The Business Press: Credit Unions see mortgages as part of return to profitability

By Chris H. Sieroty 

Contributing Writer

California credit unions originated more than 12,500 primary mortgages, including purchases and refinances, in the second quarter of 2009, the highest level since the second quarter of 2004 and almost 2,000 more than the first quarter, according to a report by the California Credit Union League.

Based in Ontario, the CCUL said California credit unions originated more than $7.3 billion in loans in the second quarter, up from $7.1 billion in the first quarter of the year.

In Inland Southern California loan volumes were mixed as credit unions in San Bernardino County originated 92 primary mortgages in the second quarter for more than $16.2 million, compared to 108 loans for more than $12 million in the first quarter. In Riverside County both primary loan numbers and capital outlay were down in the second quarter. The CCUL reports 542 loans were made in the second quarter for more than $9.3 million, compared to 708 loans for more than $12 million in the first quarter.

“We are still seeing credit unions approving primary loans in the region,” said Daniel Penrod, senior industry analyst with the CCUL. “I expect the number of home sales will increase but home prices will continue to decline because there are still a lot of foreclosures and short-sales available. Things will level off near the end of the year.”

Despite, the region’s high unemployment rate and stagnant real estate market, Penrod told The Business Press that credit unions are seeing an increase in deposits as customers view credit unions as conservative and a safe lending institution compared to major financial institutions.

But Inland credit unions have not been immune to the financial problems brought about by sour real estate loans that have forced the Federal Deposit Insurance Corporation to seize local banks and sell their assets to more stable financial institutions.

In the High Desert, the National Credit Union Administration has seized two credit unions and sold their assets and liabilities to Alaska USA Federal Credit Union.

In June, Alaska USA purchased certain assets and liabilities of High Desert Federal Credit Union in Apple Valley in a deal valued at about $100 million, according to a company executive. The sale came after the NCUA had been overseeing the operations of High Desert since Oct, 16, 2008, when the federal agency placed the struggling credit union into conservatorship.

Three months after it acquired High Desert, Alaska USA took over The Members’ Own Federal Credit Union in Victorville in a deal valued at approximately $80 million, according to the NCUA. The Anchorage-based credit union now owns five local branches, servicing a combined 22,000 members.

“The acquisitions are part of our strategy of expanding our business into areas where we feel like there is an opportunity to grow our business model,” said Dan McCue, Alaska USA’s senior vice president, corporate administration. “San Bernardino County is a good sized area with lots of opportunities.”

McCue said the credit union’s business model was based on attracting deposits along with offering other business lines, including mortgages, trust services, business services and insurance.

In terms of originating primary mortgages, McCue said even in a recession Alaska USA would continue to do business in the Inland Empire.

“We are looking for loans,” he said. “We are making decisions on a case-by-case basis, but we are trying to offer mortgages and other loans to our members. I’ve been told that customers are happy we are in the region, because some credit unions had stopped lending money.”

While Alaska USA is relatively new to the two-county region, Altura Credit Union and Arrowhead Credit Union are well known brands locally.

Mark Hawkins, president and chief executive of Altura Credit Union, said the loan totals seemed low and attributed the CCUL’s figures to loans made by local credit unions and placed on their books and not packaged and sold on the secondary market. Based in Riverside, Altura is a state-chartered credit union with 14 branches, 110,000 members and $908 million in assets.

“So far this year, we’ve made about $100 million in loans,” Hawkins said. “In most cases we are not putting the loans on our books. We are packaging them and selling them on the secondary market. We can do a lot more business by packaging our loans.”

Altura Credit Union is expected to issue $11 million in primary mortgages in October. Hawkins said most of the mortgages approved have been for “purchase activity” and not refinances.

“It’s a tough time when it comes to refinancing,” he said. “Most people can’t qualify for refinancing, because they’ve lost the equity in their homes.”

It’s also been a difficult time for Altura in terms of loan losses, which has forced the credit union to use staff to modify mortgages to keep people in their homes. Hawkins said the credit union lost money for the first five months of the year but in each of the past five months has reported a profit.

For the six months that ended June 30, Altura reported a loss of $3.5 million, but for the third quarter it reported a $1.8 million profit.

“We will be profitable for the fourth quarter, but we expect to report a loss for the fiscal year,” Hawkins said. “But any positive trend is extremely welcome.”

Larry Sharp, president and CEO of Arrowhead Credit Union, said his company would not be profitable this year because of heavy loan losses.

“Last month we reported a $94,000 profit, though it won’t be enough to make up for earlier losses,” Sharp said. “We will be profitable in 2010 and 2011 on a year-to-year basis. We have turned the corner, and things are beginning to stabilize.”

Despite reporting loan losses, Sharp said Arrowhead was actively lending and putting those loans on the firm’s balance sheet.

“We are not going to the secondary market,” he said. “We feel like it’s a good time to be making home loans, especially with yields down in other lending. Since December, delinquencies have been going down, but consumers are still skeptical about how slow things are turning around.”

Gene Shabinaw, Arrowhead’s senior vice president of lending, said the company had set aside $68 million for loans, with a portion designated for real estate transactions. In terms of returning to making a profit from home loans, he acknowledged the company had “dipped into the red and is starting to come out the other end.”

Sharp agreed, saying Arrowhead will benefit from working with some of the region’s largest employers, from local school districts and county governments to Stater Bros.

“Our members are mostly employed by some of the largest employers in the area,” he said. “Many of these agencies and companies have begun to settle down in terms of layoffs, while the general community hasn’t settled yet. We will benefit from (that stability).”

Based in San Bernardino, Arrowhead Credit Union, a state-chartered institution, operates 24 branches, with more than 162,000 members and $979 million in assets.

CREDIT UNION INDUSTRY BRIEFING

During a recent hearing held by the U.S. Senate Banking, Housing and Urban Affairs Subcommittee on Financial Institutions, Debbie Matz, chairwoman of the National Credit Union Administration, said it was a challenging time for credit unions, and predicted that the number of troubled credit unions would probably increase through at least early 2011.

