Tuesday, March 13, 2012

And the Public Wakes Up to the Deadway in Boston

In today’s Boston Herald article, “Greenway Conservancy critics have their say” the public has finally reached the conclusion that many of my posts have addressed. The Greenway is, relative to its cost and promise, a complete failure because of Mayor Menino and the restrictions that have choked the project. The ridiculous spending of the Conservatory is a symptom of what happens when nothing happens. “Overseers” claim that they need to “oversee” because the park isn’t successful. And it never ends.

The Greenway is the Deadway, and the game’s up on everyone involved. I served on the Surface Artery Commission of the State Legislature for two years before the Greenway opened. The State legislation designated that the Greenway be used for public use—not open parkland—public use. Of course, every environmental, preservation-minded person on the panel took that to mean empty parkland. And so we have what we limited ourselves to—a seldom-visited, chopped up series of miniature parks that nobody walks through.

I will put it simply. There is nothing to do on the Greenway, and it is not located in a spot where people would naturally congregate, i.e. the Common, Copley Square, City Hall Plaza. It is a circuitous path around the perimeter of the city, lined by buildings on both sides. Given the choice on a winter night of the choice to walk from Federal Street to North Station, nobody will decide that it would be more aesthetically pleasing to add 20 minutes to the trip by heading east and walking in an empty circle. People head in straight lines.

The solution is simple. First, charge fees to the current beneficiaries of the Greenway, the property owners along its path. They will object. They will fight. But if you make the fee reasonable, then you can beat them through public opinion. I can see an article in the Globe now: “Boston Harbor Hotel, city’s most expensive, refuses to participate in Greenway partner project.” And make life miserable without cooperation.

Second, get rid of the notion that big and tall is bad and let new construction take place, the return on which would justify a developer undertaking the project. And yes, Mr. Mayor, that means height. Every approved project would carry with it a pre-construction covenant of payment to maintain the Greenway. This is done in San Francisco at Yerba Buena Park and has encouraged new development –developers will gladly pay to build on an amenity. And, to address a primary purpose of the Greenway, assure that the developments incorporate a connection to the harbor. And I do not, in any way, mean height limits. We are afraid of tall buildings. Visit the waterfront of Sydney and tell me whether tall buildings and 24/7 vibrancy can coexist.

Those two financial assessments alleviate the maintenance of the park. Goodbye Conservancy, goodbye to public funding. But they don’t address the core issue of making the Greenway a place people want to go.

Let the private sector build on the Greenway. I know this will shock everybody at the BRA because I think they actually enjoy reviewing and encouraging nonsensical non-profit proposals (YMCA, Mass. Audubon, Museum of History, etc.) Each parcel can structurally bear significant buildings. Allow private developers to create public spaces. They would not necessarily be free to the public but they would be designed to bring anyone into the project as opposed to office towers or residential buildings.

Let Apple build one of its glowing iconic stores. Let the BSO build a magnificent opera house, raised above Dewey Square. Let the Bruins and the Jacobs Brothers build a remarkable hockey rink near the Garden. The developers’ costs will not be recovered by charges. The expenditures will not be recaptured and categorized as advertising. And not impermanent billboards or flashing signs but physical spectacular advertising they could develop, all in the name of the public good. I can see the blimp view of the Greenway during a Pats game now—alive and creative.

Let imaginations run wild for once rather than be dismissed by restrictive rules that have utterly failed. I don’t have the answers for how the private sector will react and what they will propose. But they will respond and it will be exciting. Otherwise, we’re struck with the Dimway, bleeding money.

Friday, February 3, 2012

Millennium, Filene’s and the Skeletons in the Closet

Millennium, Filene’s and the Skeletons in the Closet

Let me begin with a quote from the New York Time in which Tony Pangaro, Boston Principal for Millennium Partners, discusses Hayward Place in Boston. Please note the date: “‘We think we can build this summer after two years when we couldn’t,’ said Anthony Pangaro, a principal of Millennium Partners-Boston, which has previously developed luxury condominiums downtown. This month Millennium’s $200 million Hayward Place project in the theater district sought city approval to convert from 200 condominiums to 265 units, mostly rentals.” (NY Times, February, 2011).

