olds who make up the bulk of the renter base, and mortgage underwriting standards are stricter, the math is becoming more appealing for people deciding to buy a home or condominium over renting an apartment, Cohen said.

Those decisions are being influenced by spiking rents that have already pierced their pre-recession highs in such markets as San Jose, Oklahoma City, Denver, East Bay, San Francisco, Chicago, Portland and Pittsburgh.

Apartment Starts Ramping Up

While only 60,000 new apartment units are expected to be added this year, well below longterm average, construction starts and permitting activity are beginning to pick up from historical industry lows not seen since 1993.

"In advising our clients on market selection, we are starting to get calls with concerns about the rate of supply and net completions," Cohen said.

But developers who have delayed decisions to build are seeing the window close as capitalization rates reach record lows.

"2013 will be the first year we’ve seen deliveries above 100,000 units. We need to readjust our perspective on supply for Chapter Two (of the recovery). We haven’t seen 100,000 units come to market since 2009."

CoStar's outlook for supply is moderate through 2015, with between 100,000 and 130,000 units delivered per year, a rate expected to achieve equilibrium between supply and demand, Cohen said.

Homeowner Distress Continues To Help Apt. Investors

Meanwhile, apartment investors continue to reap benefits from the current weak housing market, with the flow of distressed homeowners-turned-renters still above average, while the flow of renters turning into buyers is still quite low, according to Mejia, who recently joined PPR as director of multifamily research.

A comparison of homeownership and foreclosure trends confirms that the homeownership rate could continue to decline -- possibly falling below 65% -- until the delinquencies and foreclosures that have plagued homeowners finally ease.

In the early 2000s, optimism about rising home prices and loose underwriting standards helped push the ownership rate up to almost 70%, leading to a price bubble that began to deflate in 2006, causing a surge in foreclosures and sending the homeownership rate tumbling.

"Apartment markets will continue to see additional demand while the foreclosure rate remains above pre-crisis levels and potential home buyers are cautious about committing to a purchase, even amid all-time low mortgage rates," Mejia said.

Mejia also pointed that as foreclosures remain elevated and renters mull their home-buying decisions, the ownership rate will likely continue to decline, although the extent of the decline depends on the length and strength of the housing recovery.

Basell III and Dodd-Frank Update

The Federal Reserve Board of Governors met on June 7th to publicly discuss proposals for implementing the Basel III capital requirements and Dodd-Frank capital requirements in a simplified manner, as well as to vote on a final market risk capital rule (Basel 2.5).
The Board unanimously approved the release of three Notices of Proposed Rulemaking (NPRs) for Basel III and the final rule for Basel 2.5. Basel III requires that a bank hold 4.5% of its risk-weighted assets (RWA) as common equity (up from 2% in Basel II) and 6% as Tier 1 capital (up from 4% in Basel II). Total capital (Tier 1 plus Tier 2) must be at least 8% of RWA. Additionally, Basel III requires that banks hold another 2.5% capital buffer, made up of common equity. Restrictions are also to be imposed on what assets can be counted toward Tier 1 capital.
The Board is under the impression that most banks already meet these requirements at the present time (especially those under $10 B). The approach for calculating risk weighted assets would also change the treatment of residential mortgages, making it more risk-sensitive. Under the NPR, residential mortgages are divided into two categories and the risk weights would depend heavily on LTV and would range from 35%-200%, while High Volatility Commercial Real Estate Exposure (HVCRE) risk weights would jump to 150% from 100%. Governor Elizabeth Duke raised concerns about this portion of the proposed rule reducing the willingness of banks to make mortgage loans.
While the new capital rules won’t take effect until 2019, concerns have been expressed by both industry and some Fed governors, that such an increase in capital requirements would have negative economic effects, as there would be less capital available to lend. The Fed’s rule-writing staff said that these effects were likely to be modest and would largely be mitigated by having a long phase-in period. Furthermore, the staff said that banks could largely meet requirements via retained earnings, and would probably not have to issue more equity.

