California Mortgage Bankers Association 1955-2005
E-News
Commercial/MultiFamily
"The Voice for California's Real Estate Finance Industry"
Volume III, Issue III
March 2006
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California Mortgage Bankers Association 1955-2005 E-News
Commercial/MultiFamily
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"The Voice for California's Real Estate Finance Industry" |
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Volume III, Issue III |
March 2006 |
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- Have Company News You'd Like Other CMBA Members to Know About? Submit Press/News Releases to Dustin Hobbs, CMBA Communications Director -
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Headline News
Foreclosures Rare in Katrina-Ravaged Zone
Flood Insurance: Shifting Liability Stirs Debate
Industry News
Sacramento - Spec office complex planned for Rocklin
CBRE | Melody Arranges $255 Million in Financing for Retail Property
Los Angeles - Captial Condos? Critics Hate the Sound of it
San Francisco - Blackstone bets on valley with deal for CarrAmerica
Johnson Capital Arranges $16.5 Million Condo Conversion
Analysis
Business Expansions Down - Experts Say Activity Could Pick Up in 2006
As Downtown Oakland Fills Up, Lease Action Moves to Airport Area
GlobeSt.com - Experts Remain Optimistic But Worry Some at ‘Real Estate 2006’ Conference
East Bay - Opportunity - and Cash - Knock
Commercial Real Estate Market Continues to Improve, NAR Survey Shows
Office, Industrial Vacancy Down in SoCal; Costs Curtail Development
Compliance News
** Special Report: Applying the Overtime Rules to the Financial Services Industry
Laura P. Worsinger, Esq., Senior Counsel, Buchalter Nemer, CMBA Member
CMBA News
CMBA Legislative Day Pictures Now Available Here!
New President's Council Sponsor - First American Title Insurance Company!
Calendar
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Headline News
Sacramento Bee (3-15-06 )
Andy Furillo, Bee Capitol Bureau
The flame flickered low on an infrastructure bond deal Tuesday, with Assembly Speaker Fabian Núñez saying the package is likely headed for a vote on the November ballot, rather than the June 6 primary.
"We're back to square one," Núñez said in a Los Angeles radio interview.
Senate Democratic and Republican leaders, meanwhile, met during the day with Gov. Arnold Schwarzenegger, which prompted gubernatorial spokeswoman Margita Thompson to say the administration remains "cautiously optimistic" that as long as people are talking, a deal still could be struck to put something on the ballot in June.
Núñez, D- Los Angeles , sought clarification from Secretary of State Bruce McPherson on the legislative deadline to submit a measure for a June vote.
McPherson initially set the deadline for last Friday but has since suggested the March 10 date was flexible.
In a response letter to Núñez, McPherson said the Legislature and the governor can go beyond the deadline if they agree to shorten the public display period for the ballot arguments from 10 days to eight and if they agree to pay for a supplemental ballot pamphlet.
Perhaps signaling the fading prospects for a bond deal, Núñez planned to attend a University of California Board of Regents meeting today in Los Angeles . Schwarzenegger also made other arrangements, scheduling an appearance at the California After School Summit in Sacramento .
No bond votes were scheduled Tuesday, a day after Núñez called the Assembly together for an evening session but sent lawmakers home without taking any action amid blanket Republican opposition and some internal grumbling among Democrats over an amended infrastructure plan.
Schwarzenegger opened the political year in his State of the State speech by calling for a $222 billion, 10-year infrastructure plan that would be funded by $68 billion in publicly approved bonds to upgrade the state's highways, levees and schools, among other things.
He subsequently increased the bonding level in his plan to $71 billion.
Democrats later agreed among themselves to a $48.6 billion plan that would be paid over four years and include more funding for transit than envisioned by Schwarzenegger, as well as programs for low-cost housing and urban parks.
Legislative Republicans, however, blocked the deal, saying it lacked a Northern California surface-water storage component.
They also said the plan fell short on the "design-build" approach to streamline contracting, failed to sufficiently streamline the state's environmental review process and contained too many items that had nothing to do with infrastructure.
Assemblyman Keith Richman, R-Northridge, said the plan Núñez hoped to submit to his house on Monday night would not have attracted a single Republican vote.
That was also the case in the Senate, when the Democratic package died without any GOP support for a proposal that needed two-thirds approval to pass.
"There was just no support in our caucus for what was felt to be a fiscally irresponsible bond package," Richman said of the Assembly Republicans, adding that "the prospects are dim for anything happening right now on a bond measure."
At least a few Democrats in the Assembly appeared ready to back away from the party's bond plan after Núñez massaged it with amendments from the version that was shot down on the Senate floor Saturday.
The Núñez version included a $500 million water storage plan favored by Schwarzenegger.
It would have allowed the Legislature at a later date to allocate the money to any or all of three locations on a two-thirds vote, with the cash rolling back to a groundwater program if lawmakers couldn't pull the trigger on a dam site by 2018.
Núñez's plan also took back some of the money the Senate had earmarked for urban parks, exempted 211 bridge reconstruction plans from California Environmental Quality Act provisions and put $250 million more than the Senate did into Highway 99 improvements - threatening other Northern California road projects.
Senate President Pro Tem Don Perata, D-Oakland, issued a memo to his own caucus - which he also made available to the media - at the outset of Monday's Assembly session, pointing out the several areas of disagreement between the measure he put up and the amended version offered by Núñez.
The speaker, in his radio interview Monday, dismissed the notion that he and Perata were at each other's throats. He said the two infrastructure versions were "pretty similar," but with "a few exceptions, which we thought were going to help deliver Republican votes, and they didn't."
With no agreement in hand, Núñez said, "We're going to be working day and night to make sure we put something on the ballot by November of this year."
State Sen. Deborah Ortiz, D-Sacramento, said the way things played out in the Assembly this week, "It appears there isn't a consensus among Democrats" in the Legislature's lower house.
"Otherwise, they would have taken up the measure," Ortiz said.
Assemblyman Dave Jones, D-Sacramento, said the disagreements were to be expected.
"Is there ever a consensus anywhere among Democrats?" he said.
"There are always going to be different viewpoints. But on something as large and as important as this, there are going to have to be a variety of compromises made."
By midafternoon Tuesday, Assembly members had pretty much given up on the chance of any bond action on their part.
"I'm going home," said Republican Tim Leslie of Tahoe City .
"I would be surprised if there weren't a group of people sitting around a table somewhere talking, but I don't know who, where, or if at all."
Foreclosures Rare in Katrina-Ravaged Zone; Lenders Show Patience
MSNBC (3-15-06 )
Martin Wolk, Chief Economics Correspondent
Nearly one in every eight mortgage holders in Louisiana and Mississippi was considered seriously delinquent at the end of last year, but few lenders initiated foreclosure proceedings in the hurricane-ravaged area, a mortgage bankers group reported Tuesday.
Nearly 76,000 out of a total 632,000 mortgages were 90 days overdue or more as of Dec. 31, putting them in the seriously delinquent category, according to the Mortgage Bankers Association study. But almost no new foreclosure proceedings have been started because of government and industry actions giving owners more time to bring their mortgages up to date.
Overall about 21 percent of mortgages in Louisiana and 17 percent in Mississippi were at least 30 days delinquent as of Dec. 31, representing a slight improvement over the previous survey conducted at the end of September, just a month after Hurricane Katrina severely damaged or destroyed thousands of homes along the Gulf Coast.
But most of those mortgages have now moved into the "seriously delinquent" category, meaning payments are at least 90 days past due.
Normally that would mark a time when mortgage lenders could initiate action to take control of the property through foreclosure, but so far that has been extremely rare in the hurricane zone, according to the mortgage bankers.
In fact, foreclosures in Mississippi and Louisiana are much more rare than elsewhere in the country, in part because of government and industry "forbearance" programs that give homeowners more time to bring their loans up to date.
The rate of new foreclosures in the fourth quarter was only 0.16 percent in Louisiana and 0.26 percent, compared with the national rate of 0.42 percent. In both states, the rate was at least three times as high in the comparable year-earlier period.
In Louisiana, for example, lenders began foreclosure proceedings on only 657 homes in the fourth quarter, compared with nearly 2,400 in the second quarter, the last full quarter before Katrina, according to the MBA figures. In Mississippi lenders began foreclosing on 576 properties, compared with 1,400 in the second quarter.
All told there are about 630,000 properties with mortgages in Louisiana and Mississippi, according to MBA figures, of which 123,000 were at least 30 days delinquent. In the New Orleans area alone, at least 95,000 residential structures, or two-thirds of the total, suffered damage totaling $8 billion to $10 billion, according to a previous study by the mortgage bankers.
Shifting Liability Stirs Debate
San Diego Union-Tribune (3-8-06 )
Michael Gardner, Copley News Service
SACRAMENTO – As a series of late-winter storms keeps Northern Californians on edge, lawmakers are piecing together a series of measures that could fundamentally shift the financial responsibility for flood cleanup to homeowners and local agencies.
