Commercial Real Estate Financing
To give you an idea of the range of commercial properties you can own, and earn money from, here's a quick summary of a number of types Other nonresidential buildings. Any other type of nonresidential property comes under this category. What you do with it depends on the type of property and the function it fulfills. Hence, what you can do with it varies widely with your interests and skills Now we'll look at a few specific commercial properties to see how you could finance, own, and profit from them. We'll start with an amusement and recreational property.
It has one major Most BWBs I meet want to invest in residential properties. While such properties have built and are building thousands of real estate fortunes, I suggest you also look at small office buildings as your potential source of real estate wealth. Why Because Office properties can be bought by you with better financing than residential properties because there are fewer buyers for office buildings. Hence, sellers are more creative in the unique financing options they offer buyers namely you.
Before getting into the tangible differences between investing in residential and commercial property, let's pause to make a big distinction. When you invest in residential property, you are essentially dealing with people. When the rent is not paid on time, you have to deal with a person (the tenant). If you feel the property is not being kept clean and tidy in accordance with the rental agreement, then you will have to deal with people, who may have a different opinion as to what constitutes cleanliness and tidiness. On the other hand, when you deal with commercial property, you are essentially dealing with contracts. If the rent is not paid on time, then the contract (the lease agreement) stipulates a series of remedies that the landlord can take. If the property is not kept up to a certain standard, then the contract may stipulate that you can send in a commercial cleaner and send the bill to the tenant. With commercial property, on the other hand, what is in the lease contract is...
A commercial property is simply a property that is zoned commercial. It doesn't have to be a towering highrise or a sprawling mall it could be a small office building or retail strip center, and it may not cost much more than houses in good neighborhoods. In fact, many commercial properties were once residential. You see those buildings in cities and towns across the country homes that were converted to business use as commercial activity expanded into neighborhoods and properties were rezoned. Of course, that simple issue of zoning creates a number of important differences. In general, commercial real estate buyers, sellers, and brokers are more sophisticated than their residential counterparts. They're usually dealing with higher dollar figures, and it's quite common to have a number of investors involved in a single deal. Commercial leases are more complex than residential ones. Property owners and tenants are often dealing with government regulatory issues that don't affect...
Under the broad umbrella of commercial real estate are four property types retail, industrial, offices, and multifamily residential. You should be familiar with all four types, but I recommend that you choose one of the four Offices. Offices accommodate businesses that don't need manufacturing, warehouse, or other industrial facilities. Office buildings tend to cluster in downtown areas and modern office parks. Categories you'll need to be familiar with are highrise (exactly how high depends on the area) midrise and lowrise (again, varies by area) and garden (one and two stories, heavily landscaped buildings). Office buildings are also classified as A (new or less than 4 years old in great locations and easily accessible with the latest and greatest amenities) B (8 to 10 years old with dated amenities) and C (15 or more years old). B and C buildings are less desirable because of their age, location, or construction factors. Class A buildings command the highest rent and cost the most...
It's a good idea to invest time shopping for buildings long before you are actually ready to buy. The sellers and brokers are a tremendous source of knowledge and education about the local market, the process of investing in commercial real estate, and even managing commercial property. And as you're well aware, knowing your market is critical in any real estate deal but especially with commercial property. residential and commercial buildings, ignore the it could be getting
Many potential investors lack knowledge of commercial properties. Or they think such properties cost too much. But, individual investors now realize that in today's real estate market, many commercial properties offer lower prices and higher yields (i.e., higher cap rates, higher cash on cash returns) than houses, condominiums, and small apartment buildings. Read through the sampling of for sale office and retail from around the country (Figure 15.2). As you can see, none of these commercial properties is priced above 325,000. Their cap rates range between 6 and 12 percent, which is typical. One strong upside of commercial properties is that (in most but not all situations) your tenants operate businesses or professional practices. They establish themselves in a set location. Therefore, commercial properties typically experience low tenant turnover. On the other hand, when you do get a vacancy, that vacancy can last for months or if you own a specialized property (or a property in an...
I am willing to bet anyone an ice cold case of Beck's Beer that the numerous commercial real estate market meltdowns that have occurred during the past 30 years would not have been so severe if the high rollers had bought more real estate options instead of properties. In this way, if they did not want to exercise their real estate options, they could have simply let them expire, and that would have been the end of it. And they would not have incurred any of the transaction, maintenance, management, holding, and debt service costs that eventually forced them to go belly-up. In other words, they would not have been saddled with the financial responsibility and personal liability that go along with outright property ownership, and they automatically would have avoided having to
When I was starting out as an option investor, I bought a one-year option on a run-down commercial property in Ruskin, Florida, that belonged to a fertilizer manufacturer. And two months later, the company filed for protection under Chapter 11 of the U.S. Bankruptcy Code, and the property I owned an option on came under the control of a court-appointed bankruptcy trustee. The judge presiding over the case in U.S. Bankruptcy Court in Tampa ruled that my real estate option to purchase agreement was personalty or personal property and that I did not have an interest in the property. The case dragged on for over two years and, in the meantime, my option expired and I was out my 3,500 option fee. The 3,500 lesson that I learned here was to always do a lawsuit search on the individual or business entity that owns the property before I ever plunk down my hard-earned money to buy an option.
In the chapters that follow, you will learn how to enhance your profits through intelligent use of leverage (mortgage financing), bargain hunting, sharp negotiating, creative improvements, commercial properties, strategic management, tax avoidance (not evasion), and moving your monies to undervalued properties and areas.
I have found that the best real estate brokers have the client's interests at heart. The best example I can give relates to my good friend and client, Craig Coppola, who was acting as my real estate broker in my attempt to buy an office building for my law firm. Although I had my heart set on buying a particular building, Craig was a good friend and professional broker who looked me in the eye and told me that it was not in my best interest to act and that I needed to be patient as the market was trending downward. Clearly, Craig's advice was in my best interest and not in his short-term interest since no commission would be paid.
When I decided to become a real estate agent in 1990, I didn't even consider residential real estate sales as a career path. I wanted to wear the nice suits, drive the fancy cars, and meet over power lunches with those who made the business world turn. I wanted to sell and lease commercial real estate. Of all the wisdom he shared with me that day, one thing he said really stuck in my mind Making 100,000 a year is easiest in the arena of residential real estate. In fact, you can reach that goal in your first year. He'd been there and done it all residential real estate, commercial real estate, and land development. Independently or through syndications or joint ventures, he'd had a personal stake in every facet of commercial real estate including sales of retail buildings, apartments, undeveloped land, and office and industrial spaces. He knew the game from firsthand experience and I knew he was speaking the truth. I followed his words and broke into the residential arena. The...
