Posts Tagged ‘ real estate finance ’

An Appraiser’s Assessment of Frederick’s Commercial Real Estate Market

The Panama Canal could save Hagerstown, but will it boost Frederick’s industrial real estate values?

Michael Pugh of Pugh Real Estate Group is one of Frederick County’s leading commercial real estate appraisers, and he recently shared his perspective of Frederick’s CRE market with a group of commercial agents and brokers at the Frederick County Association of Realtors (FCAR).

Appraisers are on the front lines of the commercial real estate market, so we were very interested to hear his impressions of recent activity in Frederick’s market.  Following is an overview of Michael’s presentation to FCAR’s commercial Realtors on March 27, 2013.

Overview of Frederick’s Commercial Real Estate Sectors

Housing:  Local homebuilding activity has a significant impact on Frederick’s commercial real estate, so it makes sense to begin there.  Housing starts this past September were up 25% from August.  Big national homebuilders have not been this optimistic since 2004.  Lot sales to builders for homes in the $350,000 – $400,000 range have increased from last year as a result.

Unsold homes and foreclosures may throttle the housing recovery, however.  Home prices have fallen 24% from their peak during the second quarter of 2007, so there are still many homeowners underwater on their mortgages.

Flex:  There is good reason that the next Matan project planned for Frederick is apartments, not flex.  Frederick County still has about 800,000 square feet of flex space available for sale.  A significant amount of that inventory is sitting on the market today because the owners either don’t seem to understand that there has been a recession, or believe that somehow their property values alone were unaffected by it.

Office condominiums:  During the recession, office condos held their value longer than any other commercial real estate in Frederick—the rate of sales slowed considerably, but the values held, mainly due to medical owner/users.  Prices for office condos in Frederick have remained relatively flat as a result.  There is currently only about 60,000 square feet of office condominium space on the market.

Office buildings:  Frederick has seen a decline in the value of office buildings, and marketing times have lengthened as well.  (MacRo Report has covered the reasons behind that decline extensively.  Office use in general is in transition, and large employers like Bechtel are leaving for more favorable business climates like northern Virginia.)

Retail:  Retail property values for lower quality assets (i.e. strip malls) in Frederick and Washington counties both took a huge hit during the recession.  There is a big price differential between lease rates in Frederick’s high quality retail assets—like Market Square and Clemson Corner—and lower quality assets—like older, dated retail properties on the Golden Mile.  The difference is as much as $40/square foot in the most extreme cases.

Retail development projects at Clemson Corner and Market Square on Route 26 have been a resounding success.  Look to Brunswick Crossing for the next big retail venture:  the town has approval for 300,000 square feet of commercial development, and an economic development team that is doing everything right to change the culture there and revolutionize the town.

Proposed retail development at the hotly-disputed Monrovia Town Center could also do very well, as the population in Urbana has exploded but there is relatively limited retail there.

Industrial:  A vacant industrial lot is the poorest-performing commercial real estate asset in Frederick County right now.  Manufacturing jobs, the life-blood of industrial real estate values, declined in Frederick during the recession and they don’t appear to be making a comeback any time soon.  Maryland is not high on the list of places for manufacturing businesses to locate.

However, the Panama Canal may succeed where Annapolis has failed—and save Hagerstown in the bargain.

The Panama Canal is undergoing a large expansion and will soon be able to accommodate super tankers for the first time.  There are only three deep water ports on the entire east coast that can also accommodate massive transport ships, and Baltimore is one of them.  That means Baltimore, and by extension, Hagerstown, is very well positioned to experience significant growth as a distribution hub.  Sites at the intersection of Interstates 70 and 81 would make great locations for warehouses.

Frederick County sits right on the path leading there.

Frederick’s Commercial Real Estate Market: 2013 1st Quarter Impressions

Leasing activity for quality commercial assets picked up, and sales activity during the first quarter of 2013 increased over the 1st Q of 2012.  For the first time in years, commercial appraisers in Frederick have comps that are less than one year old.

Cap rates are moving down—the better the asset quality, and the better the tenant, the steeper the slope.  Banks have been holding caps rates up a bit.  Two years ago, no commercial bank would finance above a 70-75% loan-to-value ratio; today, commercial banks are getting comfortable again with 80% LTVs.  As a result, cap rates are coming down to 4-4.5% for good quality assets in Frederick.

