The market is looking for clarity from the federal government for both how much will it be buying and leasing.Clarity will allow companies to iron out their business plans and figure out how much space they will need.Most Likely OutlookIt is expected that political uncertainty will be a risk to the economy over the next two years.Expect there to be about 18 months before the reintroduction of federal procurement creates new demand for office space.Federal leasing funding will start to impact the market 9-12 months after the budget is established. The first groups expected to reengage the office market are advocacy/associations (with membership organizations the outlier). These groups are expected to lease smaller blocks of space 30,000 sf or less but could break big blocks of space.The big wave of law firms expatriations starts in 2015, cresting in 2017 – All things being equal, expect law firms to be more efficient with their space.There should be a direct correlation with demand in the market and how much landlords will spend/grant on concessions. As the economy creates new demand for office space, landlords will start pulling back. Expect a 6-9 month lag.Issue not addressedNext Debt Ceiling debate expected to start Feb. 2013Layoffs associated with sequestration (Government Contractors)
With a resolution to spending cuts and a new debt ceiling debt on the horizon, economic uncertainty will remain much longer, pushing out any market recovery.Some markets will be more tighter than others. Submarkets of interest to lead the curveBethesda, East End CBDLaging the Curve Crystal CityEconomic Growth/Economic UncertaintyEconomy has been sluggish due to uncertainty of Federal spending.Under this scenario, a clear spending mandate that comes out with the 2013-2014 budget, creates the certainty that companies need to make real estate decisions.Federal Spending/ProcurementSpending cuts are to be addressed during the first quarter of 2013. Hopefully these will be more targeted that Sequestration.New procurement which will drive new government contracting growth will be well off historical paces (Won’t be a driving force for new office demand).Federal Government will be more efficient with space utilization (180 sf/employee will be the new norm with increased reliance on telework programs).Demand for Office Space (Private Sector)Much of the new demand for office space will be from Non-Profit/Advocacy/Lobbying groups.Technology (especially B2B, cloud computing and cyber security) will generate new demand.There will be a flight to efficiency. Over the next 5-8 years, expect 8-10% reduction in space from renewing tenants (all things else being equal).Demand for Office Space (Public/Public Like Sectors)There will be some growth from smaller contractors with specific capabilities, but over all contraction from Government Contractors.Federal Government will be more efficient, requiring less space as agency leases come due. (Current Cap levels are $50 FS in the District)Base Realignment and Closure Act of 2005 Implementation (BRAC)Big waves of move outs in 2013 and 2015:2013: 936,185 sf2014: 298,587 sf2015: 847,794 sf
2013-01-17 2013-2014 Economic Outlook
2013-2014 Economic Outlook and Impact of Finance and Accounting Debra Santos, CPA - Manager AMS January 17, 2013Thrive. Grow. Achieve.
RAFFA HISTORY IN 1984, TOM RAFFA SET OUT TO CREATE200 MEANINGFUL ACCOUNTING WORK THAT SUPPORTEDEmployees, in GIVING BACK TO THE COMMUNITY.3 separatecompanies: RAFFA’S VISION IS TO BE THE MOST CARING AND• Raffa PC EFFECTIVE PROFESSIONAL FINANCIAL SERVICES PARTNER IN THE INDUSTRY.• Raffa Financial Services Inc.• Raffa Wealth Management LLC