Well, obviously that didn’t happen, given that the official groundbreaking was November 15, 2011. Yes, the mayor had his shovel out. Of course, he also misled the public in June 2011 by announcing that construction would begin in 2 weeks.

Yesterday, referring to the Filene’s site and Vornado, Vornado announced it “has reached a deal to team up with a local developer to jump start the stalled project.” (Boston Business Journal, 2/2/2012.) First of all, Millennium is not a local developer. They began in NYC, have most of their holdings there, and are headquartered there. Their website opens with a camera scanning the New York skyline. The only thing missing is a Giants logo.

Millennium did not buy the Filene’s site. They have an undefined “deal” with Steve Roth. The problem is that there has been no movement in the condition of the intended market for the site for which Vornado overpaid to the tune of $100 million. The rent the target market of users for space within a 1.2 million square foot tower are willing to pay is not high enough to generate a sufficient return on Roth’s investment.

The rough cost of developing the property (land cost + construction costs) will be roughly $500 million, according to Millennium. On a per square foot basis, the development cost would be roughly $420.00. Developers demand high rates of return for new construction because of the high risk involved. Let’s use 20% as a desired return. Let’s take the case of a potential office user. In order to meet any developer’s acceptable rate of return, an office user would have to pay roughly $110 per square foot in rent (20% of $420 + $25.00 in tax and operating expenses.) The average market rent in Boston for Class A space today is $50.00. The highest priced space is $70.00. The latter are in premier office towers in premier locations—111 Huntington Avenue, International Place, the Hancock Tower, 75 State Street—not in the middle of Downtown Crossing. Of course, the project has other components—retail and residential—but the market is still not at an acceptable rate of return. Perhaps I am underestimating the residential component but full plans have not been presented. And achievable residential sale prices do not currently fit what the cost structure seems to be at Filene’s.

Millennium cannot change the market. They bring Boston expertise to the project, but there is an awfully big skeleton in their closet and it is only 2 blocks away.

The Mayor has spent about 2 years blasting Vornado after, with full permits in hand, they legally demolished a significant part of the former Filene’s, the first step of construction and not inexpensive. When rents in the market dropped and sources of financing dried up during the recession, Vornado put the project on hold. Menino has been enraged ever since.

Let’s look at the Filene’s timeline.

1. November 2007: City grants full permit to Vornado for demolition and construction of 1 million square foot mixed use project.

2. Summer 2008 to November 2008: Demolition completed.

3. November 2008 to present: No further construction.

4. February 2012: Announce “deal” with Millennium.

Now let’s get to the skeleton in Millennium’s closet. It’s called Hayward Place. It’s been and still is a shabby parking lot on lower Washington Street facing the Paramount Theater and the Millennium-built Ritz-Carlton Hotel and Towers. The city owned the property and put it out to bid for residential development in in April 2001.

By July 2001, eight developers had submitted proposals. The bids included, as required, both project designs and price offers. All but Millennium proposed housing, in combination with other uses such as school, retail, and office. The high bidder, at $23 million, was Lincoln Property Co, in a joint venture with Equity Residential Company. Millennium bid $20.5 million. The high bidder was not awarded the site for development.

And then the “irregularities” occurred. For reasons never explained, rather than selling to the highest bidder meeting the original requirements, the BRA invited the other short-listed developers, including Millennium, to match Lincoln’s high bid. They then awarded the designation to Millennium as the developer for Hayward Place. The BRA’s reasoning for blatantly changing the requirements of the bidding process to make sure Millennium got the project were feeble. In its summary of the “bidding”, the BRA stated that the choice of office rather than housing use was explained as due to an oversupply of housing in the area. The BRA also stated that it chose this proposal for the “vitality” to be created by an office building. And, then, just for the heck of it, in June 2003, the city allowed Millennium to lease rather than purchase the land, an opportunity not granted in the original bidding or subsequent bidding.