Legislation that would require mandatory flood insurance and transfer liability for levee failures from the state to cities and counties has already split lawmakers and put Gov. Arnold Schwarzenegger in the middle.
California maintains about 1,600 miles of Sacramento Delta levees that protect sprawling urban growth and farmland. In addition to lives and property, the system also safeguards two-thirds of Southern California 's water supply that flows through the Sacramento Delta. A massive levee failure, such as one that occurred two years ago, could draw saltwater from San Francisco Bay deep into the delta's freshwater channels.
“We have two choices,” Schwarzenegger said earlier this year in promoting his bond plan for levee safeguards. “Invest in flood protection, or . . . invest in cleanup.”
Schwarzenegger recently doubled the size of his flood package to $6 billion after failing to secure guarantees that the Bush administration would finance an equal share of levee work.
The governor acknowledged that his move could give the federal government an excuse to ignore the state's call for aid, but he said, “I believe the threat of levee failure in California is too great and we must take action.”
Counting on federal dollars is risky. The federal government has failed to keep its promises to finance a large share of flood protection, investing just $600,000 compared with the state's nearly $90 million over the past five years, according to state records. Congress in 2004 authorized $385 million for California water projects – including flood control – over the next 10 years, but none of the money has been appropriated.
In Sacramento, some lawmakers are pushing mandatory insurance for those living in low-lying areas at risk of flooding to limit the state's exposure as the deep pockets of last resort should levees fail.
Flood insurance can vary by region and by mortgage requirements.
The National Flood Insurance Program reports that homeowners can buy a minimal policy for as little as $302 a year. A limited business policy would run $651 annually.
Homeowners have mixed feelings about mandatory coverage, said Rege Farina, who lives steps away from the Sacramento River .
“They'd be foolish not to have it,” he said. Farina said he is covered, but he's not sure it should be required. The uninsured “pay taxes too,” he said.
Schwarzenegger is opposed to requiring insurance. “That should be up to the individual,” he said.
The Republican governor is, however, pushing to expand the responsibility of land-use planners if a new development floods. He wants local agencies to indemnify the state as a condition of receiving funds.
The governor is pressing to shift liability in the aftermath of a 2004 court decision that found the state responsible for a 1986 flood north of Sacramento , forcing a $464 million payout to 3,000 residents or their heirs.
Rodney Mayer, head of the state's flood-management division, said there is a “complete disconnect” between cities and counties that approve new developments and state taxpayers who must pay damages when it floods.
“We believe it's appropriate to share liability,” Mayer said.
That position irritates local representatives. “We don't own and operate the levees. We have no say in the design or maintenance,” said Yvonne Hunter, who monitors the issue for the League of California Cities.
Assemblyman Dave Jones, D-Sacramento, supports Schwarzenegger's goals. But Jones said he wants a system of shared liability that covers only future development that occurs on land zoned as open space or for agriculture.
Jones said Congress already has exempted the federal government from damages. “The federal government has walked away and left the state holding the bag,” he said.
Tim Coyle, who represents powerful building interests in the Capitol, said he is concerned that the liability debate could become a distraction from the more important goal of shoring up delta levees.
“The flood liability in California shouldn't be measured only in dollars,” he said. “It's human life.”
Oakland Tribune (3-15-06 )
Eileen Alt Powell, Associated Press
The nation's three major consumer credit bureaus have created a new credit scoring system designed to make it easier for financial institutions to evaluate loan applications and to give consumers a better way of measuring their financial health. But consumer advocates raised concerns about the system.
The credit reporting agencies — Equifax, Experian and TransUnion — announced Tuesday that they're introducing "VantageScore" to banks, mortgage lenders and credit card companies immediately. The new scores will be available to consumers after the lender rollout, probably later this year.
"There's clearly been a need out there to have a consistent scoring model that works across all three reporting agencies' data," said Kerry Williams, group president of Experian's credit services division. "And consumers need a consistent score that they can understand and use in their own financial lives."
Credit scores traditionally have been three-digit numbers that lenders used to evaluate the creditworthiness of borrowers. The scores reflect how much debt a consumer is carrying, how good they've been at paying back loans and how many credit applications they have outstanding.
They're important because lenders use them to determine if they'll loan money to consumersfrom Business 1
and at what rate. The higher the score, the more creditworthy the consumer is considered and the lower the interest rate theconsumer will be charged.
The agencies in the past each used their own proprietary formulas to generate their own scores, meaning that a lender dealing with a consumer's application for a credit card or a mortgage might have to reconcile three widely different scores.
With the new system, a single methodology will be used to create the scores for all three credit bureaus, the agencies said.
As a result, scores will be "virtually the same across all three of the national credit reporting companies," said Experian spokesman Donald Girard. Any difference in the scores provided by each agency will reflect differences in the data they've collected in consumers' files, he said.
The credit reporting agencies said in their announcement that VantageScore "will provide consumers and businesses with a highly predictive, consistent score that is easy to understand and apply."
Some observers applauded the announcement.
"This is good news because it will make it easier for the consumer to understand," said Shirley Dean, spokeswoman for Consumer Credit Counseling of the East Bay . "We always recommend that people look at all three scores once year."
But consumer advocacy groups expressed concern that the new scoring system would not eliminate one of the biggest problems in the industry, which is incorrect information in consumers' credit files.
"If this change results in more accurate and more simplified reporting, that could benefit consumers. But that's a big if," said Kevin Stein, associated director of the California Reinvestment Coalition. "The Consumer Federation of America did a study last year that called into question the accuracy of the credit reports."
"The new scale is not helpful," said Stephen Brobeck, executive director of the Consumer Federation of America. "It will confuse many consumers who are finally getting used to the 350-800 scale the bureaus have used and is the basis for FICO scores, which are the most frequently used in the consumer mortgage area."
Certified public accountant Lawrence Pon of Redwood City said he wondered if this standardizing would actually help the consumer or the lender. "Fortunately, most of my clients have good credit so this may have no impact on them," Pon said. "This sounds like it will impact those with the lower ratings the most."
Dana Wiklund, senior vice president for predictive sciences at Equifax, said that VantageScore "is a new, competitive product to give lenders greater choice, and hopefully greater accuracy, in credit scoring."
VantageScore ratings will range from 501 to 990. The top end is slightly higher than scores currently in use.
In a separate statement, Experian said the new scores will be grouped on "the familiar academic scale." Experian gave these groupings, with A and B being the best potential borrowers and D and F being the weakest:
A — 901-990
B — 801-900
C — 701-800
D — 601-700
F — 501-600
Business Writer Francine Brevetti contributed to this report.
Industry News
Spec Office Complex Planned for Rocklin
Sacramento Business Journal (3-13-06 )
Mike McCarthy, Staff Writer
Opus West Corp. is planning to build another big, speculative office building in south Placer County, this time in Rocklin.
Already successful with its two-building first project in the area, the company has decided that Placer pays off. The combined Roseville/Rocklin area has been the most successful office submarket in the Sacramento region during this decade.
Opus West said Monday that it bought 13.9 acres from Rich Griffith, head of Longmeadow Development. The site is on West Oaks Boulevard near Sunset Boulevard, close to Highway 65.
The company plans to begin construction on a two-building, 228,000-square-foot Class-A office complex in October 2006, said senior vice president Don Little.
The complex would be built in two phases, each a three-story building of about 114,000 square feet. The offices would feature floor-to-ceiling glass, extensive use of natural stone and surface parking.
Kevin Larscheid and Scott Rush of CB Richard Ellis represented both seller and buyer in the Rocklin deal. CB is also the new project's listing agent; because the project is speculative, it would start construction without tenants signed up.
Opus West recently completed a comparable office development in Roseville, called Opus Corporate Center. Also in Greater Sacramento, the company is building and developing Sacramento Gateway, a 1.5 million-square-foot, mixed-use center located north of Interstate 80 at Truxel Road.
That development includes The Promenade, a large shopping center anchored by major brands; The Village, a pedestrian-oriented "lifestyle center" with boutique shops and restaurants; and Gateway Corporate Center, featuring some 600,000 square feet of Class-A office space and two hotels. The Promenade opened with a Target store and will open in phases through the summer; The Village is scheduled to open in November.
Phoenix-based Opus West is one of five regional units within Minneapolis-based The Opus Group, a $1.4 billion development company. The Opus Group has completed more than 2,200 projects and has 24 million square feet in planning or development. Opus employs 1,400 people in 28 offices in the United States and Canada.
CBRE|Melody Arranges $255 Million in Financing for Retail Property Portfolio
CBRE|Melody, CMBA Member, Press Release (3-01-06 )
March 1, 2006 (Newport Beach, CA) - The CBRE | Melody Newport Beach office announced today that it has arranged financing in the amount of $255 million for a cross-collateralized portfolio of eleven (11) retail properties: nine (9) in California, one (1) in Nevada and one (1) in Arizona. Sharon Kline of CBRE | Melody’s Newport Beach office and Mary McDonald of CBRE l Melody’s San Francisco office secured the funding for the transaction. Allstate Life Insurance Company provided the financing on behalf of Donahue Schriber Realty Group, L.P.