WHERE ARE WE NOW? CURRENT • Largest reduction in GDP over last 4 years, since the great depression • Non profits struggle to find funding and maintain programsEconomic & • Tax increases may reduce donations • Government funding cuts could reduce grants to organizations“Fiscal Cliff” & • Collaborative, Innovative, Interdisciplinary, Entrepreneurial“ Debt Ceiling” • Elimination of uncertainty of personal tax rates • Improved employment statistics in DistrictImpact • Sequestration
2013-2014CHALLENGES• Need to develop investment strategy/increase return on investment• Open new revenue streams (improve program results and metrics)• Managing organizational debt• Attracting and retaining talent• Understanding Capital Structure
UNDERSTANDING CAPITAL STRUCTURE Pursuit of MissionPreservation of Capital StructureOrganizational &Financial Visibility
STRATEGIESINNOVATIVE USE OF TECHNOLOGY• Revenue generation – Social Media, Crowd-sourcing• Improve efficiency of Program DeliveryNON PROFIT PARTNERING• Space and resource sharing• Integrated program deliveryUSE OF DEBT• Levering a Line of Credit• Financing out of a DeficitRETURN ON INVESTMENT• Engaging financial consultant or fiduciary manager• Building excess reserves
Cresa2013 Washington, DC Market OutlookJanuary 2013Presented to:Non-Profits & Associations of Washington DC
Table of ContentsLocal Area Market/Economic ConditionsReal Estate Window-of-OpportunityNonprofit Real Estate TrendsNonprofit Office Space TrendsStrategic Real Estate Planning9 | Cresa Washington DC—DC Market Outlook/ Trends
Local Area Market/Economic ConditionsCurrent Market Conditions Expected Market Conditions in 2015 Uncertainty as to the role of the Federal A lot depends on politicians coming together in 2013. Government and federal spending They’ve already shown that political bickering is still the Flight to quality; flight to efficiency norm. Low activity in the market; no new office demand Still need a firm understanding on what will happen to Limited new development; must have pre-comment federal spending. Stable opportunities for leasing - Expect continued political posturing to make any resolution The rise of the special servicers difficult. Stable rents; rising concessions - Expect demand growth to stay sideline until certainty is established. Current Economic Conditions Headwinds Tailwinds Spending Cut Debate Federal Government has pent up demand and Next Debt Ceiling Debate needs to spend money 2013 Fiscal Budget Debate Increase demand for Healthcare; Education On going risk created by political uncertainty Need for cyber-security and national intelligence to Slow economic growth grow European debt crisis Strong corporate and personal balance sheets Strong tech sector Cheap debt3 | Cresa Washington DC—DC Market Outlook/ Trends
Local Area Market/Economic ConditionsEconomic Recovery and Leasing Opportunity Timeline (Projections) Debt Ceiling Debate 2012 Elections Another Continuing Resolution Super Committee Major BRAC Full implementation Major BRAC Impasse Fiscal Cliff Move-Outs of new procurement Move-Outs Averted Revised Spending and leasing Priorities Potential Market Shift 2012 2013 2014 2015 2016 Leasing Sweet Spot Economy Growth Political Uncertainty Federal Spending/Procurement Flight to Efficiency Demand for Office Space (Private Sector) Demand for Office Space (Public Sector) Concessions Assumptions Congress creates a spending cut agreement reducing the federal debt by $ 2 trillion over the Trend next 10 years. No impact from European debit crises or Lighter the color; less pronounced the trend Darker the color; more pronounced the trend economic recession 11 | Cresa Washington DC—DC Market Outlook/ Trends
MARKET + BUILDING + LANDLORD = WINDOW OF OPPORTUNITY12 | Cresa Washington DC—DC Market Outlook/ Trends