Commercial banks are chasing loans for medical offices and apartment buildings.  Most commercial bankers will tell you that there are not a whole lot of people (or businesses) in Frederick County with the capacity to qualify for a commercial loan right now.  If you want a good client, your best bet is to find a doctor.

Michael P. Pugh is a Certified General Real Estate Appraiser with the Pugh Real Estate Group, LLC., in Frederick, Maryland.  He specializes in the appraisal of improved and unimproved commercial and industrial real estate.  He is an Associate Member of the Appraisal Institute and has nearly completed work on his MAI certification. 

The authors: Rocky Mackintosh is President of MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He also writes for TheTentacle.comKathy Krach is a commercial sales and leasing agent with MacRo.

Local Lenders: A Key to Frederick’s Economic Recovery?

Is Maryland’s Lend Local Act enough to loosen small business commercial credit?

Most people think of It’s a Wonderful Life as one of the greatest, if not the greatest, Christmas movies ever filmed.

It also happens to be just about the best P.R. that local community banking has ever received. If anyone, anywhere, has ever done a better job of highlighting the direct impact that actively engaged “relationship bankers” have on the economic well-being of the communities they serve, please share it.

Ben Bernanke himself asserts that not one of the “too big to fail” banking institutions has an algorithm sophisticated enough to match the “in-depth local knowledge that community banks use to assess character and conditions when making credit decisions. This advantage for community banks is fundamental to their effectiveness.”

Of the few Frederick-area businessmen and women who came to the Weinberg Center for last week’s town hall meeting of Maryland’s Small Business Commission, a significant number claimed “trouble getting loans” as their most pressing issue. This isn’t unique to Frederick. All over Maryland, businesses owners are frustrated by the lack of “affordable and reliable credit” needed to grow their businesses.

Large institutional banks have tightened credit so much since the recession they may well find themselves the subject of an upcoming episode of Hoarders. (This is a great show to watch if you need motivation to clean out your garage. Or anything else, for that matter.)

Early in April, along with co-sponsor Senator Ron Young, the Maryland Senate passed Senate Bill 792 – Lend Local Act of 2012, which was subsequently signed into law effective July 1, 2012.  Simply put, the State of Maryland promises to use local banks for $50 million worth of deposits in return for those deposits being lent to small businesses at below-market interest rates. A loosening of the credit supply would go a long way toward overcoming some of the regulatory hurdles that Maryland business owners face.

However, $50 million across the entire state of Maryland doesn’t go as far as it may seem.  Not only that, but in speaking with one local community bank executive, who stated that he is “intimately” familiar with the legislation, it seems there is not that much enthusiasm for programs that involve government deposits.  ”We struggle with enough government red tape as it is,” he said, “and frankly such deposits are just not that dependable” when one factors politics in to the equation.

No question that several of Frederick’s large and small banks have taken serious hits on commercial loans and real estate used as collateral. But while real estate values continue to be a drag on balance sheets throughout the banking industry, local banks have come through this crisis in much better shape than most of their large institutional competitors.

It shouldn’t take an act of legislature to encourage Maryland to use local banks for state deposits. It seems common sense to infuse local lenders with capital when they are in such a great position to jump start our business communities out of this recession. And now is the time many major businesses that survived the recession are reporting record profits, and are crying out for capital to expand.

Smaller businesses are beginning to see the trickle-down effect and face the same needs for capital, as the Small Business Commission representatives admitted they hear over and over.

MacRo Report noted in a previous post that some economists are predicting the recovery from this recession will be regional, with states and communities led by fiscally responsible governments seeing the strongest (and longest lasting) improvements.

Frederick is uniquely situated in Maryland, and is poised on the brink of some exciting new development projects that will provide growth opportunities for new and existing businesses alike. There are any number of Washington and Baltimore developers who are beside themselves at the potential they see in Frederick’s future, and are drooling over the opportunity to get involved somehow.

It would be better for Frederick on many levels if the capital to finance these projects is provided locally. This is an instance where Frederick County’s “small town” culture can be leveraged—it’s certainly easier for our local banks to weigh risks and rewards of commercial lending in a business community as intimate as Frederick County. And keeping the money in town means Frederick keeps some control of its own destiny.

