Jeff Keitelman

Some real estate brokers offer to share a portion of their brokerage commissions on certain deals as a way to reduce transaction costs for their best corporate clients. Is this fairly common practice of commission sharing lawfully permitted in your state?

State laws are all over the map on this issue. Our recent survey shows that 10 states actually prohibit any type of commission sharing, and, of the 40 that technically allow it, most state statutes and accompanying regulations and guidelines (state laws) are narrowly drafted. And in some cases, like when the U.S. Government is the tenant, even federal law or custom may prohibit the practice. Accordingly, this practice of commission sharing requires careful consideration of all facts and circumstances on a case-by-case basis.

Some states permit commission sharing by brokers but limit that permission to sharing only with other professionals (like lawyers) who are licensed in that state. Other states allow commission sharing whether or not the non-broker party is licensed. Some states prohibit commission sharing with unlicensed parties, but only to the extent the non-licensee performs a service for which a license would otherwise have been required. Some states permit commission sharing with a party that is licensed in any one of the 50 states, but prohibit commission sharing with those licensees if the ultimate beneficiary of the share is a non-licensee. And still other states limit that ultimate-beneficiary analysis only to the state in which the relevant property is located.

Most states that allow some form of commission sharing require written disclosure of the fee-sharing arrangement among all interested parties. In most instances, a finding of improper commission sharing or lack of required notification can result in fines, penalties or license revocation of the broker involved. Accordingly, even in those states that do not require disclosure, an agreement documenting the commission-sharing arrangement may be the prudent course of action in any event. Moreover, a carefully crafted indemnification provision might be advisable to protect the parties in the event the commission share is reviewed by regulatory authorities at some later date. In states where commission sharing is technically prohibited, it still may be desired by the parties that the broker share some of the financial burden of a transaction. The parties then often structure some way for the broker to be liable for the payment of tenant improvement costs, costs related to the landlord’s improvement work, design costs, moving costs, etc. In many states, however, the definition of commission sharing is broad enough to include “expenditures made for a principal” or wording of similar import, thereby obviating the ability of a broker to lawfully pay or share in such costs. Again, prudence would dictate a thorough review of the regulatory environment before proceeding in this manner.

For larger corporate users with omnibus service agreements with major brokerage firms, it may be easier to mitigate the burden caused by state law prohibitions against commission sharing. For example, many such agreements provide for a market-rate commission structure on individual sale or lease transactions but also include many administrative and project management services to be provided by the broker at no additional cost to the user. In addition to saving money, these large corporate users find that shifting the burden of real estate administration, for example, adds additional value, including with respect to the reporting requirements mandated by Sarbanes-Oxley. Given the facts of a particular case and the applicable state law, it may be possible to identify similar avenues for cost shifting to enable the provision of an indirect benefit within legal boundaries.

Unfortunately, at present there is no comprehensive regulatory scheme in place that can be used as a guideline for evaluating commission-sharing arrangements across the 50 states. If some type of commission sharing or similar arrangement is desired, prudent practice would dictate that the parties review the specific facts of the applicable case in the context of applicable law.

A “good real estate investment” can mean different things to different people. For this article, the definition of a good real estate investment is:

“A real estate ownership interest, whether a personal residence or rental property, that increases one’s net wealth by a fair rate of return on their invested cash equity; for the corresponding amount of risk they are taking by owning a relatively high risk asset.”

What that means is that if you are going to put your invested cash equity into real estate, your net worth should improve by a greater amount than if you invested in a similarly risky asset. And “invested cash equity” isn’t the property price; it is how much cash you took from your bank account to acquire the property, which includes your down payment, plus closing costs, plus rehab costs.

Realize a lot of things can go wrong with real estate ownership, so you had better get a fairly high return on your invested cash equity for it to be a “good deal”. So you ask, how would one figure that out?

For investment properties

Your returns are part cash flows and part appreciation in value. For example, if your property rental income minus expenses produced $250 per month positive ($3,000 per year); and your invested cash equity was $50,000, that’s a cash on cash return of 6.00% ($3,000/$50,000). And that is a pretty darn good deal in real estate.

To add to that, let’s say you project net appreciation in value contributing an extra 1.0% or 2.0% return per year (after subtracting your projected estimated costs of capital repairs and improvements). Summing the cash flows and net appreciation could equal about a 8% to 10%+ projected return per year on a long term basis; and if you achieve those numbers….. that is a good real estate investment!

Some investment properties don’t cut it! Most fancy condos or beach houses, where the net rental income is very low compared to the purchase price, usually have projected negative cash on cash returns. So if you buy a fancy property with negative (4.0%) cash on cash returns, even if it appreciates 2.0% per year, you are typically at a 0.0%, or worse, return on your equity cash investment. And that isn’t a deal most experienced investors would take.

For personal residences

You will also be putting down a large amount of cash equity and the calculations are really a little more complicated and difficult because you need to look at how much you are paying in housing expense versus how much that amount would be if you were just renting someone else’s property. So the overall question again is, “Is your wealth going to improve by owning the property?”