What really happened? Lincoln Properties and Equity Residential, a combined entity with far more capital and experience than Millennium, outbid Millennium. This disappointed the Mayor. So the BRA changed the selection criteria to favor office and gave the designation to Millennium. And, after all these years, what is Millennium building on the site? You guessed right—residential. That’s the same Millennium that’s part of the new Filene’s team.

The Hayward deal was manipulated and everyone in the market knew it. As bad as that is, let’s look at the Hayward timeline and compare it to the Vornado timeline.

January 2001: Millennium designated to develop project.

November 2011: Millennium holds groundbreaking.

From 2003 to present: Millennium collects substantial parking revenue, effectively making their holding cost zero.

So let’s see. Vornado buys the Filene’s site in a private transaction for $100 million. Millennium buys the Hayward site from the city by way of a politically manipulated bidding process for $23 million.

Vornado receives development approval in November 2007, begins and finishes demolition work in November 2008, and puts further construction on hold. Time between last activity on site and today: 3 years, 2 months.

Millennium receives development approval on January 2003 and does nothing until it holds a groundbreaking on November 15, 2011. Time between last activity on site and next action: 13 years, 11 months.

The Mayor has never uttered a peep about Millennium’s failure to move forward on its eyesore. Millennium’s reasons, when given, for not moving forward match those of Vornado, namely that market pricing is not high enough to justify development and financing is not available. The Mayor never vilifies the principals of Millennium as he does with Vornado. The Mayor doesn’t call the Mayor of New York to urge him to make Millennium to build, as he did in a plea to have Vornado build.

And now, we have a team. Millennium sat on a project in the neighborhood for nearly 14 years and received no criticism. Vornado did the same for 3 years and he has been held up as the real estate devil incarnate.

I want to see development at both the Filene’s site and at Hayward Place. I don’t see how adding Millennium to the team assures this given its own hole in the ground. I hope they prove me wrong.

Wednesday, February 1, 2012

Help, I’m Sinking in a Think Tank and I Can’t Get Out

Help, I’m Sinking in a Think Tank and I Can’t Get Out

Today, the Beacon Hill Institute issued a report entitled “Massachusetts Real Estate Licensing Requirements Benefit Agents Not Consumers.” The Boston Business Journal and Banker & Tradesman ran the article as their lead columns on line.

The research article was written by Benjamin Powell, Ph.D., an Associate Professor of Economics at Suffolk University and a Senior Economist with the Beacon Hill Institute, and Evgeny Vorotnikov, Ph.D., a Post‐Doc Research Fellow at the University of Minnesota and Tuerck Foundation

In short, the writers argue that requiring brokers to take 12 hours of continuing education courses every 2 years at a cost of $100 is a) driving brokers out of the industry; b) increasing the average incomes of those remaining; and c) having no impact on claims filed against brokers at the Mass. Division of Licensure.

They have fallen victim to the trap of coincidence and effect. This fallacy was recognized in Ancient Greece and simply states that correlation does not imply causation. The opposite belief, correlation proves causation, is logical fallacy by which two events that occur together are claimed to have a cause-and-effect relationship. The fallacy is also known as cum hoc ergo propter hoc (Latin for "with this, therefore because of this") The writers even state in their report that “the cost, in terms of both time and money, of twelve hours of continuing education is unlikely to cause many full‐time realtors to exit the industry or to deter others from entering.” Not a single broker was interviewed in the article.

The requirement to take classes does not “cause” anything. The balance of their research is a measurement of coincidence, not causation. The writers use the legislation passage as the independent variable, even though they fail to establish cause, and use multivariate regression analysis to state that the legislation requiring continuing education was statistically significant in accounting a) fewer brokers, b) lower incomes, and c) lack of change in complaints against brokers. I could further critique their work for the paucity of additional dependent variables that should have been added to the list tested. But there really is not point when we are speaking coincidence, not correlation.