But can Lend Local really make enough of a difference? While it’s always refreshing to see Maryland trying to be part of the solution, the best thing O’Malley can do is move quickly to untangle the mess of taxes and regulations that discourage business in this state. Otherwise Maryland communities are destined to play Potterville to Virginia’s Bedford Falls.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes and

Local Housing Market Recovery Tied to Foreclosure Processing

 “Potomac Gap” offers further proof that Maryland legislation is slowing our region’s economic recovery.

Well folks, spring is in full swing, which means that all eyes turn once again to the housing market with fervent hopes that 2012 will mark the beginning of a sustained recovery in real estate.

There is some good news.

Foreclosures continue to fall in Frederick County, down to 55 in February from 65 in December. More importantly, the difference between the average home sales prices and average foreclosed home prices declined significantly. In February the average difference was $27,677, versus $91,614 last March!

Unfortunately, the housing market soothsayers are pointing to another surge in foreclosures this year, and all indications are that the Maryland (and by extension Frederick County) real estate market is going to be caught in the cross hairs.

As one expert noted, “The pig is starting to move through the python.”

Bloomberg News published an article in February pointing out that the housing markets of Fairfax County, Virginia and Montgomery County, Maryland are heading in opposite directions.

Both of these counties serve the same job market and have a nearly identical population size and demographic. So why has this so-called “Potomac Gap” developed between the performance of their respective housing markets? According to housing economists, this has happened because Virginia doesn’t require court approval to foreclose on delinquent home buyers.

This trend is not unique to this region. Economists are noting that throughout the U.S., the housing market recovery of the 24 states that require court mediated foreclosure is significantly lagging behind those states that do not.

In 2008, and then again in 2010, Maryland lawmakers passed legislation that gave homeowners more time to stay in their homes and required a court mediation process. This resulted in significant delays to Maryland’s foreclosure process.

Add to that the voluntary halt in foreclosures by major lenders as the “robosigning” settlement was finalized, and Frederick now has a foreclosure backlog of approximately 575 homes (about 60% of these are “pre-foreclosure” and are not listed yet). That may not sound like a lot–until you realize there are only 850 active home listings total in the county right now!

Once again, Maryland’s economy feels the effects of too much government intervention.

Maryland’s housing market will recover much faster if our lawmakers roll back some of that foreclosure legislation.

Maryland’s foreclosure process was once known as “the rocket docket” because it was so streamlined (as little as 15 days from borrower default to foreclosure sale). Court involvement was required to protect the homeowner and insure no lender improprieties, but deadlines were much tighter to move the process along faster.

There is no good argument NOT to pursue re-streamlining Maryland’s foreclosure process.  In fact, studies show that the longer process does not result in borrowers finding ways to make their mortgage work. Instead, an increased number choose strategic defaults, live in their homes without making payments, and ultimately delay the housing recovery.

We’ve written in the MacRo Report about a terrific collaboration between Frederick County government and local Frederick nonprofits to utilize our foreclosure inventory for affordable housing. This is a brilliant idea that solves two problems at once with very little taxpayer funding required to make it happen.

We are in desperate need of that kind of smart thinking at the state level, and soon, or Maryland’s economy will lag for years.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes for and

MacRo Report, Spring 2012: What’s Effecting Your Land Parcel Price?

Discover What Key Factors are Effecting Your Land Parcel Price

The following MacRo Report entry is written by Dave Wilkinson, Vice President of MacRo, Ltd. regarding the current factors that can influence the market price of land in Frederick, Maryland.

The land market in Frederick County is showing signs of increased activity this spring, as many land owners finally determine they are unwilling or unable to wait out the recession. Every potential seller who calls is interested in knowing “What’s the market value of my property?” On the most basic level, the answer is “whatever someone is willing to pay you for it,” but that generally isn’t a satisfactory response!

Here is a list of key influencers on land parcel prices:

  • LOCATION: Valuations will differ dramatically for a lot located in a high-demand suburban area like Urbana versus rural lots in north and west areas of Frederick County.
  • ZONING: Commercially zoned land fetches the highest price per acre, followed by residential and then agricultural.
  • UTILITIES: Are electric, telephone, natural gas and/or internet service available to the property, or are extensions needed? Is water and sewer provided by public systems or private well and septic?
  • IMPROVEMENTS: If there are existing buildings, are they functional or obsolete, and what is their condition?
  • SIZE: “Price per acre” is an overly simplistic measure – as property size increases, price per acre declines.
  • TERRAIN: Is the property flat, gently rolling, or steep? Is the land wooded, tillable or pasture?
  • ACCESS: How much road frontage exists, and will access points meet governmental standards for road adequacy, separation from adjoining property entrances, and required site distance?
  • AESTHETICS: Views, road or industrial noise, and condition of adjoining properties can enhance or detract value.

