Commercial Property Turn Arounds for Profit

This month’s newsletter has just been released!

Check out the latest tips for tenants and users of commercial real estate space. Learn about insurance provisions you must consider and what your landlord thinks about absentee tenants!
In this issue

    • Keeping Your Tenants- Easier Than Finding New Ones
    • Single Tenant Properties- Not For All Investors
    • Property Turn Arounds For Profits

 

 

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November 2012 Rob Cassam’s Commercial Real Estate Insider Newsletter

This month’s newsletter has just been released!

Check out the latest tips for investors of commercial real estate space. Learn about insurance provisions you must consider, how to handle the ghost tenant, and how to benefit from options!

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Money Making Strategies For Selling Commercial Real Estate

Buying and selling commercial real estate can be an extremely lucrative venture; however, it can also spell financial disaster if you make a mistake. Often, investors make the mistake of assuming that selling a piece of commercial real estate is basically the same as selling residential real estate. In reality, they are very different. Typically the buyers, laws, procedures and financing are all different when commercial real estate is involved. Consider the following tips if you plan to sell commercial real estate:

    • Setting the right price is crucial, yet complicated, with commercial property. Numerous factors affect the price including location, improvements, neighborhood trends, and zoning. Having a professional market analysis done is a good idea.
    • Know the zoning laws. Zoning is everything when it comes to commercial real estate. Zoning laws are also subject to change—and do change—on a regular basis. Make sure that you consult with someone who knows if the laws have recently changed or if there is any legislation pending that might change your property’s zoning in the near future.
    • Be an advertising guru, or hire one. Advertising is always an essential component in the sale of property; however, because you are trying to reach a much smaller market of potential buyers when selling commercial property, advertising is even more important.
    • Make sure you understand the process. Buyers in the commercial real estate market are typically seasoned veterans. Sometimes, this means they will not hesitate to take advantage of someone who is not. If you do not know the process inside and out, make sure that you retain the services of someone who does in order to avoid this possibility.
    • Be prepared to wait. Of course some commercial property is snatched up the moment it is listed for sale, but as a general rule the commercial real estate market moves at a slower pace than the residential market.
    • Be certain that you understand the legalities. Contracts for any sale can be complicated. Contracts and the supporting documents that go along with the sale of a commercial property can be very complicated and verbose. If you have any doubt about your ability to understand them, use a professional for the transaction. Given the amount of money that is likely at stake, this is truly one of those situations where it is better to be safe than sorry.

If you choose to go it alone, heed the preceding tips when selling a commercial property. Your best bet, however, is often to use a professional who specializes in the sale of commercial property.

As always, contact me with any questions.

Rob Cassam

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May 2012 Real Estate Investors Insider Newsletter

This month’s newsletter has just been released!

I know you will enjoy some great information on commercial real estate valuations!  Stay tuned for more money making information on commercial real estate investing information.

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How to Determine the Value of a Piece of Commercial Real Estate

I am often asked how commercial brokers determine the market value of a property. In order to perform that task, a detailed analysis and report should be prepared. Here is how you do it.

Property Inspection: If you’re performing an exterior inspection and the property is open to the public (retail store, office building, etc.), then you should enter the building to gauge the condition and occupancy but please do not make contact with the property owner or tenant. In an interior inspection of a multi-tenant property, please assert your right to view individual units. Note the condition of all units, with special attention paid to items of deferred maintenance.

Photographs: Take a sufficient number of photographs to properly capture the entire subject property and important neighboring aspects. This includes, but is not limited to, front, rear, each side, parking lot, street scenes (all directions), areas of deferred maintenance and any other nearby conditions that influence the subject. Photographs may also be used to document the occupancy of the building by taking pictures of tenant’s signs or any tenant directory.

Property Identification: Research the borrower names, property address and Assessor Parcel Number (APN). Note the previous market sale and current tax values and tax assessments.

Local Market and Value Trends: Research current trends in the market and explain market conditions, direction of market values, development stage of the submarket, market activity (buyer or seller’s market), average time on market for like-kind properties, population and employment trends, and overall level of demand. Discuss area foreclosures, boarded-up properties, crime, or anything that would have effect on values in this area.

Real Estate Taxes: This should be based on the current assessment per taxing authority.

Condition / Location Ratings: Determine the appropriate rating for the property keeping in mind that these ratings are relative to how the subject property compares to the balance of the submarket. Typically the range of quality includes a simple four category scale of poor, fair, average good. When making these ratings, be sure to remember that adjustments will be needed to equalize the researched properties to the subject property.

Listed for Sale or Lease: Determine if the subject property is listed for sale or lease and obtain any MLS, Loopnet, or other listing data flyers to your CMA. Listing data of the subject should normally set the upper limit to market rent and value.

