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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: patron_anejo_por_favor who wrote (187281)2/28/2009 7:32:03 PM
From: PerspectiveRead Replies (1) of 306849
 
REIT HELP! I still don't have an intuitive feel for these darned things. Any idea how much of a factor commercial RE values are vis-a-vis the irrelevance of depreciation expenses? I was just thinking yesterday that maybe the reason they've gotten away with ignoring depreciation is the old saw that "real estate always goes up." So, by the time you get to the end of a loan, the underlying real estate has gone up so much that accumulated depreciation is irrelevant.

Residential homeowners have certainly benefited from this thinking. How many folks do you know that basically ignore the cost of capital improvements and maintenance on their homes because the underlying value was rising so quickly that it just didn't matter? Folks are getting a rude awakening there now.

Is that why REITs have been able to get away with ignoring depreciation and GAAP income formulae? Because ignoring depreciation in looking at profitability is like ignoring the cost of doing business. And for REITs, there is a HUGE difference between EBIDTA/FFO and income numbers...

Anecdotally, I've always been amazed at how many perfectly good commercial structures get razed after standing for only a few years. Perhaps that practice is also going to be impacted.

`BC
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