Texas rides high. I read in the WSJ the other day that 37% of all the new net jobs created since the recovery began were created in Texas. If you take out nonfarm payroll employment, it accounts for 45% of net US job creation! Obviously the rest of the states might be interested in seeing what it is that seems to be working for them. What’s working is a rejection of the economic models that the current administration espouses. Texas has no state income tax (like WA), but it is also a right-to-work state (workers can elect not to belong to a union (not like WA), it has ongoing tort reform (not like WA), it has a friendly regulatory environment (not like WA), and, get this: no one in Texas can get a home loan with less than 20% down!! So of course, Texas avoided the worst of the housing bubble. Imagine that. Do we think that Congress and the President might get a clue? I think this time they might.

Installment sales.

If you believe capital gains tax rates are going up, you’re probably right. But if you are thinking that an installment sale will ensure the 15% tax on the appreciation part of your gain and the 25% tax on the depreciation that you took, you need to know that Congress probably won’t allow you to take those rates going forward. They’ve done it before (e.g. 1986) and they’ll probably do it again.

Medicare premiums can be deductible. If you’re self-employed and over 65, paying a Medicare premium (which, btw is means-tested, you should check out what you pay if it is deducted from your SS check), you can deduct all of your health care premiums for both 2009 and 2010. Not only that, you can deduct them for your spouse as well if that spouse is not an employee of someone else’s.

AMT. High income filers who owe AMT may pay more than 15% for capital gains as well as dividends.  If filers are in the AMT phaseout zones ($150,000 to $439,800 for couples, less for singles) the effective rate on gains and dividends is 21.5%. (from the Kiplinger tax letter)

Donated Easements. If you’ve donated a real estate easement in 2009 or 2010, you may face an IRS challenge unless you have meticulously documented all the criteria required for a deduction. Appraisals (before and after values) as well as donee affidavits are essential to preserve the donation.

Boeing and the NLRB. Hard to believe, isn’t it? The government tells you where you can and can’t open a new plant!  The NLRB used to be fairly impartial, but now that it is stacked with Obama ex-union lawyers and representatives, it has turned into the weapon of choice for the unions. Well, the outrage they caused by ruling that Boeing had to close down the newly built plant in South Carolina because it is a ‘right-to-work’ state is coming back to haunt the NLRB. The unions who pressed the NLRB to act are now trying to make nice, but it is REALLY SCARY, and would prompt a new plant to be built overseas, out of the reach of the unions and their lackeys in government. What is amazing to me is that Boeing is actually willing to ‘settle’ on this matter. It should go to the mat for its right to do business in any state in the USA. It should not even discuss the matter with these thugs.

The commercial real estate in Thurston County appears to be stabilizing. Hopefully we will begin clawing back to levels that generate cash flow and make balance sheets look better.

For all asset classes the biggest expense is property taxes. One might think that line item would have decreased, but there are a several reasons why it hasn’t: (a) Thurston County reassesses only once every six years, (b) assessments look back to the previous year, and (c) when assessed value goes down, the County jacks up the levy rate. I guess that the best I can say is that property taxes should be stable over the next several years.

Sales prices for all assets have fallen in response to higher cap rates, although less so for multifamily projects, mainly because vacancies were low during the recession. Cap rates for multifamily have held at 7%, which is good.  Cap rates for office buildings are probably going to average around 8%, and retail class B properties may show up to 8.5%. I don’t see cap rates falling any time soon.

Multifamily unit income has been flat since 2007 (median: $9,515/yr). Operating expenses have held steady ($4,532/yr). These numbers are for Western WA counties excluding our neighbors to the north, and have been compiled by Dupre + Scott. Taxes are the biggest line item expense. In 2009, the median tax amount was $946 per unit/yr. In 2010, it was $1003. That’s per unit!!

Office vacancies are filling, but at rental rates that dialed back to years-ago rates. My advice to landlords is to give concessions rather than accept ridiculously low lease rates. It saves the value of the building because the pro-forma is still good. It takes years for a low rent to come back up, even with yearly increases.

Retailers are still hurting, as we see from the many closures of big stores and the holes in the shopping centers. That sector will only come back when there is certainty and confidence in the job market. Only then.

So we’re not out of the woods yet. The new Boeing contracts will be very helpful for the state. It increases employment, confidence, revenue—all those things in such short supply lately. Not to mention the trickle-down effect.

My biggest hope for our state is that legislators may have learned a couple of very important lessons, chief among them are 1) don’t chase away your biggest revenue provider (Boeing) and 2) don’t sell your soul to the unions, because once you’re bought, you become a burden to the taxpayers you’re supposed to serve.  It is about balance sheets, it’s about the cash flow needed to fund (really) necessary services. It shouldn’t be about the next election. It should be about what really matters to the taxpayers and residents of the state. Who should be in the safety net and who shouldn’t.  The poor and vulnerable are the ones who need to be in the safety net, but the net has become so big that it is coming unraveled under them (they don’t vote, usually). Maybe if the State gets Medicaid dollars in the form of a block grant it will pay closer attention to waste and abuse and actually cover the most vulnerable.

