The world of commercial real estate is filled with enough intimidating jargon to fill a book, which is exactly what Realtor.com did. Their “Commercial Real Estate Glossary” is a handy guide to bookmark in case you ever find yourself unable to remember what a NNN is or wondering what you may be in store for with LPTI.
The weekend is here! But first, your daily commercial real estate news and updates.
Retailers are keeping expectations low for Black Friday 2016. Malls are experimenting with a number of different experiences they hope will draw in shoppers and families for the holidays.
The massive shift to online shopping that has crushed retail sales over the last decade is about to punish investors who put money into malls. Many loans that went into financing mall construction are set to refinance next year – causing a headache for investors of the struggling retail emporiums.
Despite a small upcoming spike in vacancy rates, downtown Louisville is poised for a positive future. Well-researched investors continue to pour money into recreational buildings and hotels.
The Berkshire Group has invested an undisclosed amount into commercial real estate developer Leggat McCall. “We believe that Greater Boston will continue to be an attractive market for real estate investment given its position as a world leader in higher education, healthcare, life sciences and high tech,” a spokesman for the Berkshire Group said.
Five articles this morning to help put a boost into your day.
Commercial Real Estate Market in Southern Nevada Making Progress, With Lagging Office Market Starting to Bounce Back
Good news for investors living near Las Vegas. After the recession, commercial real estate has been on a steady recovery, but office buildings have lagged behind. A new reports suggest that’s about to change though, as a tremendous amount of office space was sold in the last quarter.
A strong list covering how to protect investments through the long-term. Tips includes setting reasonable expectations and avoiding over-leveraging.
Silicon Valley continues to experience growing pains. This November, smaller suburbs will vote on rent control, to the ire of real estate agents and landlord associations.
Nigel Satterley, an Australian property developer predicts Perth’s real estate market will suffer in the back-half of this decade. Perth’s reliance on it’s mining industry makes it a “a one-trick pony and, of course, that’s finished, and we are struggling.”
Your investing and brokering news for the day.
A list of recent, notable commercial real estate transactions.
Crain’s has published their annual list of the largest real estate brokers in the Chicago area. CBRE Inc. took the top spot with nearly $7 billion in sales and lease transactions.
Large brokers are buying up smaller, boutique firms in South Florida. The trend is attributed to the growing commercial real estate market in the area.
Two articles to help you get ahead today.
Private investors are beginning to compete with institutional buyers for single-tenant net lease assets. The property type is bouncing back after capital markets tightened earlier this year.
Occupancy levels in nursing homes have fallen to a five year low, a trend that may cause interested investors to pause. Changes in Medicaid and Medicare are shortening patient stays and contributing to the low occupancy.
10 things you need to know today.
By Troy Muljat, Certified Commercial Appraiser & Broker
The process of selling commercial real estate can be the easy part. Difficulty comes knocking in the form of due diligence, the sometimes long investigative process done before the purchaser is legally bound to acquire the commercial property of interest. Choosing the right due diligence steps not only helps with the discovery of issues your purchasing client could face, but builds loyalty and eliminates extra hours of research.
As a commercial broker and appraiser with over 25 years of experience in the industry, I have helped clients with their due diligence for a variety of commercial property types, sizes, and budgets. Here is my process for a successful due diligence that saves time, identifies the concerns, and has clients coming back to work with you again. I used the steps below to help me close an $8 million deal and other seven-figure properties since.
1. Annual Profit & Losses
Analyze the past three years and current year-to-date financials using a spreadsheet to categorize the percent changes between each year. Depending on the type of property, you will be able to catch irregular expenses by analyzing line by line. Remember to look at the cost of insurance each year, taxes, and utilities.
2. Monthly Cash Flow Statements
Study the month-by-month cash flow statements for the past three years. This will allow you to know which tenants are paying on time and who has a reputation of paying late. These items do not show up on annual financials.
3. Study the Rent Roll
Make sure you look at multiple years of the property’s historic rent roll. Look for significant changes or rental modifications. This is a good cross-check for the lease analysis.
4. Analyze the Leases
This task can take the most amount of time. In many cases, items in the lease have been forgotten, like a lease cancellation clause with 90-day notice. These clauses can substantially impact the value of the property. If lease abstracts are provided, then verify each item. If they are not, create your own one-page lease abstract for each lease. Consider having your client hire an attorney to review leases and provide your client with the summary of the pertinent issues. This will also shift the responsibility to a third party.
5. Contact the City/Fire Department
Countless times, tenant improvements are constructed without a final occupancy permit or even a permit at all! Check to see if anything has been “red tagged” by the city. Verify all spaces and units have received a final occupancy permit. It’s better to find out that you are missing permits and $5,000 worth of work needs to be completed before your client buys the property.
6. Interview the Tenants
You can discover a lot about a property and any unknown issues by interviewing the tenants. Try to do this without the current owner or property management company with you in order to get information about any conflicts or issues the tenants have had with them. Ask the tenants the following questions:
- How long do you plan on staying here?
- Why did you locate your business at this center?
- How has your relationship been with the property management company?
- How has your relationship been with neighboring tenants?
7. Hire an Inspector/Contractor
I typically will have the client hire a local contractor (I don’t like typical “home inspectors”) to “inspect” the property. You want to rely on a professional that knows construction and can give you an unbiased assessment of the current condition of the property. I have yet to see a property without some hidden defects – even new properties.
8. Review All Capital Expenditures for Past 5 Years
Capital expenditures will give you insight into the work the current or previous owners have done to the commercial property. Analyzing these expenditures will help you determine if the owner has put any money into the property, if he or she chose “cheap” solutions to problems, or if problems were fixed correctly as the issues arised. Ask to see actual receipts and bids for all of the work the owner did and talk to the companies who completed the work. Then contact the companies who bid on the job but did not do the work. Ask them why their bid wasn’t chosen.
9. Complete a Market Survey
Make sure you have completed a detailed market survey of the current rental income as compared to the competition. Is the property above market? Why? If the leases are triple net, how do they compare to the completion? Make sure you look at access, exposure, and traffic counts to the comparables. Why will the subject property be competitive in the future? What new product is coming online to compete with the subject
10. Everything Else
Other items to consider reviewing: Tax returns, balance sheets, title policies, insurance policies, current appraisal, loan documents, copies of all utility bills, current service contracts, deeds, current environmental reports, wetland reports, surveys, bank statements, litigation history, and mortgage estoppel letters.
At the end of the day, the goal is to verify all the information you receive from the seller. Make a request list up front in the purchase and sale agreement. Having a complete list of these items and letting your client know how you handle these things will give you a competitive advantage in representing buyers and sellers of commercial property. Some commercial brokers have even charged a fee to clients that they do not represent to do the due diligence for them. Due diligence can be difficult, long, and frustrating. But, when done right, you will help represent your clients well, eliminate problems quickly in the process, and gain a unique competitive advantage in the market.