The Federal Reserve surprised the banking industry by forcing even the smallest lenders to comply with Basel III -- all 7,307 U.S. banks. Many bankers had expected regulators to exempt smaller, community bank lenders. While the core Basel III rules will apply to all banks, other aspects of the new regime single out the biggest, most complex banks for tougher treatment than their smaller peers. The banks will have more than six years to fully comply with the new rules, with the phase-in period starting next year.
Potential Impact on Credit Capacity

While the goal of the new regime is commendable, requiring banks to hold far more capital to prevent financial disaster could further exacerbate credit challenges for real estate and broader credit capacity. There is grave concern among many in the banking community that stricter capital rules may curb economic growth by making it more expensive to lend.
As proposed, there is concern that the measure is not appropriately calibrated and could lead to disproportionately higher borrowing costs for commercial real estate borrowers. Setting excessive capital requirements will limit the availability of funds that support new investments and job creation – particularly for commercial real estate.
The current risk weight under Basel II for commercial real estate loans, including acquisition, development and construction (ADC) loans, is generally 100%. However, the Accord permits regulators the discretion to assign mortgages on office and multi-purpose commercial properties, as well as multi-family residential properties, in the 50% basket subject to certain prudential limits. Under Basel I, commercial real estate was assigned to the 100% basket. The proposed Basel III measure would increase the risk weighting to 150% for High Volatility Commercial Real Estate Exposure (HVCRE) and, which could also deter banks from making real estate loans and reduce credit capacity.
Importantly, however, the NPR specifically permits regulators the discretion to exempt certain commercial real estate collateral from HVCRE treatment that fall under certain guidelines. Such collateral would generally be treated as corporate debt position, with a 100% risk weighting. These CRE exemptions would apply to:

(1) One- to four-family residential property; or

(2) Commercial real estate projects in which:

(i) The LTV ratio is less than or equal to the applicable maximum supervisory LTV ratio in the agencies’ real estate lending standards;

(ii) The borrower has contributed capital to the project in the form of cash or unencumbered readily marketable assets (or has paid development expenses out-of-pocket) of at least 15 percent of the real estate's appraised “as completed” value; and

(iii) The borrower contributed the amount of capital required under paragraph 2(ii) of this definition before the banking organization advances funds under the credit facility, and the capital contributed by the borrower, or internally generated by the project, is contractually required to remain in the project throughout the life of the project. The life of a project concludes only when the credit facility is converted to permanent financing or is sold or paid in full. Permanent financing may be provided by the banking organization that provided the ADC facility as long as the permanent financing is subject to the banking organization's underwriting criteria for long-term mortgage loans.

Next Steps

The Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) must also review the proposed Basel rules before they take effect, and are expected to do so on June 12th. Comments on the three NPRs' will be due on September 7, 2012.
NAR is currently reviewing the measure and its potential impact on commercial and residential real estate credit capacity. We are already working with a number of industry groups to develop consensus viewpoints in an effort to begin raising concerns about the economic consequences of proposed rules in advance of the comment deadline.


The documents may be found at CLICK HERE

GEMBA and Lean Management in Healthcare

For the past 13 years, Alan Gleghorn has been the CEO of Christie Clinic, one of the largest physician-owned, multi-specialty group medical practices in Illinois. Faced with a challenging economic environment and fierce competition upon his arrival, he quickly sought to guide the organization to a stronger financial and strategic position by empowering his team members to focus on continual organizational improvement. In moving the organization from a command-control leadership to a dispersed/consensus style model, he implemented Lean Healthcare and created a true cultural transformation at Christie.

As Systems Manager, Stephanie Van Vreede is responsible for network coordination at ThedaCare Center for Healthcare Value.  She handles the organization of Gemba visits for attendees of the 53 organization-strong healthcare organization. The HVN is a consortium of like-minded healthcare organizations from North America that come together to share and learn, while leveraging their unique perspectives to accomplish a shared goal of fundamentally improving healthcare delivery through lean thinking.

Change is bearing down fast on healthcare in the United States. The good news is that competitive, choice-driven care is still possible, as long as we focus on three essential elements:

• Delivery of care that’s designed around the patient
• Payment based on outcomes
• Transparency of treatment quality and cost

The ThedaCare Center for Healthcare Value is a resource hub that brings together in one place the important insights, examples and worthy experiments from across health care. We provide the framework and tools needed to unite leaders behind an integrated approach focused on better patient value.

 Gemba has several different meanings, so to start let’s use the literal Japanese translation and define gemba as meaning ‘the real place’.

In traditional (i.e. manufacturing) Lean, gemba is frequently used synonymously with ‘shop floor.’ (You may hear the term genba-with an ‘N’-used interchangeably with gemba. Lean is funny that way. There are many ways to say the same thing.)
But as Lean has migrated to the office, gemba has a new meaning. This ‘real place’ can be in an engineering cubicle, at a cash register in a retail store, or in front of a computer where orders are entered.
It is not as common to hear the term gemba specifically used in the Lean office, but the principle behind ‘going to gemba’ (meaning the real place where the work is being done) is just as strong.