The financing consists of a LIBOR-based interest-only floating rate loan which was swapped to fixed by the borrower. Leverage is at 75%. The loan is structured to provide the borrower with maximum flexibility. For example, 50% of the loan will be due in six years and 50% in seven years. Also, substitution rights and partial release rights are provided. In addition, prepayment flexibility, which was an important factor for the borrower, is available as the loan is locked to prepayment for one year and then open at par. Lastly, the entire loan will be funded over the next year, with the largest traunch of $161.3 million funded in mid-January secured by seven of the 11 properties. The staggered fundings coincide with the maturity dates of the existing loans on the properties.
The retail portfolio consists of 11 shopping centers built between 1984 and 2000 with a combined net rentable area of 1,363,982 square feet. At the time of financing, average occupancy of the properties was 99%. All of the shopping centers are grocery anchored, except for Natomas Marketplace, which is a power center. The individual properties included in the funding are listed below:
Sharon Kline of CBRE l Melody states that the structure was driven by the borrower who wanted to obtain maximum leverage and maximum flexibility. The loan consists of a unique structure for a life insurance company. Allstate was able to meet the borrower’s request for flexibility, as well as providing a competitive rate, which won them the business, added Kline.
“We’re very pleased to participate in this transaction because it matches very well with our real estate investment strategy,” said David Kocourek, portfolio manager, Allstate Investments, LLC.
“We’re looking for properties concentrated in fast-growing regional economies with well-established borrowers and flexible lending terms.”
CBRE l Melody and Allstate have a previous relationship with Donahue Schriber Realty Group. Two of the loans in the portfolio had existing Allstate debt on them originated by CBRE l Melody.
Capital Condos? Critics Hate the Sound of it
Los Angeles Times (3-16-06 )
Cara Mia DiMassa, Times Staff Writer
For generations, industry titans wishing to place their mark on Los Angeles often did so through their buildings. These were structures destined to become landmarks like the Romanesque 1924 Gas Co. building and the towering Art Deco Title Guarantee building.
As Los Angeles lost its perch as a corporate center in the 1980s and 1990s, the buildings were left behind, sometimes little more than empty hulls. Until recently, that is, when a spate of buildings that once served as corporate headquarters have been revived as luxury condos and lofts.
But word this week that music giant EMI was considering offers to sell the landmark Capitol Records building in Hollywood to a developer who might convert the structure into condos has been met with concern.
A growing number of city leaders, including Mayor Antonio Villaraigosa, are suggesting that the famous stacked-record tower is too much an icon to be turned into housing. They say that Los Angeles already has enough famous buildings that used to be something else and that they would prefer that the Capitol tower remain part of the music business. The tower, near the corner of Hollywood Boulevard and Vine Street , "is an operating, corporate headquarters," said Josh Kamensky, a spokesman for City Council President Eric Garcetti. "It's not just that they look like a stack of records. It's that the music of today and tomorrow is happening in there."
The sentiment is shared by other Angelenos, who say that they like the idea that music is still made inside the building and that it is not just a landmark of the past.
"If they leave, it'll take something away from Hollywood ," said Erin Bennett, a hostess at Hollywood and Vine, a restaurant on the northeast corner of the famed intersection. "It'll be an old building that used to be something."
Ghosts of Los Angeles ' regal past have been re-emerging in solid form.
In Mid-Wilshire, workers are converting a sleek 22-story office tower — the longtime home of Getty Oil Co. — into 260 condos complete with a rooftop pool and spa. Downtown, whole sections are returning to life, with lofts at Henry Huntington's block-square 1905 Pacific Electric trolley headquarters and apartments in the former General Petroleum headquarters, which was designed in the late 1940s by Welton Becket, whose firm did the Capitol building.
Developers love the buildings because their rich history and details offer a special cachet. Preservationists mostly applaud the projects, because they spare the often rundown buildings from the wrecking ball. And city officials cheer at anything that dents Los Angeles ' housing shortage.
Kate Bartolo, senior vice president of development for Kor Realty Group, which is restoring buildings in Hollywood and other parts of Los Angeles , said such projects make financial sense because developers can pay for the hefty restoration costs with the sale of condos.
Los Angeles has its share of former corporate flagships to work with: It once was the home to some of America 's most prestigious companies, such as Arco, First Interstate Bank and Security Pacific Bank. But the city has only a few Fortune 500 company headquarters now
"Perhaps it's because Los Angeles didn't take the care it should have for several years in preserving its landmarks," said Bartolo, who is converting the turquoise-tiled Art Deco building that once housed the Eastern and Columbia outfitting companies into 147 housing units. "When you are in an iconic building, it's a hard feeling to explain. You feel like you are part of something…. Without sounding overly sentimental, you do feel like you're part of history."
But Capitol Records is different, said Diana Rubio, a spokeswoman for Villaraigosa. It is more that just an architecturally significant building, she said, it's a symbol of Los Angeles and the entertainment industry.
Soon after the 13-story building, said to be the world's first cylindrical office tower, was built in 1956, it became a landmark symbol of enterprise and talent. Capitol Records, one of the few record companies to be based on the West Coast, has included on its roster Frank Sinatra, the Beatles, the Beastie Boys and Radiohead. "There isn't any other building like it," Rubio said. "It's a lot like the Hollywood sign. There's only one Hollywood sign, and there's only one Capitol Records building."
Only about 160 Capitol Records employees work in the building — a fraction of the thousands working in the music business in Los Angeles . But Rubio and others contend that it says something important about the city to have music industry people working in a building famous for music.
In 2000, Capitol Records officials said they were prepared to leave Hollywood because of a lack of parking and the need to upgrade their building. The City Council spent $4 million to help Capitol refurbish a nearby office building and prevent the move.
Jeanne Murphy, a spokeswoman for EMI, said Wednesday that although the company was not "actively shopping" the building, it had received several serious proposals from interested buyers.
"We have a responsibility to look at anything serious," she said.
Murphy said that even if the company sold the building, it would explore an arrangement in which some of the space would be used by the record company "if the economics were right."
Even Ken Bernstein, head of the Los Angeles Conservancy, which has pushed for so-called "adaptive reuse" projects, sees a distinction with the Capitol Records building.
Many old corporate landmarks that have been rehabilitated were vacant or underused for years. The Eastern and Columbia building last served as headquarters for the Eastern Outfitting Co. in the 1950s, around the same time that the last Red Car rolled out of Pacific Electric headquarters.
The Capitol Records building, Bernstein said, is different because it remains a center of the music world.
"It is appropriate that city officials ask whether that should apply to active corporate anchors," he said.
Villaraigosa and city officials are working with EMI to head off a sale and keep Capitol Records in Hollywood .
Kamensky, Garcetti's spokesman, said his office was arguing that converting Capitol Records to condos would clash with the intent of the city's condo conversion ordinance, which is designed to help restore long-vacant buildings.
There also is a concern that by going condo, the Capitol Records building could upset a balance in Hollywood among retail, residential and commercial space in a quickly changing zone.
"We have to be really careful to make sure we don't transform Hollywood into a city of restaurants and lounges and high-end residential," said Kor Group's Bartolo, "without being mindful of the need to have office workers in the area by day to shop and eat in the restaurants."
Blackstone Bets on Valley With Deal for CarrAmerica
Silicon Valley/San Jose Business Journal (3-10-06 )
Sharon Simonson
New York's Blackstone Group has become the latest large Bay Area and Silicon Valley landlord with its acquisition of real estate investment trust CarrAmerica Realty Corp.
According to its 2005 annual report, Carr owns more than five million square feet of San Francisco Bay Area offices. The year-end summary says the region is the company's largest, making up roughly a quarter of its wholly-owned 18.4 million square-foot portfolio. It owns portions of another eight million square feet, too, including 20 percent of the nearly one million square-foot CarrAmerica Corporate Center in Pleasanton.
Among the millions of Bay Area square feet are also substantial South Bay holdings. In late 2004, Carr acquired the high-profile Mission Towers I building fronting U.S. Highway 101 in Santa Clara for nearly $130 million. It also has substantial holdings in Sunnyvale, Mountain View and Palo Alto at the Stanford Research Park.
Beyond that, it has significant interests on and near San Jose's North First Street, among the best high-tech corporate addresses in Silicon Valley. North First is already home to many of the region's best-known companies -- including Cisco Systems Inc., eBay Inc. and BEA Systems Inc. -- and boasts a national and even international reputation.
Calls to CarrAmerica and Blackstone have gone unreturned since the merger was announced March 6. A spokesman for Blackstone says the company has agreed not to speak to the press until the deal closes in the second quarter.