What is also amazing is that, at no point do the writers actually discuss the nature of the classes, and I would be willing to bet they attended none and have no knowledge of them. I have sat through 6 sessions to date. The purpose is education. There are six modules, each covering a different topic which enhances a broker’s skill sets and, above all, informs brokers of new rules and regulations affecting the profession, such as disposal of toxic waste; lender-broker relationships; and rules on the use of multiple listing services. The authors are trying to argue that obligating brokers to pay $100.00 every 2 years to bring themselves up to date should be abolished because it is too much of a burden for part time brokers. Would the writers like it to hear their doctors tell them they had not attended any industry events or training programs since receiving licenses to practice? How about their attorney? How about the pilot flying their plane?

The writers ran their statistical tests, the results of which emblazoned the papers. And yet they failed to establish any reasonable case for cause and effect. We all want to believe. That’s why we have rain dances and rub our rabbit’s feet. But, if the event occurs after we have danced or rubbed, it is a coincidence, nothing more.

The simple fact is that the requirement to take a licensing course every 2 years has no effect on the number of brokers, the income of brokers, and the number of complaints. Let me tell you what does have an effect on these three measurable facts.

1. Numbers of brokers: The number of brokers has been shrinking continuously and will continue to do so due to:

a. Real estate technology used not only in residential online “shopping” but as a single source of information for the massive commercial real estate brokerage industry. It is both a source of information and as a tool for market and financial analytics. The individual broker simply has more tools at hand which has led to a massive layoff of brokers. That has reduced the number of real estate brokers more profoundly than any other influence, and it will continue to do so. Think of Wall Street 30 years ago and today.

b. Brokerage industry consolidation has eliminated overlapping brokerages within geographic areas, decreasing the number of brokers necessary to cover a given area. The consolidation has also allowed brokers to draw on central office sophistication to further improve general skills or to develop necessary transaction documentation, allowing a standardized approach to the business, which again allows fewer brokers to do the work of one.

2. Broker Income:

a. The income of brokers has increased because there are fewer brokers for the reason state above, not because of the burden of licensing.

3. Complaints and Litigation:

a. The fact that the number of complaints has not materially changed is, once again, an instance of not understanding where the nature of complaints play out. Any broker knows that it is not at the Licensing Division. Most complaints against brokers fall under Chapter 93A of the consumer protection acts of Massachusetts through the Attorney General’s office. But there is a distinction between the complaints against a broker’s action and the actions of an incompetent broker. I would recommend the broker check the AG’s office for a true sample of complaints. I would suggest the writer’s might list as a “dummy” variable the number of houses in foreclosure and the statistical significance of the number of broker complaints.

b. What the writers fail to grasp is that the argument to end licensing requirements would lead to the real legal battles in real estate which involve contract law and, typically, the disagreement between the parties over the obligations of each party in the contract. Since brokers are the first step toward a contract, I think I would prefer a more-educated, licensed lawyer, with knowledge of changes in real estate law and regulation involved in a transaction. Of course, that would cost $100.00 every 2 years.

Thursday, January 26, 2012

A Quick Note about the “Benefits of lowering the capital gains tax.

The argument in favor of lowering the cap gains tax because, in the past, it has shown to result in an increase in government revenues, is faulty on its premise and in its time horizon.

First, there are a wide variety of reasons why someone sells a capital asset. I am not arguing that, in the past, IRS collections have gone up after a decrease in the rate. But it's not about capital generations, new jobs, and all the nonsense behind the arguments. It’s because, with a lower rate, the value of your asset went up in the moment, and you are more likely to sell, which sets off a higher rate of collections.

The problem, which most economists make, is that they fail to look beyond what happens after the first year as far as collections. They also fail to see that capital gains collections are subject to countless variables other than the tax rate, perhaps, above all, the stock market.