Alan has incorporated GEMBA principles in his Lean Management at Christie Clinic with such success that many health care groups have come to look at Christie Clinic as an example to follow.  In this interview Alan and Stephanie Van Vreed discuss Lean Management and its applications in the healthcare industry.  To watch the entire interview with Alan Gleghorn and Stephanie Van Vreed CLICK HERE

All Commercial Real Estate Sectors Continue to Improve, Multifamily Strong

Shaking off a prolonged impact from the recession, fundamentals are gradually improving in all of the major commercial real estate sectors, according to the National Association of Realtors quarterly commercial real estate forecast. The apartment rental sector has fully recovered and is growing.

The findings also are confirmed in NAR’s recent quarterly Commercial Real Estate Market Survey, which collects data from members about market activity.

Lawrence Yun, NAR chief economist, said new jobs are the key. “Ongoing job creation, which is at a higher level this year, is fueling an underlying demand for commercial real estate space, assisted by a steady increase in consumer spending,” he said. “The pattern shows gradually declining commercial vacancy rates, with consequential but generally modest rent growth.”

Yun expects the economy to add 2 to 2.5 million jobs both this year and in 2013, on the heels of 1.7 million new jobs in 2011, assuming a new federal budget is passed before the end of the year. “Although we need even stronger job growth, by far the greatest impact of job creation is in multifamily housing, where newly formed households striking out on their own have increased demand for apartment rentals – this is the sector with the lowest vacancy rates and strongest rent growth, which is attracting many investors.”

Rising apartment rents also are having a positive impact on home sales because many long-time renters now view homeownership as a better long-term option, Yun noted.

A large problem remains for purchases of commercial property priced under $2.5 million. “Our recent commercial lending survey shows that there is very little capital available for small business, which is significantly impacting commercial real estate transactions, although funding is less restrictive for bigger properties.”

NAR’s latest Commercial Real Estate Outlook1 offers projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS, Inc.,2 a source of commercial real estate performance information.

Office Markets

Vacancy rates in the office sector are projected to fall from 16.3 percent in the second quarter of this year to 16.0 percent in the second quarter of 2013.

The markets with the lowest office vacancy rates presently are Washington, D.C., with a vacancy rate of 9.3 percent; New York City, at 10.0 percent; and New Orleans, 12.6 percent.

Office rents should increase 2.0 percent this year and 2.5 percent in 2013. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, is forecast at 24.7 million square feet in 2012 and 48.0 million next year.

Industrial Markets

Industrial vacancy rates are likely to decline from 11.0 percent in the current quarter to 10.7 percent in the second quarter of 2013.

The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 4.7 percent; Los Angeles, 5.0 percent; and Miami at 7.2 percent.

Annual industrial rent is expected to rise 1.6 percent in 2012 and 2.4 percent next year. Net absorption of industrial space nationally is seen at 44.1 million square feet this year and 62.4 million in 2013.

Retail Markets

Retail vacancy rates are forecast to decline from 11.3 percent in the second quarter to 10.7 percent in the second quarter of 2013.

Presently, markets with the lowest retail vacancy rates include San Francisco, 3.7 percent; Fairfield County, Conn., at 4.0 percent; and Long Island, N.Y., at 5.0 percent.

Average retail rent should rise 0.8 percent this year and 1.3 percent in 2013. Net absorption of retail space is projected at 8.0 million square feet this year and 21.9 million in 2013.

Multifamily Markets

The apartment rental market – multifamily housing – is likely to see vacancy rates drop from 4.5 percent in the second quarter to 4.3 percent in the second quarter of 2013; apartment vacancy rates below 5 percent generally are considered a landlord’s market with demand justifying higher rents.

Areas with the lowest multifamily vacancy rates currently are New York City, 2.1 percent; Portland, Ore., at 2.3 percent; and Minneapolis at 2.4 percent.

After rising 2.2 percent last year, average apartment rent is expected to increase 4.0 percent in 2012 and another 4.1 percent next year. “Such a rent increase will raise the core consumer inflation rate. The Federal Reserve, in turn, may be forced to raise interest rates, possibly as early as late 2013.”

Multifamily net absorption is forecast at 215,900 units this year and 230,300 in 2013.

The Commercial Real Estate Outlook is published by the NAR Research Division for the commercial community. NAR’s Commercial Division, formed in 1990, provides targeted products and services to meet the needs of the commercial market and constituency within NAR.

Its Not a Sprint its a Marathon!

Last year, the Christie Clinic Illinois Marathon drew 18,700 runners to the streets of Champaign-Urban to tackle the various races including: the relay, the half-marathon, 5K, 10K and the big race … the 26-mile marathon.  This year, race organizers are expecting to hit 20,000 runners.  Add in the thousands of spectators lining the streets to cheer on the runners … and this is one of Champaign-Urbana’s largest events.