Comparing commercial real estate to residential real estate is like comparing apples to oranges. Both are from the same genre, but that is where the similarities end. The following are general descriptions of the two types of real estate 1 Commercial real estate is business-focused. It involves property that is sold, leased, or used to achieve a predetermined business objective. It's used as an investment to achieve an anticipated rate of return on the funds invested. The selling process for commercial real estate hinges on numbers and return-on-investment calculations. Residential real estate is nowhere near so cut-and-dried because it's more of an emotional purchase. Many buyers make decisions based on the fact that the house just feels right to them. I've sold homes to people who insisted they needed a fourth bedroom, an island kitchen, a family room off the kitchen, or a three-car garage. Yet when they fell in love with a home that lacked their must-have amenities, they purchased...
Before you launch your career in residential or commercial real estate, you need to objectively weigh the pros and cons against your own goals and interests. Making a U-turn after the wrong initial selection could take at least one year. The upcoming sections help you view the two paths with an objective eye, without getting wrapped up in the excitement of either. Exploring the pros and cons of a commercial real estate specialty Landing a job at a commercial brokerage house is much like being hired into a Fortune 500 company. Expect to attend a series of interviews, answer a number of questions about your history and educational background, and endure a careful assessment of your ability to succeed in the field. Once you land a job, most commercial real estate companies pay you a salary while you cut your teeth in your new career. They want you to succeed, and they stake a monetary investment in your success. Commercial agents work in a far more respected business environment than...
I can tell you from firsthand observations that most of the investors who try their hand at flipping properties usually end up spinning their wheels. While I was writing this chapter, I received a telephone call from an investor here in Tampa who wanted to know if I was interested in buying a small commercial property that he had under contract to purchase. As I found out, this guy was unable to finance the purchase of the property, and his purchase agreement was due to expire in five days. He was in a panic mode, frantically trying to find someone to buy his agreement before he lost his earnest money deposit and the seller filed a lawsuit against him for failing to purchase the property as agreed. I passed on the deal but took down the property's street address for future reference. Who knows, if the property fits my needs, I may contact the owner later on and try to negotiate an option to purchase.
No question about it, agents in commercial real estate experience a much stronger risk-and-reward connection than those in the field of residential real estate. Residential agents minimize their risk by earning many smaller commission checks as the result of numerous deals each year. With only a few deals and larger, but infrequent, checks, commercial real estate agents face a greater threat when a deal goes awry.
Commercial real estate is very different from residential real estate. Craig Coppola is recognized as one of the best commercial real estate brokers in the United States. That is why he is my partner in commercial real estate investments, and we have done extremely well financially. When Kim and I began our transition from residential to commercial real estate, the first thing we had to do was let go of a residential real estate investor's mindset. We had to see real estate investing through a different set of eyes. If not for Craig's experience, Kim and I might have lost a lot of money paying for our commercial real estate education. Craig is great because he is a tremendous teacher and takes the time to explain what we fail to see. As an example, Craig's education of Kim and me began with our interest in a beautiful office building in a great location. It was a cute structure, built in the 1980s. The first thing Craig said was that there was not enough parking. He did not even look...
When it comes to understanding the lay of the land, I look for what real estate pros call the path of growth in the market. Even in cities that as a whole are not growing, there usually are areas that are. How do you recognize the path of growth when it comes to commercial real estate Look for the areas where home builders are buying land, where new homes are being constructed, and where elementary schools are being planned and built. City governments are a great resource for this information because they tell you where they are planning to build new facilities and where infrastructure is going in. You can also get good insight from the economic development officials in your city offices. It's always interesting to see which projects they are the most excited about and what they see developing down the road.
Rental income is not always the sole source of income in the setup. In the hotel business, for example, food and beverage income represents a major portion of the income stream. In urban areas, parking is often an important source of revenue. In residential developments, income from laundry and vending machines may be significant, as may income from amenities such as golf and tennis facilities. Income from services provided to tenants of office buildings, shopping centers and industrial parks may also be significant, although it is unusual for these services to contribute a substantial profit. Whenever revenues of this type are included in the setup, care must be taken to include all associated costs.
Estate market has been able to come up with a profitable use for the property. And I attribute this to a general lack of vision, creativity, and foresight on the part of most so-called real estate professionals. The fact of the matter is that many of the people involved in real estate today are afflicted with a bad case of tunnel vision, which prevents them from seeing beyond the borders of their own local real estate market. And for whatever reason, they have not been able to apply the marketing concept of buy locally but sell nationally and globally to their real estate investment business. Granted, residential real estate may pretty much be a highly localized business, but that does not mean that the marketing of commercial and industrial real estate should be restricted to the local marketplace. And this is exactly why you must expand your real estate market horizons so that you are able to think outside your local real estate market. To illustrate my point, I recently advised an...
One of the most important decisions you as a real estate investor will have to make is in which area of the business you want to specialize. If reading this book tells you anything, it should tell you that there are a lot of ways to make and lose money in the world of real estate. Even within the commercial real estate sector, there are a number of different asset class options. You'll soon discover that they are each quite specialized with plenty of their own nuances and requirements. I believe it's important to see the commercial real estate sector in its entirety so that you get an accurate picture of how it is all interconnected because, even though the different asset classes are unique, they all do work together to create an environment within an area of a city or town. Here are the asset classes complete with descriptions and the risks and the rewards.
The multifamily asset class includes everything from small duplex apartment buildings to entire apartment complexes with eight hundred units or more. The biggest risk in this asset class is oversupply because when people have lots of choices, rents can fall, affecting your property's operating performance and cash flow. Another risk with multifamily is that when interest rates are low, more people can afford to buy homes, so they don't have to rent. That leaves more apartment units vacant and competing for fewer residents. But on the plus side, when lending gets tighter and it becomes harder to qualify for a home mortgage, renting becomes the only option, and the demand for apartment homes increases. Investors have made a lot of money in this area of commercial real estate by buying right and managing efficiently. Like all commercial real estate, the value of a multifamily property increases based on increased operating performance. In other words, buying a property and then managing...