Interested in what the value of your property is? Call today!

Dave is a licensed Realtor and brokers many of MacRo’s real estate building lot listings, using his knowledge of zoning and subdivision regulations, real estate market conditions, and land development options to help MacRo’s clients achieve their goals. Contact Dave at 301-748-5670 or

Click here to download the complete PDF version of this spring’s MacRo Report!

Lessons from the New Third World- Frederick, Maryland

Can Leaders of Maryland and Frederick County be the Architects of a Regional Economic Recovery?

Good news is trickling in about the economy: signs of job growth, record corporate profits, a down tick in real estate foreclosures.

But it still feels as though the entire country is collectively holding its breath, waiting… waiting for the outcome of the 2012 presidential elections, waiting to see if the European Union can prevent member country defaults, waiting for the housing market to enter a sustained recovery.

Are you getting tired of holding your breath?

If so, here’s a good read: Boomerang:  Lessons from the New Third World, written by Michael Lewis, financial journalist and author of Liar’s Poker.

Boomerang came together from a series of articles that Lewis wrote for Vanity Fair magazine, and you can find most of those articles on their website. They are worth a read, if you want to understand the series of events that took the International Monetary Fund (IMF) to the brink of bankruptcy, and the potential impact to the fiscal health of the U.S.

The final chapter of the book is the focus of this article, and begins with Lewis interviewing Meredith Whitney, a banking analyst and frequent contributor to a variety of cable news programs.

Depending on whom you ask Meredith Whitney is either prophet or pariah. She appeared on 60 Minutes about a year ago predicting that U.S. cities and municipalities are in such dire fiscal trouble that there could be 50-100 defaults in the municipal bond (muni) market in the coming year.

The furor that ensued in the muni market as a result of that appearance resulted in a temporary crash and several death threats to her!

The defaults Whitney predicted have not come to pass, but what she says about the importance of fiscal responsibility at the state, city, and county levels makes a lot of sense.

States and local municipalities piled up debt and took extraordinary risks with pension funds just like corporations did during the go-go years of 2002-2008. Many states are now suffering because stock market gains failed to materialize, state spending ballooned, health care plans were underfunded, real estate property tax revenues declined, and federal subsidies were cut.

The states will survive, because they can cut funding to municipalities to prevent default, but where does that leave our cities and towns?

Whitney’s theory is that in recovering from this economic recession, the U.S. will reorganize into a collection of regional economies–“zones of financial security and zones of financial crisis”–with those regions where companies are able to flourish being the strongest. Obviously, individuals will go where the good jobs are, leaving those who do not have the means to follow jobs living in the areas that can least afford to support them.

A vicious cycle ensues.

So how do we prevent Maryland and Frederick from becoming a “third world” region of the U.S.?

Third World? “Oh, give me a break!” you might say.

Right now, our proximity to D.C. ensures a plenitude of federal jobs, to the tune of about 42% of all jobs in the region.

Those jobs have insulated Maryland and Frederick from the worst side effects of this recession, but 42% is an awful lot of eggs in the federal basket, in this man’s opinion.

If Maryland (and by extension Frederick County) is going to remain a region of financial security—a desirable place for people to live and corporations to locate—our leaders have their work cut out for them.

Up front, state government needs a serious ideological adjustment. Governor O’Malley and his administration need to understand how important an influx of corporate jobs are going to be to this region, and what “business friendly” really looks like. It’s a shame that Maryland had to resort to bribing Bechtel to the tune of $9.8 million to keep just a part of their operations here.

The MacRo Report Blog has repeatedly featured posts about PlanMaryland, which is in fact taking our state in the opposite direction of business friendly.

On the local level, the Frederick Board of County Commissioners led by Blaine Young has taken dramatic and quite controversial steps to ensure that Frederick enjoys fiscal health, through a focus on the following:

While not taking as aggressive an effort as the county government, the leaders of the City of Frederick have moved positively toward trying to ensure that their treasury remains solvent and can meet its obligations.