“Credit unions have not been spared harsh effects of the economic downturn and have a difficult road to travel in 2010 and beyond,” Matz told lawmakers at the Oct. 14 hearing on the condition of the financial services industry. In response to the challenging environment, she said the “NCUA has enhanced our supervision, shortened the examination cycle, increased the number of examiners and upgraded risk-management systems.”

She said that as of Sept. 30 there were 66 credit unions with assets over $100 million with a CAMEL 4 or 5 rating, compared to 12 in 2007. Overall, there are 326 such credit unions, representing 4.9 percent of all credit union assets.

According to the NCUA, a CAMEL rating is an internal rating system used for evaluating the soundness of credit unions on a uniform basis, the degree of risk to the National Credit Union Share Insurance Fund (NCUSIF), and for identifying those institutions requiring special supervisory attention or concern.

Matz said one of the bright spots is the “savings flight to quality” caused a 16 percent annualized increase of member deposits during the first half of 2009.

The Business Press: Community banks seek gain in market share from fallen

By Chris H. Sieroty

Contributing Writer

A steady stream of financial institutions nationwide have collapsed over the past year as a result of the country’s economic crisis and millions of dollars in soured real estate loans. As of Oct. 2, the Federal Deposit Insurance Corp. had taken over 98 banks both large and small across the country.

That figure compares with 26 banks seized last year and just three in 2007, according to statistics compiled by the FDIC. In Inland Southern California, four community and business banks — 1st Centennial, PFF Bank & Trust, Temecula Valley Bank and Vineyard Bank — have been shuttered since November 2008, and analysts expect additional small and midsized financial institutions to be taken over by the federal agency before the two-county region’s economy begins to recover late next year.

“California banks have probably been hit harder than banks in most other states due to the decline in the real estate market,” said Beth Mills, vice president of communications with the Sacramento-based California Bankers Association. “Additional banks being seized by the Federal Deposit Insurance Corporation is inevitable. It’s going to be a tough environment over the next year to year and a half.”

Mills said despite the adverse economic conditions, the majority of community and business banks in the Inland Empire “are well-capitalized and have enough capital to withstand the downturn.”

In total, the four Inland Southern California community banks seized by the FDIC cost the federal agency $1.897 billion. But those financial institutions that remain have been looking to take advantage of the fallout to increase their market share and total assets, according to several bank presidents interviewed by The Business Press.

“The recession wiped out a lot of the competition,” said Gary Votapka, president and chief executive officer of Temecula-based Mission Oaks National Bank. “I’m not happy about that. It’s not the way you’d like to increase your market share.”

Votapka said Mission Oaks has seen a fair amount of new business since Temecula Valley Bank was seized by regulators on July 17 and was taken over by First Citizens Bank of Raleigh, N.C. He explained that many of their new clients wanted to continue doing business with a smaller, independent business bank.

Ralph Wiita, president and chief executive officer of Golden State Bank in Upland, agreed, saying they’ve had a good opportunity to increase market share, particularly following the collapse of PFF Bank & Trust and Vineyard Bank.

“Our opportunity to increase our market share lies with attracting customers who want to work with a community bank and not a large financial institution like the banks that have taken over several local banks,” Wiita said. “We also have a one-on-one marketing effort. We have been calling offices and soliciting business, while following up on referrals and participating in networking opportunities with social organizations, chambers of commerce and rotary clubs.”

For the second quarter, Mission Oaks National Bank reported a net loss of $3.84 million, or 85 cents per share, compared with net earnings of $158,000, or 4 cents per share, for the same period a year earlier. In the first six months of 2009, Mission Oaks lost $6.39 million, or $1.42 per share, compared with net income after taxes of $461,000, or 10 cents a share, in the corresponding 2008 period.

Results from the second quarter and year-to-date of 2009 are exclusive of any credit for income taxes while the results from the second quarter and year-to-date of 2008 included tax provisions of $80,000 and $261,000, respectively, the company said in a regulatory filing with the U.S. Securities and Exchange Commission.

The earnings decline was primarily attributed to increased contributions to loan loss reserves, which totaled $3.61 million in the second quarter and $5.97 million year-to-date. That compares with provisions for loan losses of $534,000 in the same quarter and $786,000 in the year-to-date results a year ago, the company said.

Votapka said second-quarter results were impacted by a $3 million write-down on a secured real estate loan that became “impaired” during the quarter.

As of June 30, the company had total assets of $218 million, up $6.8 million, or 3.2 percent, over what was reported a year ago. Total deposits in the second quarter were $182.3 million, a 13.8 percent growth from the same period a year earlier.

He said the bank remains well-capitalized under regulatory guidelines. Mission Oaks National Banks has $25.5 million in equity capital, according to the FDIC.

“The biggest issue for our bank and banks in the Inland Empire is the devaluation of real estate holdings and the effect it’s having on our balance sheets and earnings,” Wiita said.

Golden State Bank has $160 million in assets and operates two branches in Upland and Brea. The collapse in real estate values has caused the company to swing from a profit of $600,000 in 2007 to a loss of $9.2 million from January 2008 through June, he said.

“The bank is padding its capital fund internally,” he said. “Our losses are all related to our real estate portfolio. We don’t see any more losses and our (third quarter) earnings are much improved.” Golden State Bank was scheduled to release its third-quarter earnings on Oct. 19.

Wiita stressed that the company’s “core operating earnings are profitable and have been profitable all along.”

The bank, which was founded in 2003, has a diverse loan portfolio with about one-third small-business loans; one-third commercial, office, industrial and real estate construction loans; and one-third real estate business loans. He said real estate business loans were dominated by specialty loans to fast-food restaurants, convenience stores and gas stations, all businesses that tend to do well in recessions.

Wiita said Golden State Bank has been more selective in making loans because the risk exposure is “bigger” in a recession.