Just as you need to know the various asset classes and some of the nuances of each, it's a good idea to know the four classes of commercial space that refer to the quality of the property. Too often I have seen novice investors duped into believing that an office building is one class, when it is really a lesser class. Class matters because the better the class of building, the higher the rent per square foot. Here are the official class guidelines
Now, some of you will be thinking that 17.63 percent yield is good but not spectacular. My response is to remind you that I am not particularly interested in yields. With a mortgage of 56,000 (70 percent of 80,000) and a purchase price of 59,000, the total capital I had invested in this deal was only 3,000. The mortgage interest rate at the time of just under 10 percent meant I was paying 5,400 a year in interest. Because this was a commercial property, the tenant paid the outgoings (property taxes, insurance, etc.). Therefore, my net return was the rental income less the mortgage interest, or 5,000 per year. Given I only had 3,000 invested, my cash-on-cash return was in fact 167 percent per annum. In other words, I was pulling more out of this property every year than I had put into it in the first place.
Although you now know there are more kinds of commercial property than you could have imagined, you may still be surprised to learn that their performance over time is cyclical in whole and in part. What I mean by that is that each asset class runs through a cycle. And each asset class's cycle either flows before, flows with, or flows after another asset class's cycle.
Tlp Recommendation No 8 Understand the real estate cycle and watch for the indicators and you will seldom be surprised
Cycles are important, but in reality if you buy right, your real estate will do well, regardless of where in the cycle you bought. But if you are just starting out, buying right may not be as intuitive to you, so understanding the real estate cycle becomes golden knowledge. The following diagram shows the typical commercial real estate cycle and how it affects new construction and vacancy.
However, another law relating to the protection of the disabled normally is covered on the test. Congress passed the American with Disabilities Act (ADA) in 1992 to ensure not only protection from discrimination but also to provide access to public spaces. This law, which affects public and commercial buildings, requires buildings to be accessible to handicapped persons. It also requires new multifamily housing of four or more units to be handicapped accessible. Employers, including real estate brokers, must be aware of the necessity of their places of employment being accessible to handicapped employees and the handicapped public at large. Real estate agents also need to be aware of ADA regulations with respect to commercial or other public buildings with which they may be involved.
TIP Recommendation No 10 Phase 3 and Phase 4 are not the times to buy They are the times to research and target
Further, understand that all real estate follows this pattern and that some asset classes will follow the curve earlier or later than others. For instance, residential real estate is always the first to decline and the first to rebound. Multi-family follows a little later, and retail and commercial after that. Commercial industrial is usually the last asset class to emerge from a down market however it is usually the last to enter it. The more familiar you get with watching the real estate cycles, the better you will get at knowing where you are in them. Commercial real estate, for me, gives me plenty of warning to buy, sell, and hold.
When you are a landlord of an apartment building, retail location or office building, you are facing greater risks than you do in your own home. There is the danger that a renter or a renter's guest will get injured and sue you, possibly claiming that some physical defect in your building caused the injury. An additional danger is that a fire or a leak will cause damage to rental property, and you will be held liable. One way to minimize or reduce insurance costs in rental properties is to require all tenants to have their own renter's insurance policies or business policies, if you own a retail or office building, in place.
One obvious right of ownership of property, for example, is the right to actually possess or occupy it. However, if I own an office building, I can give that right of possession or occupancy to a tenant through a lease. I may still own the building, but I've separated a part of my right to occupy the building from my bundle of ownership rights. Doing so severely limits my right to occupy that part of the building that I leased to a tenant, even though I still own the building.
One of the best sources of problem property leads that is often overlooked by most investors is local, county, and state government agencies. For example, one of the types of properties that I buy options on is vacant commercial properties that have been repeatedly cited for non-structural code violations. I have chosen this particular type of property because these properties are in steady supply and are relatively easy to find in Hillsborough County, Florida. The code enforcement departments for both the city of Tampa and Hillsborough County maintain files on all of the properties that have been cited for code violations. Plus, these properties have bright fluorescent orange condemnation notices conspicuously posted on them. The following local, county, and state government agencies are all sources of problem property leads
Look for new construction of housing, office buildings, manufacturing plants, retail stores, or parks and recreational facilities. New construction not only creates jobs but, if properly integrated into an area, increases the area's desirability. Note, too, the prices or rental rates of any housing that's newly built or under construction. Is the new housing more expensive than the existing homes and apartments If so, these higher prices indicate that the neighborhood is moving upscale.
Personally, I like properties with problems that scare off most conventional real estate investors. Generally, these are properties with correctable problems that appear to be complicated and usually require some sort of specialized knowledge in order to be solved. However, in most cases, it is the common mispercep-tion of how difficult the problem is to solve than the actual problem itself that scares off most conventional real estate investors. For example, I specialize in buying real estate options on small, vacant, condemned commercial properties that are structurally sound but in dire need of an industrial-strength cleaning. Most conventional investors are instantly turned off by this type of property
One way to minimize or reduce insurance costs in rental properties is to require all tenants to have in place their own renter's insurance policies or business policies, if you own a retail or office building. You simply stipulate in leases the amount of coverage that you require all tenants to maintain, and add a clause stating that they will not hold you liable for loss of belongings. Be aware, however, that such clauses in leases may not prevent certain tenants from suing you in the aftermath of a fire or flood.
Ownership of real estate by business organizations is not so much about the forms of ownership as it is about the organizational structures of the businesses. You're not likely to be involved very often with this type of transaction in your everyday real estate practices, unless you work a great deal with commercial real estate and developers. State exam writers, however, expect you to know something about different business organizations.
So far, I've talked about using lease options to purchase single-family homes, but they can also be used to buy multiunit residential and commercial properties. Multiunit properties are generally more expensive than comparable single-family homes and therefore require larger down payments. A lease option lets you take control of the building and build up your down payment before you buy it while profiting from the property's cash flow.
Standardized residential real estate forms can be typically found at the local association of Realtors, or from software such as True Forms, software containing a variety of real estate forms. True Forms can be found at www.trueforms.com. Similar sources for commercial real estate forms can easily be located on the Internet.
Life insurance companies are another important source of real estate financing, particularly for commercial properties, such as shopping centers and office buildings. They are also a major source of credit for large apartment house projects, hotels and motels, industrial buildings, and regional shopping malls.
