IntelligentCRE

Commercial real estate has seen a tidal wave of activity this year. Sam Zell sold his darling, Equity Office Properties (the nation’s largest office REIT) to Steve Schwarzman’s private equity group, The Blackstone Group, for $39 million. In less than two months, 50% of the properties were “flipped”, mitigating nearly 70% of the purchase price.

In an ironic twist similar to that found on a reality show, Schwarzman continued his game by selling 10% of The Blackstone Group in an IPO, and a similar portion directly to the Chinese Government. Since then (two months ago), the publicly traded, private equity firm’s stock dropped by 20% on fears of new, less favorable tax treatment for private equity firms. The Chinese Government is not happy, nor are the speculators who bought in, as they are finding themselves to be the greater suckers.

The Greater Sucker Theory was the driving force behind the Dot Com Bubble, the housing bubble, and much of the speculative activity in commercial real estate today.

In real estate, as each round of speculation raises the assets book value, so too does it lift the brow on the face of the county tax assessor. An unfortunate consequence, passed-through to tenants, is the incremental tax increase. To add insult to injury, these greater-sucker landlords, who had no regard for the underlying economics of the asset, are now raising rents to cover their increasing cost of capital and to justify the purchase to shareholders.

But tenants don’t have to be spectators in this game. Relocating to a building with a long-term holder is recourse, but for tenants with term on their leases, the increased taxes are inevitable. As far as increasing rents to appease the greater sucker landlord, well that’s negotiable.

Rory Johnson 8/12/2007

rory@intelligentcre.com