“One of the challenges in this economy is to maintain higher reserves and capital level,” said Kevin Farrenkopf, president and chief executive of the Bank of Hemet. “Our goal has been to increase our capital reserve level, which we did through earnings. As of June 30, we had earnings of $3 million for the first six months of the fiscal year.”

The bank has $37.8 million in total capital, according to the FDIC. Based in Hemet, the bank has six branches and focuses on lending to small businesses and income-producing real estate.

Farrenkopf said the bank opened a permanent branch in Beaumont in September but will likely not expand this year or in 2010.

“We’ve been there for over a year, but we just recently opened a new, permanent branch,” he said. “Our company was originally attracted to Beaumont because there were no other community banks in the area. We also thought in was an underbanked area.”

Both Wiita and Votapka said that Golden State Bank and Mission Oaks, respectively, have no plans to expand their companies through opening of new branches.

The Press-Enterprise: Businesses advised to prepare for emergencies

By CHRIS H. SIEROTY

Special to The Press-Enterprise

Inland businesses are being encouraged to prepare ahead for potential disasters, as part of a national campaign in tune with National Preparedness Month.

The program, Ready Business, was launched nationally five years ago by the U.S. Department of Homeland Security and the Advertising Council as an extension of the Ready Campaign, which was implemented as a response to the Sept. 11 terrorist attacks and was designed to educate Americans on how prepare for and respond to emergencies.

A disaster plan can save lives, company assets and get a business back up and running after a disaster, according to an executive with the Ready Campaign.

“You need to remember at least one in four businesses never reopen after a disaster,” said Becky Marquis, acting director of the Ready Campaign in Washington D.C., a division of the Federal Emergency Management Agency, which is overseen by DHS.

Marquis said more often than not these disasters are everyday events and not necessarily a major event like the wildfires in Southern California that have been dominating the local headlines.

Robert Bahler, a spokesman with the American Red Cross in San Bernardino, said local businesses seeking assistance in preparing an emergency plan can schedule an appointment to have one of his employees come to a local business and speak about emergency preparedness.

“We work with a number of business partners every year to establish emergency preparedness plans,” Bahler said. “Our chapter serves people from Yucaipa to Chino Hills, which is home to more than 2 million people. We probably work with 30,000 people a year in preparing for a disaster.”

Marquis said preparing for a disaster can be daunting but urged business owners to visit www.ready.gov/business for information on how to prepare for emergencies.

“Once they print out what they need to get started, they’ll find it’s rather simple to put a plan in place that will protect their business and employees,” she said. “We recently conducted a survey that found only 38 percent of businesses nationwide had an emergency plan.”

One business that is prepared is Best Best & Krieger in Riverside. Debbie Prior, the company’s director of human resources, said for a modest investment other companies can follow the law firm’s lead in preparing their employees for any emergency.

“One of the things we do is provide every employee with an emergency backpack that includes water, a flashlight, whistle, first aid kit and granola bars,” she said. “We also encourage employees to bring in other items, including tennis shoes. It may sound funny, but many female employees wear high heels and would need to change into tennis shoes if a disaster happened and they needed to get out of the building.”

Prior said the firm also holds occasional staff meetings to update employees on emergency procedures, and has CPR trained employees in every office.

With fire season in full swing and the experts predicting an increase in cases of swine flu virus this fall, U.S. Small Business Administration Administrator Karen G. Mills said now is the time to revisit preparedness plans.

“We should all realize that storms, floods, earthquakes, fires and man-made disasters can strike at anytime and anywhere,” she said in a statement.

One local business that is no stranger to rebuilding after a disaster is the Redlands-based KOLA-FM and KCAL-FM radio stations. Steve Hoffman, KCAL’s program director, said the station’s transmitter was destroyed in the Old Canyon Fire that burned thousands of acres in Waterman Canyon in San Bernardino County six years ago.

“We were lucky because we were able to get back on the air using backup equipment,” he said. “We do have a disaster plan that would allow the stations to keep operating following an emergency of any kind.”

Hoffman explained that if the building were to collapse after an earthquake, everything from music to commercials is backed up on computers.

“Our technical people would grab two computers and they would be taken to the transmitter,” he said. “In the old days, stations had booths at their transmitters that would allow them to broadcast live. If something happened, we would still be able to broadcast and inform the community.”

But unlike other businesses, Hoffman said on-air and technical employees would automatically come to work in the event of an emergency.

“We would broadcast information to the community in the event of an earthquake,” he said. “That’s what we do. We are also part of the Emergency Alert System, which is operated by the Federal Communications Commission and gives the president the capability to address the nation during a national emergency.”

As part of National Preparedness Month, Fontana is hosting an emergency preparedness and safety fair Saturday at the city’s police station. Laura Wolbert, Fontana’s emergency manager, said residents and local businesses who attend will learn how to make an emergency supply kit, create an emergency plan, and receive valuable local emergency preparedness information so they know how to stay informed during an emergency situation.

(For more news about Riverside and San Bernardino counties, visit www.pe.com)

Donald Paysinger takes over as head coach of Beverly Hills

By Chris H. Sieroty

The Beverly Hills High School football team began fall practice on Monday with a new head coach for the first time in 19 years. Donald Paysinger, a longtime assistant coach with the Normans, replaces his older brother Carter Paysinger.

Carter Paysinger, who coached Beverly Hills since 1990, resigned following an 8-4 season to concentrate on being an assistant principal at the school. He has said he will continue to help call plays during gams and develop game plans on the weekends. 

Donald Paysinger, a 1977 Beverly High graduate, was Santa Monica High School’s football coach from 1998 to 1999, leading the Vikings to a 2-8 record each season.

Paysinger was also a graduate assistant coach at San Jose State University and coached with the San Francisco 49ers during training camp in 2004 in connection with the National Football League’s Minority Fellowship Program.

“The reason I applied for the job was simple, we needed a head coach,” Paysinger said. “If I’m going to be involved with the team, I thought I could do a good job as head coach. I’ve been coaching for 29 years.”