So, it is not clear how great an issue were Carr's Silicon Valley interests in the deal. The company also has 4.8 million square feet of offices in downtown and suburban Washington, D.C., for example. It is headquartered on K Street NW in that city. Washington has become a commercial real estate darling in the last several years.
In contrast, Silicon Valley office space clearly remains a forward-looking play, with recovery in the air and in isolated pockets, though weaknesses clearly remain.
Still, the private-equity investor was among the early names thrown out as a contender for the valley's Peery-Arrillaga portfolio. That 5.3 million square-foot offering from Richard "Dick" Peery and John Arrillaga has been on the market since last year with no sale announced so far. Blackstone does not appear to remain in the running, however.
Jim Sullivan, a principal with Green Street Advisors in Newport Beach who oversees its research on the office and industrial sectors, says the Bay Area's portfolio is so prominent within Carr's overall holdings that it is impossible to ignore.
"While Washington might be a primary focus, you can't buy Carr and not have a strong opinion of the Bay Area's prospects," he says. "It is clearly key to the deal."
Green Street estimates Carr's net asset value at $43 a share. Blackstone is paying $44.75.
Mr. Sullivan says the premium "presumably" represents Blackstone's interests in acquiring Carr's corporate structure, which includes Carr's stable of talent.
That talent includes Christopher Peatross, the Stanford graduate who runs its Northern California operations. Mr. Peatross joined Carr in May 2002. Not long after he was joined by John Moe. Both men have long tenures in Silicon Valley. Both came to Carr directly from DivcoWest Properties, which is also in the process of liquidating a large commercial real estate portfolio including several downtown San Jose office buildings and other Bay Area holdings.
Johnson Capital Arranges $16.5 Million for Condo Conversion in Phoenix, AZ
Johnson Capital, CMBA Member, Press Release (03-14-06 )
Johnson Capital's San Diego
office arranged $16,500,000 in bridge financing and $3,500,000 in mezzanine financing for acquisition and condominium conversion of a 181-unit apartment property located in Phoenix, AZ.
Willow Tree is a 181-unit Class B multifamily apartment complex constructed in 1979 and located in Phoenix, AZ. The ten (10) two story buildings were improved on a 5.5 acre parcel located just west of the Scottsdale and north of Hwy 202.The property is well positioned for a condominium conversion due to the excellent location, the high level of proposed improvements and the rapidly increasing home prices in the area.
Johnson Capital is a commercial mortgage banking and capital advisory services firm specializing in providing capital for commercial real estate transactions including senior debt, mezzanine debt, structured debt, bridge debt and joint venture equity.
In addition to San Diego , Johnson Capital has offices in Boca Raton , FL , Little Rock , AR , Denver , New York , Norwalk , CT , Irvine , Los Angeles , Orange County , Phoenix , San Francisco , San Jose , CA , Salt Lake City , and Washington , DC .
Analysis
Business Expansions Down; Experts say activity could be picking up again in 2006
LA Daily News (3-8-06 )
Gregory J. Wilcox, Staff Writer
Business expansions plunged 27.5 percent in Southern California last year, but Los Angeles County remained the nation's top industrial market and there are signs that activity is picking up, according to a study released Tuesday.
The drop came as industrial vacancy rates fell to record low levels and the office vacancy rate continued to decline, said the report from the Los Angeles County Economic Development Corp.
Nevertheless, the total investment value of business growth edged up to $1.9 billion from $1.8 billion because strong demand for large blocs of space pushed up rents.
Last year across the six county region from Ventura to San Diego counties, the LAEDC logged 252 major business expansions leases of at least $1 million or a building of at least 20,000 square feet 96 fewer than in 2004. It notes that the dip is not necessarily bad news but an indication that business caution and higher costs put the brakes on growth.
"What we are hearing from our regional managers is that all of a sudden activity has picked up and they are our real-time indicators of what's going on," said LAEDC chief economist Jack Kyser. "Expansion sprung back to life." It is being driven by both local businesses and firms expressing interest about moving into the area. Last year three of Southern California 's major projects were relocations from states that had been scoring California jobs Colorado , Nevada and Texas .
But a scarcity of land for new commercial development poses a growing challenge and concern for the area, the report said, and rising construction materials costs are compounding the situation. "Basically Los Angeles County is about built out and what we are seeing is this slow erosion of industrial land. It is being converted to mixed-use retail and some residential (uses) and this is a concern," Kyser said. For example, during 2005, industrial building permits valued at $755.8 million were issued in the five-county Los Angeles area, down from $888.9 million a year earlier.
During the 2005 final quarter the county's industrial vacancy rate was 2 percent and some submarkets were lower. The county has been the nation's top industrial market, as measured by the vacancy rate, for three consecutive years, Kyser said.
The nation's No. 2 industrial market is the Inland Empire . At the end of last year there were 915,900 manufacturing jobs in Ventura , Los Angeles , Riverside , San Bernardino , Orange and San Diego counties, the largest concentration in the nation, Kyser said.
Robert L. Scott, chairman of the Valley Industry and Commerce Association, agrees that the region's stock of industrial land faces severe pressures.
"That's a disturbing trend because the industrial base is what's providing the core of your economy. These are good, well-paying jobs," he said.
Last year brought a mixed bag of activity. The LAEDC analysis found that:
In Los Angeles County , there were 128 major expansion, 50 fewer than in 2005.
The cities of Los Angeles and Irvine remained the leaders, with 28 and 26 major projects, respectively, in 2005. Ventura County 's major projects count slipped to 13 from 15 in 2004.
The Riverside-San Bernardino area experienced a modest increase in activity, with 38 major expansions in 2005 compared with 37 in 2004.
Orange County 's major project count dropped by 45 to a total of 73 in 2005.
Professional services, including accounting, law, architecture and engineering as well as personnel services, posted the largest number of major expansions in 2005 with 52, up 11 from 2004. Logistics came in second with 26 major expansions, down by eight from 2004. And Los Angeles ' flagship entertainment industry had 11 major expansions in 2005, down from 12 in 2004. Aerospace/defense and hi-tech both had nine major expansions compared to 10 in 2004.
Scott said L.A. city officials are aware of the problems posed by the eroding industrial base, and that the Planning Commission intends to hold a special meeting to discuss industrial zoning.
"Deputy Mayor Bud Ovrum is very engaged in that topic," he said. "It's too bad it has to become a disaster before we do something about it."
Ovrum said the Planning Commission will hold a special meeting March 16 to discuss industrial zoning issues. "We need to recycle some of these older areas to get more productivity out of them. That's a real hot-button issue for us," he said.
As Downtown Oakland Fills Up, Lease Action Moves to Airport Area
San Francisco Business Times (3-10-06 )
Landlords Shorenstein and Brandywine are doing great business in downtown Oakland, but the leasing action may soon shift to the area around the Oakland Airport.
That's the spin from Colliers Managing Partner Ken Meyersieck's team in Oakland, at least, and, like any pronouncement from brokers, should be taken with a handful of salt. But there is some evidence to support the idea of a southwesterly shift in lease deals.
First, downtown: Shorenstein and Brandywine (formerly Prentiss Properties) control 43 percent of the market for downtown office space between them and boast a combined vacancy of just 6 percent, according to Colliers' fourth quarter report. Colliers pegs downtown Class A vacancy at nearly 11 percent. Bottom line: Shorenstein and Brandywine are making out like bandits, even by the standards of the tight market downtown.
With downtown filling up, tenants will need to shift to lower-grade space in other areas.
"This shift will directly benefit submarkets like Marina Village, Harbor Bay and the Oakland Airport, which have all had vacancy rates above 25 percent at the end of the fourth quarter," the Colliers report states.
Indeed, Class A office space in the Oakland Airport market was just 16 percent empty in the fourth quarter of 2005, compared with 25 percent in the year-earlier period.
Neighboring Alameda has seen investment dollars pour in. Legacy Partners paid $190 million for Alameda's Marina Village last month. Peet's is set to build a $24 million roasting facility in Alameda's Harbor Bay Business Park.
Deals
GlobeSt.com: Experts Remain Optimistic But Worry Some at ‘Real Estate 2006’ Conference
GlobeSt.com (3-14-06 )
Bob Howard
CENTURY CITY, CA-From brokers on the street to management in the executive suites, commercial real estate professionals foresee increasingly strong demand for space in virtually all classes of investment real estate in Southern California, and industry icon Sam Zell expects a continuing strong flow of capital into commercial real estate for at least five years. But interest rates remain a bugaboo, the condo market shows some strain and rising construction costs worry lenders and developers.
These were just some of the high points of the day-long ‘Real Estate 2006’ conference at the Hyatt Regency Century Plaza on Monday. Brokers, lenders, developers and investors speaking at panels throughout the day tackled a host of issues and fielded questions from an audience of 1,200 at the gathering.