A thorough inventory of Providence office space was completed in December 1968 as part of the planning for the Hospital Trust Tower, tne city's largest office building, which opened in 1973. In that inventory, downtown space comprised the following 10 Orms Street is a new suburban-type office building of 50,000 square feet on an urban renewal site north of the CbD. This project is said to be 85 leasea at rents of 10.90 per net usable square foot. The building is located across the street from the new Marriott Hotel, and provides parking for tenants.
A great lesson can be learned on how you can put anything in a real estate contract from one particular property I bought back in 1993. In a small classified advertisement, a real estate agent had simply advertised Commercial property, 12,000, 17 yield, phone XXX-XXXX. 4. Depending on what you are trying to achieve and how prolific you are in a particular market, there may be advantages in having a secrecy clause in your contract, so that only the people you are negotiating with on any particular deal get to know about that deal until everything is signed, sealed, and delivered. For instance, with the downtown Phoenix commercial property that I discussed in Chapter 8, I would not necessarily want the owner or agent to know that I had successfully negotiated a great price on the transients' hotel next door, as it may alert them to what I am up to, and more important, it may cause them to raise their expectation of price on their property.
Please note Some of the advice in the pages that follow may not apply to the properties you are inspecting. An office building will not have laundry facilities or a kitchen, for example. Please read the sections that provide the information you need. Or read it all because one day you may need to know it and knowledge is power in the business of real estate.
The three types of buildings I'd like to focus on in this chapter are as follows Residential. Users live in one to four units. Can be various types, such as single family, duplex (two units), triplex (three units), and fourplex (four units). Commercial. Five or more business units, such as an office building or a strip mall.
Each year the federal government (in addition to HUD VA) sells all types of seized and surplus real estate, including homes, apartment complexes, office buildings, ranches, and vacant and developed land. Among the most active sellers are the Internal Revenue Service (IRS), Government Service Administration (GSA), and the Federal Deposit Insurance Corporation (FDIC). On occasion, you can also find properties offered by the Small Business Administration (SBA). Although space here doesn't permit full discussion of each of these agencies, you can locate their properties and sales procedures at the following web sites
I recently completed a facelift for a twenty-year-old office building. The owner wanted to sell and felt a fresh look to the building would speed up the process. Without a huge budget, we knew we had to rely on color and landscape to do the trick. We selected exterior paint colors to work with the existing natural stone and brought in a landscape architect to accentuate the building's best attributes. He suggested we clean up the entry by reducing the number of overgrown plants, replacing them with smaller, easily maintained varieties. This gave the building a cleaner aesthetic as well as an enticement to potential buyers who were looking for less exterior maintenance. He also worked to accentuate the main entries of the building, leading tenants and visitors to the entrances with ease.
As you venture into the world of commercial real estate, many of the principles we already talked about still apply. But first and foremost, you still need to take the target tenant into account first and create a fantastic first impression. After all, people want to be proud of where they work, and they want that space to be functional and comfortable. That charge isn't always easy because commercial properties can often be quite large, quite complex, and rather impersonal. The key is creating personal, more intimate spaces inside or outside a large building to add that personal touch and provide respite from a busy day. It doesn't take much. A shady tree, a fountain, or a comfortable bench away from the hustle and bustle can achieve this important goal. Alcoves within a lobby space with nice art and comfortable furniture can work, too, while they welcome visitors and provide a gathering place for tenants. Of course, you will have a plan for the revitalization of your commercial...
Traditional office building, the industrial park site may tend to consist of relatively small office spaces, a limited number of onsite employees, and a greater emphasis on industrial sites with a front office (as opposed to separate office and industrial tenants). It may be more common to find a concentration of employees in the production area of such combined facilities, with office space required only for reception clerical employees and a few members of management. While this is a generalization, it is applicable in many situations. However, recognizing the advantages to flexibility in design, an office industrial complex may be designed to respond to a variety of dissimilar tenant requirements, including specific design criteria for tenants able to commit to long-term leases.
The importance of the office and light industrial combined park development setting reflects a modern trend. Today, approximately one-fifth of all U.S. employees work in office buildings.3 This may include urban high-rise offices, suburban complexes or office parks, and mixed-use (office and industrial) projects. Ownership, notably of larger projects, consists of approximately one-fifth owner-occupied buildings, with the remaining projects owned institutionally. For example, equity REITs or real estate partnerships may favor ownership of office and industrial parks as providing favorable cash flow as well as historically established long-term market appreciation.
That all changed when my father, Douglas McPherson, who was a successful real estate investor and owner of a prominent commercial real estate brokerage firm, sat me down and said, Look, you think you know a lot about real estate, but it has only been from textbooks with no practical experience. If you really want to get in the business, you need to step up and buy something
An office building is usually defined in terms of its class. Class A buildings are most attractive to investors, and are characterized by quality of materials, design, and amenities. Location may also be a factor for example, a building located in a high-visibility, status address may improve marketability to investors (for example, Wall Street in New York, Wilshire Boulevard in Los Angeles, or The Embarcadero in San Francisco). This class attracts tenants who want to project an image of success and who benefit from the public relations value of the space. Class B buildings are often older, but functional. Rents will tend to be lower and design may be outdated. Tenants may include not-for-profit organizations, advertising firms, and other business service companies. Class C includes the oldest grouping of office buildings. Internal systems, heating and air conditioning, lighting, and amenities may be substandard.
Office space size classifications are quite varied, given the differences between high-rise buildings and stand-alone projects. However, even when larger buildings are involved, a second size consideration should be given a lot of attention, especially when an owner will be reviewing feasibility with tenants in mind that of each floor's size. In a high-rise building, each floor may vary between 15,000 and 35,000 square feet, whereas smaller office buildings may have collectively larger space but more limited overall cash flow potential. If the floor area is too large, then distance from windows (thus, light source) and the building's core will be too great. If the floor
Phase 1 A Phase 1 environmental assessment is primarily a review of the records regarding the property in question. The records that are reviewed focus on any environmental complaints, violations, special permits, or other documentation that may indicate the presence of environmentally hazardous material. This phase also includes a visual inspection of the property. Phase l environmental assessments are commonly done before someone purchases an industrial or commercial property.
