Rob Cassam's Commercial Real Estate Insider Newsletter
Money making tips for commercial real estate investors and end users!
February 2013

For those of you keeping track, please note I have changed my email address to Please update your records.

In this issue I focus on a variety of important commercial real estate topics for both tenants and owners. I hope some of these may help you know or in the future. This new format includes money making tips for all types of commercial real estate including tips for end users of commercial real estate.
Rob Cassam
Carolina Realty Advisors

704-442-1774 Ext. 100

Increasing Cash Flow In Apartment Investments

For apartment owners, the way to increase rental income and gain a bigger return on investment is to improve the property. One way to reduce vacancies and increase rentability of apartment units is to make them cleaner, brighter, fresher, more comfortable and homey than other apartments in town.

Sometimes these two objectives can be in conflict. For instance, an improvement designed to attract tenants may cost so much that the amount of necessary rent increase makes the units harder to rent.

The Factors In The Decision

Here are some ideas about the factors that come into the decision to make alterations, or remodel the apartment property:

Take a hard look at the rent schedule to see what the vacancy situation is now, if there are any concessions or giveaways currently in effect in the building, and the prospects for renewals. The answers can provide some answers about the timing of renovations.

Painting both exterior and interiors is a good and inexpensive way to make a property look instantly better. This usually yields an immediate and satisfactory return on the cash cost. Experts recommend the use of lot of white and soft colors. If you think about using wallpaper or wall coverings for a more formal effect, realize that they cost more initially, but may last longer than paint.

If you replace carpets, drapes and appliances, the appearance of the unit is dramatically improved and the chance for rentability increases. These costs, however, cannot usually be recouped quickly by means of a higher rent charge.

Adding some recreational facilities can be a way to attract tenants. At some properties, a jogging track might be provided at a fairly low cost. Other exercise equipment such as horizontal and parallel bars can be inexpensive. Providing saunas, indoor exercise rooms, aerobic exercise areas or swimming pool are expensive and may not be justified by either an increase in rentability or return on investment.

Take care if any kinds of exercise facilities are added, check with your liability insurance agent to determine the protection needed against litigation from injuries.

Adding barbecue pits and picnic tables if space is available can inexpensively attract tenants.

Remodeling a kitchen or bathroom is always expensive. If your kitchens and bathrooms are now very outdated, they may be costing you lost rentals. If the funds to do the remodeling must be borrowed, making the determination of the amount of increase in rent will take careful calculation. Try to recover at least the financing costs within the first term of the lease.

Sometimes a washer and dryer rental company will totally refurbish the laundry room as part of the opportunity to install their coin-operated equipment. The owner of the property can make the property more attractive and rentable without any cash outlay at all.

In some apartment properties, recreation rooms have been converted into a day-care center staffed by a licensed day-care operator. The room might be divided for use by both young children and elderly people. It becomes a source for additional income for the owner and a drawing item for working mothers and for workers who care for elderly parents. Again, check your liability insurance!

Always keep tabs on the condition of the property. Make repair and improvement decisions promptly. If conditions deteriorate, it can lead to costly projects later. Keep very alert to what the competition is doing and always try to stay competitive with them.

Why The Office Building Is A Hot Investment

The second hottest investment (second only to apartments) is the office building. That is the suburban office building rather than the ones in downtown areas.

An office building has always ranked as one of the favorite real estate investments of most large institutions, insurance companies, pension funds, banks and foreign investors. It follows, then, that if they are that attractive to institutional investors, they should be of interest for the average investor now.

Why The Office Building?

The income in a well-operated office building can be excellent. An office building that is fully occupied has a rental income less operating expenses that compares favorably with a shopping center investment.

Office leases are not computed based on a percent of the retail sales like shopping centers. The rent in office buildings is often fixed for the duration of the lease, with a formula tied to the rate of inflation and other factors - all designed to maintain or enhance the profit margin.