One of the problems with public sector deficits is that government is the provider of the ‘industries’ that are inefficient and unproductive by nature. The biggest services that government funds (education, health care, government) are also the most difficult to change (strong unions). Productivity enhancements have not been common in any of these industries. When lawmakers try to get some concessions, they are sued and they lose. The city of Vallejo, CA tried going bankrupt to get concessions. Five million dollars later, the city realized that pension obligations remain in force even in bankruptcy. All that the city got was some minor reduction in health benefits for city employees! The American Federation of State, County and Municipal Employees shelled out $40,000,000.00 to buy favors from legislators from 1989-2004. Now that is clout! One in ten delegates at the 2008 Democratic convention in Denver was a teacher. Now that is clout! (These numbers come from The Economist 3-9-11)

The reason that public sector employees should not have collective bargaining rights is that they have undue power to shut down essential services. Hospital union workers have the same power, which is why Andy Stern organized them into such powerful unions. They can shut down a hospital, especially when several contracts come due at the same time, which is a key tactic for the SEIU. It is easier to cave than to fight. Except when that piper comes around, like he did in Pritchard, Alabama, a municipality that can’t write any more pension checks because if they are written, they will bounce!

For the past couple of years our government took over the role of growth producer for the country. That proved to not work too well, although it may have saved us from total destruction. Now it is time to shed that role, and we’ve seen Obama finally understand that government needs business. So it is up to the private sector to step in and provide the jobs, but it will do so only when confidence and certainty return. Now that the regulatory environment for banks is getting clearer (Dodd-Frank, Basel III, etc) perhaps banks can figure out what their capital requirements will be. That will enable them to make loans again. We’re actually seeing that.

Another issue in the financing realm is rates. I think that as long as unemployment is high, the Fed will keep rates low, since that is their main indicator (simply the largest component, I guess). The Core inflation remains low (although now over 2%), but that is because commodity prices (e.g. gasoline, corn, copper) are not part of the index. They are ‘too volatile’ I’m told. My reaction is that they are the ones we really feel, and they should be included. I sort of wonder if they are not included because it keeps the COLA’s down for the big checks the government has to write…(I am soooo jaded…) If one were to include commodities into the CPI, it would be much higher because that is where all the big price increases are. One definition of inflation is the gap between aggregate supply and demand and the public’s expectations. I guess the public is pretty beat up at this point! We’re not expecting much these days.

Tax tidbit from Kiplinger’s letter: The 100% write-off for the cost of assets placed in service after Sept 8, 2010 and before Jan 1, 2012 is set to fall to 50% for tax year 2012. Renovations landlords make for commercial tenants can qualify for the break, even if the improvements are made to restaurants or retail stores. Businesses can elect 50% bonus depreciation in lieu of the 100% write-off. I have a feeling that tax breaks will be few and far between in the near future.

Priscilla S. Terry, CCIM, broker, editor

On the real estate front, it’s been a difficult couple of years for many real estate investors and the industry in general has taken a beating. As we’ve watched the Dow climb its way back towards its 2007 peak in a bull rally like we haven’t seen in years, real estate continues to lag. So much so that in most parts of the country, prices still haven’t reached bottom. We can thank the policy makers who decided it was necessary to give loans to people who would never be able to afford to repay them and call it the American Dream. In addition, everyone who participated in turning all these loans into derivatives by chopping them into little pieces, bundling them together and selling them off as “investment vehicles” are just as guilty. What made matters worse was these “bonds” were being sold off as AA or AAA rated when in reality, they were sub-prime junk. Pension fund managers, insurance companies, 401k managers and the like drank the Kool-Aid and when it all began to unravel, so did everyone’s balance sheets. What was sold as an ingenious way to increase liquidity and reduce risk created the worst recession in the history of this great nation and accomplished nothing more than the shifting of blame. That is one of the major problems with derivatives. In the case of banks, a bank that knows it doesn’t have to keep a loan on the books will underwrite it differently than it would a portfolio loan (aka Fannie and Freddie, two of the biggest mortgage backed security originators). The bottom line is most of those banks had no skin in the game. Lastly, everyone has to look in the mirror. Just because you can get 95% or 100% financing doesn’t mean you should. Where’s the margin of safety in that? The answer is, by definition, there is none. It is my opinion that a good investment is one that provides protection of principal and a return on the investment. It’s really as simple as that. During the hay day, however, everyone thought their principal was inherently safe and went after the biggest returns possible. Well, that never works well in the long run; it’s usually very speculative and as in the case of the last decade, ends terribly.

So what can we do now? That’s the exciting part. Opportunity abounds at the moment and the folks who made sound choices the last go around have a wonderful opportunity and the cash necessary to purchase property at price levels from almost ten years ago. With cap rates at least two points higher almost across the board than in 2005-2007, there are some great investment opportunities out there if one is willing to come at them with the right approach. This is a buying opportunity (for the right properties) the likes of which we may never see again in our lifetimes.