Craig is the most well-organized person I know. Not only is he one of the most highly regarded commercial real estate brokers, but he is also an investor in his own right, and together, he, Kim, and I have done several deals together. I say that Craig is organized, but I really mean he is very goal oriented. He has accomplished more in his life than many of us could achieve in several lifetimes. He attributes this to goal setting and prioritizing what he really wants from life. Craig is one of those rare people who chooses what he wants carefully, then goes after getting it with a vengeance. He has his days planned to the minute and is constantly self improving. He studies and invests in his personal development on a regular basis. Yet, his family takes the highest priority, and he is very involved in his children's lives. Again, what I learn from Craig beyond just about everything I know about commercial real estate is priorities. Craig has a lot of designations after his name, but I...
To avoid being snookered by dishonest property owners who use bogus appraisal reports to help substantiate the asking price for their property, you must know what to look for when reading a residential or commercial property appraisal report. A sham appraisal report is not that difficult to spot when you know what to look for. The best way to check the validity of an appraisal report is to use an appraisal report checklist, such as the sample on page 134.
The example with the carport is real enough, but the concept also works for much larger projects. I own a block of shops that are butted up to the sidewalk, but out back there was a lot of vacant land. It was continually being overgrown by weeds, and the tenants tended to store their rubbish there. I was after a creative solution. This is what I did I found out that rentals on storage garages were running at around 40 a week. My vacant land could just accommodate five garages, for a total of 200 per week, or just over 10,000 per year. I knew that capitalization rates on commercial properties in the area were hovering around 10 percent, so theoretically the extra rental of 10,000 per annum would increase the capital value of the property by around 100,000. All that remained to be done was to figure out what the garages would cost to build. Similar but grander things can be done with commercial properties. The biggest way to increase the value of a commercial property is, as we have...
To calculate the capitalization rate or cap rate, you would divide the property's annual net operating income by its estimated value. For example, a property with an annual net operating income of 36,000 and an estimated value of 360,000 would have a cap rate of 10 percent ( 36,000 + 360,000 10). In most markets, cap rates between 9 percent and 11 percent are considered good. In most markets, it is hard to find reliable capitalization rate data for small commercial properties. That's because in most markets, there are generally fewer sales of small commercial properties from which to gather comparable property sales and income data. This results in property appraisers having to construct capitalization rates that are not based on verifiable sales and income data, but rather on what is known in certain property appraisal circles as the SWAG Principle, which is an acronym for some wild ass guess. Unless you can find bona fide cap rate data that is based on actual sales of comparable...
Ideally when you flush, it becomes someone else's problem. The waste from your house travels through sewer pipes and eventually is treated at a sewage treatment plant, usually operated by the city, town, or county. If you live in a large residential complex or work in an office building that has no sewers, a small, nearby treatment plant may service your building or housing complex. So why is this important For example, say you owned a 40,000-square-foot piece of commercial property. You build a small store with a parking lot and cover half of the lot with building and pavement. The next time it rains, does it rain only on the half of the lot that is still grass so that the rainwater can be absorbed into the earth No, of course not. It also rains on the 20,000 square feet of the
One of the premier commercial real estate brokers in the United States, Craig Coppola has been awarded the Arizona Office Broker of the Year six times in the past thirteen years by the National Association of Industrial and Office Properties. He has completed more than twenty-five hundred lease and sale transactions over the past twenty-three years, totaling a value in excess of 2.5 billion. As founding principal of Lee & Associates Arizona, Craig has earned the top three designations in the real estate industry CCIM, CRE, and SIOR. Only thirty-five people worldwide hold all three designations. He is a Rich Dad Advisor and author of the forthcoming book How to Win in Commercial Real Estate Your Guide to Finding, Evaluating, and Purchasing Your First Commercial Property in 9 Weeks or Less.
The replacement cost method of estimating a property's value is based on the cost of replacing the improvements on the property minus the cost of the land to estimate a property's value. Replacement costs are calculated on a per square foot basis by dividing the total number of square feet in the building by the per square foot construction cost. For example, a 2000 square foot convenience store that cost 275,000 to build would have a replacement cost of 137.50 per square foot ( 275,000 + 2000). You can usually get a free building replacement cost estimate by calling a local independent insurance broker who represents insurers that specialize in providing property and casualty insurance coverage for residential and commercial buildings. Property replacement costs are calculated by using a replacement cost formula that is based on the property's geographical location and its
Advantages of residential real estate mentioned above, there are so many great advantages of commercial real estate that once they have tried commercial real estate, many serious investors never go back to residential. In his book Real Estate Riches (Wiley, 2004), Dolf devotes a chapter to comparing residential real estate with commercial real estate. We won't repeat all the information here, but will highlight some of the main points. Similarly, commercial real estate is, by definition, any real estate where commerce is carried out. Hence, it includes shops, strip malls, office buildings, oil refineries, restaurants, storage units, automotive assembly plants, plant nurseries, motels, bicycle repair shops, hairdressing salons, warehouses, factories, hotels, convention centers, call centers, telephone exchanges, lumber yards, veterinary surgeries, funeral parlors, and ice-cream stores. One of the most fundamental differences between residential and commercial real estate, which you...
While I was active in residential sales, there was a young man in our city by the name of Jackson Cooper who was starting to branch out from residential into commercial activities. He eventually left his company and formed his own brokerage, specializing in commercial real estate. His company became the dominant commercial brokerage in our area. Everywhere you went you saw his sign. And I mean on big, big properties. He was a prime mover and investor in the building of a brand new Holiday Inn Express on the lovely Willamette River, and also the building of a large hotel complex adjacent to the local university campus. A few years ago he relocated his business to Boise, Idaho. If you have not visited Boise lately, trust me it is a growing, robust economy. To quote from an e-mail he sent me shortly after relocating Boise is a fantastic real estate market To check it out for yourself, including some very impressive commercial listings visit his website at www.jackson-cooper.com. (When I...
Another method for appraising real estate based on its income is known as the income capitalization approach. Like the GRM and GIM, this method converts the income of a property into an estimate of its value. Appraisers generally use this method for commercial buildings such as shopping centers, office buildings, and large apartment buildings. The basic formula for this approach, commonly referred to as IRV, is A capitalization rate is similar to a rate of return that is, the percentage that the investors hope to get out of the building in income. You can determine a capitalization rate in many ways. In fact, advanced courses that commercial property appraisers take concentrate on understanding different ways to calculate capitalization rates. The most straightforward method and the one I teach you how to do is pretty simple. The one necessity you have is the need for some comparable sales buildings similar to the subject property being appraised that have sold recently. Suppose you...