Increasing the revenues from an office building has to focus on rents. Keeping rents at a proper level at the time of a lease renewal is obvious. Consider charging rents based on space used by the tenant plus a percentage of space represented by restrooms, hallways, atriums, rather than space actually within the walls of the tenant's unit. A difference of over 10% between usable space and rentable space is common.

Another saving can be in changing the leasing of the building from a gross basis to a net basis. In a gross lease, the lessor collects the rent, but is responsible for all of the operating costs, such as real estate taxes, utilities, maintenance, management, etc.

Switching to a net lease on renewals for new occupants, all of the costs are allocated to the tenants on a pro-rata based on the square footage being used.

However you compute the terms of the lease, the pressures of the marketplace may cause the rents to remain the same or go down. Not long ago, we saw reduced rents and concessions such as free rent in overbuilt areas.

Some companies continue to reduce the need for office space because of more efficient space planning and reduced home office personnel. Some have employees working from their homes, in touch with the office by computer. These trends will have some effect on the demand for office building space. Management and social realities dictate that office locations of some kind are needed for nearly all businesses.

The Terms in Leases

The lease of office space will vary widely in term. It can run anywhere from one to 25 years (in extreme cases, sometimes longer). The bargaining position of the tenant can range from practically none for a short-term tenancy for a small office to the extremely strong position of a Triple-A tenant who will occupy the major part of the building.

Of course, the owner and the tenant know that rent will be required and paid. The question always is how much will be paid and how will it be computed. Following are points that are negotiated in leases for office space.

A Flat Rental.

This lease calls for a rent amount that will be the same for the whole term and is most common in the short-term rental. The problem with the landlord is the failure to protect him against unreimbursed increases in taxes and operating expenses.

A Step-up Lease.

This contract calls for a gradually increasing amount of rent, to be stepped-up a certain amount or percentage at specified intervals. It may be used to compensate the owner for expenses as they increase, but more often it is used as an inducement for a tenant who has recently started in business and may be only able to afford a smaller rent.

Expense Participating Lease Or Escalator Lease.

Many long-term office leases are written this way. The tenant pays a fixed rent plus a specified portion of the real estate taxes, insurance, and repairs other than structural ones. The expense participating lease requires the tenant to pay an immediate share of these costs, while with the escalator lease the tenant pays only a portion of any increases in costs during the lease term.

Cost Of Living Lease.

With this lease, the tenant's rental amount is increased or decreased at specified intervals depending on the fluctuation of the dollar as shown by price indices or other agreed measures of the degree of inflation or deflation that has occurred.

Reevaluation Lease.

This lease calls for an appraisal of the property and a fixing of the rent as a percentage of the appraised value at specified intervals. The new rental may be fixed on the basis of the value of the land and building, or on the rental value of the premises occupied by the tenant.

In addition to these computations of the amount of the rent, the lease should indicate the method of payment. In some cases, the tenant's income is seasonal, and monthly payments can be of unequal amounts. The date of the first rental payment should be set forth specifically, and the intervals when subsequent payments are due. If any rent concessions have been granted by the landlord, the lease should clearly indicate the months that are to be rent-free.

Watching Some Lease Provisions

The following is a useful checklist of some of the items that should be clarified between the parties in the lease:

1. What is the amount of usable space? Since the rent may be based on a square foot rate, the rate may be quoted on a rentable or a usable area. Rentable space means the actual office area, plus a proportionate share of facilities and corridors that service the floor on which the office is located. This concept is used in most buildings. Usable space is the actual space located within the walls of the office and excludes any part of the service facilities.

2. Who pays the broker's commission? Maybe the broker has been working for the tenant, but the fee is usually paid by the lessor. Often the lessor has hired the broker to represent him in the negotiation. The lease should reflect the obligation and who will pay it.

3. On what basis is electric current or other utilities paid? The tenant usually will pay for his own utilities. However, it can be computed in two different ways. It could be a flat rate added to the rent. Sometimes, each office is provided with its own meter and charged only for the actual consumption of the utilities.

4. What services will be provided? There are a number of services in a building. There may be elevator service, air conditioning, restroom maintenance, parking that is available to tenants or will be rented. The tenant's right to use these services and the limitations should be spelled out.