Property Comments / Description: Note the entire property characteristics including all buildings, the parking lot, ingress and egress. Also discuss external factors (positive or negative) such as vehicular or pedestrian access, visibility, zoning, neighboring property types, crime, vandalism, and stage of the market (growth, stability, decline, revitalization).

Deferred Maintenance / Vacancy Issues: Determine the specific deferred maintenance issues and the overall maintenance level of the building(s). Note all observable problems such as broken windows, roof issues, potholes in parking lot, etc. To the extent possible, determine the potential or known vacancies in the building(s). Note obvious signs of vacancies which include stark, curtain-less apartment windows, missing electric meters, broken windows, for rent signs, etc.

Comparable Sales: Research the sales of similar property types within the same or similar submarket. Comparables should be selected based on the type of real estate rather than tenancy. Retail buildings should be compared to retail buildings, office to office, industrial to industrial, and so forth. If recent comparable sales do not exist in the same submarket, extend your search further back in time and then further away in other, similar markets. Next rate the comparability of the particular sale (for age, size, condition, location, etc.) by indicating whether it is superior, inferior or similar in the appropriate field. Be cautious not to use sales that have business value, FF&E or any leased-fee component included in the sale price. In the absence of comparable sales, include comparable listings. If using listings in your analysis, then base your value conclusions (for the subject) on what you think the listed properties will sell for, not their listing prices. Document your analysis with any supporting data sheets with your CMA, including copies of the MLS or other listing.

Comparable Rentals: Comparable rentals should show support for your estimates of market rent for the various units in the building. Note in your comparable rentals findings, which party is responsible for expenses – landlord or tenant. Listing data may be used as comparables if actual comparable leases are not available. Document your analysis with data sheets (MLS listings, Loopnet, other data sources) to your CMA.

Income Approach: This is a multi-step process to estimate the value of the property based on its ability to generate income. The income approach should be based on your Comparable Rentals and knowledge of the local market. First, using estimates of market rent calculate the Potential Gross Income (PGI). PGI is the total income of the building(s) at full occupancy. Then deduct a market based estimate of Vacancy and Collection Loss (V&C). Vacancy estimate should be based on the local market, not the subject property. Add an estimate of any Other Income that the property may generate (garage rentals, parking revenue, reimbursed operating expenses, etc. PGI less V&C will generate Effective Gross Income (EGI). From EGI deduct the sum of the real estate taxes and operating expenses to calculate Net Operating Income (NOI). Divide the NOI by an estimated capitalization rate to estimate the value via the Income Approach. Make sure the capitalization rate you choose is within a range of capitalization rates as extracted from comparable sales. Your result here will be a stabilized income approach value.

Rent Loss represents an estimate of the total amount of rent not collected for a vacant unit(s) while awaiting future occupancy. For example, if six of 12 apartment units are undergoing a six-month renovation/re-leasing program and typically rent for $500 then the rent loss for these vacant units would be estimated as 6 units x $500 x 6 months or $18,000 (assuming all get rented at the end of the program). This amount may be less if units are renovated and leased over the course of the renovation project. In the case of a multi-tenant building with an estimated one-year lease-up scenario, it is fair to assume that some units will get rented before others. In other words, units would get rented as they are absorbed by the market so rent loss may be less than a full year. Estimating rent loss requires you to estimate the number of months it will take for a unit to get rented and multiply that number by the estimated monthly rental rate.

Tenant Improvement deductions represent the costs associated with making a unit rent-ready and are commonly associated with, but not limited to, office and retail properties. Costs may include new carpet, interior paint, interior alterations, etc.

Leasing Commissions account for brokerage costs for leasing vacant space. Amounts should be estimated by whatever is typical for the local market.

Deferred Maintenance represents costs associated with bringing the building back to useable condition. These costs include items such as the roof, foundation, repair/replace HVAC, interior/exterior repair/renovation, parking lot and any other item necessary to make the building rentable. If these costs are substantial, then you must get a contractor’s estimate. If minor, estimate these costs as best you can.

Properties that require extensive, lease-up, renovation, or cost to complete should be accounted for by estimating these values and subtracting it from the above Income Approach figure to determine the as-is income approach value.

The income approach is not always relevant to the valuation of the subject.

Reconciliation: This is the phase where the two market value indications are resolved into a final value estimate. Do not average the two approaches. Rate the strengths and weaknesses of the Sales and Income Approaches to value and estimate a final value by giving weight to whichever approach was more reliable. Your final value estimate should fall between the two approaches to value. If you conclude the Income Approach does not provide a valid indication of value, then you should rely solely on the indication from your Sales Comparison Approach. If the subject property is listed for sale then the list price should normally set the upper limit to value. Your reconciled value estimate should assume a 12 month marketing period.

If you were able to determine the “As Is” and “As Stabilized” value estimates (unless the subject is REO and displays significant vacancy and/or deferred maintenance), you should estimate the “As Is” value only.