The sales comparison approach Single-family houses The cost approach Unique properties such as churches The income approach Investment properties such as office buildings Finally, the appraiser prepares the report in whatever format is appropriate for the project usually either a form report, which is how most mortgage appraisals are done, or what is referred to as a narrative report. The form, which was created by Federal agencies to provide a standardized way of preparing appraisal information, is known as the Uniform Residential Appraisal Report Form (URAR), or sometimes the Fannie Mae form, for the agency that was most responsible for its creation. A narrative report, which is used mostly for large commercial property appraisals, is like the term papers you did in school and contains more information than a form report.
The primary mortgage market, which sometimes is referred to as primary lenders, is where consumers, that's you and I, go to borrow money to buy a piece of real estate. Although all of these institutions make loans directly to the public, some specialize in large projects, commercial properties, or residential properties. The list of typical primary lenders includes Insurance companies. These lenders tend to specialize in lending for large projects, such as the construction or purchase of large office buildings or shopping centers. The average homebuyer wouldn't borrow money from an insurance company to finance the purchase of the property.
After you've established a track record in residential real estate, you may want to consider making the move to the commercial side of the business. This chapter offers a taste of what that's all about and shows you how to develop a strategy for beginning to invest in commercial properties. I can't tell you how many times one of my students has left a training program on residential real estate investing and literally bought a property on the way home. Even though that's certainly possible with commercial real estate as well, it's not nearly so common in that area. Most people find that it takes a little longer to learn the market and the business, find the properties, and put the deals together. Now, it's still real estate, and if you can do residential deals, you can do commercial deals. I don't want you to fear commercial real estate, but you have to respect it. You'll be doing yourself a tremendous disservice if you jump into this side of the business without a solid understanding...
Each time someone develops, improves, purchases, or refinances a piece of real property, he or she must raise or contribute capital. The dollars involved are enormous. As estimated in The Changing World of the Real Estate Developer, the value of U.S. residential property is on the order of 5 trillion. The value of all U.S. property, including commercial property, is certainly in excess of 7 trillion. If only 5 of this property value were developed, improved, sold or refinanced in a given year, this would require 350 billion in new financing transactions per year.
Say you borrow 100,000 to buy a house on a straight loan at 8 percent interest with a term of 20 years. You'd pay 8,000 ( 100,000 x 0.08) in interest each year for 20 years. At the end of the 20 years, you'd have to make a single payment to the bank of 100,000, which repays the principal. These loans are used more often for commercial properties than they are for residential properties and may be fixed rate or adjustable rate. See It's Payback Time Mortgage Repayment Plans earlier in this chapter for more about repayment plans. Commercial property owners who sometimes sell their property after five or ten years may want this type of mortgage, because unlike the homeowner, they're not necessarily interested in paying off the property.
The Truth in Lending Act is the popular name for the federal Consumer Credit Protection Act. This act was implemented by Regulation Z of the Federal Reserve Board. In practice, these three names are used interchangeably when referring to this piece of consumer protection legislation. The regulation applies to all real estate credit transactions for personal (home) or agricultural purposes but not for commercial properties. The primary purpose of the act is to require that creditors provide information to consumers so they can make informed decisions about the use of credit in real estate transactions. Creditors are defined in the act as people or institutions who make more than 25 loans per year or provide credit more than five times a year, if the loans use real estate as security.
When it comes to investing in commercial properties or any kind of real estate, for that matter it's not about pride of ownership it's about income. You don't have to own landmarks or architectural marvels you need to own buildings that generate positive cash flow and will appreciate in value. I urge you to play it safe. Commercial real estate is a dangerous place for pioneers. Don't venture into the unknown buy and build where there is a history. Let the risk takers clear the path then you follow along and build a fortune. Without a doubt, commercial real estate can be extremely lucrative, and I would never discourage anyone from venturing into it. But don't jump into the proverbial deep end of the pool if you don't know how to swim. Start with residential properties, learn the business, develop your management skills, educate yourself, and then, after you're comfortable and confident, take the next step. millionaire mentor Commercial Real Estate Highlights The basic principles of...
If you followed my advice in Chapter 13, you should have negotiated a 500 cleaning credit, which the owner deducted from the option fee. The cleaning credit is to help investors defray property cleanup costs. And depending on the property's size and condition, most of my cleanups run from 500 to 1,200. For example, it usually costs me right around 500 to have a vacant three-bedroom, two-bathroom, single-family house cleaned up. This includes trash removal, lawn mowing, tree trimming, and pressure washing. I spend between 500 and 1,200 for an industrial-strength cleaning on a vacant piece of commercial property. I use a father and son team, who specialize in clearing lots, hauling trash, pressure washing, and making buildings secure. My guys are experienced professionals with state-of-the-art equipment, who work fast and charge reasonable
Some states also provide different assessment ratios for different types of properties. I discuss assessment ratios in Oh so valuable Assessing property for taxes earlier in this chapter. For example, commercial properties may be assessed at higher assessment ratios than residential properties. What that means is that if you have a residential and a commercial property that have the same market value, the commercial property pays a higher amount of property taxes than the residential property of equal value.
The same principle applies to real estate. When you approach your rental business with the attitude I can design and develop more profitable (less costly, higher-yielding) ways to run these properties, your results will outperform the results of other owners. The property managers of large shopping malls, office buildings, and apartment complexes have long proved the merits of market research, strategy, property improvement, and cost reduction.
On the other hand, someone who never has owned an office building before and has no familiarity with the needs of people who rent office space probably will hire a professional manager. Because an office building is used primarily during the day, providing on-site management or at least service people during business hours may be necessary. An office building is also more likely to generate enough income to support a property manager's salary.
Such high loan-value ratios, however, are extremely uncommon with commercial properties. Typically, banks will lend 50 percent of the appraised value of a commercial property. Some will go to 60 percent, and more rarely you can talk banks into 66 percent. Having said that, it is generally much easier to instantly increase the value of a commercial property from the low purchase price you paid to the new appraised value after you have owned the property for a few weeks. The reason is simply that an empty residential property still appraises for close to what its value would be if it were occupied. However, an empty commercial building is not worth much at all. Consequently, you may buy a commercial property for a song, put in a tenant that you had lined up before you bought the property, get a new appraisal, go to a bank, get a modest 50 percent mortgage, and still end up with more money than you need to pay for the property according to the contract price. I did a similar thing with...