5. Is there a "most-favored tenant" clause? If a tenant moves into a new building that is only partially filled, he may demand a clause in the lease that will give him the benefits of any rental concessions that the landlord may subsequently make in order to obtain tenants.

Managing a Small Office Building

Office buildings usually take less of the owner or manager's time and attention than other types of property. Some office building owners are former apartment owners who didn't like handling the details of apartment ownership and management, but who do like running an office building.

Tenants in office buildings are usually much less demanding than residents in apartments, since the tenants can generally be dealt with on a much more professional level. Professional management is easy to get - competent property management companies are available in most areas.

Getting Rich By Solving Problems In Real Estate

An empty new office building. A remodeled apartment house or hotel that has an excessively high level of vacancy. A large tract of undeveloped land that no developer has become serious about wanting to develop. These are examples of troubled property -- property that is a definite financial burden to continue to hold but which also is unattractive property to most prospective buyers. Unattractive, that is, until very recently.

The timing now seems increasingly right for investors to obtain troubled property at bargain prices. There are two reasons for this: (1) the supply of money for real estate loans is at record high levels and growing measurably, and (2) the pressure on owners and lenders with troubled property to get out from under the on going burden is also high. The result is that syndicates are rapidly being formed to seek out and buy up troubled properties.

High Risks

Knowledgeable property developers and managers (especially those familiar with empty or near-empty office, hotel, and apartment buildings) caution that buying troubled property requires taking a very high risk. The financial returns are uncertain and may be a long time in coming, if they come at all. This type of investment is not for everyone; it's for those who can afford high-risk situations.

The profits can come from any one or a combination of circumstances.

1. A market turnaround caused by a boom in the local and/or national economy.

2. An improved system for promoting and operating the property. Some syndicates are being formed solely to manage the troubled property with an option to buy when and if it hits a specified profit level.

3. Purchase of the property at an almost give-away price, often combined with imaginative and untraditional financing techniques. Some lenders are asked to share the financial risks by accepting a low initial interest rate in return for a big share of the profits later on. Sometimes the seller of the troubled property is asked to retain a financial stake in the property and to help turn it around. The seller's experience and involvement in the project from the start can be valuable.

4. Including the troubled property in a larger development plan. An office building that sits empty might become part of a new industrial park with hotels, conference facilities, and residential apartments, all of which are successful.

Take another look at troubled properties in your area. With fresh new ideas and a re-structuring of the mortgages, the troubles may go away, leaving a profitable investment for you.

In This Issue
Increasing Cash Flow In Apartment Investments
Why the Office Building Is A Hot Investment
Getting Rich By Soving Problems In Real Estate
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Contact Information
Rob Cassam, MBA, CCIM
Carolina Realty Advisors
1001 East Blvd. Ste. B
Charlotte NC 28203
Tel: (800) 587-4066 Ext. 100
Fax: (704) 442-8841

I provide real estate brokerage services for small and medium sized businesses, investors, and individuals who are fed up with losing money, paying too much and/or, spending too much time not getting the right piece of property for their particular situation. I act as the quarterback in the real estate transaction for my clients who coach me in managing all of their different needs.

My clients love not needing to worry about making bad decisions or bad investments and love winning negotiations.

Owners Of Commercial Space

How are your properties helping you in your life?

Have your investments turned out as planned?

What types of problems have you had growing your portfolio?

How has the economy impacted your rents and vacancy?

Are you satisfied with your income and asset portfolio? Is it meeting your needs?

How much of a problem is dead equity in your property?

How long are you prepared to go on doing nothing about situations in your business that are not quite right?

End Users Of Commercial Space

What types of growing pains is your company facing with your location?

Are rising occupancy costs a challenge your company is facing?

Is having too much space or not enough space a challenge your company is facing?

How much of a problem is dead equity in your property for you?

How long are you prepared to go on doing nothing about situations in your business that are not quite right?

Give me a call, I may be able to help.

Carolina Realty Advisors

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