The annual conference and networking event is part of the RealShare Conference Series produced by New York City-based Real Estate Media, publisher of Real Estate Forum, GlobeSt.com and Real Estate Southern California. The event features panel discussions and individual speakers from every realm of the commercial real estate world.
Pointing out that Southern California has relatively little land available for new developments anywhere except in outlying areas, a number of speakers made the point that the combination of this lack of new construction--along with population growth and the rising demand for space in commercial buildings of all kinds--is bound to eventually push rents higher for all product types. Another prospect the speakers broached is that if prices for investment properties have been climbing even in the face of rents that have been rising only slightly for several years now, prices will climb even further if growing demand for space pushes rents higher.
Observations on the condominium market suggested that the frenzy is slowing and that problems await in some markets because of oversupply amid speculative investing, but other markets remain sound and strong. In the construction realm, lenders and developers for all product types are focusing on how to ensure returns on their investments in the light of building materials costs that are escalating as never before.
The meeting kicked off with opening remarks by Jonathan Schein, president and CEO of Real Estate Media, and by Marty Stolzoff, founder of the Real Estate Conference Group, who introduced a panel of brokerage executives that was moderated by Pamela Westhoff, a partner at the law firm of DLA Piper Rudnick Gray Cary. Panelist Neil Resnick, EVP and managing director at Grubb & Ellis, cited three recent office leases ranging from 50,000 sf to 250,000 sf in Westside markets as indicators that the post-dot.com sluggishness in the Westside office markets is long gone and that demand for office space is growing both there and elsewhere in the region.
“All three of these deals were for new uses, not just relocations of existing uses. This is real growth,” Resnick observed. Others echoed the sentiment, with executive managing director Lew Horne of CB Richard Ellis commenting, “The occupier is back.” Horne added that with occupiers pushing demand for office, industrial and retail space, and with a population that continues to grow, two of Southern California’s biggest challenges are how to transport people to their jobs and how to provide reasonably priced housing.
The brokerage panel was followed by Zell, chairman of Equity Investments Group, who did double duty as keynote speaker and as presenter of the Lifetime Achievement Award to Dick Ziman, chairman and CEO of Arden Realty Inc. Zell was introduced by Michael Desiato, group managing director and editor-in-chief of Real Estate Media, who outlined the Equity Group leader’s 40-year career in the real estate industry.
Zell spoke on the theme of monetization, explaining that the flood of capital that has washed over the real estate landscape in recent years is tied to “the greatest monetization of assets in history.” Furthermore, Zell stated, the tide of capital created by this monetization is “an enormous oversupply” so huge that it will continue for at least five to seven years before conditions return to equilibrium.
In addition to his spoken remarks, Zell made his point about monetization via a video he showed to the audience that featured a song with the refrain “Capital keeps raining on my head,” that played to the tune of the popular hit “Raindrops Keep Falling on My Head.” It was the same video that Zell sent at the end of last year as a message to friends and business acquaintances to offer them his view of current and future market conditions.
In his speech, Zell touched on the recurring topic of “bubbles” in real estate, expressing exasperation that those who are unfamiliar with the industry mistakenly believe that rising prices in real estate correspond to rising prices that have caused notorious bubbles in other investments. He cited the tulip craze of the 1600s and the dot.com bubble of the late 1990s as two examples, explaining that fads and frenzies like the tulip craze and the flowering of outlandish Internet schemes have something in common that is not true of real estate: “They could go to zero because they had no intrinsic value.”
Zell also commented on the continuing undervaluation of publicly held real estate companies, which has prompted private buyers to take a number of REITs private at prices substantially higher than the public market valuations of the REITs. “As long as public markets continue to undervalue real estate, we will see public-to-private transactions,” Zell declared.
Among the public REITs that have been taken private is Arden, which went public in 1996. Ziman, in accepting the Lifetime Achievement Award, praised the management and staff at Arden as the reasons for the company’s success, saying, “Awards come to you when you are surrounded by terrific, successful people.”
In addition to Zell's presentation and the panels, the conference included an economic update by chairman Stan Ross of the USC Lusk Center for Real Estate, panels on finance, development, mixed-use projects and tenant-in-common investing. This year’s conference featured its first-ever session on recruiting in the commercial real estate industry, a panel discussion titled “Human Capital: Attracting and Retaining Talent.”
Opportunity - and Cash - Knock
East Bay Business Times (03-10-06 )
Katherine Conrad
What's a buyer to do with money burning a hole in his pocket and nothing to buy?
Make an out-of-the-blue bid for property that isn't even on the market. And if your first bid is turned down, make another. Exactly the course followed by one Gerald Hodnefield.
In a market where it seems practically every property has traded, unsolicited offers are becoming common.
"We are seeing them more and more often due to the fact that (owners) are not ... interested in selling," said Tony Ferreri, a broker for Lee & Associates. "But when the opportunity presents itself and a guy wants to pay a premium - how could they say no?"
In Hodnefield's case, the second time was the charm and San Francisco-based McMorgan Institutional Real Estate Fund, agreed to sell after the Gerald Hodnefield Trust, represented by Mike Smith of TRI Commercial, raised his first offer by several million to $9 million for 49,000 square feet of light industrial buildings in Pleasanton's Valley Business Park.
Neither Smith nor Hodnefield returned phone calls, but as reported in the Union Democrat in Sonora, it appears that Hodnefield and his wife, Sheri, sold their Eagle Ridge Ranch last October in an all-cash transaction for $17.5 million. The almost 4,000-acre ranch in Rail Road Flat, was called the largest residential transaction ever in Calaveras County.
So the Hodnefields exchanged a spread that included a 4,400-square-foot home, an airport, cabins and a lake, for industrial structures in Pleasanton leased to Peregrine Falcon Corp., Peridot and Severn Trent Laboratories.
Whether they made a fair trade depends on your perspective.
Commercial Real Estate Market Continues to Improve, NAR Survey Shows
Commerical Property News (03-15-06 )
April Michelle Davis, Contributing Editor
Along with the increase in investment grade real estate changing ownership, commercial real estate investment rose 44 percent in 2005. According to a National Association of Realtors' commercial real estate outlook, at a $268 billion record level, the figure doesn't include transactions valued at less than $5 million.
"A lot (of the increase) has to do with the fact that there is so much capital out there chasing investments," Scott McIntosh (pictured), NAR's senior economist of commercial investment real estate, told CPN this afternoon. Investors are now "looking at the pricing rather than the income."
"It is certainly a record compared to the previous year," McIntosh added. "I think (this year) will be another record year." The NAR forecast expanded to five major commercial; sectors: office, industrial, retail, multi-family and hospitality. Below are some of the highlights.
Office: Vacancies are at the lowest level since 2001. In the fourth quarter of 2005, the vacancy rate was 13.6 percent. But by the end of this year, it is expected to drop to 11 percent. With this change, rents are expected to rise 5 percent. Areas with the lowest vacancy rates (all 8.5 percent or less) include Ventura County , Orange County and Riverside , Calif. ; New York City and Miami .
Industrial: The vacancy rate is projected to fall from 9.6 percent in the fourth quarter of 2005 to 8 percent in 2006. In addition, rents are expected to increase 3.8 percent. The areas with the lowest vacancies, all with 5.7 percent or less, include West Palm Beach , Fla. ; Las Vegas and Los Angeles , Riverside and Orange County , Calif.
Retail: With only a slight decline in the vacancy rate, the 8 percent in the fourth quarter of 2005 is forecast to drop to 7.8 percent in 2006. Retail markets expected to have the lowest vacancies in 2006 include San Francisco , Las Vegas , San Diego , Seattle , and West Palm Beach .
Multi-family: Since the apartment rental market is tightening, the vacancy rate is expected to drop to 4.5 percent from 5.2 percent in 2005. The average rent is projected to increase by 5.3 percent. Of the 2005 transactions, 34 percent were apartment conversions into condominiums.
Hospitality: Still recovering from Sept. 11, hospitality is expected to increase its occupancy rate to 68.7 percent from 64.5 percent in 2005. In addition, RevPAR is forecast to increase 6.3 percent. Markets with the biggest gains in RevPAR include Honolulu , Houston , and Chicago . And markets with the highest RevPAR forecast in excess of $100 include West Palm Beach , Honolulu , New York City, Miami , Phoenix and Fort Lauderdale.
Office, Industrial Vacancy Down in SoCal; Costs Curtail Development
Commerical Property News (03-07-06 )
Gail Kalinoski, Contributing Editor
Office and industrial vacancy rates have declined in Southern California , but high costs and a lack of building sites are making it harder for developers looking for large tracts of land, according to a study released today by the Los Angeles County Economic Development Corp.
"The urban core of Los Angeles County is pretty well built out. Orange County is getting to that point too," Jack Kyser (pictured), the organization's chief economist, told CPN this afternoon. "Developers like to go in looking for 100 acres at least. It's getting increasingly hard to find that. People looking for that have to go into the high desert, which is basically to the northeast of the Riverside-San Bernadino area."