What does the success of these endeavors depend upon?

First and foremost, voters should pay very careful attention to who they elect to run our state and local governments!

Conservatives may be lukewarm toward the current slate of presidential candidates, but it’s clear from this blogger’s perspective that the majority of the efforts made by our local elected leaders are pressing forward with an approach to limiting government as a means of lifting our economy out of this recession.

If the State of Maryland doesn’t get with the program, then Frederick is going to need to develop greater autonomy in creating its own micro-economy. A charter government structure could go a long way to establishing greater control of Frederick’s economic destiny.

What do you think?

Can Frederick County stop holding its breath and start engineering its own economic recovery?

Do you believe that despite the efforts within our county to be more business friendly, that Maryland is tightening the noose on the state’s economic competitiveness in this region?

How would this region survive ?

Will local corporations and citizens continue their outmigration to the greener pastures of Virginia and other states?

Speaking of business friendly, stay tuned for a future post when we answer the question “what does business friendly REALLY look like?”

The author: Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He also writes for and

SBA Helping Owners Tap Their Real Estate Loans for Equity

The following excerpt is from news article by Randyl Drummer.

Business owners may be overlooking a SBA program that helps them refinance commercial real estate loans to obtain working capital!

“The 504 Loan Refinancing Program—implemented under the Small Business Jobs Act of 2010—allows small businesses to refinance not only existing debt but use excess equity to obtain working capital that can be used to finance eligible business expenses”

Click Here to read the complete article.

Amortizing Tenant Improvements in a Challenging Real Estate Market

A Creative way for Tenants and Charter School Start-Ups to reduce their annual rental payments.


During the past couple of weeks, the MacRo Report has provided an overview of the challenging market for commercial office and warehouse/flex real estate in Frederick County.

It has touched on high vacancy rates, shadow space, and the glut of properties that entered the market just as the real estate recession became evident.  Among many other circumstances, all are putting pressure on prices and lease rates.

This economy has put both developers/owners and buyers of commercial real estate in a tough spot.  Prices for commercial space are flat and dropping, however many businesses aren’t in a position to take advantage of these opportunities as they struggle with the “buyers market.”

Those that could buy aren’t sure the market has bottomed out.

Leasing is the safe bet right now.

Many, if not most, commercial spaces require some type of tenant improvement (TI) in order to customize or modify the space to the needs of a particular business.  This can include walls, cubicles, paint, carpeting, doors, rest rooms, and much more.

Landlords typically provide a TI allowance that pays for some of these improvements. The tenants or buyers of commercial space are financially responsible for the remaining costs; when property is leased, these costs are paid up front or amortized over the initial lease term.  The terms of the allowance for, and financing of, improvements are covered in cost of the lease.

In order to mitigate the risk of a tenant default, landlords typically seek some sort of personal guarantee or additional collateral beyond the limited liability of a corporation or an LLC.

In recessionary real estate markets, landlords will very often offer reduced rental rates as a concession to attract tenants to their vacant space, but rarely compromise on the guarantees when significant customized TI is involved.

Take for example a lease transaction that is being facilitated by MacRo, Ltd. for the Frederick Classical Charter School that has sought about 30,000 square feet of space.

The Frederick County Public School system provides operating funds on a per-pupil basis for approved public charter schools, but Maryland state law has traditionally not awarded public funding for charter school groups to secure their facility or make capital improvements therein.

Therefore, beyond a state grant of about $500,000 for furniture and equipment, the typical charter school must find a way to manipulate their operating budget so as to “rob” the necessary funds for facility rental and maintenance.  These often come from such line items as curriculum and operations.  In the case of the Frederick Classical School, the founders are confident that they can scratch together around $350,000 per year (just under $12.00 per square foot) to pay the base rent and approximately $1.4 million in tenant improvements, which a landlord is considering to amortize over the initial term of the lease.

This is where the length of a lease becomes critical for any tenant who receives landlord funded tenant improvements.

For example, if a landlord were to finance the $1.4 million over a four year period and include an annual base rental rate for the shell of say $120,000, the combined annual rental rate for the school would exceed $535,000 or nearly $18.00 per square foot as shown in the above chart.

Simply put, such a rate is unaffordable for a start-up charter school entity.