Some general guidance herein. As a general rule, if you are not planning to own it for at least five years you will most likely not be adding to your wealth. Any appreciation in value will not compensate for the 8.0% to 10.0% transaction costs on the buying and selling of your property. And even worse, the monthly ownership expense is usually higher than if you just rented a similar property. Therefore, if you don’t plan to own the property a long time, and the longer the better, you will probably do better renting and leaving the hassles and costs of ownership to a landlord.

So a good real estate investment is really one that will increase your net worth over time. The longer you own it, the better the chances for that appreciation in value and wealth building.

As proof positive on this, find someone who has owned real estate for 20, 30, 40 years and ask them what is a good real estate investment? It is generally easy to find them, they are retired, living comfortably, and usually happy to tell you about the properties they bought decades ago. (credit to leonard baron)

 The American Institute of Architects (AIA) semi-annual Consensus Construction Forecast, a survey of the nation’s leading construction forecasters, projects a 6.4% increase of construction spending in 2013.Despite the lingering effects of an over-built housing market, the continued difficulty to obtain financing for real estate projects, budget shortfalls at state and municipal governments and the anxiety surrounding the prolonged European debt crisis, there are signs that the U.S. design and construction industry will be improving.

Corporate profits have returned to pre-recession levels and businesses have subsequently been increasing their capital spending, borrowing costs are at record low levels and pent up demand for commercial and retail projects factors into what projects to be a 2.1% rise in spending this year for nonresidential construction projects.

“Spending on hotels, industrial plants and commercial properties are going to set the pace for the construction industry over the next two years,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “The institutional market won’t experience the same growth, but healthcare facilities and places of worship are poised for a positive economic outlook in that sector.”

Remarking on what could derail a positive turnaround, Baker added, “We are concerned that the unusually high energy costs, given the overall weakness in the economy, might trigger a jolt in inflation and hamstring economic recovery.  The housing market also needs prices to stabilize and to resolve the high number of delinquencies and foreclosures before it can fully recover.” (credit d, barley wpc)

The Oracle of Omaha has finally made it to the cover ofTime magazine. It’s a first, which seems long overdue, considering Warren Buffett’s investment wizardry and, increasingly, his outspoken willingness to talk straight about everything, including the future of the American economy.

On that note, the profile of Buffett — an excellent read titled “Warren Buffett is on a Radical Track” — contains the octogenarian’s thoughts on the U.S. housing market. It is a succinct analysis of what Buffett believes is the intricately linked relationship between housing starts and employment.

Once we get back to a million housing starts per year”– the current tally is 685,000 — “I think pundits will be surprised just how fast unemployment will come down in this country,” he says. “There are 4 million people hitting age 22 every year in this country. Sure, you can double up on households for a while, but at some point, hormones kick in, and living with your in-laws loses its allure.” Buffett notes that nearly every one of his major non-housing businesses has had several strong quarters, and Berkshire companies are making a record number of investments, the vast majority of which are in the U.S. “I am 100% sure that people in this country will be doing more business 10 years from now than they are today.”

You heard it from the Oracle of Omaha. Anyone eager to bet against him?

The author of the article, Time assistant managing editor Rana Foroohar, lends some context to Buffett’s perspective.

It’s easier to have a bullish view on America from Omaha, where unemployment is only 4%, family-owned businesses abound, and the economy in general was never as bifurcated as in many coastal or Rust Belt areas. But Buffett insists his optimism isn’t emotional but quantitative: he focuses not on media headlines about America’s inevitable decline or cheerleading about innovation and education but on the underlying data. Basic demographics favor the U.S. over nearly every other rich country in the world. And with corporate America so lean and inventories so low, the growth engine, in his view, has to kick in soon.

Not a bad line of reasoning for eager Americans to hear as they wonder whether there’s way out of this long, hard economic slog. (credit, L, Vecsey)

California commercial real estate developers and their bankers are growing optimistic about their industry’s prospects, a report said.Although the national economy has given mixed signals in the last six months, California’s markets for office and industrial space have made progress, albeit uneven, according to the semiannual Allen Matkins UCLA Anderson Forecast.

“The progress, such as it is, has been driven by the steady employment gains in coastal California,” the report said.

Businesses filling offices include professional, technical and scientific services firms along with healthcare companies. Industrial and warehouse space is being taken by manufacturers and export-related businesses.

The forecast is based on polls of developers and their financiers about their sentiments for the coming three years. Their responses varied by region, with markets where the tech industry is strong showing the most promise. San Francisco and Silicon Valley, tech hotbeds, ought to be the first areas where nonresidential construction is renewed, the report said.

In Southern California, some office landlords are finally beginning to see tangible evidence of a recovery taking hold, the report said, as rents and occupancy stabilize in their buildings.

“Clearly, Southern California office space markets have not recovered and the fundamentals do not by themselves support another building spree, but the free-fall of 2008 and 2009 is over and office markets are, little by little, getting better,” the report said.

Developer optimism combined with stronger job growth in San Diego and coastal areas of Los Angeles County such as Santa Monica suggest nonresidential construction will return to San Diego and parts of Los Angeles before the balance of Los Angeles County and Orange County.

Bay Area industrial property developers were most optimistic about Silicon Valley as the location for future construction. Orange County got the most support in Southern California, where three-fourths of those surveyed said they were in the process of putting together new industrial projects. (credit to, r, vincent, la times)