What’s the right approach and how does one capitalize on these opportunities? Well, let’s talk cash. For me, a comfortable margin of safety, if you will, would be a loan of approximately 65% to value. While this may mean less deals can be done, it also means that the deals done are bound to be much safer long term. How many investors today wish they would have put 35% down five years ago? Instead of being underwater and unable to refinance, they’d be cash flowing and most likely set up with a new loan at a much lower interest rate. You see, the owners who did this before the crash are in a better position today. While their property may be worth substantially less and they may have lost some tenants, most of them are still collecting dividends. The point of an investment isn’t to check and see what it’s worth every day. Who cares? The point is to collect checks every month, reinvest them and in turn create even more checks! If you know you’re in it for the long run, you can rest assured that the property will be worth more when you’re ready to sell twenty years from now than when you purchased it (in most cases). What an appraiser says it’s worth today is irrelevant.  The problem is, most real estate investors are so used to maximizing leverage so now they do have to care what the appraiser says. They have borrowed so much in relation to value that a lower appraisal means they have to bring cash to the table at time of refinancing. I’d rather collect a point or two lower return per year and sleep at night than go for broke each time and constantly ride a roller coaster. Being more concerned with the power of compounding than the thrill of hitting homeruns will always pay off in the long run. All that being said, if you are interested in taking advantage of one of the best buying opportunities we will see in our lifetime, we are here to partner with you. There are quality assets out there selling at huge discounts to replacement value and at attractive cap rates and they’re ripe for the picking! As these difficult refinancings come up, some borrowers may have to unload and the result of that will be some excellent opportunities to build an asset portfolio that is well positioned to increase in value in future years.

Zach Kosturos – Principal

As we near the halfway point of 2011, we are excited to announce a few major changes at Prime Locations, Inc. which include the addition of three commercial brokers, Charlie Grate, Crystal Harlow and Joni Baker. In addition, I have recently completed the second leg of my buy-out of Prime’s founding partners by purchasing Jeff Powell’s shares.

Prime Locations, Inc. was founded in 1988 by Jeff Powell, Priscilla Terry and Dean Questi and has been a leader in the commercial real estate sector in the South Sound for over 20 years. In 2009, I purchased Priscilla’s shares. Both Priscilla and Jeff continue to work in the company as agents. Together they bring over 63 years of combined brokerage, property management and development experience, and I am fortunate that they are sticking around a little longer.  Dean Questi remains a partner at PLI and I can’t speak highly enough of him or ask for a more supportive colleague.  What he does for the company and for our clients is invaluable and I am thankful I am able to continue to work with and learn from him.

Charlie Grate joined PLI in March after a three year tenure with Kidder Matthews. He is a real estate veteran and has been involved in marketing real estate in the area since 1990. As an Olympia native, Charlie brings a wealth of knowledge and expertise of the local market that aides him in the success of his business. Charlie is a graduate of Capital High School and received his Bachelor’s degree in Construction Management from Central Washington University.

Crystal Harlow joined PLI in March. She began her career in commercial real estate in 2005 and in addition to market experience, her background includes accounting, marketing and web design, all of which help her understand how to best market properties for her clients. Her family background and personal ownership in a construction company has given her knowledge in site work, and construction management. She is a go-getter and is excited to take on new challenges!

Joni Baker rejoined PLI this March after a stint with Coldwell Banker and we are happy to have her back. She is also a Thurston County native and has many connections within the business community. She has been a sales and leasing agent since 2003 and works tirelessly and effectively with clients, tenants, brokers, developers, contractors and business owners to maximize value.

PLI will continue to grow. We promise you that we will constantly strengthen our team so that we can provide you with the highest standards of service. We are excited about our new additions, because they are an integral part of our strength and community service.

I want to take this opportunity to thank you for all your support in the past. I will continue to earn it every day of the future!

CLICK TO VIEW LISTING

CLICK TO VIEW LISTING

Well, do you think there’s enough reason for a train along the I-5 Corridor yet?

Gosh, why can’t we get this done? It would solve so many problems, and do so much for all the ideals we say we hold dear. I feel we are hypocrites if we can’t muster the will to do what is so clearly necessary.

Recovery in Thurston County is slow, but I’m seeing some interest from tenants. They are poking their heads up and having a look. There are buyers for investment properties, but large down payments are required. It’s all about skin in the game these days, and I don’t argue. Just think of all the problems we wouldn’t have had if there had been some skin required in all the games played over the last several years. When you have skin in the game you don’t game the system, and you are apt to factor in sound economic and financial judgment. One thing that the jerks had in common, no matter how big or small, was the fact that they took unfair advantage of an American system that was too easygoing….Thurston County’s normal buffer against big economic swings did not work in our favor this time. State legislators did great long term damage by overspending in the face of an unsustainable economy. Tax revenues must increase before we can recover, and tax revenues will only come when the private sector hiring improves. And it will improve when we get the signal from the legislators that they can be responsible. Or when Democrats lose their majority…

Residential multifamily: Occupancy is up. Our vacancy rate at PLI is about 3%.  Rents aren’t going up yet, but the giveaways are gone. All those folks that were buying houses that shouldn’t have been—are back in apartments. On the whole, this sector fared better than the rest of the commercial investment properties.

Retail Real Estate: there is interest, but potential tenants are extremely tentative and are making offers that reflect their trepidation. Some landlords are desperate enough to take the low offers, but my advice to them is to not hurt their long term value for a short term fix. Things will come back, so any special deals from Landlords should be short lived.