If the initial term of the lease was extended to eight years, the amortization of the TI would spread over the same period, which would allow the annual lease rate to fall to $360,000 in the first year.  Put another way, the per square foot rent would drop by 33.3% to $12.00.

A sixteen year initial term could reduce the first year’s rent by nearly 50% from that of a four year initial term.  With a first year rent of $273,000 ($9.10 per square foot), Frederick Classical would have that much more of their operating budget to put toward student education.

The risk for a landlord who is willing to finance the TI over the initial term of a lease for a public charter school is that it is very unusual to obtain any kind of outside guarantees from the school founders or the Board of Education.  On top of that the school board always retains the right to terminate a charter school’s charter at any time with just cause.

Therefore, any landlord willing to provide $1.4 million in customized TI without guarantees of some sort is taking a significant risk to the point that it becomes philanthropic, as they are aiding a worthy not-for-profit cause.

The challenge for the Frederick County Board of Education is to be willing to take a leap in breaking with their tradition of only granting initial charters of four years to these start ups.  Extending the initial charter term results in a more realistic risk profile for private investors and real estate developers, while allowing the school to have an affordable rent.

In the end, since the Board has the ability to terminate a school’s charter at any time with just cause, there is no reason that the initial term can not be set for terms as long as 15 or more years, as is the case in states such as Washington, D.C., Nevada and Arizona where public school charter programs are flourishing.

Frederick Classical Public Charter School is the first of the three Frederick County charter schools to seek a developer who will provide a customized build-out of the school’s needed space.

The only thing standing in the way of moving forward is the willingness of the Board of Education to recognize the dilemma that faces the real estate developer, their investors and the start-up public charter school.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes and

Have Office Vacancy Rates Peaked?

The office vacancy rates in Frederick County are strongly influenced by employment, but things are starting to improve.

The Washington, DC market (including Frederick County) was somewhat insulated at first from the real estate collapse that resulted from the pop heard around the world.  The local office market, which had already reached a vacancy rate of over 12% in 2004, dipped to under 9% a year before emergency legislation was working its way through Congress to save big banks and Wall Street.

With hope that the well-defined recession was just another two-year cyclical swing, business held on for a while.  Gradually, however, realization dawned that the cavalry was not going to save the day and more and more businesses either shut down or cut staff.

Eventually office vacancy rates in this extended DC submarket grew (despite some encouraging dips) to nearly 16% … and that is with very little new product being introduced to the market over the last 5 years.

Encouraging signs?

In many camps, there seems to be a bit more hope that the economy is showing faint, but reasonable signs of an upward turn.  For many sectors of the real estate market anything that offers a glimmer of promise is exciting.

According to data gathered by the CoStar Group, profits of many major corporations have risen from a low of about $650 per employee in early 2009 to a 15 year high of nearly $1,500 at the end of the 2nd quarter of 2011.

During this same period, however, job growth has only crept along at very sluggish levels.  Clearly, through the use of new technologies and outsourcing, businesses have learned to do more with less.

The global markets continue to struggle with finding ways to restructure government spending, revenues and most importantly high levels of debt; so business remains very cautious to the idea of any significant expansion.  CoStar real estate economist Adrian Ponsen recently projected “weaker near-term office demand growth. With our weaker near-term expectations of office-using employment growth, we are expecting about 13% less office demand growth than previously forecast through 2015 and higher vacancies in the near term.”

After major cutbacks, many businesses left the desks and offices of downsized employees empty rather than tackle relocating to a smaller space.  As a result, the ratio of office space per employee has risen, creating what is known as shadow office space – meaning while it is leased, it is under-utilized.  Such space will typically be the first corporate America will fill before relocating to larger quarters or expanding into the vacant space next door.

CoStar estimates that this Shadow Space may add as much as 5.4% to vacancy rates nationally, while only 2.2% in the Washington, DC real estate market.  On top of that, with minimal new construction in the pipeline and a rise in telecommuting, the modest gains in the local and national employment picture do not mean that vacancies will fall in any significant way.

But the good news is that despite the fact that office building owners are making deals throughout the market to fill vacancies, rents are still projected to increase at very modest rates of around 2.1% during that term.

How many jobs will it take to fill over 1.3m square feet of office space?

In the 2nd quarter of this year vacancy rates in the Frederick office market peaked at over 16% and dipped a bit in the 3rd.  This equates to nearly 1,350,000 square feet of empty space, not counting shadow space … and before we factor in the decision by Bechtel to transfer over 600 employees to Virginia.