Current Real Estate Trends for NonprofitsReduce Real Estate Costs Evaluating layout to reduce space size and sublease additional space Restructuring Lease to reduce rates by extending term Evaluating Operating Expense and Real Estate Tax Additional Costs Reducing LAN rooms through cloud technologyIncrease Space Efficiency Smaller standardized offices More open workstations decreases square footage (“benching”) Considering telecommuting optionIncrease Office Collaboration More open workstations increases collaboration More “teaming rooms” Incorporating “Starbucks design” in pantry for more casual meeting area Increased use of glass for collaboration and LEED design principals13 | Cresa Washington DC—DC Market Outlook/ Trends
Nonprofit Office Space Trends14 | Cresa Washington DC—DC Market Outlook/ Trends
Strategic Real Estate Planning15 | Cresa Washington DC—DC Market Outlook/ Trends
New Markets Tax Credits and Tax Exempt Bond FinancingOlivia Shay-Byrne, Esq., (Partner, Reed Smith LLP) OLIVIA SHAY-BYRNE | 202.414.9370 | OSHAY@REEDSMITH.COM
BUY VERSUS LEASE: CONSIDERATION FACTORSTHE BUSINESS’ FUTURE GOALS AND NEEDSLONG TERM CASH FLOW ANALYSISFLEXIBILITY RELATING TO EXPANSION AND SPACEUP FRONT COSTSOPERATING EXPENSESPOTENTIAL FOR ADDITIONAL REVENUE SOURCE
ADVANTAGES TO BUYINGCURRENT LOW INTEREST RATES & PROPERTY VALUESOPPORTUNITY TO BUILD EQUITYFLEXIBILITY - ABILITY TO LEASE EXTRA SPACENO RENT INCREASESCONTROL IN OPERATION AND MANAGEMENT OF BUILDINGTAX INCENTIVES POSSIBLELONG TERM FINANCINGPROFIT IF MARKET VALUE INCREASES
BUYING REQUIREMENTSUP FRONT CAPITAL TO PURCHASE (TYPICALLY ABOUT 10 TO 20% OF TOTAL ACQUISITION)SUFFICIENT CREDIT TO SECURE FINANCINGFAMILIARIZATION WITH OWNERSHIP AND/OR UNIT OWNER’S ASSOCIATION
LEASING BENEFITSCREDITWORTHINESS IS NOT AS SIGNIFICANT.MINIMAL UPFRONT COSTS.ABILITY TO MOVE AT THE END OF THE LEASE TERM WITHOUT SELLING OR LEASING OTHERSPACE.
DISADVANTAGES TO LEASINGMINIMAL FLEXIBILITY – LANDLORDS TYPICALLY LOCK TENANTS IN FOR LONGER TERMS (10YEARS) WITH A SIGNIFICANT EARLY TERMINATION FEENO EQUITY BUILD UPRENTAL RATES ON CURRENT MARKET CONDITIONS WITH ANNUAL ESCALATIONTENANT MAY BE REQUIRED TO MOVE AT END OF LEASE TERM.
TAX EXEMPT BONDSMAY BE USED TO:PURCHASE A BUILDING-- may use less than all of the buildingRENOVATE A BUILDING-- may use less than all of the buildingNEW CONSTRUCTION -- MAY PURCHASE A FLOOR IN AN OFFICECONDO
SELECTING PROJECTS THAT QUALIFY FOR TAX EXEMPT FINANCINGELIGIBLE ASSETSTYPICALLY, TAX-EXEMPT BOND PROCEEDS ARE USEDTO FUND THE COST OF:•Acquiring or constructing capital assets•Interest during construction•A debt service reserve fund•Certain costs of credit enhancementCosts of issuance funded from bond proceeds are limited to 2% of
1430 K STREET, NW AMERICAN EDUCATION RESEARCH ASSOCIATION TAX EXEMPT BONDS AMERICAN SOCIOLOGICAL ASSOCIATION TAX EXEMPT
NATIONAL ASSOCIATION OF REALTORS WASHINGTON, D.C. HEADQUARTERS
ADVANTAGES OF TAX-EXEMPT FINANCING LOWER INTEREST COST IN COMPARISON TO THE INTEREST RATE ON CONVENTIONAL DEBT AVAILABLE TO THE BORROWER. BECAUSE INVESTORS IN TAX-EXEMPT BONDS DO NOT PAY FEDERAL INCOME TAX ON INTEREST PAYMENTS RECEIVED ON THE BONDS, THESE INVESTORS ARE WILLING TO ACCEPT AN INTEREST RATE LOWER THAN THE INTEREST RATE ON COMPARABLE TAXABLE BONDS, THE INTEREST ON WHICH IS SUBJECT TO FEDERAL
LOWER INTEREST RATE BENEFITSEQUITY PROVIDEDHIGHER LEVERAGELONGER TERM LOANBurdens• More complex• 90 Days +• More costly
WHO MAY TYPICALLYTAX-EXEMPT BONDS? ISSUE ISSUED BY THE STATE AND LOCAL GOVERNMENT AUTHORITIES (THE “AUTHORITY”). TO APPLY, AN ELIGIBLE ORGANIZATION MUST SUBMIT A COMPREHENSIVE APPLICATION WITH SPECIFIC INFORMATION REGARDING THE ORGANIZATION AND THE PROSPECTIVE PROJECT. THE AUTHORITY’S APPROVAL PROCESS INCLUDING TEFRA HEARING AND APPROVALS TYPICALLY TAKES ABOUT 90 DAYS.