The key to quickly reselling your real estate options is to market properties under option to the largest possible number of prospective buyers. In today's wired world, this includes the global audience of potential buyers, which are available online via the World Wide Web. And in spite of what some foreigners may think about our political leaders, American real estate still attracts investors from around the globe. For example, here in Central Florida, real estate investors from the United Kingdom, Germany, the Netherlands, Canada, and Spain are continually investing in residential and commercial real estate. The main reason I like European investors so much is that they are generally cash buyers, who are ready, willing, and financially able to close a deal without first having to play the mortgage loan disqualification game with lenders in order to finance the purchase. I once sold an option that I had on a small warehouse to a German, who exported German Christmas decorations to...
It's also good to give direction to your team members. Don't assume that they know what you want. For example, if you ask them, What is a good investment you have not given them enough information to adequately answer the question. Does good mean strong cash flow or strong appreciation Are you looking for a large commercial building or a single-family residence Are you looking to create long-term passive income or cash from a quick flip A good deal for one person is not necessarily a good deal for another.
Whether you should invest in residential property or commercial property is a decision that you will have to make on your own. I do have some points to offer for your consideration, though. If real estate seems daunting to a lot of people starting out in the game, then commercial property is far more daunting than residential. The reason is simply that everyone knows what constitutes a home that someone could live in. You would notice the absence of a kitchen, or a bathroom, or if there were no windows However, if you came across a commercial property with no kitchen, no bathroom, or no windows, would that matter Storage units would be worth less if they had windows (as then people could see what you were storing, and the risk of theft or arson would be greater). So it is much more difficult for beginners to know what it is that commercial tenants will want. Whereas residential properties tend to have a lot in common, commercial properties are far more specialized. Having said that,...
Chuck made some necessary revisions in the agreement, and we all concurred, but then he brought up a crucial point that I was not aware of. Remember earlier when I mentioned that with a single-tenant commercial property the quality of your tenant is number one As far as I could see, the tenant was a large, well-known, national fitness club chain. But that's not what the lease agreement stated. Chuck red-flagged this and brought it to our attention.
Current tax law states that real property wears out in one of two ways. It either wears out over 27.5 years in the case of residential property, or it wears out over 39 years in the case of nonresidential property. Residential property is defined as someplace where you can live. This depreciation may be taken over what is referred to as a straight line. That means that the same amount of depreciation expense is taken each year until the asset is fully depreciated, when the basis equals zero. Adjusted basis is equal to the acquisition cost minus depreciation that has been taken. To calculate the amount of depreciation expense that can be taken, subtract the land value from the acquisition cost to obtain the value of the improvements. Then divide the value of the improvements by either 27.5 for residential property or by 39 for nonresidential property.
Money may not grow on trees, but it does grow out of the ground. Just look around at all the houses, apartment complexes, office buildings, retail centers, and industrial facilities that are making their owners very rich. Think about being able to pick your share of fruit from those brick-and-mortar trees.
You could also buy an office building, an apartment building, a warehouse, or bare land. We have clients who sell bare land, which is not income producing, and then buy rental properties, such as apartment buildings, which do produce income. In other words, they use an exchange to create cash flow. We also have clients who sell one income-producing property and buy another in order to increase their cash flow, and we have some who sell income-producing properties, generally apartment buildings, and buy bare land in order to get out of the hassles of managing their property they use an exchange to simplify their lives.
Ture that fronts on 5th Avenue and Madison Avenue at the southeast corner of Central Park in Manhattan. It is one of the few buildings in the world that takes up an entire square block bounded by two major avenues. It is regarded as the premier office building in New York City. to the existing tenants (GM, Estee Lauder, etc.) plus other Fortune 500 companies desiring offices in what was considered to be one of the most prestigious office buildings in New York City. Although office building condominiums were popular and successful outside of New York City, that trend had not worked in New York. Developers who tried it were unsuccessful and usually abandoned the concept. Undaunted by this track record, Trump filed a condominium plan for the building and the state attorney general approved it. Recognizing the possibility that the condominium concept might fail, Trump told me that my number one priority was to position the building to prospective tenants in such a way that it could...
If breaking residential sales records is a test of a project's success, Celebration, Florida, would probably win. Annual sales above 120 million for three years running demonstrates the popularity and success of this mixed-use complex. It is home to more than 8,000 residents in 2,300 homes and 1,200 apartments. The complex also has a 1.8 million-square-foot commercial building and a 110-acre Class A commercial district office and office complex sites and a hotel conference center. Commercial tenants include Walt Disney Imagineer-ing, Bank of America, SunTrust Bank, a post office, a cinema, and a town hall.
The worlds of residential and commercial real estate agents are as different as night and day. Each arena offers its own set of opportunities, advantages, and challenges. Surprisingly, you find little overlap in terms of the types of clients served, the emotional involvement of buyers, the sales process, and the real estate agent's financial return against time invested.
A binder, or offer to purchase, may be the first step toward solidifying a deal in some parts of the country, in different parts of the same state, and, in recent years, among different brokers in the same market area. A binder is used for residential real estate. A similar agreement, called a letter of intent, is used in commercial real estate transactions. A binder is used primarily to signify that a deal has been made and an agreement has been reached to go forward with more formal contract negotiations. At the point at which there's an accepted offer, the binder is signed by both buyer and seller. A binder often is accompanied by an earnest money deposit or down payment to signal the buyer's seriousness in going forward with the purchase. In other parts of the country, binders are not used, but a sales contract is prepared immediately.
There are three specific kinds of real estate supply already built, under construction, and proposed. Each of these has a different level of reliability, and the variables should be discounted by the analyst. For example, developers sometimes announce a project that they do not have tenants for, only as a way to scare off other developers or to try to attract a potential tenant in order to drive the development most downtown office buildings cannot be built or financed without a committed tenant. So it is a common practice among developers to announce construction more as a marketing ploy than as a statement of fact.
External (locational) depreciation occurs when a property fails to reflect the highest and best use for a site. Say you find a well kept little house located in an area now dotted with offices and retail stores. Zoning of the site has changed. More than likely, the house would add little or nothing to the site's value. When someone buys the house, they will probably tear it down (or renovate it) to make way for another retail store or office building.