Office Real Estate: as a property owner as well as leasing agent, I do not encourage owners to take ridiculous offers. It devalues not only their real estate, but also everyone else’s: that ‘deal’ becomes a part of the historical record that appraisers use to determine value. Commercial leases are long, and the value reductions will hurt for a very long time, affecting balance sheets, loan refinancings, etc. Do the math: don’t do a tenant improvement when it doesn’t cover the rent you get for that lease term! Don’t hurt yourself for the long term. You will regret giving away the farm.

Industrial Properties: there is still a lot of vacancy in the large warehouse complexes. It will fill back up slowly. This class of real estate seems to swing more violently than others in Thurston County. Either we have no warehouse space at all, or we’re swimming in it. The large buildings in Meridian Campus are nice properties that over time will provide Lacey with a good source of manufacturing jobs and revenues.

Private employers will delay hiring as long as they can. They are uncertain what the next employee will cost them in government mandates, and they’re not sure this recession is over. This is not a business friendly state, and now we have an unfriendly federal government as well. Small companies will be in no hurry to reach the size cutoff points that mean more regulation. Small firms are still shedding many jobs each month. A looser credit environment would help small companies get back to some semblance of normal, but right now that ain’t happening.

Legislators who have never met a payroll (that would be most of them) cannot understand why uncertainty is a problem.  For us, the only certainty is that Democrats in both Washingtons and their labor union cronies believe that private employment is just a tiresome bump on the way to their Nirvana of a truly socialized, egalitarian community where the enterprising are punished and the entitled are forever so. But who will pay the bills?  Oi, what bills! And since about 48% of the populations doesn’t pay income taxes, the rest of us stooges are feeling somewhat overburdened. You don’t have to be a Tea Partier to be angry. Class warfare happens when a government forces 1% or 2% of the population to subsidize all the unfunded mandates for generous entitlements. There just aren’t enough geese. It’s the golden eggs that spread the wealth, but those eggs need to grow into fledglings and soar. Democrats are raiding the nest. The first raid is an increase in marginal rates, on top of surtaxes on capital gains, dividends and investment income. These surtaxes will devalue assets,because as returns are being held down by tax increases, so are relative values.

In terms of health insurance, I agree that everyone should be in the pool. But the mandate would have been fair if it had come in the form of a VAT earmarked specifically and ONLY for healthcare, replacing premiums that individuals and companies now pay. The VAT would have had everyone contributing a share towards his/her health care. But the bill writers didn’t take that route because they wanted to “stick it to the rich”. Max Baucus himself said the health care overhaul is not so much about health care as it is about a more egalitarian society. Wow! Of course, the funding mechanism for all new entitlements is those earning more than $250,000 (mfj).

As it happens, the constitutionality of federal mandates for insurance purchase has been called into question. I think they knew this would happen, which is why the individual mandate piece doesn’t kick in until 2014. That is also why, IMHO, they have been talking about a VAT, not earmarked for healthcare, but in additionto all the other taxes and premiums. Not good business. They could have had it up and running by now. And without creating the intense anger that now exists.  A healthcare VAT would cost folks less than their premium did (except for government workers, who haven’t had to pay much).

Speaking of redistribution of wealth, Obama’s buddy (more visits to the White House than anyone else) Andy Stern has retired from the Service Employees International Union (SEIU). I would be happy, except that I know he will emerge in an equally toxic reincarnation. Under his direction, the SEIU has become a pernicious force of intimidation for anyone who stands in its way. And that is personal intimidation, as in going to people’s homes and surrounding them and hollering.

I’m sure that Congresspeople, having succumbed to its Faustian deal, are not willing to cross this union and be subject to its intimidating harrassment.  Next election we will see SEIU vs. Tea Party. It will be an ugly thing. Strange about the Tea Party, isn’t it? I personally prefer more moderate people, but sometimes it takes a two by four.

A huge threat to our economic recovery is the strengthening position of public sector unions. The unions’ original generous benefits were supposed to offset lower wages. However, now public sector union wages are outpacing those in the private sector (notwithstanding the dubious claim by our Dept of Personnel to the contrary—they didn’t factor in the pension benefits). The future demand of those ultra generous union benefit and pension packages will break jurisdictions. Some states such as California are already broke because of them, but there will be no givebacks by the powerful unions. Unions threaten legislators who don’t toe the union line. (see p.A15 WSJ 5/21/10) Paraphrasing Mort Zuckerman: … “…it is a ruinous collaboration that we have between elected officials and unionized public employees, and it is all at taxpayer expense..we work for them now…it is not an accident that in framing the national stimulus program in 2009 Congress directed a stunning $275 billion of the $787 billion as grants to the states to support public service employees…these lopsided subsidies for pensions and health costs are a large part of the fiscal crises at the state and local levels…it has squeezed out education and infrastructure investment.”

Mr. Obama favors unions:

• The other day he decreed by executive order, that government projects of $25M or more (maybe a project with a government backed loan or contract), will be required to agree to union representation for your workers. This discriminates against the more than 85% of US construction workers who choose not to join a union. It means the project will cost a lot more. The taxpayer will be subsidizing union contracts that are richer than their own, and pay for benefits that they can’t afford to give their own employees
• The National Mediation Board (labor regulatory body for railroads and airlines) just made the path to unionization easier by changing the union voting rules. It used to be that a union could be certified only if it was approved by a majority of the workforce that would be organized. Workers who didn’t vote were counted as “no” votes. Now they will be counted as “yes” votes!! What did Obama have to do with that? His new Board appointment was the swing vote.
• Obama’s recess appointment of Craig Decker to the NLRB is a blow to business. Decker is a big union lawyer. The NLRB is supposed to be neutral. So much for that.