The Normans aren’t the only Ocean League team adjusting to a new coach. Jahmal Wright takes over for Tom Salter at Culver City and Travis Clark succeeds Zach Cuda at Santa Monica. Wright was an assistant for Salter, who declared him his designated successor before he step down at the end of the last season. 

Culver City was 7-3 last season and captured the 2008 league championship with a 57-27 win on Nov. 14 over Beverly Hills. The Centaurs lost to Alemany of Mission Hills, 31-15, in the second round of the CIF Southern Section playoffs.

Clark prepared by being an assistant to Norm Lacy on CIF championship teams at both Santa Monica and St. Monica. Lacy is now Santa Monica High’s athletic director and hired Clark over the summer. Cuda, who coached Santa Monica for three years, resigned following an 8-3 season and remains as a teacher at the high school.

Santa Monica’s only losses last season were to Culver City and Beverly Hills in league games and Warren High School in Downey in the first round of the CIF Southern Section playoffs. Santa Monica has lost four straight games to Beverly Hills. Last year, the Normans defeated the Vikings, 26-10.

The 2009 schedule is almost the same as last year’s. The only difference is that Beverly Hills plays Hamilton High School this year instead of Marshfield High School from Massachusetts. In non-league play the Normans will also face Long Beach Jordan, Santa Barbara, West Ranch and Desert Hot Springs.

Last year, Beverly Hills defeated Santa Barbara, West Ranch and Desert Hot Springs but lost to Marshfield and Jordan. 

In Ocean League play, the Normans main competition for the league title will probably come from Culver City and Santa Monica. After a 5-5 season last year, Inglewood was expected to challenge for a CIF playoff position despite the loss of several key players, Morningside was expected to be in the middle-of-the-pack and Hawthorne is in the middle of a 32-game losing streak and hasn’t won since 2005.

“It’s going to be a tough league again this season,” Paysinger said. “Santa Monica and Culver City are going to be tough, while Inglewood always plays us hard. Morningside gave us a tough game last season. It’s going to be a coin toss again to see who wins the league. There are four or five teams shooting for three playoff positions.”

According to preseason rankings compiled by Calpreps.com, Culver City was expected to repeat as Ocean League champions, followed by Santa Monica, Beverly Hills, Inglewood, Morningside and Hawthorne. The high school sports website ranked Beverly Hills 13th overall in the CIF Southern Section’s Western Division.

On the field, Paysinger said the Normans will be led by four key players. Junior Josh Newman replaces Dex Lucci, who graduated last year, at quarterback. Last season Newman was 13 for 25 for 166 yards and three interceptions in two games.  

Kenny Bassett, who rushed for 1,414 yards as a junior, and senior wide receiver Daniel Bradbury were expected contribute heavily to the Normans offense, he said.

On Defense, junior defensive end Greg Townsend Jr. was expected to improve on last season’s 38 tackles.

“Both Josh Newman and Kenny Bassett started for us last year and played very well,” Paysinger said. “We are a young team, but the good thing is a host of kids played for us at some point last season. I think with Newman, Bassett, Bradbury and Townsend we’ll be alright this season.”

Beverly Hills will play its opener Sept. 11 at Nickoll Field against Long Beach Jordan. The Panthers, who tied for second place with Compton and Lakewood in the Moore League, defeated Beverly Hills, 28-13, in the opening week of the 2008 season.

The Business Press: Hospitality Lane still drawing crowd

By Chris H. Sieroty 

Contributing Writer

The center of San Bernardino’s retail and office market once was located within a vibrant downtown, but over the past two decades many retailers and companies have moved their operations to Hospitality Lane.

The pattern has transformed what was once an underdeveloped area next to Interstate 10 into the city’s hub of shopping and employment.

Within the past year, several restaurants and retailers have closed because of the recession, but interest in leasing retail space remains strong, according to several real estate brokers. The 1.2-mile stretch of Hospitality Lane between D Street and Tippecannoe Avenue has experienced an increase in hotel development, led by the $10 million upgrade to the Hilton and a new Hilton Garden Inn, which is expected to be completely built by the end of September.

Jim Morris, chief of staff to Mayor Patrick Morris, said the “strong demand” for modestly priced hotel rooms targeted to the business traveler has driven the increase in new hotels on Hospitality Lane over the past four years.

“Over the last four years three new hotels have opened,” Morris said. “A fourth is about to be completed and two other hotel projects are in the planning stages.”

The Hilton Garden Inn and Hilton Hampton Inn will be situated within a 7.3-acre development called Hospitality Courtyard that is being built by Los Angeles-based ICO Development. Messages left with ICO Development were not returned.

“A niche (hotel) market has been developed along Hospitality Lane, which is a nice complement to the retail and office that has already exists,” he said.

Once completed, the new hotels will join Fairfield Inn & Suites, La Quinta Inn, Quality Inn & Suites, Residence Inn, Best Western and Days Inn.

Along with hotels, Hospitality Lane has developed into a regional dining destination. Over the past few years, regional and national chains such as Pat & Oscar’s, BJ’s Restaurant and Brewhouse, Elephant Bar, and Ruby Tuesday have opened successful outlets.

Pat and Oscar’s, which opened in March 2005 at 690 E. Hospitality Lane, was recently sold to a franchisee. The restaurant seats more than 250 customers and is approximately 5,200 square feet. It’s located in the Tri-City Corporate Centre.

“We are excited about our acquisition of the Pat & Oscar’s in San Bernardino,” said Ron Mehrens, who owns the franchise with his two sons, Kevin and Ron Mehrens Jr. “It was the second Pat & Oscar’s franchise we purchased after acquiring an outlet in November in Palm Desert.”

Mehrens said the acquisition of the Hospitality Lane location closed on March 2 when “the economy was probably as bad as it was going to get,” but in the past five months he hasn’t seen a decline in sales. He declined to release revenue figures or the purchase price for either location.