SELECTING PROJECTS THAT QUALIFY FOR TAX EXEMPT FINANCINGQUALIFIED USE VS. PRIVATE USESECTION 145 OF THE CODE IS THE PRIMARY FEDERALTAX STATUTE DEALING WITH TAX-EXEMPT BONDS FOR501(C)(3) ORGANIZATIONS.•Requires all property financed by the tax-exempt bonds to be owned by a 501(c)(3) organization or a governmental unit.•95% of the proceeds of the tax-exempt bonds be used in the exempt activities of the 501(c)(3) organization ("Qualified Use").
NEW MARKET TAX CREDITS UPDATEON JANUARY 3, 2013 PRESIDENT OBAMA SIGNED THE AMERICAN TAXPAYER RELIEF ACT OF 2012WHICH INCLUDED AN EXTENSION OF THE NEW MARKETS TAX CREDIT PROGRAM FOR 2012 AND2013. THE TAX CREDIT ALLOCATION AUTHORITY IS $3.5 BILLION FOR EACH YEAR.THE CDFI FUND IS CURRENTLY REVIEWING APPLICATIONS RECEIVED UNDER THE 2012 ROUNDAND PLANS TO ANNOUNCE THE AWARDS IN APRIL.
NMTC PROGRAMPURPOSE: TO ATTRACT PRIVATEINVESTMENT TO PROVIDE CAPITALFOR SPECIFIC TYPES OF FOR-PROFITAND NON-PROFIT BUSINESSES INLOW-INCOME, ECONOMICALLY-DISTRESSED COMMUNITIES (TARGETZONES)
GENERAL OVERVIEWTHE NEW MARKETS TAX CREDITPROGRAM IS DESIGNED TO:–Stimulate job creation–Encourage investment in and revitalization of low-income urban and rural communities.THE PRIMARY FINANCIAL BENEFIT OFTHE PROGRAM IS A SUBSTANTIALFEDERAL TAX CREDIT TO THEINVESTOR.
WHICH PROJECTS CAN USENMTCS?NMTC PROCEEDS CAN BE USEDFOR A WIDE VARIETY OFPROJECTS:OfficesRetailMixed used projectsManufacturing plantsSporting facilitiesHealthcare facilities
WHAT ARE THE BENEFITS FOR THEINVESTOR? NMTC INVESTOR CAN CLAIM A SIGNIFICANT TAX CREDIT CREDIT CLAIMED OVER A “SEVEN YEAR” PERIOD AS FOLLOWS: THE TOTAL TAX CREDIT IS 39% OF THE QUALIFIED EQUITY INVESTMENT (“QEI”) • 5% of the QEI is paid in Years 1-3 • 6% of the QEI is paid in Years 4-7
WHAT ARE THE BENEFITS FOR THEBORROWER? GAP FINANCING - MAKES THE PROJECT FEASIBLE. BORROWER IS TYPICALLY REQUIRED TO PAY “INTEREST ONLY” ON LOAN PAYMENTS (7 YEARS).
FINANCING STRUCTUREA LEVERAGE STRUCTUREINVOLVES:A LOAN FROM A LEVERAGELENDERA CAPITAL CONTRIBUTION FROMA NMTC EQUITY INVESTOR
“TARGET ZONE”LOW INCOME COMMUNITY (“LIC”): WHAT QUALIFIES? Location – Location – Location A CENSUS TRACT WHERE: AT LEAST 20% OF THE POPULATION IS AT OR BELOW THE POVERTY LEVEL THE AREA MEDIAN FAMILY INCOME IS NOT MORE THAN 80% OF THE STATEWIDE OR METROPOLITAN AREA INCOME, AS APPLICABLE
EXAMPLES OF TARGET ZONES IN THE DISTRICTTARGET ZONES INCLUDE PARTS OF: The H Street Corridor NOMA Pennsylvania Avenue Baseball Stadium Anacostia And More!
THANK YOU!CONTACT INFORMATION: OLIVIA SHAY-BYRNE OSHAY@REEDSMITH.C OM 202.414.9370