I just wish the Republicans could get it together and become what they used to be: responsible legislators who voted in a responsible way. Now they are asleep at the switch, allowing ‘progressives’ to hijack the constitution and turn it into a ‘living document’ which means that it will lose its wonderfully simple and disciplined promise of what the central government will not do to you. It will be transformed into a typical third world political tool for guaranteeing more and more goodies for the group of the day.

Other than that, Mrs. Lincoln, how did you enjoy the play?

Priscilla S. Terry, CCIM, ed.

I have an announcement to make… some of you have met Zach Kosturos. He has purchased my share (1/3) of Prime Locations, Inc.

I will stay on and work with him and the other agents for the foreseeable future. Jeff Powell and Dean Questi remain at the helm. Zach is young and full of energy and new ideas.

He will be the one taking the company into the future. We’ll be upgrading our marketing and communications packages. It is really fun for me to see his brain work!! Zach is an incredibly gifted young man, so I am perfectly comfortable in the knowledge that my clients and customers are in very capable hands. Please read his introduction below.Other good news: I see many more trucks on I-5. I’m hoping that means inventories are finally running out and need replenishing. Maybe that’s why the stock market is rising so significantly…But small businesses are still suffering. For them, credit is getting even harder to obtain. Lines of credit have been cut by 25% since last year. Banks are still amassing reserves to cover still rising defaults as well as more cash calls from the FDIC.

In the 3rd Quarter of 2008, half of all private-sector job losses occurred in companies with fewer than 20 employees. The great engine that usually gets us out of recession has been hobbled by lack of credit. Small businesses employ 50% of the country’s workforce and contribute 38% to GDP. Without credit, they can’t grow or hire. Small banks should be given incentives, more than just the SBA loan program, to extend credit to small operators.

Capitalism is now a dirty word. An Olympia businessman said recently that he was embarrassed to call himself a capitalist! But capitalism creates wealth and raises standards of living. Even panhandlers are capitalists: they jockey for the most lucrative corners! Americans at the core have always been an acquisitive bunch. Entrepreneurs, risk takers by nature, must not be left unfettered, because eventually they risk too much and the common good takes a major hit, as we have been most painfully reminded. Capitalism must be regulated, but that doesn’t make it bad. Socialism, now that is bad, because eventually the money runs out. Now we are supposed to be Communitarianists. We’re all working for The Public Good. That’s great so long as everyone is responsible and doesn’t take undue advantage. But this country is full of folks who take advantage.

Stimulus money: Thurston County got $5 million. Peanuts… And here I was hoping for a train!! We needed infrastructure and all we got was a piece of a walking trail! Without incentives for job-creating investment we will not see a return to growth.

CPI Index is down in a range between -1.8 for “all cities” to -2.4 for smalls like us. That means that the Fed will not tighten any time soon. If the economy starts to turn around, the Fed will start taking money out of the system to get its balance sheet back to some kind of order. That is when we will see rates rise.

Apartment vacancies county wide are 8% although lower at Prime (3.6%). I think having our resident managers work together really makes a big difference. A new apartment complex we manage is experiencing a lease-up rate of 12 units a month, slower than one would like, although compared to Seattle, that’s not bad. Seattle has had a large number of condos dumped on the rental market, which is also causing rents to decrease over 10% in some areas. Sales volumes are way down, even though there is still financing for large apartment communities. Less risk.

Office vacancies are still high. A service called Co-Star published data on 685 out of 710 buildings in Thurston County and came up with a 10% vacancy and a YTD leasing rate of 1%. So although they missed all of PLI activity, so although it’s probably better than what they show, it is still grim.

Retail vacancies are also higher than normal. Co-Star shows retail vacancies lower than 2007, so I think their number of 6% is totally wrong. (You’ve got to know your market to know whether what you read is correct or not). Big and small retailers alike are getting hammered. Big guys just close a couple of stores, little guys go bankrupt.

The tax assessor’s office relies heavily on sales for the prior year when assessing value. Because of the big drop in volume and sales prices, the assessor has used sales into 2009. Although the losses were just beginning to show up, things still show value increases for the period. I doubt we’ll see increases next year. Overall commercial values in the County went up 4%. Land: up 15.4%, Offices: up 5.4%, Retail buildings: up 8.4%, Large Multifamily: up 3.8%. Seems strange, since nationwide commercial real estate values have been greatly reduced in 2008.

Health care: I find it unconscionable that folks who can’t get or can’t afford health insurance must subsidize many with ‘cadillac’ plans. Brian Baird and Adam Smith pay $356.00 a month for their plans (family of 4). One of my partners pays $800.00 for less coverage. Baird was asked if he would enroll in the ‘public option’. He said probably not!! He’s happy with his current plan. I guess he is!