The Los Angeles County Economic Development Corp. tracks major business expansions of $1 million or 20,000 square feet or more in greater Los Angeles . Last year, there were 252 major expansions in the five-country region, down 27.5 percent, or 96 projects, from 2004. That is partly attributed to higher construction and land costs as well as development moving further east and northwest, Kyser said.
He added that the study doesn't track the large number of small businesses that have sprouted up in recent years that could be contributing to the declining office and industrial vacancy rates. "Industrial rates are very, very low," Kyser said. " Los Angeles County is at 2 percent. Riverside-San Bernadino is at 2.7 percent and Orange is at 4.4 percent."
Office vacancy rates during the fourth quarter of 2005 compared to the same time in 2004 showed that Los Angeles County 's rate declined to 11.2 percent from 14.8 percent; Orange County dropped to 7.2 percent from 10.7 percent; Riverside-San Bernadino counties were down to 7 percent from 9.5 percent and Ventura County dropped to 9 percent from 11.2 percent.
Kyser said he would like to see communities and developers "start to use land more intelligently. There's still a lot of growing going on in Southern California and it's a diverse base of growth."
One of the greatest needs, he noted, is space for more warehouse and logistics facilities. "There's a huge need because international trade is growing very, very strongly," he said. "Last year, 14.2 million containers passed through (local ports). This year, it's projected that 15.6 million containers will pass through the local ports."
Compliance News
Special Report: Applying the Overtime Rules to the Financial Services Industry
Laura P. Worsinger, Esq., Senior Counsel, Buchalter Nemer, CMBA Member
Compensation of highly paid, non management employees presents an expensive and complicated dilemma for all employers, particularly mortgage lenders who pay out huge amounts in the form of commissions. U nless their loan officers and other commissioned staff qualify as exempt under the federal Fair Labor Standards Act (“FLSA”) and applicable state law, or can be classified as independent contractors, these employers may face significant liability for back pay.
This is how it works: If workers are not exempt or do not qualify as independent contractors, they must be paid overtime for all the hours worked over 40 in a week. This means these non-exempt employees are owed 1.5 times their hourly rate for all overtime hours worked over 40 in a week. In California , Alaska , Colorado and Nevada , overtime of 1.5 times the hourly rate must be paid for all hours worked over eight in a day and 40 in a week and double the hourly rate must be paid for all hours over 12 in a day.
Take for example a loan officer who averages $3,000 per week in combined salary and commission. The regular hourly rate would be $75 ($3,000 divided by 40) and the overtime rate would be $112.50. If that same individual works an average of 60 hours a week, he or she would be entitled to 20 hours of overtime each week, amounting to an extra $2,250 per week! This explains why one large mortgage lender recently settled an overtime class action brought by its loan officers for $30 million and another lender settled for $21 million.
Who Qualifies as Exempt from the FLSA Overtime Rules?
Under federal law in order to qualify as an exempt from overtime the employee must first meet two tests: the test salary which is easy and straight forward and the duties test, which is much more complicated .
The Salary Test: Under the new federal FLSA regulations that went into effect in August 2004, the minimum salary level to qualify for exemption increased to $455 per week or $23,660 per year.
In California , in order to be exempt, a full-time employee must earn salary of at least two times minimum wage ($540 per week, $2,340 per month and $28,080 annually). In addition, he or she must spend at least 50% of the time performing exempt duties.
The Duties Test: The employee must also qualify under either the professional, the administrative or executive exemption.
Under federal law, to qualify under any of the three classifications, the employee must be “engaged primarily in exempt duties”. There is no absolute percentage requirement.
In contrast, in California an employee must spend at least 50% of his or her time performing what are considered “exempt” duties in order to qualify as exempt. This is an absolute requirement. Exercise of discretion and independent judgment also remain crucial to the determination. There is no general “engaged primarily” criteria. As a result, in order to determine whether an employee qualifies as exempt, a specific evaluation of an employee's daily responsibilities is essential .
APPLYING THE FLSA AND STATE OVERTIME RULES TO THE FINANCIAL SERVICES INDUSTRY
There is little doubt that routine clerical staff such as secretaries and receptionists are entitled to premium pay if they work overtime. Other staff members might be more difficult to fit into exempt and non-exempt categories. These would include quality control staff such as reviewers, analysts and underwriters. Employees in these positions may be eligible to be classified as exempt but their specific duties need to be carefully analyzed.
Of particular concern are loan officers or sales representatives. While these positions are often “salaried” or commissioned, the question remains, should they be paid premium pay for overtime work? They must fall under a specific exempt category to qualify.
Professional Exemption
The category recognizes as exempt “learned professionals”. Because most industry employees usually are not licensed as medical doctors, CPA’s, lawyers or engineers (typical examples of learned professionals under the regs) they would not fall under the general exemption for professional employees.
Executive Exemption
To be exempt “executives” the primary responsibility of an employee must be to supervise others, at least two or more employees. In this regard the new federal regs may be even stricter than California standards. These regs make it more difficult for employees to qualify as exempt executives They require exempt executives to have actual authority to hire and fire, or make recommendations that are given “particular weight” Also, to qualify for the executive exemption, an employee must be paid on a salary basis. Employees paid on a pure incentive bonus program would not qualify as exempt no matter how many people they actually supervise.
Administrative Exemption
Whether an employee can qualify under the administrative exemption depends on the nature of the employer, as well as the duties of the employees. The exemption in the new regs requires that the employee perform non-manual work directly related to management (as opposed to the former language in the regs that stated “related to management policies” not simply management ) or general business operations of the employer or the employer’s customers, which include the exercise of discretion and independent judgment with respect to matters of significance.
In California exempt administrative employees are required to assist a proprietor (or an executive), engage in specialized or technical work, or engage in specialized assignments or tasks.
In an attempt to provide greater clarity to the exemption, the new FLSA regulations provide explicit examples of what type of work fits within this definition. A detailed list of examples of exempt and non-exempt administrative work is contained in the new regs. One of the prime examples is financial services industry employees. The regs provide that these employees are generally exempt if their duties include:
“… work such as collecting and analyzing information regarding customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products and marketing, servicing or promoting the employer’s financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.”
Also listed as examples of exempt work are the following:
Advisors in the Financial Services Industry;
Project leaders;
Insurance claims adjusters;
Executive Assistants with substantial independent authority;
Human resources managers who implement, interpret and formulate policy;
Purchasing agents who have authority to bind the company on significant purchases;
Examples of administrative duties that are generally not exempt :
Inspectors;
Examiners;
Routine comparison shoppers
In California the administrative exemption standards are stricter. An Employee whose primary duty is to produce the commodity that the enterprise exists to produce or market is engaged in “production” activity and is not exempt. As a result, because mortgage originators sell the product that the company they work for exists to sell, they may not be exempt from overtime as administrative employees. The same is true for underwriters and quality control personnel who “process” the product that the company sells.
The $100,000 Question: the New Special Federal Rule for Highly Compensated Employees.
The new federal regulations include a special, streamlined rule for highly paid employees. Under this rule employees paid $100,000 or more annually, including a guaranteed salary of at least $455 per week, and performing “non-manual work” are exempt provided they “customarily and regularly” perform identifiable executive, administrative or professional functions. Under the new FLSA rules, highly compensated employees would not have to meet all the elements of the standard duties test to qualify for the exemption as a highly compensated employee. For example, an employee who supervises two workers but does not participate in any hiring or termination decisions in the company would still be exempt because the employee has a function that is identifiable as an executive function.
This new rule makes it much simpler for employers in states other then California , where the FLSA applies, to determine who qualifies for overtime. Keep in mind however that loan officers who work on straight commission, no matter how highly paid, would not qualify. Also, if a highly paid loan officer receives a guaranteed salary of $455 a week or more, that individual must also perform executive or administrative duties on a customary or regular basis to qualify for this special exemption
The difference in California is that regardless of the compensation level, both quantity and quality apply to the analysis. A California employee must spend at least 50% of his or her time performing what are considered “exempt” duties in order to “fit” into an exempt category. As a result, a California loan officer might be in “sole charge” of a department, earn a substantial base salary, with total compensation exceeding over $100,000 annually, but not meet the duties test in order to qualify as an exempt manager. The loan officer must spend most of the time actually performing exempt duties and selling loans does not qualify as an exempt duty.
Exempt Sales People/Inside and Outside
As discussed above, the new federal regs identify financial service employees as coming within the administrative exemption. The regs however, specifically exclude employees whose primarily duty it is to sell financial products.
If an industry employee works as a sales representative and is compensated primarily by commission, that person is probably non- exempt unless he or she can qualify as an exempt inside or outside sales person.
Outside Sales People .