“We are very fortunate to be located next to so many offices,” he said. “Even in tough times local offices still demand catering services. Our long-range goal is to open four more Pat & Oscar’s, but will probably have to wait a couple of years to see what happens.”

Despite the ongoing success of Pat & Oscar’s, Hospitality Lane has seen the closing of two well-known chain restaurants: Guadalaharry’s at 280 E. Hospitality Lane and Crabby Bob’s seafood restaurant at 215 E. Hospitality Lane. Both restaurants have been vacant for more than a year.

On the retail side, the former Circuit City store at 555 E. Hospitality Lane remains empty after the electronics retailer filed for bankruptcy in January and closed its 567 stores nationwide.

Both restaurant properties are listed for lease by Lee & Associates. Jeff Stanley, senior vice president with Lee & Associates Commercial Real Estate Services in Riverside, said Guadalaharry’s 9,000-square-foot, two-level building with its upstairs patio is listed for $1.75 per square foot, while the former Crabby Bob’s 6,200 square feet of space is listed at $2.20 a square foot.

“We’ve had a few offers for the former Guadalaharry’s and Crabby Bob’s locations from nightclub operators and other restaurants, but nothing has been signed,” Stanley said. “The rental rates for both properties are soft. We’ve had to talk about being flexible about rental rate reductions with the landlords to attract new tenants. The problem is rental rates are off 20 percent to 30 percent below what they were at the peak of the market at the same time last year.”

Stanley admitted that while interest in retail properties remains strong it has taken longer to close a deal because of the recession. The last restaurant deal he was involved with was Ruby Tuesday’s leasing of 5,300 square feet of ground floor space at 996 E. Hospitality Lane in August 2008.

Stanley said the Maryville, Tenn.-based chain of midpriced restaurants that features burgers, salads and sandwiches signed a 15-year lease.

“The area’s strong office market has helped increase the interest (in) retail and restaurant chains considering a move to Hospitality Lane,” he said. “We use it as a selling point. Even though the office vacancy rate is around 22 percent in San Bernardino, it’s better than other submarkets within Inland Empire.”

The area’s demographics are key to its success. Within a one-mile radius there is a total daytime work population of 11,021, according to 2008 statistics provided by CB Richard Ellis. That figure increases to 60,437 within three miles and 121,706 in the surrounding five miles.

In terms of restaurant expenditures in 2008, the real estate firm reported that $4.1 million was spent within a mile radius of Hospitality Lane, increasing to $74.2 million by consumers within three miles before dramatically rising to $223.9 million within five miles.

Attracting tenants to Hospitality Lane hasn’t been difficult, said Michael Ray, vice president with CB Richard Ellis in Ontario.

“San Bernardino is on fire,” Ray said. “For one of the smallest submarkets it’s … one of the largest amount of space in the eastern Inland Empire. Hospitality Lane is the nicest of all the options, with attractive prices, a large population of employable residents and attractive on-site amenities.”

He said the vacancy rate figure quoted by Stanley included downtown San Bernardino and that the vacancy rate for office space along Hospitality Lane was lower.

The real estate firm is in negotiations to lease 20,812 square feet of space at the Northpointe building at 1003 E. Brier Drive. The 284,000-square-foot building is anchored by Wells Fargo Bank, which signed a 10-year lease in 2006.

Ray declined to identify the company negotiating to occupy the space at Northpointe. The company has approximately 239,579 square feet of office space listed for lease in Northpointe, Tri-City Corporate Centre and other buildings adjacent to Hospitality Lane.

“Certainly Hospitality Lane is doing much better than downtown,” Stanley said. “There has been ongoing interest from possible tenants in newer retail and office properties east of Waterman Avenue.”

But after a decade of building shopping centers and office buildings, the area is built out. City officials have shifted their focus from new developments to working with existing property owners located from Waterman Avenue west to D Street in an effort to revitalize aging office buildings and retail space.

Morris said the mayor’s office was trying to pull together property owners to reinvest in their properties and reinvent the western area to take advantage of an expansion of rapid bus service that stretches north to downtown and then to the University Park area of San Bernardino. He said by repositioning the western end of Hospitality Lane it would create a new market for retailers looking to attract rapid-transit commuters and consumers from other areas of the city.

“Hospitality Lane is a critical area of the city,” Morris said. “It’s critical in terms of retail sales taxes, critical as an employment center and functions as a regional hospitality destination.”

Market News International: California Watch

13:28 EDT 07/21

{California Watch: $26 Billion Budget Deal Reached>}

–Lawmakers to vote on Calif. budget deal Thursday

–Two-third vote needed to approve California budget deal

 

By Chris H. Sieroty

 

   LOS ANGELES (MNI) – California is expected to stop printing IOUs

after Gov. Arnold Schwarzenegger and lawmakers reached an agreement on a

plan to close the state’s $26.3 billion budget shortfall.

 

   The governor and lawmakers announced the compromise late Monday,

almost three weeks after the state began issuing IOUs to thousands of

state contractors and vendors. So far California has issued more than

$661 million in IOUs, according to the state controller’s office.

 

   A vote on the agreement, which is composed of cuts, borrowing and

fund shifts without raising taxes, was expected Thursday. The deal will

need to receive a two-thirds vote in both the state Assembly and Senate

before it’s send to the governor’s office for his signature.

 

   Assembly Speaker Karen Bass, D-Los Angeles, and other legislative

leaders urged lawmakers to approve the compromise plan, describing it as

the best way to close the state’s budget deficit and prevent further

decline of the state’s credit rating, which is already the worst in the

nation.

 

   “These are painful solutions for all Californians and many of the

cuts we have to make would be unthinkable if we weren’t in the midst of

an unprecedented and ongoing recession that is plaguing our nation and

our state,” Bass said. “But despite a two-thirds vote requirement that

hamstrings our ability to pass responsible revenue solutions, we’ve

prevented irreparable harm to our schools and prevented the proposed

elimination of California’s safety net.”