Employers, who should not be in the business of providing insurance coverage will still be required to do so. Employer sponsored health insurance premiums have increased 119% over the last decade. Cost of health care was bigger than profit margins last year. Small business pays 18% more per worker than large firms for the same coverage. They are a smaller risk pool. At the moment, only 49% of small firms (up to 9 employees) offered plans in 2008. They’re dropping like flies because the increases are steep and unpredictable. Who doesn’t want things changed? Unions, government workers and Medicare folks, because they’re the ones getting the free ride. Medicare recipients will take a real hit under the Baucus plan. So will hospitals and specialists.

Most Americans agree that our country suffers from excess litigation. From Bus. Wk. 9-28-09 and the WSJ 9-29-09: Doctors say huge premiums and defensive medicine constitute 10% of their costs. Currently, 54 cents of the malpractice dollar goes to lawyers and administrative costs, not leaving much for injured patients. Trial lawyers surely don’t reduce injuries. There is no differentiation between good care and bad care. It doesn’t matter if ‘best practices’ are followed or not. Washington State even struck down as unconstitutional the use of a type of ‘health court’ that was supposed to take best practices into account. So we still do not have anything that might be an incentive to lower tort costs. Palin, that nincompoop, sputtered about ‘death squads’. The provision she referred to simply allowed docs to get paid for counseling for end of life care, which is very sorely needed. So much money is spent by all on keeping a very sick old patient alive for a few extra days of pain and suffering. Counseling? Yeah, I’d say we need that.

A survey of 30 states that have enacted tort reform by the Kellogg School of Management shows that comprehensive, nationwide reforms would lower overall health care costs by 2.3% at most. Significant enough to do, but still a fairly small number. Some in DC say that defensive medicine may be motivated less by liability concerns and more by the income it generates…Texas enacted big reforms in 2003. The number of lawsuits fell by half, and malpractice premiums went town 30%, but health care costs in Texas are still among the highest in the nation, and growing at a faster rate. The article concludes that tort reform’s best use might be as a carrot to go along with more significant health-care reforms. I conclude that the two are not necessarily related. Perhaps a quid pro quo should have been in place.

Peter Orzag, Obama’s OMB director, says waste accounts for 30% of Medicare spending, some of that being overuse/overconsumption based on warped incentives for providers. And since a lot of this consumption occurs with seniors, Medicare is a target.

So when 11 million older and disabled Americans, covered by Medicare (single payer, btw), and employees covered under generous employer plans declare that they are happy with their insurance, they need to know that things will change with or without ObamaCare. Unfortunately, I guess it is going to take a lot of rationing and coverage loss before this becomes fully apparent. Obama will get blamed, but it won’t be his fault. He shouldn’t have left it to Congress to muck it up. Pelosi and her left wing henchpeople can’t wait to turn this country into a more egalitarian society. Americans aren’t egalitarians. They don’t mind sharing, but they want theirs first.

Congress set itself up for the furor that it got. Unfortunately, because only a few had actually read the bill (because they are not subjected to it, of course…), they couldn’t address the structural points that should have been under discussion (see nincompoop, above). And they wonder why Americans have no confidence or trust in them?

So how do we get to universal coverage and universal care, and bridge the gap between them?

I still believe that individual coverage should be mandated, and that a national sales tax is a fair way to cover a portion of the shortfall. Everyone in the pool, everyone pays, even illegal immigrants, who are going to get treated in the ER even if they’re not ‘covered’ under the public option. I think that people should secure their own coverage, depending on what each needs. I also think that if we’re forced into a public plan, we should be able to secure additional coverage and services if we want to (as opposed to Canada). This allowance would go a long way toward reducing opposition.

GDP is $14.1 trillion. Now get this: health care costs in 2009 will be $2.5 trillion (half of which is Medicare/Medicaid). That is 17.6% of GDP. Of that $2.5T, hospitals account for 31% and docs account for 21%, so you can see why those two are in Obama’s sights, and that’s why he intends to reduce overconsumption. If the health care premium comes out of our own pocket we might change our unhealthy habits! Too many Americans take no responsibility for their health, yet they want free care. Shame on them.

I think the national insurance exchanges are OK (all states will have to agree on standardized coverage requirements), and I’m even thinking that private non-profit insurance generally may be the way to go…maybe even a cadre of “community health workers” to keep folks healthier at the grass roots level. Gosh, I’m a communitarian too.

How about that Nobel peace prize! It takes the scientists forty years to get recognition, but Obama gets one ‘in anticipation’. Give me a break!

Correction: I mentioned last time that The Olympian was our only source of local news. I was reminded by Dick Pust that KGY has a reporter on its staff.

Some housekeeping:

1. If you’d like to be off this mailing list, let me know: pterry@primelocations.com

2. If you’d like to receive this electronically, send me your email address.

Priscilla S. Terry, Broker, Prime Locations, Inc.