To qualify under the new regulations (1) making sales must be the employee’s “primary duty”; and (2) the employee must be customarily and regularly engaged away from the employer’s place or places of business. (The new regs eliminate the test which required the employee not devote more than 20% of his time on non-exempt non-sales activity) Unlike the other exemptions, the employee need not meet the $455 or be paid on a salary basis.
Another advantage of qualifying as an outside sales person is that the minimum wage law does not apply.
The problem is in this age of the internet and faxes, sales representatives in many industries do not spend the majority of the day visiting clients, but do their work from an office, or by phone or on the internet. Even if their offices are at a remote location, such as their homes, they are considered “inside sales” people. The DOL has made it clear that to be engaged “away from an employer’s business, the outside sales employee must make the sales physically at the customer’s place of business.” Sales by phone, e-mail or the Internet are not considered “outside sales work.”
In California the employees must also be engaged in selling away from the employer's place of business. The difference is, instead of “customarily and regularly” selling away from the employer’s place of business, the sales person must spend more than 50% of his or her time, selling away from the employer’s place of business.
Inside Sales People .
Certain inside sales people working for retail establishments may also be exempt if:
1. Their earnings exceed one and one-half times the minimum wage ($7.73 at the current 2005 prevailing minimum wage of $5.15 and in California $10.13 per hour at the 2005 minimum wage of $6.75); and
2. More than half of their compensation must be from commission.
Wholesale sales representation does not qualify as “retail or service establishments” under the federal FLSA. As a result, wholesale representatives do not qualify as exempt inside sales people. The term "retail or service establishment" is defined under the FLSA as an establishment in which 75% of the annual dollar volume of sales of goods or services (or of both) is not for resale and is recognized as retail sales or services in the particular industry.
In California , there is no specific requirement that the sales person work for a retail or service establishment. If the employer is operating in interstate commerce, the stricter FLSA rules probably apply and the employee should not be treated as exempt.If there is a guaranteed draw against commissions, the California Labor Commissioner may consider the earnings not an actual commission, but rather a salary and the exemption may not apply. As a result, many inside sales employees are non-exempt in California .
The Independent Contractor Alternative/Risky Business
Keep in mind that simply calling someone an “independent contractor” or having them sign an agreement stating that they are an independent contractor is not enough. Such an agreement, standing alone, may be of little value. The same reasoning applies to issuing a 1099 instead of deducting payroll taxes. It is the actual relationship between the employer and the individual is what counts.
Factors that Determine Whether a Worker is an Independent Contractor
Various government agencies including the Internal Revenue Service (IRS), the California EDD and the courts use different tests to determine how workers should be classified. Often these tests are confusing and subjective and do not provide a concrete answer. In each case, however, the specific facts and totality of circumstances must be considered.
Right of Control and other Key Factors
The key to most tests of worker status is the right of control test—whether the “employer” has the right to direct and control the person’s work. -- both the final results and the details of when, where and how the work is performed.
In fact, the more the employer controls, or has the right to control (whether exercised or not), the more likely the worker will be improperly classified as an independent contractor. If the employer only dictates the “end result” but not how it should be achieved, the more likely a court will find an independent contractor relationship exists.
In determining whether a loan salesperson or loan officer is an employee or an independent contractor the California EDD will be guided generally by the rules set forth in Section 4304-1 of the California Code of Regulations. These regulations include the following factors in addition to the control test:
Non exclusivity--Other employment suggests the existence of an independent contractor relationship.
Constancy-A worker who works occasionally and sporadically on an as-needed basis points to the independent, non-employment, character of his work
Method of Payment- The fact that a worker is paid by the job, and not by the hour, favors the employer's position that the worker is an independent contractor.
Understanding--A worker's belief that he is not an employee, although not conclusive, is a significant factor for consideration in the determination of employee/independent contractor status. If the independent contractor relationship is confirmed in a written agreement can be helpful, but is not conclusive.
Instrumentalities and facilities--Whether the principal or worker provides the instrumentalities or facilities necessary to accomplish the work.
Separately established occupation or business-- If the person performing services for the principal is not in a separately established occupation or business it will be evidence that the services are performed in employment.
Specific Application of Rules for Determination of
Employment Status to Circumstances in the Real Estate Industry
While determinations of whether a salesperson is an employee or an independent contractor are based generally by the rules set forth above in Section 4304-1, specific application of those rules to circumstances in the real estate industry are set forth in Section 4304-2 of the California Code of Regulations. Because those provisions are more precise and are industry direct, they provide indispensable guidance for classification of workers. The key provisions are as follows:
Agreements--When an employment agreement is signed, it will be evidence of the intent of the parties. However, if the terms of the agreement are not complied with in practice, the agreement shall not determine the relationship of the parties to the agreement.
Employer’s policies--Since the Business and Professions Code and regulations of the Real Estate Commissioner require the broker to insure that the rights of the parties to a real estate transaction, such policies alone, however, will not establish the right to control the manner and means of performing services necessary for a determination that an employment relationship exists. However, policies relating to the manner and means of performing services that extend beyond those necessary to ensure satisfaction of statutory and regulatory requirements shall be evidence of the exercise of a right to control the manner and means by which a salesperson performs services.
Contract provisions, or policies evidencing control--Policies and contract provisions that lend themselves to the increase of business, profits, or sales activity will not be considered necessary to satisfy statutory or regulatory requirements. Such provisions would include, but not be limited to fees, time, solicitation, acquisition of listings, closures, floor time, termination, business licenses, fidelity bonds, automobile insurance, expenses, business cards, advertising, secretarial help, educational requirements, training, office and desk space.
Policies relating to ethical standards—these are required of persons in the real estate industry and as such are considered as part of the statutory and regulatory requirements going to the end result of the services performed rather than the manner and means by which they will be performed.
Assignments other than licensed activities-- If a salesperson is expected, by the employer to fulfill assignments other than licensed activities or functions incidental thereto, it will be evidence of an employment relationship. Such assignments may involve public relations, tours, office duty, floor time, open house, phone solicitation, making deliveries, or making reports other than as required by law.
Educational requirements, training and skills--Since an independent contractor is supposed to be a person in business for himself or herself, it would not normally be necessary to train that person to perform the functions of that person's business, nor would it appear appropriate for an employer to require another independent businessman to seek any particular educational requirements. Therefore, any [training] requirements in that regard will be looked on as evidence of employment. However, voluntary attendance at training sessions would not be evidence of employment.
Office and desk space---While a broker may allow an independent salesperson to use office facilities, other than incidental use of such facilities on a voluntary basis will be evidence of employment. Of particular significance, would be assigned desks or support personnel, such as secretarial and clerical help, continuing mail box or basket or other receptacle, continuing use of transcription or typewriting or duplicating facilities, or telephone facilities.
Business cards and advertising –If the employer is a broker, the fact that the broker’s name appears on business cards used by a salesperson or loan officer and in advertising in the name of the broker will not be considered evidence of an employment relationship. However, if the salesperson's name does not appear on the business cards or the business cards are supplied to the salesperson by the broker without a reasonable charge to the salesperson, such cards will be considered evidence of an employment relationship.
Floor time--Assignment of floor time will be considered evidence of an employment relationship. Floor time will not be considered evidence of an employment relationship if it is allowed by the broker on a voluntary basis and allowed at the sole discretion of the independent salesperson.
Sales meetings--The requirement that a salesperson attend sales meetings or any kind of regular or irregular meetings at any location, make communications to or for the broker, or make appearances at the broker's office or other facilities, will be considered evidence of an employment relationship. Submission of documents attendant to a real estate transaction for review required by law or regulation is not considered an appearance or communication.
Assigned territory (farm system)-- The assignment by a broker of a specific geographical territory in which an independent salesperson is expected to perform services will be considered evidence of control of the manner and means of performing services and of an employment relationship unless the agreement specifies that performance of services within a specific territory is consideration for entering into the agreement.
Working hours--Any requirement of a minimum or maximum time limitation upon the hours to be worked by an independent salesperson will be considered evidence of an employment relationship.
Method of payment---While payment by commission only will not create an inference of either an employment or independent contractor relationship, payment by salary, guaranteed minimum commission, draws or advances against commissions, unless such advances are secured by promissory notes or other normally acceptable arrangement for repayment by the salesperson, will be considered evidence of an employment relationship.
Incentives--No inferences of employment relationship or independent contractor relationship will be drawn from bonuses which are paid as incentive for additional sales or comparable production, nor will increased commissions by amendment of the agreement with the broker, whether for a single transaction or not. However, overrides, drawing accounts, expense accounts, or other forms of consideration in addition to pre-determined commissions will be considered evidence of an employment relationship.
Benefit plans--The fact that a broker allows an independent salesperson to participate in a health, medical, life insurance, or retirement insurance program will not be considered evidence of an employment relationship if the independent salesperson is required to, and in fact does, pay all premiums necessary for participation in such program.
Workers' compensation insurance. The fact that a broker carries workers' compensation insurance on all salespersons, whether in an employment or independent contractor relationship, will not create an inference of employment.