 

   The compromise includes billions in cuts to education, health care,

prisons, welfare and other programs. The rest of the deficit will be

made up by a combination of borrowing from local governments, shifting

money from other government accounts and accelerating the collection of

certain taxes.

 

   Schools will take a $6 billion cut, but won a commitment to be paid

back $9.3 billion in cuts from previous years. The agreement also cuts

$2.8 billion from the University of California and California State

University systems, $1.2 billion from the corrections department, and

$1.3 billion from MediCal funding.

 

   Schwarzenegger and Republican lawmakers were able to uphold their

vow of no new taxes with a series of accounting shifts, borrowing and

fund shifts. The state will extract $4.4 billion from local governments’

revenues — about $2.1 billion in borrowing by suspending Proposition

1A, $1.3 billion in redevelopment dollars, and $1 billion in transfers

from local gas taxes.

 

   Schwarzenegger also succeeded in having a proposal to expand oil

drilling off the Southern California coast for the first time in 40

years included in the budget agreement. Under that plan, drilling would

be allowed from an existing rig off the Santa Barbara coast, generating

about $1.8 billion in revenue.

 

   Some 200,000 state government employees already have been ordered

to take three days off a month without pay, the equivalent of a 14

percent pay cut. Those furloughs will continue through next June,

shutting many government offices for three Fridays a month.

 

   “This is a budget that has no tax increases and a budget that is

cutting spending,” Schwarzenegger said Monday. “We’re protecting

education and making government more efficient and cutting waste and

abuse. All around this is a really great achievement.”

 

   California’s latest budget crisis came less than five months after

negotiations resulted in tax increases and spending cuts to eradicate a

$42 billion budget shortfall. Since then, California’s deficit has

spiraled as soaring unemployment and one of the worst home foreclosure

crises in the United States have sent state revenues declining to levels

not seen since the 1990s.

 

   Personal income fell this year in California for the first time in

70 years, leading to a 34% plunge in income tax revenue during the first

half of the year. The $26.3 billion shortfall amounts to nearly 30% of

the state’s general fund, the account that pays for day-to-day state

services.

 

                  ** Market News International **

 

[TOPICS: M$$CR$,M$U$$$]

The Business Press: Homebuilder begins ‘infill’ effort in Upland

By Chris H. Sieroty 

Contributing Writer

Trumark Cos. has established a new company called Trumark Homes to take advantage of the downturn in the real estate market by acquiring infill properties in distressed communities statewide, according to a company executive.

Michael Maples, principal at Trumark Homes and co-founder of its parent company Trumark Cos., said current economic conditions have created an opportunity for his company to acquire distressed properties because they are “unencumbered by the financial challenges faced by existing builders.”

The privately held firm’s first acquisition was 4.38 acres of land at 15th Street and Benson Avenue in Upland, where it will develop a project of 39 courtyard-style homes called Wyeth Cove. Maples declined to release the purchase price or seller but said the property was “a short sell with Comerica Bank.”

Since Trumark Homes is able to build on land that was purchased on good terms — often at below replacement cost — it can afford to sell homes at prices as much as 50 percent below what the market would have priced them at in 2005, the company said in a statement.

The single-family homes will range in size from 1,717 square feet to 2,401 square feet, with construction scheduled to begin in August. Maples said the homes, which will be priced between mid-$300,000 and low $400,000, were expected to open early next year.

“In this case we bought finish lots that already had been permitted by the city,” he said. “At the top of the market, these homes would have been priced in the mid-$600,000. It’s also a price point that will allow buyers to meet federal loan limits at least for 2010, which are about $425,000 in Upland.”

Maples described Trumark as a builder that was initially targeting distressed markets. Its projects will include town homes and small-lot detached and traditional single-family housing.

“We are looking to build in constrained markets that are close to job centers and have an older housing stock,” he said. “In Upland, about 90 percent of the homes were built before 1989. There is demand for new home projects.”

In April, the median home price in Upland was $379,000, down 15.8 percent from $450,000 from the same month a year ago, the California Association of Realtors reported. As of mid-June there were 838 properties in various stages of foreclosure — defaults, auction, bank-owned and houses for sale — in Upland, according to figures compiled by RealtyTrac Inc.

The single-family homes in Upland will range in size from 1,717 square feet to 2,401 square feet, with construction scheduled to begin in August.

Maples said the reduction in home prices, distressed property assets and the credit crisis have created opportunities in the land market, which provided Irvine-based Trumark with the ability to acquire lots at a cost that could lead to a profitable return when sold. Besides the firm’s Upland property, Maples told The Business Press the company has bought or contracted to purchase 200 properties in California over the past 90 days.

He said the company looks for properties in older communities where re-sales are more of an issue than foreclosures.

Since Trumark Homes is able to build on land that was purchased on good terms — often at below replacement cost — it can afford to sell homes at prices as much as 50 percent below what the market would have priced them at in 2005 before the real estate market crashed, the company said in a statement.

“A down real estate market is the perfect time to launch a homebuilding company since relationships have changed from old builders to new builders,” said Gregg Nelson, a principal with Trumark Homes. “We are at a competitive advantage, where investors are seeking to work with us.”

Currently, Trumark Homes is underwriting its deals using private equity and does not expect to acquire debt until next year. Maples said once banks become more confident and start lending again, the company will seek low-leverage construction loans for current and future projects.

“We believe that banks will be interested in lending to us because our devalued assets will offer significant loan security and upside potential. In addition, most of our projects will be located in niche markets where there is no competition,” Maples said.

Market News International: California Watch

15:48 EDT 07/07

California Watch: State IOUs Sought On eBay,Craigslist;Pay 3.75%>

–Regulator’s Respond to Offers for IOUs

–Would-by Buyers seek Calif. IOUs on Craigslist, eBay

–Calif. Treasurer Issues IOU Trade Rules

–CalPERS Not Affected by State’s IOUs

 

By Chris H. Sieroty

   LOS ANGELES (MNI) – Buyers of California IOUs will have to prove they are the legal owners of the promissory notes to cash them in when they mature in October.