I wanted to introduce myself to all of you whom I have not yet had the chance to meet. My name is Zach Kosturos and as Priscilla mentioned, I have purchased her share of the company. I have lived in Olympia since the age of 11, attended Olympia High School, then went on to Washington State University on a baseball scholarship (Go Cougs) where I received degrees in Organizational Communication and Business Administration. After graduating from WSU in 2005, I spent the next year building homes before being hired to train and implement sales teams for a startup company. In the three years I spent with the company, our sales teams grew to over 35 people and our revenue was in the tens of millions. While the experience I gained from this was invaluable, it wasn’t what I loved. I loved the stock market and real estate. My father is a hard working brick mason, and my stepfather is an executive at a title insurance company, so real estate is in my blood. I enjoyed building homes and I bought my first home at 21, so I’m a believer in real estate. While I love the numbers and game of the stock market, I enjoy the ability to have something I can touch and feel in real estate.

My journey to Prime began when a mentor of mine began talking to me about commercial real estate. He is a very successful man in the community and we talked almost weekly for two years before I took the plunge! I didn’t even look at other real estate firms before coming to Prime Locations because he told me “Priscilla and Prime is hands down the best place to learn. I trusted him and after meeting her, Jeff and Dean, I knew I was in the right place. I didn’t intend to own a part of this company, not this quick anyway  but the pieces began falling into place early and the fit was right!

Many people I’ve met have asked me, “Are you crazy buying a real estate company in a time like this?” I always answer the same way, “Warren Buffet always said something along the lines of…Look for strong companies which are undervalued and when everyone else is scared to invest, go in, hire good people, work hard, have a vision, innovate when needed, plan to be in it for the long haul and it will all work out!” By no means am I claiming to be like Warren Buffet but I’ve always thought those were good words of advice and they obviously worked for him.

I looked at what Priscilla, Jeff and Dean have spent the last 21 years building and all the people in the community they have served and I knew the first criteria was met. And certainly the value was there, as was an excellent, hard working staff.

As far as working hard goes, that’s never been an issue for me. I feel guilty if I’m not working  and I love to work! My favorite “Buffet-ism” is “Have a vision.” I have a huge vision. My vision is to grow Prime Locations, become an integral part of this community, and offer clients, staff and agents a secure and enjoyable working experience that they feel invested in!

I agree with him that “innovation” is a key to success. I subscribe to the notion that “If you refuse to change, you stagnate and die.” I think many small businesses today are struggling because of a lack of willingness or ability to innovate. But we small businesses have more ability to innovate than ever before! In order to be competitive in these times, we must change with them. I’m not saying the current economy isn’t having a huge impact on our small businesses but I think the companies that are going to come out of this recession whole will have done so because of their ability to innovate in some way. And when those companies are the last ones standing, they’re going to have a huge leg up on the competition. One of the major ways Prime Locations is innovating is by harnessing the power of technological change. For example, for the first time in history, advertising and marketing can be directly targeted. No more paying thousands of dollars for scattershot ads. Through the power of the internet, we can now track the effectiveness of a marketing campaign. The way we market our businesses can, and should be, flipped upside down. Our marketing and advertising dollars can go ten times further by targeting our specific markets! I’d rather have my product marketed to 100 potential buyers than 100,000 non-potential buyers any day of the week. Last year, 92% of all real estate sales were initiated on the internet! Other technology avenues such as Twitter, Facebook Fan Pages, Biznik, ezine’s, online press releases and blogs can all be used to create “buzz” and added traffic to our product. It’s amazing.

As small businesses, we shouldn’t be intimidated by these new tools. We should embrace them and use them to stay competitive. At Prime Locations, we have already begun a “technology revamp.” We have updated our logo, created a completely new marketing campaign, started to streamline internal processes, and most importantly, are in the process redesigning our website. For our clients as well as our company, these changes will be vital. It is so exciting to know that in difficult times like this, we have the ability to create new business that just three years ago wasn’t nearly as accessible.

While the media and many other sources out there would lead us to believe the sky is falling, I choose not to think of it that way. I look at the resources we have at our disposal and know, if we are willing to go out and do things no one else is willing to do, we can be successful! The days of people beating down our doors to buy are over. Even in the Great Depression, there were those who amassed fortunes, built empires and inspired nations. It didn’t come from sitting around waiting for someone to buy something. It came by thinking outside the box and pounding the pavement.

Lastly, Warren always said, “Be in it for the long haul.” He bought stocks he said he would NEVER sell! Well, I’m in it for the long haul. I am here to see Prime Locations morph and change and grow and continue to serve this community and our clients. I love the people I meet and the atmosphere of the Thurston County community. I belong here. There is a reason our communities continually get high marks for outstanding places to live, it’s because of the people and the leaders who live here and the vision we all share for our future! I look forward to meeting all of you who read this newsletter and look forward to many more years of doing business together.

I’ve sat down to write my report a couple of times, but each time was whipsawed by national news that came too fast for me to digest and report…let alone comprehend.

Thurston County life seems not to have changed as much as seems to be reported in other places. I do hear that some businesses are reporting slower sales, although our unemployment is less than the national average and we still have some job creation to partially offset the losses. Local jurisdictions will have to make do with less sales tax revenue from construction, real estate sales as well as retail sales. Thurston County has been caught flat footed behind the eight ball. Commissioners were dozing on automatic pilot and didn’t make a course correction when conditions changed. Will new blood improve their foresight and reaction time?…Commercial real estate leasing activity is beginning to slow down. Agents are still leasing office and retail space, but not a their previous pace. Non-residential construction numbers are still on the rise, but that is because these projects were born and nurtured over the last couple of years. I get asked all the time why such and so building is being built, and the answer is that after all the effort, time and money has been expended, the owner continues his/her march forward, even in a headwind.