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Where to Get Commercial Real Estate Comps

Getting commercial real estate data points for use in various real estate analysis is not an easy task. Quite simply, there are not many sources, and those sources that exist do not contain data with all inclusive details.

Sources for gathering commercial real estate comps include:

1. Local tax assessors website

2. Local commercial real estate data services (membership typically required)

3. Public commercial real estate sites such as Loopnet.com Users can pay for data comps on a per piece basis or as a subscription.

4. Local commercial appraisers.

5. Local commercial real estate brokers.

6. Costar

There are various outlets for commercial real estate data for large properties and trend analysis. Many small investors should not mistakenly use this information for application to smaller properties. For example, market cap rates for a 20 unit apartment will be much different than a 200 unit apartment located in the same market.

The most difficult data to obtain are lease details. Since there is no required recordation, the only person to rely upon is the owner, tenant or brokers. Most of the lease term data is viewed as confidential by one or all of these parties in some way. The owner may not want to let the world know how much of a discount he had to take to accommodate the lease on the table, The tenant may not want their competitors taking advantage of the information on their term. Typically, a call to the broker involved in the transaction will yield enough detail to make the data you are considering relevant for your analysis.

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February 2012 Real Estate Investors Insider Newsletter

This month’s newsletter has just been released!

Dont forget to take a look at the redesigned website! Stay tuned for more money making information on commercial real estate investing information.

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Real Estate Values and Appraisals

Investments, terms for loans, processes, and other parts of real estate can often be overwhelming to someone who hasn’t received a degree in real estate. If you are looking for definitions and actions behind those definitions, then don’t forget about getting the right appraisals. This will help you if you are looking for the right market for your property.

An appraisal consists of a professional opinion that is made about a property. Included in this opinion are several factors that allow for this statement to be made. Overall, the appraisal will lead to the conclusion of what the market value is. If the market price can not be defined easily, then someone can look at the different parts of the property and determine what they believe the market price should be. Usually, this will be done by an inspector looking at the various mechanics that may have been swept underneath the rug.

An appraisal may be a necessary requirement when one is looking into selling real estate or having the property insured or financed. It may use several external resources and definitions of what market value may include in relation to the opinion being made in order to determine the price value of a the property. When getting an appraisal, you can expect that the estimates will be based around the various factors that are related to the market at the time. Instead of just examining the parts of the property, an appraiser will also examine the market and see what everything else is worth in relation to the property. In addition, a careful review of the income stream and expenses associated with the property will be a separate value that is used to determine the final value. Both methods will also compensate for deferred maintenance of the property. Said another way, it is the work the property will need to get it to a sale-able or rent-able state.

By appraising a property, you will know how much the real estate is worth in relation to your own needs on the property and in relation to everything around it. By observing the standards that are set both inside and outside, you will have the ability to know when the timing is right to get involved with your piece of real estate.

Note that many real estate brokers can provide a similar analysis but cannot state the market value per se. They can only reference these values as a range of probably value or the brokers opinion. As you can imagine, it pays to work with a professional who knows what they are doing and has the relevant experience!

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When would NOW be a good time to invest in real estate?

While you see businesses come to life, peak and fall, you may be thinking if the business of real estate is worth the investment. You wouldn’t want to invest in something that won’t be substantial. Unlike other businesses, real estate is very often times a good investment to make, and may be the only real mainstay market.

Even though the real estate market rises and falls, there are still many benefits to being in real estate. You can expect that if something happens that causes the real estate to lower, it will eventually come back up. There is always a need for bricks and mortar in which businesses need to operate. People are always moving into different locations as well as leaving for business reasons. No matter what type of real estate you are investing in, you can expect that someone will have the need to use the property for something. Because real estate is part of the basic needs of individuals, it can be expected that someone will always be looking, and others will always be selling.

One of the advantages of real estate that gives it more stability is that no matter what the economy, there will always be real estate selling. It can be expected that if the market is bad, individuals will be working towards selling their homes to move somewhere more substantial. If the economy is good, then individuals will be looking into buying homes that can offer more. This helps to keep real estate as one of the stable markets among businesses.

If you aren’t certain about investing in real estate, you don’t need to look any further than the economy and how the fluctuation is always to the advantage of those owning property. No matter what the circumstances, individuals are always looking for a place to live. If you want to make sure that you are part of the trends in the market place, then investing in real estate is a certain way to keep stable income.

Take a serious look at what current investment alternatives there are in the market now. Then look at those returns against both opportunistic real estate and stabilized real estate investments. Compare the internal rate of returns on the options and make your decision.

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December 2011 Real Estate Investors Insider Newsletter

This month’s newsletter has just been released!

Dont forget to take a look at the redesigned website!  Stay tuned for more money making information on commercial real estate investing information.

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