   That was the warning Tuesday from State Treasurer Bill Lockyer’s office after reports that the IOUs, or registered warrants, were being sought by third parties on Craigslist and eBay.

   Tom Dresslar, spokesman for the treasurer’s office, told Market News International the treasurer’s office won’t redeem the state’s IOUs without a notarized bill of sale signed by the payee whose name appears on the note. He said Lockyer had asked Craigslist, eBay Inc. and any other marketplace that helps sell the IOUs to post a notice of the policy on their sites.

   About $3.4 billion in IOUs are expected to be issued this month because California legislators have been unable to close a $26.3 billion deficit in the state budget. The first in a series of notes were issued late last week to residents who are owned tax returns from the state.

   The IOUs carry an interest rate of 3.75 percent payable after Oct. 2. That high interest rate has attracted investors hoping to profit by buying them at a cheap rate and redeeming them later.

   The idea is that investors will pay less than the face value to businesses or individuals that receive IOUs but need cash immediately to meet payroll or pay other expenses. Once the IOUs mature, the investors will cash them in for their full value plus the 3.75 percent interest the state is offering.

   ”We buy California IOU’s. Got shafted by California with an IOU check? Need cash NOW? We buy California issued IOUs and give you cash IMMEDIATELY at $0.85 per dollar,” reads one ad on Craiglist, surrounded by classifieds seeking the likes of a Serta full or queen mattress and an Xbox 360 game console.

   ”Sell your government IOU for cash” advised the banner headline at a brand-new Web site, BuyMyIOU.com.

   For now, most IOU holders can simply deposit them. A number of major banks including Bank of America, Wells Fargo and Citibank will accept IOUs until July 10. But the banks haven’t said they’ll take IOUs after Friday.

   Dresslar said if banks don’t extend the deadline for accepting the state’s IOUs, recipients have two choices: either hold on to them until you are able to redeem them on Oct. 2 or sell them to someone other than your bank.

   ”If you don’t need to cash it you hold on to it,” he said. “There are probably a lot of people who will pursue other opportunities to cash in the IOUs.”

   Meanwhile, retirees who get their pensions from CalPERS as well as CalPERS’ vendors are not affected by the state’s decision to pay some of its bills with IOUs.

   The California Public Employees’ Retirement System says retirees and beneficiaries will receive regular payments just like they have in the past. CalPERS employees, vendors, contractors, investment managers, health plans, and other providers of goods and services will also receive regular payments.

   The state’s plan to pay some of its bills with IOUs, officially called registered warrants, is caused by a cash shortage in the state General Fund. CalPERS is a special fund agency and is, therefore, not affected, it says.

   With approximately $182 billion in assets, CalPERS is the nation’s largest public pension fund.

 

             ** Market News International **

 

The Business Press: Defaults, foreclosures loom on commercial real estate front

By Chris H. Sieroty 

Contributing Writer

As the collapse of the housing market in Inland Southern California slowly begins to stabilize, economists and real estate analysts are concerned that increased foreclosures in the commercial real estate market could prolong the region’s efforts to recover from the current recession.

The problem was expected to get worse as a large number of loans approach their renewal date over the next few years and companies and individuals will no longer be able to meet the original loan conditions or refinance.

“The commercial real estate market has already burst beginning more than a year ago,” said Christopher Thornberg, an economist and principal with Beacon Economics. “The key to commercial real estate is that it’s a very slow pop, and it can take years to break.”

He said the major problem facing the local commercial real estate market was cash flow versus debt servicing as property prices in the two-county region were already too high to begin with. But Thornberg added that debt service is relatively cheap at the moment, and much of the debt on commercial properties “is on a three- or four-year balloon,” with problems expected to occur when the loans start to come due.The region’s commercial market experienced a big decline in market conditions in the first quarter of the year, according to a CoStar Inland Empire report. The vacancy rate jumped from 7 percent in the fourth quarter of 2008 to 8.1 percent in the first quarter of 2009, while net absorption was negative 1.37 million square feet and vacant space increased by 416,856 square feet, according to the report.The region’s net absorption rate turned dramatically from the fourth quarter of 2008 from a positive 760,304 square feet. The report attributed the increase to large retailers vacating space in the first quarter of 2009, including Mervyn’s, which vacated approximately 245,000 square feet of commercial space during the first quarter.

“Vacancy rates are way up in the Inland Empire,” Thornberg said. “That’s a big problem, because retail was overbuilt. Retail is worse than other parts of the market, but they are equally bad off. The office market is tiny and realistically will bounce back. Warehousing is an issue. But warehousing is going to be (all right) as trade flow starts up again, which eventually it will.”

Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington, D.C.-based trade group for banks and other financial institutions, said about $1.3 trillion in commercial real estate loans nationwide are coming due between this year and 2013.

“It has become the next round of bad news,” Talbott told The Business Press in a telephone interview. “A decline in property values along with fewer potential tenants looking for space translates into a decline in income for landlords and higher vacancy rates which have combined to create a perfect storm for commercial real estate.”

He cautioned that a commercial mortgage collapse could prolong the region’s recovery. Increases in foreclosures, bankruptcies and falling real estate prices could lead to additional bank losses, while many financial institutions have been setting aside additional resources to cover loan losses from mortgage and credit card defaults.

Additional defaults on commercial properties could lead to additional taxpayer assistance for regional and local banks, he said.

“It’s going to be difficult to refinance those loans because underwriting standards have tightened up and because of the credit crunch banks are not willing to lend as they have in the past,” Talbott said. “There is 3.3 trillion square feet of commercial real estate nationwide. The delinquency rate was 1.8 percent at the end of 2008, but expect delinquency rates to rise this year.”

The reality of bankruptcies and foreclosures is already on display in San Bernardino and Riverside counties.

On April 16, General Growth Properties filed for bankruptcy protection. Based in Chicago, the company, which owns 158 malls nationwide, including Redlands Mall, Galleria at Tyler in Riverside, Montclair Plaza and Moreno Valley Mall, was forced into bankruptcy when it was unable to renegotiate its debts as they came due.