I was delivering a set of plans the other day to the folks at the City of Olympia, and asked about the state of their world. They said that people are submitting plans, but when it comes time to pick up a permit, they are not coming in. That means things will get slower, and Olympia has reduced its planning staff probably in anticipation of this. I surely hope the City Council doesn’t raise traffic impact fees like they’ve been talking about doing. And the raise they’re talking about is an 81% increase! Do the words ‘grinding halt’ cross their minds?

Sellers are still stuck on 5% and 6% caps to set sale prices on their properties, which to me seems unreasonable in the face of 7% to 8% leverage costs. The press has now begun to incite worry about commercial real estate following the path of the housing situation. I can’t speak for elsewhere, but I’d have to say that our local properties are well positioned to handle a slowdown.

Multifamily property vacancy rates are low, in the neighborhood of 3%. Supply of apartments is still not abundant, even though some new complexes have come on line. It costs so much to build apartments, but the rents aren’t there to support that cost, so developers are wary of building them.

Now that Obama is elected, I am thinking that the “Slumpometer” (I stole the word from The Economist,11-08) will register less relentless negativity. Take his appointments, for example. Everyone thinks they’re all good picks. I wonder about some of the economic team members, because on the one hand, they seem like smart, moderate types who should be good guides for our financial future, but on the other hand, weren’t they behind institutionalizing all that free money that has completely distorted our financial system?

Capital is supposed to be a scarce commodity, rationed with a price mechanism based on reasonable levels of prudence. When the price went to near zero along with prudence, why did these people not spot the danger of over-leveraging? Was it because they were also gaming the system? Everyone at every level seemed to be taking advantage. It all seems pretty contaminated to me, especially since we prudent taxpayers will be asked to bail out the incompetents and cheats.

How did so many people and businesses get entangled in the greed and incompetence that resulted in our financial crisis? How did we get to this place? This business of gaming the system and ‘taking advantage’ is a disease. It looks like greed, but I believe it stems from the fundamental loss of principles and shared values. Where are the common work and business ethic denominators that many of us built our plans and businesses on? Are business and social ethics principles not a part of the education process? We run the risk of becoming a third-world country, mired in the corruption of ’self-gain’ if we do not have a better set of values to guide our actions. The corrupt CEO who gives capitalism a bad name is no better than the little mortgage lender who enticed the migrant worker earning $14K a year to buy that $760,000. house with some cockamamie financing scheme. The migrant worker took advantage also! Where does it end?

Before our memories fade about how things used to be, ought to be, we should fix our sights back on the values that made us great. Values where responsibility is fashionable, where integrity is the benchmark, where a debt is a pledge to pay, where doing what is in your own economic best interest is also good for others, where swift consequences will foster accountability instead of corruption, and where folks don’t cheat and steal just because they can. Can we do this? Can we reset our moral compass?

But I digress…

I will say that I do like the President elect’s choice for the new chief of staff, mainly because Rahm Emanuel’s brother Ezequiel not only shares my ideas about fixing the health care problem (see my July report), but more importantly, thought of the solution to get us where we need to be (universal access to health care). I’ve been saying that there must be an individual mandate or it won’t work. Everybody must be in the insurance pool individually. Maintaining employer coverage will make the system not work for many reasons: it throws the whole idea off balance, it doesn’t get rid of the competitive disadvantage to American business (GM currently insures ONE MILLION PEOPLE), etc. How to get compliance from everyone and how do they pay for it? Here’s Ezequiel’s genius solution that I mentioned in July’s report: a national sales tax that would replace individual premiums. This tax is paid by everybody. Everybody is in the insurance pool, which means enough money for universal access. Each person owns his/her health plan. We can keep a market system for insurance (no exclusions, no cherry picking) and delivery so we don’t wind up with Canada’s system of what amounts to nationally employed doctors and a rationing of care. I want my doctor to be working for me, not the government! Business should like it because the heavy yoke of unknown and hobbling health care cost will be off its back. Employers can now pay their employees the higher wages they’ve been afraid to in recent years. There will be enough money for primary care providers to get paid properly for the work they do, and all Americans will have a ‘medical home’ with their basic health care plan and any additional coverage they choose to purchase. I’m holding high hopes for this radical reform. One of the best things about it is that it could be implemented rather quickly if there is political will. Ezequiel Emanuel has written a book called Healthcare Guaranteed.

Here’s something else I’m holding out for: a train up and down I-5!! If the President-elect wants to fiscally stimulate the State of WA, and he wants to be green, maybe the U.S. taxpayer will buy us Washingtonians a train. I’d say this is our best shot at it. Just like the 4th Ave bridge: hold off fixing the problem long enough and the U.S. taxpayer will pay for it. (Earthquake damage paid by Feds). Did you notice that awful headline in The Olympian the day after the election: “What can Obama do for South Sound?” Well, Mr. O, how about healthcare reform and a train? And, oh yes, I want a moral compass too. All of us should say, “yes we can” on this point.

Priscilla S. Terry, CCIM, editor