If we use a factor of 190 square feet per employee, that comes out to over 7,000 jobs needed to fill those buildings … before we consider the 1,220,000 square feet of vacant flex industrial space.

That’s a lot of jobs!

The population and job growth in Frederick County typically outpaces that of Maryland, and the unemployment rate in Frederick tracks lower.  Strong employers like MedImmune and NCI/SAIC are growing and bringing new jobs, and Ft. Detrick continues to be an attractor and incubator of new biomedical technology and business for Frederick County.

Among many other positives that Frederick County has to offer are proximity to the Washington, DC and Baltimore markets and the fabulous community that has been created here.  Combined with aggressive landlords, we are sure to beat the national odds of staying ahead of the sluggish national projections.

Rocky Mackintosh, President, MacRo, Ltd., a Land and Commercial Real Estate firm based in Frederick, Maryland. He is an appointed member of the Frederick County Charter Board. He also writes and

Landlords Likely Exempted from New Lease Accounting Rules

The following excerpt is from CoStar news article by Randyl Drummer.

New accounting standards changes requiring companies to capitalize real estate and equipment leases on their balance sheets will not apply to commercial property owners and landlords.

“The International Accounting Standards Board (IASB) and the U.S.-based Financial Accounting Standards Board (FASB) signaled at their meetings Oct. 19-20 that they will exclude lessors and owners Parents voice concern that new bound horoscope aries could make it tougher for kids east of the river to get into better schools across town. of investment properties from the proposed rules. The panels expect to issue a revised exposure draft of the lease accounting standard in the first half of next year, with adoption of a final standard targeted for the second half of 2012.”

Click Here to read the complete article.

What You Need to Know About Capitalization and Property Development

To capitalize or to deduct property development costs?

Land and real estate developers, regardless of size, are faced with tax issues that can have a significant impact on their resources and profits. Some of these issues relate to tracking and capitalizing property development costs. It is important for any real estate developer to be familiar with basic tax concepts regarding capitalization, in order to ensure they are following the required tax rules and are not taking deductions for costs that should be capitalized.

Brokers that acquire real estate with the intent to resell it in a short period of time as well as developers that acquire real estate with the intent to build, improve or develop the property can incur costs that may not be deductible in the current period. Such costs will be recouped either through depreciation deductions over time or recovered upon sale by increasing the cost basis of the property.

What types of costs are subject to capitalization?

Costs incurred to produce the property are not currently deductible. Taxpayers must capitalize all the direct costs of producing the property and the real property’s allocatable share of indirect costs. “Production costs” include the cost to construct, build, develop or improve real property. Processes such as grading and clearing of land, excavating for the purpose of roads, laying foundation or lines for utilities, plumbing and/or electrical work, qualify as production costs. Labor costs such as standard wages, overtime, employee benefits or payroll taxes are also included in direct costs. All indirect costs allocatable to the construction activities, such as rent, repairs and maintenance, insurance utilities and depreciation, should be capitalized as well.

There are costs a developer may incur in the pre-production phase that are also subject to capitalization, if it is more than likely the property will be subsequently developed. Some of these costs include property taxes, government permits, zoning variances or engineering and feasibility studies.

Marketing, selling and advertising costs, although very important to the sale of the property, are not considered construction related costs and can be expensed in the year incurred.

Internal Revenue Service (IRS) regulations may also require the capitalization of interest on debt incurred with respect to a property during the production period. The production period is considered to begin on the first day that any physical production activity is performed (i.e. clearing, grading, demolition, etc.). Production ends when the property is ready to be placed in service or is ready for sale. Completion date can be a problematic subject for those involved in the construction of multi-unit buildings. From a tax perspective, each unit is considered to be independent of others as long as each unit is not contingent on another in order to be sold or placed in service. Capitalized costs, in this case, must be allocated to particular units using some reasonable method accepted by the IRS.

There are other considerations that brokers or real estate developers should take into account before investing.  Knowledge of the capitalization rules and regulations should be a priority for companies as these rules affect the timing of deductions with regards to income taxation.

Article provided by Anca Stradley, MKS&H.

About: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick, Maryland.  MKS&H helps owners and organizational leaders become more successful by advising them regarding their financial, technology and management needs. Please visit for more information.

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