Most successful business leaders adhere to the tenet that if you ask the right questions you arrive at the right answers. The following seven questions are designed to elicit answers to determine whether your personality, interests, and career goals are best suited to a career in residential or commercial real estate. If you can't answer yes to this question then you have no choice but to steer your career toward commercial real estate sales. In residential real estate, you won't become successful without working some nights and weekends during your first couple of years. As I mentioned at the beginning of this chapter, my own ego controlled my decision to become a commercial real estate agent. However, once I removed my ego and focused on the financial rewards of residential real estate, I made the right decision for myself. If so, how much structure do you need in order to reach your potential If you're among those who need or prefer a strong structure, note that the environment in...
There is a general notion that in order to buy a commercial property, you have to be a very wealthy person, while more modest means will suffice to buy a residential property. While in general this may be true, we have already seen in Chapter 8 that it is possible to buy a viable commercial property for 59,000 that has all the advantages of any commercial property. So long as people think that commercial properties are expensive, then you will have little competition looking at small (low capital value) commercial buildings. To the extent that it is true that commercial properties are generally more expensive than residential properties, there is a commensurate benefit. To own 10 million worth of residential property, you generally would have to own a lot of separate properties, with many dozens of separate rental agreements. The management overheads could be huge A single commercial property, on the other hand, could be worth the same 10 million. You may have only one lease document,...
Published sources are available to provide guidance in developing cost budgets. One of the best known sources is the Robert S. Means Company, which publishes annually updated cost information from computerized files. Means' prototype cost model for a typical suburban office building is presented for illustration.
Whereas construction of commercial property may be financed without difficulties from own funds of customer or commercial loans, construction of residential property through third party financing is permitted only through special Construction Financing Funds and Real Estate Operations Funds, institutes of joint investment, non-state pension funds and by way of issuance of corporate bonds.
Serious thought needs to be given to the street location of an office. (See Personal Exercise 20.) In the past, consumers generally walked into real estate offices to seek assistance with finding a home. This customer behavior pattern may not exist in all marketplaces, however. In addition, lower rental rates are causing a trend in residential real estate companies to move into actual office buildings. Here are some factors a broker should consider when selecting a street location for an office Visibility. Twenty years ago, it was considered foolish if a real estate office did not have ground-floor visibility on a major traffic artery. However, with the increasing mobility of buyers and sellers and the impact of the Internet on customer behavior, some brokers feel that visibility is not as important as it used to be. Several companies in urban marketplaces are located in high-rise office buildings or in office parks, with little or no visibility.
Income Method The third and most complex method for appraising property is based on rental income derived from properties. This method is used for both residential single-family or multi-unit buildings and for commercial properties. This method, also called direct capitalization of the subject property, is convincing when it conforms to market rates in comparable sales, when rents are at market rates, and when the properties are stabilized. Alternative calculations may be based on assumed available return on investment from other uses of capital, and the calculations are far more complex. For complex properties, such as office buildings or rehab properties with long-term lease tenants, the appraiser may find that rents are significantly above or below market rates. In these situations, appraisers will use a discounted cash flow over the entire life span of the investment by valuing earlier cash flow as worth more than future cash flow. The goal in this approach is to reduce the future...
Similarly, right now I am looking at a commercial building in downtown Phoenix. It is a beautiful art deco building with a historic places designation on it (meaning tax breaks for anyone renovating it). One concept is to turn it into condominium apartments, but the downside is that there would not be sufficient parking. So I am looking at the building next door. It is an old building, in a terrible state of repair, and is used as a transients' hotel. It will probably not be there much longer. As a hotel, it has limited value. However, as the site for a potential parking garage for the condominiums next door, it has great value. Therefore, the potential value to me may be much more than the value to the current owners. There is no For Sale sign on it, but I would be foolish to limit my search to those buildings that are officially on the market.
How was she to value the Masonic Hall She remembered that there are three common approaches. One is to value the income a building produces another is to estimate what it would cost to replace the building finally she knew that recent sales of buildings comparable in size and location would give a guide to the Hall's worth on the market. The replacement cost approach did not seem relevant, since there was clearly no demand for another Masonic Hall in downtown Providence. She found out, however, that a new office building of approximately the same size as the Masonic Hall would cost approximately 65 a square foot to build and develop, excluding the land on which it sat. Prudence decided to find out whether any useful comparable sales had occurred. In her official capacity, but not letting on the specific reason for her inquiry, she called several prominent brokers in Providence to ask whether any recent sales had occurred and, if so, what the buildings were like and what condition and...
During that summer, Joey spent three weeks each with the Assistant to the President, who had hired him, the President, the Vice President of Real Estate, and the head of marketing at the giant housing firm. He performed marketing studies, cranked numbers, such as discounted cash flows, and made an inventory of commercial properties they owned in the East. In this latter assignment, he determined which of their shopping centers were in the best position to sell and pro
To develop your own game plan, first decide what you're going to use the property for. Is it for yourself or an investment If it's an investment, are you buying to keep or sell Then develop a profile of the type of property you want. For example, if you want single-family homes, in an auction of hundreds of properties you might quickly exclude all the commercial properties, raw land, condominiums, and multiunit buildings. Do your necessary inspections and research and come up with five properties you're going to bid on.
I am primarily a commercial mortgage broker. I provide debt and equity for commercial real estate transactions around the country. I can tell you that loan documents and joint venture agreements are extremely complex, and you do need someone who can thoroughly understand them and explain them to you.
Operation of high-performance green buildings. LEED process certification provides building owners and operators with the tools they need to have an immediate and measurable impact on their building's performance. LEED principles have now been adapted to a variety of residential and commercial building types.
An estate for years is a lease agreement with a definite starting and ending date. The tenant is required to leave when the lease expires, and the landlord isn't required to give the tenant notification to leave the premises. Neither is the tenant required to give notification to the landlord that she's leaving. Commercial property leases generally create an estate for years. No automatic renewal of an estate for years is available, but a new lease can be negotiated. Also, the agreement survives the landlord's death or the sale of the property. Note In spite of the name, the lease could be for a term shorter than a year.
The appraiser will first consider the type of property being appraised and which of the three approaches is the more valid approach for the subject property being appraised. If the property is a single-family residence, the sales comparison approach would be the most appropriate approach. If the subject is an income-producing piece of commercial property, the most valid approach is probably the income approach. Finally, if the subject is a special-purpose property, then the best approach is probably going to be the cost approach. Once the best approach has been determined, the appraiser will analyze the quality of the data that went into each approach. Given these inputs, the appraiser will assign weights to each of the value estimates, and these weights will be applied to each of the three approaches, with the general equation in Equation 10.28. The weights assigned to the three approaches must add up to 1.
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