“We are starting to see some notices of default throughout the region,” said Eric Frickle, of Eric Conrad Frickle Commercial Realty Services. “My opinion is it’s going to get worse in the Inland Empire before it gets better, because I just don’t think all the problems have worked their way through the pipeline yet.”

According to figures compiled by RealtyTrac Inc., 1,715 commercial properties in Riverside and San Bernardino were in various stages of foreclosure. Most of the commercial properties listed by the firm were described as defaults — 675 in Riverside County and 512 in San Bernardino County — which were about to be foreclosed.

The downturn in the commercial market has forced brokerage firms to seek additional financing to meet debt payments.

CB Richard Ellis Inc., the world’s largest commercial property brokerage, raised $450 million June 19 as part of the firm’s effort to cover loans to stay solvent during the real estate downturn. Based in Los Angeles, the company raised the money by selling bonds but was forced to offer a high rate to attract investors. The bonds, which mature in 2017, have a yield of 11.625 percent.

The company will use the proceeds of the bond sale, along with $150 million raised from a common stock sale on June 10, “for the repayment of some of its outstanding (debt) under its credit agreement.”

Frickle said lenders have tried to work things out and modify loans before properties go into foreclosure.

“We are starting to see banks trying to renegotiate (loans) because they don’t want to take this stuff back and recognize those losses if possible,” he said.

In terms of the commercial office market, Corona has experienced a construction boom in recent years when housing-related industries were rapidly expanding in the area. Today, the Corona office market contains about 3.9 million square feet of which some 1.25 million, or 32 percent, is vacant.

To put the problem in perspective, Frickle said, in 2005, which was a banner year, the net absorption rate was 340,000 square feet.

“When you look at the historical average absorption over a longer time frame (five to 10 years), the extent of the problem becomes more apparent,” he said. “The excessive vacancy rate will translate into additional defaults in the future, as more construction loans for empty new buildings come due in the next year. This will have a trickle-down effect on other properties, hitting those who bought late in the cycle the hardest as they struggle to make debt service with lower rents that result from landlords competing for tenants.”

Renegotiating leases

As vacancy rates continue to increase, some landlords have been willing to renegotiate leases with national and small-business tenants to keep commercial space occupied.

“We have been very busy renegotiating current lease agreements to take advantage of the depressed market,” said David Salazar, managing director of Cresa Partners in Ontario. “It began about nine months ago when companies began to realize the recession was real and needed to find a way to reduce costs.”

Salazar explained that some companies that may have two years left on a current lease at 40 cents a square foot have been able to reduce the rent to 30 cents a square foot by extending the lease by five years.

“It’s a win-win for businesses and landlords,” he said. “We recently worked with BBSI and we were able to adjust their rent by 25 percent, while extending their lease and acquiring additional space.”

Based in Vancouver, Wash., Barret Business Services Inc., or BBSI, is a human resources management company with offices in Ontario, San Bernardino and Temecula. Matt Maxwell, BBSI’s branch manager in Ontario, said his office hired Cresa Partners to renegotiate its lease when they wanted to acquire an additional 2,000 square feet to add a training center for their clients.

“We felt that expanding our business without revisiting what we were spending in this economy would not be wise,” Maxwell said. “We were paying about $1.80 per square foot, but to take the suite over, we wanted to lower our rate. In the end, we are paying about $1.30 per square foot on a three-year lease.”

In the High Desert, a number of businesses and landlords have reached updated lease agreements. But requirements to renegotiate a lease have been tightened because of claims of fraud by landlords who say businesses owners are trying to take advantage of a depressed commercial real estate market to receive better lease terms, said Donald Brown, president of the Lee & Associates office in Victorville.

“Probably 90 percent of the companies wanting to renegotiate are not in financial stress, but are just not wanting to honor their leases,” Brown said. “It’s unfortunate that they are trying to do this at the landlord’s expense.”

Brown said that for a rent-reduction application, many landlords are asking financial information going back two years.

But as analysts worry about increased foreclosures and bankruptcies, there are some signs of recovery in the Inland commercial real estate market.

“We expect the economy to begin recovering in the third or fourth quarter of this year,” said Brown, whose office represents properties from the Cajon Pass to the Nevada state line. “Right now our leasing agents are talking with potential clients who are looking to take advantage of the (down) market to lease property. It’s a tenant market right now, and we are advising them to take advantage of the best rates in the region.”

Calpers raises private equity, venture allocation

By Chris H. Sieroty

LOS ANGELES – The board of the California Public Employees’ Retirement System, the nation’s largest public pension fund, voted on Monday to let its investment staff increase the fund’s asset allocation for private equity and venture capital investments and to reduce stock holdings.

The board of Calpers voted to raise the fund’s Alternative Investment target allocation for private equity and venture capital by 4 percent to 14 percent of its recommended portfolio allocation.

“This is not intended to be a long-range strategy but reflects our preference for higher liquidity and moderate risk, as well as the flexibility to respond to challenges and opportunities in the markets,” said George Diehr, chair of the CalPERS Investment Committee. “Our investment officers will follow these guidelines as we position ourselves for short-term investment opportunities over the next year or so.”

Calpers’ board reduced the fund’s Global Equity target allocation to 49 percent from 56 percent of its portfolio allocation. The target allocation for the fund’s cash was increased to 2 percent from zero and the target allocation for its fixed- income investments was raised to 20 percent from 19 percent.

The fund’s real estate allocation was held steady at 10 percent and its allocation for inflation-linked assets was left unchanged at 5 percent.

“All investors in every sector have experienced unprecedented devaluations as a result of systemic threats to financial institutions and major companies,” said Priya Mathur, vice chair of the CalPERS Investment Committee. “We reassessed our strategic investment approach, incorporating current assumptions about the market that we didn’t have 18 months ago.”

As of June 12, Calpers was valued at $183 billion.