Combination operation (independent salesperson and employees)-- When a broker engages the services of salespersons, some of whom are considered employees and some of whom are considered independent salespersons, the lack of distinctly separate arrangements for the purposes of performing services between employees and independent salespersons will be considered evidence that all salespersons are employees.
Termination.--When, by terms of an agreement or by practice of the employer, the relationship can be unilaterally terminated without 30 days' notice, it will be evidence of employment. Termination without such notice for breach of ethical standards, breach of statutory or regulatory requirements, or for the protection of the public, will not be considered evidence of employment.
Managers--Managers, including, but not limited to, sales managers, office managers, and general managers will be presumed to be employees
Form 1099--- If a broker does not provide Internal Revenue Form 1099 and Franchise Tax Form 599 to salespersons considered by the employer to be independent salespersons, and submit copies of such forms to the Internal Revenue Service and Franchise Tax Board as required by law, such salespersons are considered employees.
The main concern in classifying workers as independent contractors is that someday these persons will come back and claim that they really were employees, seeking back pay for overtime, payroll tax contributions and workers compensation benefits.
ADVANTAGES OF USING INDEPENDENT CONTRACTORS
Using a true independent contractor can relieve a company of the many burdens placed upon it by state and federal employment laws. For instance, independent contractors:
● Need not be covered by workers' compensation;
● Do not have employment taxes deducted from their earnings by an employer;
● Have no rights to employee benefits;
● Are not employees subject to the Immigration Reform and Control Act (IRCA) of 1986;
● Are not covered by many state and federal anti-discrimination laws;
● Do not subject you to vicarious liability for their acts;
● Are not included under Federal/OSHA in an employer's duty to provide a safe and healthy work environment;
● Are not covered by state and federal wage and hour laws and are not entitled to overtime or guarantee of minimum wages
● Are not entitled to unemployment insurance benefits from your account;
● Are excluded from coverage under the National Labor Relations Act (NLRA) (unions); and
● Do not count for purposes of the WARN Act (plant closure law).
DISADVANTAGES OF USING INDEPENDENT CONTRACTORS
Because they are not covered by workers' compensation, an independent contractor (or his/her employee) can sue the company for personal injury sustained on its premises. This litigation can be far more costly than a workers' compensation claim.
PENALTIES FOR MISCLASSIFICATION OF EMPLOYEES AS INDEPENDENT CONTRACTORS
Misclassifications may put an employer at significant risk. In addition to the wage, tax and benefit issues that arise, the penalties for misclassifying an employee as an independent contractor are onerous:
1. If individuals classified as independent contractors are found to be employees, the company will be assessed for amounts due for unemployment insurance contributions, disability insurance contributions, and state income tax withholding amounts.
2. In addition, if the company, without good cause, fails to pay required contributions for unemployment or disability insurance benefits it may be liable for penalties
3. Companies found by the IRS to have misclassified employees as independent contractors are subject not only to large government fines but also to payment of employment taxes (including 100% of the employer's Social Security contributions), federal income tax not withheld, and UI tax equal to 6.2% of the compensation paid to the worker. The company is not entitled to collect these amounts from the alleged independent contractor.
4. While the law extends protection from harassment to independent contractors, it does not extend protection from discrimination to independent contractors.
5. The consequences of misclassifying an employee as an independent contractor in a wage/hour context are significant. They include, but are not limited to, liability for unpaid wages for a period of up to three years, including potential overtime pay. If employee status is found, the failure to pay all wages due every pay period may result in penalties of $50 to $100 per employee per pay period, and up to 25% of the wages not paid to each employee for each pay period. Labor Code Section 210.
6. Failure to pay a terminated employee improperly classified as an independent contractor all wages due and owed in a timely fashion, can subject the employer to treble damages under state law.
8. Independent contractors typically are ineligible for benefits offered to employees, such as health insurance, vacations, and retirement plans. However, an employee misclassified as an independent contractor now could retroactively be entitled to those benefits under a 9th Circuit Court of Appeals decision. Vizcaino v. Microsoft Corp., 97 F. 3d 1187 (9th Cir. 1996).
POTENTIAL CONSEQUENCES OF MISCLASSIFICATION
Example A
Loan Officer (Account Executive) originates loans for a national wholesale mortgage lender and is paid a base salary of $500 per week ($12.50 an hour), plus commission. AE earns an average of $2,000 per week in commission and her primary duty is to sell financial products. She works from the company’s offices.
FLSA—Non-Exempt
This loan officer can not qualify as an exempt outside sales person. She does not qualify under as an exempt inside sales person because she does not sell on a retail basis, and the FLSA excludes wholesalers from the inside sales exemption. She does not come within the administrative exemption because she primarily sells financial products. Although she is highly compensated, earning about $130,000 per year, she does not “customarily and regularly” perform executive, professional or administrative duties and therefore can not qualify for the “highly compensated’ exemption
California —Risky Business
This loan officer does not qualify as an outside sales person. In order to qualify for the administrative, executive or professional exemption, she must spend over 50% of the time performing exempt duties—as a loan officer selling financial products she is does not qualify.
Still, she might qualify as an exempt inside sales person because she earns more than 1.5 times minimum wage, more than half of her compensation comes from commission, and she works for a wholesaler in California . The problem is that if the company she works for operates in interstate commerce, the FLSA exclusion of wholesalers from the inside sales exemption would probably apply.
Potential result of misclassification: At $2500 per week, the hourly rate is $62.50. This employee would be entitled to the premium rate (1.5 x $62.50 = $93.00) for every hour worked over 40 in a week, or over eight in a day, going back for at least three years.
If the employee claimed to have worked an average of 50 hours per week, he would be entitled to 520 hours per year of overtime pay. For one year that would be 520 overtime hours times $93.50, which equals $48,620. Going back three years she could be entitled to $145, 860 in back overtime.
If the employer denied that the employee worked an average of 50 hours per week, it would be the employer’s burden to prove it. If the employer did not keep good time records, it would be difficult to refute the employee’s claim.
Example B
Same employee—only difference is $130,000 annual compensation is all commissions on net sales. Situation is worse for employer—much more difficult for employer to prevail on an argument that the employee was primarily engaged in anything other than selling loans. In addition to back overtime, employer might also be liable for interest and penalties.
Example C
Executive Sales Representative receives $26,000 a year in guaranteed salary ($500 per week) and makes about $75,000 in commissions based on sales, for total compensation of about $101,000. This employee customarily and regularly performs exempt functions such as supervising, training and evaluating members of the sales staff.
This Executive Sales Representative would qualify as exempt under the new Federal highly compensated employee exemption: He customarily and regularly performs exempt functions, he earns more than $100,000 per year and more than $455 per week guaranteed.
In California however, this individual would not necessarily qualify as exempt, unless he spent more than 50% of his time performing exempt executive or administrative duties. Notwithstanding his high compensation, “customarily and regularly” just won’t cut it.
Penalties for misclassification:
1. At $500 per week employee earns $12.50 per hour. Employee is entitled to $18.50 for every hour over 40 worked in a week and over eight in a day.
2. Assuming the employee averages about $1500 per week in commissions, he is also entitled to overtime for each week, based on commissions. To compute this Employee's adjusted regular rate, Employer must add the amount of the commissions earned during each week to the amount of Employee's hourly wages for the week, excluding the overtime premium ($500 plus $ 1500 equals $2000) and divide by the total number of hours worked for the week. For example if 44 hours were worked, the adjusted regular rate would be $45.45. Since regular rate is $12.50, employee is entitled to $16.47 ($45.45 minus $12.50 equals $32.95 and one half of $32.95 is $16.47) for each overtime hour worked that week. Four times $16.47 is equal to an additional $65.90 for the week.
Example D
Sales representative is a licensed real estate broker and is treated as independent contractor. She is paid a guaranteed draw against commissions, has a written contract providing she is an independent contractor and receives a 1099. She averages about $150,000 a year in commissions. This sales rep works primarily out of company offices. Although she can come and go as she pleases, she is expected to be present in the company offices for periodic sales meetings and training sessions and to be available by phone during normal business hours. She reports to a company vice president and is provided with a laptop and cell phone, and is reimbursed for travel and other business expenses.
Notwithstanding the issuance of a 1099, this rep is probably misclassified as an independent contractor due to the control exercised by the company. The employer might well be liable for her payroll taxes, overtime, state and federal income tax that should have been withheld, and significant penalties. Also, if others employed by the company received medical benefits, 401K contributions and the like, the employer could well be liable to this sales rep for the value of those benefits she did not receive.
*Ms. Worsinger is Senior Counsel at Buchalter Nemer in Los Angeles . Her practice involves all aspects of employment counseling litigation and practice before Federal and State Agencies. Telephone: (213) 891-5021, Facsimile: (213) 630-5683 lworsinger@buchalter.com
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