Jan Seeley and Mike Lindemann, co-directors of the Christie Clinic Illinois Marathon tell us more about the this year’s Marathon and new changes they have made this year to improve on the quality, safe experience for runners, volunteers and spectators.

I am proud that we can shine a light on this amazing event and the wonderful people in our community that make it happen.  To watch the entire interview with Jan Seeley and Mike Lindemann CLICK HERE

Reaching For the Stars

CU Aerospace is located in downtown Champaign in the M2 building, located minutes from central campus of the University of Illinois at Urbana-Champaign. This exciting location provides an environment where technology-based businesses can work with one another and the University of Illinois to take advantage of opportunities for collaborative research. Our close association with the University provides us access to state-of-the-art University labs, equipment, and services. This teaming arrangement proves to be an excellent way to provide the government and commercial customers with the highest quality service in a cost effective manner. Dr. David Carroll is the President and co-founder of a CU Aerospace, located in Champaign-Urbana, Illinois. C-U Aerospace operates principally as a government contractor working in space propulsion, nanosat (CubeSat) fabrication, high energy lasers, self-healing composite materials, astrodynamics, and other advanced aerospace technologies. David received his degrees in Aeronautical and Astronautical Engineering from the University of Illinois at Urbana-Champaign (B.S. 1985, M.S. 1986, and Ph.D. 1992). Dr. Carroll serves as the Chair for the Plasmadynamics and Lasers Technical Committee of the American Institute of Aeronautics and Astronautics (AIAA) and he was inducted as a Fellow of the AIAA in 2011. To watch the entire TV interview with Dr. David Carroll CLICK HERE

The Politics of People

My guest for a this very special interview is Don Gerard, Mayor of Champaign.

Don’s family moved to Champaign in 1968 and growing up he attended Champaign’s public schools, worked for the Champaign Park District, and played baseball in the Kiwanis Little League. He also earned the rank of Eagle Scout in BSA Troop 7. He was an editor on the school paper, competed on speech team, was trainer for the varsity basketball squad and had a principal role in the school play.

Don majored in Speech Communications at the University of Illinois and has taken courses at Parkland College. He has worked in a number of occupations from Day Camp Leader at the Champaign Park District to omelet chef, night club manager, resale shop owner, construction worker, shipping and receiving clerk, and freelance writer. Don spent nearly two decades performing in local rock bands including a stint as a bassist in a band on Roadrunner Records, which released three albums internationally.

Don is currently the Facilities Manager for the School of Molecular & Cellular Biology and the School of Integrated Biology at University of Illinois at Urbana-Champaign.

Don is the father of two children – Will and Chloe – both who are freshman at Champaign Central High School.

Don had never run for public office before his election as Mayor this past April; Don took office as Mayor of Champaign on May 5, 2011. In his first eight months as Mayor of his City, Don has demonstrated an active commitment to making a positive difference in the lives of its citizens.

o watch the entire interview with Don Gerard CLICK HERE

Its All About The Numbers!

Ploughman Analytics is a team of specialists who are devoted to helping businesses transform their data resources into practical decision-making tools. Their experts design and integrate customized packages of analytical tools to give clients greater control of their marketing, distribution, production, communications and other business functions. Employing such advanced tools and technologies as:

•Geographic information systems (GIS)

•Business intelligence and data warehousing

•Operations research techniques and

•Knowledge management tools

Ploughman's services can benefit a wide range of industries and organizations. Their team also has specialized expertise in the support of the agriculture and energy industries. Charlie Linville is an amazing talent. To view the entire TV interview with Charles Linville CLICK HERE

Joe Taylor Serial Entreprenuer!

Joe Taylor is the founder and President of Sleepy Creek Vineyards near Oakwood, IL.

After a receiving degree in Graphic Design from Southern Illinois University in 1990, He co-founded Taylor Studios Inc, with Betty Brennan. Taylor Studios, located in Rantoul, IL, is a business that designs and builds museum exhibits. In 1998 Taylor Studios was named to Inc. Magazines “Inc. 500” list as one of the fastest growing private companies. Today, they are one of the top exhibit design and fabrications firms in the country, employing over 30 people.

In 2002, He was bit by the entrepreneurial bug again and started Sleepy Creek Vineyards. He, and his wife Dawn, planted their 10 acre vineyard in with plans to open a winery. After establishing the vineyard, they opened their winery to the public in 2007. Sleepy Creek Vineyards currently makes over 10 different hand crafted wines. All made on site with locally grown grapes.

In addition to growing grapes and making wine, the winery host several festivals, art shows, concerts and private events. There is also a two bedroom vacation rental above the winery for visitors to rent for a relaxing getaway. To watch the entire TV interview with Joe Taylor CLICK HERE