But talk is talk. Below are two tables showing the effect of two recent reductions in the cap gains tax rate. The first table shows the rate of increase or decrease in percentage terms in IRS cap tax collections. The other shows the change in GDP as a proxy for the multivariate elements that go into capital gains tax collections.

All changes to IRS revenue and GDP occur one year after the tax act.

Long term capital gains tax rate       GDP         IRS Collections

Previous      New   Year        Percentage Δ          Percentage Δ

                             1996                     4%                   4.5%

28%  20% passed in 1997                    5%                     4.4

in effect                 1998                     4%                     4.8

                             1999                      5%                    4.1

                              2000                     4%                     1.1

                              2001                      1%                    1.8

                              2002                     2%                    2.5

20%  15% passed in 2003                      3%                    3.5

in effect                  2004                      4%                      3.1

                              2005                       3%                      2.7

                               2006                     3%                       1.9

                              2007                     2%                       -0.3

                              2008                     -3%                       -3.5

                             2009                      -4%                        3.0

                             2010                       3%                          3%

Sources: Congressional Budget Office http://www.cbo.gov/ftpdocs/108xx/doc10871/Chapter4.shtml.

Bureau of Economic Analysis http://www.bea.gov/national/index.htm#gdp

Consider years 1996, 1997, and 2003. There were no tax policy changes that went into effect in these years. And yet, the increases in each of these years are among the highest in the table. More importantly, look at the years AFTER the first year of the tax cut. The best example is the cut passed in 2003 and in effect in 2004. In 2004, collections did rise by 4.1%. Then look at the next four years—so much for the long-term impact of a one-time change in the capital tax rate.

Thursday, January 19, 2012

When the price you pay isn't the price you pay in Massachusetts

Seems like there’s been a surprise waiting for a few cellphone purchasers these days in Massachusetts. In the infinite wisdom and most-likely unconstitutional action of the Department of Revenue, when you purchase your next cell phone, you won’t pay tax on the price offered. No, you will pay on the “full wholesale price.” We all know that the purchase of a cellphone is a bundled purchase. The retailers give you a discount on the phone but it comes with an obligatory contract, on which your monthly service charge is heavily taxed by the state.

Seems like the Department of Revenue in a “Directive” dated April 29, 2011, forced the seller of a cellphone which included a bundled package of services, to tax the phone itself at “full wholesale value.” Of course, they did not define the wholesale value. The Department of Revenue basically argues that the price of an object or service sold is not the final sales price, even though the bundled service is taxable. Nothing like turning over a few centuries of the nature of sales and negotiations.

When I go to Macy’s and a sweater has been marked down 50%, with the original and reduced rate shown on the price tag, I have never been taxed on the higher price. Nor have I been forced to sign a contract to wear the sweater, paying Macy’s on a monthly basis. When I go to purchase a new car and the sales price invariably comes in below the original asking price, I have never been taxed on the original sales price. And, no, I don’t have to pay General Motors a monthly fee to drive the car. The world has been and is ruled by fair market price determined by the actual sales price at the point of transaction. Any further laws that specific transaction may set in motion, such as sales taxes or levies, should apply to the actual sales price.

The DOR directive is clearly in conflict with Mass. General Laws, Chapter 64H, “Tax on Retail Sales of Certain Tangible Personal Property”. In Section 1, paragraph 19, the “sales price” is defined by “the total amount paid by a purchaser to a vendor as consideration for a retail sale, valued in money or otherwise” with the clear stipulation in subparagraph c that “(c) there shall be excluded (i) cash discounts allowed and taken on sales.” These are the same cash discounts the state is now taxing.

To selectively apply an archaic and unenforced “full-retail tax policy” to cellphones alone is both random and dismisses the concept of tying taxes to sales prices. Inexplicably, the Globe endorsed this although, in reading the editorial, I really have no idea what they’re writing about. I guess in Massachusetts, the price is wrong.

Thursday, January 12, 2012

The Only Casino that will be built in Massachusetts

It’s nice that the Governor divided up the state into three regions for a casino. The problem is that nobody is attracted to Southeastern or Western Massachusetts if they are coming to gamble in a casino that meets the grand visions of all of us. Sorry, I don’t want to drive to Brimfield and play blackjack in a cornfield. And I don’t care if there are fifteen 5-star restaurants on the site. I don’t want to drive by abandoned warehouses and play roulette in the equivalent of Massachusetts’ Atlantic City in Fall River.

This leaves 2 options: Foxboro and Boston. I love the Pats, think the Kraft family has been an extraordinary citizen of the state, but I don’t want to drive down route 1 south, pass the 16 liquor stores and turn into a “world class” casino.

We are all forgetting one thing. A casino unto itself does not make the casino “world class” or even desirable. Casinos need access for very impatient customers and they need amenities unique to their location. Remember, we are not talking about 25 casinos along a strip in Las Vegas. Suffolk is a 10 minute van ride from Logan (not sure where the airport is in Brimfield). When your significant other wants to explore the neighborhood, I think he or she might prefer the 10 minute bus ride to Faneuil Hall than the footbridge adventure into Patriot Place. I truly have no idea where one goes if one goes outside at all in Fall River or Brimfield.

Do we want a world class casino? Then put it in a world class city. I can hear western Mass. complaining already. “We’ll depend on New England visitors!” No, not if there is a more exciting choice. Isn’t that what casinos are all about? Excitement. And nobody from Chicago’s flying in to gamble in Fall River. And no businessmen in Boston are going to drive 2 hours to hit the cornfields of Brimfield.

Further, once Suffolk is chosen, there will be no other casinos in the state. They can’t compete and they won’t compete. Look at what they’d be up against. Where would you go to play?

Wednesday, October 19, 2011

The Day the Product Broker Died

Today I reviewed the same 15 emails that I receive from the same 15 brokers every Wednesday. I’m sure I’ll do the same tomorrow. They are very nicely done. Some take you to lovely web sites which extol the values of the property. Some lead you to floor plans. All list 3 or 4 brokers ready and waiting to answer your call. The vacancy never changes.

Product brokerage is dead, and it is the entire landlord community that has allowed it. The typical broker feels that he is actually marketing and leasing a property if he or she does four things:

1. Stick a listing on CoStar.

2. Send the same lame email out weekly.

3. Present his or her client with a list culled from any responses to the above together with the classic and useless “tenants in the market.”

4. Wait for the phone to ring.

Product brokerage is a discipline that brokerage has given up on. The discipline is really quite simple but requires hard work. And the “big houses” don’t like hard work anymore as long as nobody demands hard work from them.

Product brokerage requires that a broker fully assess the attributes of the property-its location and neighboring submarket; the current tenant roster and why those tenants chose the property; its perceived class in the market—A, B, or premier; the reputation of ownership and management; all of its physical attributes from floor plate size to HVAC capacity.

From knowledge of the property attributes, a true product broker will match these against the tenants most likely to have an interest in the property. But a good broker can only do this if he or she maintains a detailed database of all tenants in the Boston market, appropriately categorized by submarket, lease expiration, preferred building quality, industry, and history of relocation, among other attributes, and the contacts at each firm.

Brokerage houses don’t have this information and that’s my challenge to the entire brokerage community. And my challenge to the entire landlord community. Tomorrow, ask your broker to provide you with his or her own list of the target tenants he or she is pursuing, EXCLUDING calls from CoStar, calls from emails, and the ubiquitous but useless “tenants in the market.” Your broker will not have a list. I guarantee it. They do not have demand side information that they have developed themselves. They may ask for a few hours but don’t give it to them.

Then the landlord community may just realize that, in their broker’s opinion, no matter how slick their latest email may be, or how fascinating their web site may appear, that you’re just another building with a “for lease” sign on it. Along with the other 10 buildings they’ve hung a shingle on.

Wouldn’t it be nice if brokers actually marketed your buildings?