Is That Property You're About to Buy Really a Good Investment? Here's How to Tell...

So you've set aside some money or maybe you've inherited a big bag of cash(repleat with dollar signs on the side of course!) from your rich aunt, or even better, you've set up a syndication group and you're ready to start buying commercial real estate.

Great!

The next step is to go out and find some potential investments. Once you've done that (easier said than done!), you need to decide if the investment is a good one or not.

How to do that? Contrary to prevailing belief, there isn't a flood of distressed property flooding the market, nor are prices being affected too drastically in Canada. From a recent Globe and Mail article about the state of the Canadian market:

But what if the market isn't all that distressed? Third-quarter statistics from RealNet Canada Inc. hinted that a rebound is taking hold in Canadian commercial real estate markets after 18 months of contraction.

And this from reportonbusiness.com on the same topic :

Canada's commercial real estate market is on the mend, as an 18-month slump in Toronto has ended and other urban centres are showing signs of renewed activity that suggest the sector has de-coupled from its troubled U.S. counterpart.

After almost two years of flat or declining activity, industry tracker RealNet Canada Inc. said investments in commercial property in the Greater Toronto Area increased by 46 per cent in the third quarter over the second quarter, to $1.31-billion, while the number of transactions increased by 20 per cent.

"This is a statistical sign of a recovery, even if it's not a full-blown recovery," said RealNet president George Carras, adding that sales are still only half of what they were going into the recession. "You can't call a bottom until it's passed, but this data is positive and very factual - it's real, hard evidence, and not anecdotal comments."

So how do you get started?

Do your research and use professionals to find the right kinds of properties. You can do all of the leg work yourself, but why not use the expertise of people who work in the markets where you want to invest? The efforts of several people working toward the same goal will almost always result in a quicker turn-around and hopefully with a higher degree of success.

Once you've found a good investment candidate (or several hopefully), you need to do your homework and analyze the tenant mix, the income and expenses as well as the condition of the property and the general market conditions in your area. Assuming that the market is stable or improving and further assuming that the property is in good condition, and also that the tenants are solid risks, all you really need to do is dissect the income and expenses and consider the cost of carrying a mortgage loan.

Simple, right? Well, the process isn't too complicated, and a competent commercial real estate professional should be able to help you with this.

• Start by looking at the Net Operating Income (NOI). Take a look at all of the income streams from the property and deduct all of the operating expenses, but ignore debt service costs, to derive the NOI.
• Next, calculate the debt service payments required to carry the property. Your lender will give you a clear picture of the required downpayment based on the property and your credit history and will give you an idea of the expected interest rate and loan amortization term. Use this handy calculator to make your calculations (note: this site defaults to a Canadian calculator - if you're in the US, remember to check the button that says US property or the result will be incorrect for your purposes.)
• Now deduct the annual debt service (12 X the monthly payment) from the NOI to arrive at a pre-tax cash flow number. This is the money left over after all expenses save income taxes are paid.

NOI-Annual Debt Service Payments=Pre-tax Cashflow

Is the number you arrive at greater than $0, also called positive cashflow? If not, is it really an 'investment'? Even if it is greater than $0, is there any room for error, or will you be in a negative cash flow position if the property's income drops just a little?

Definition from thefreedictionary.com:
investment - the act of investing; laying out money or capital in an enterprise with the expectation of profit

'The expectation of profit" is the key phrase here. I have seen too many would-be 'investors' either fool themselves or be fooled by others into buying into the philosophy that $0 or negative cashflow is acceptable because 'the market always goes up and you'll realize a profit when you sell'. While this is most certainly the case most of the time, for myself and my clients, that's just not good enough.

If an investment doesn't provide positive cashflow from day one, then it isn't an investment, it's a liability.

The exception to this rule is when rehabbing a building and you go into the project knowing that it will be a set period of time before you can expect a return on your money. In general, however, when considering pure investments where you are simply buying a property based on its existing income stream, if there isn't positive cashflow on the first day of ownership then it probably isn't worth considering.

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Super Concrete or How to Build a Pyramid

I ran across this story on wired.com today about super concrete and the US Military. Among the story ideas, including bombs bouncing off bunkers and other fantastical applications like mugs that don't shatter, the writer mentioned a French scientist, Joseph Davidovits of the Geopolymer Institute, who claims that the Ejyptian pyramids may have been built with a re-agglomerated stone rather than massive blocks.

An intriguing idea that solves a lot of heretofore baffling logistical challenges.


The applications for construction of major projects, even today, are enormous. Quick runways, immovable and nearly indestructible foundations... other ideas?

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Funny Friday - Awesome Real Estate Ad!

Thanks to Future of Real Estate Marketing for finding this gem and sharing with the world!



The guys over at I Love Local Commercials are really on to something with this plan to market small businesses with creative online ads. Great job and really funny!

Enjoy!

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Tips for Increasing the Cash Flow of Your Business

Need more cash? What business owner doesn’t these days? Even if your revenues have remained stable during this recession, your company may still be short of cash if it’s tied up in accounts receivable, inventory or capital equipment.

Thomas Comollo, a partner with B2B CFO in Ponte Vedra Beach, Fla. says there are several “tricks of the trade” that well-managed companies use to maximize their cash flow. These policies can be used by any sized business. Here are a few that will help maximize the cash in your checking account:

• Shorten your cash conversion cycle. This is the time that it takes a business to convert a sale to cash. The shorter, the better. Dell keeps its cash conversion cycle one of the best in the business by getting paid up front, ordering parts only after the order has been received and paid for, and not carrying excessive inventory.
• Reduce accounts receivable. Consider billing by e-mail so customers get invoices more quickly. Tighten your collection policy, and follow up as soon as invoices become overdue.
• Reduce inventory. Don’t order parts or supplies until you absolutely need them. Limit access to inventory to prevent theft, and get rid of obsolete inventory immediately.
• Stretch out your payments. Don’t pay vendor bills until they are due, and negotiate longer terms. Don’t be afraid to ask for 60 days to pay. Be careful though, don't create a situation where you start paying late - your good credit is too important!
  

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5 Tips for Negotiating a Renewal of Your Commercial Lease

Your lease is nearly up, and it's time to renew. Now is a great time, experts say. The recession and resulting downsizings, bankruptcies and corporate closures have created opportunities for companies looking to stay in place and renew their leases. Vacancies are up nationwide, and subleases are driving down rents. That makes landlords nervous-and anxious to retain their current tenants.

To attract new tenants, landlords often offer concessions such as free rent or buildout allowances. But renewing tenants have received little more than a rent hike-until now.

Here's how to get the best deal on your lease renewal:

1. Hire an expert. Consider engaging a broker who specializes in tenant representation. A qualified broker can help you negotiate your lease--to your financial advantage.
2. Start early. Don't wait until the end of your lease. Allow time to negotiate with your landlord and to research alternative locations should he be unwilling to bend. Experts suggest beginning the process about a year before your lease expires.
3. Keep information to yourself. To optimize your bargaining position, keep key information to yourself. For example, don't let your landlord know that his location is the only one that works for your business.
4. Do your research. Always have several other alternative locations that will work for you. Get proposals from each so you can compare the details of each deal. Then approach your landlord with comps. A landlord is only likely to give you the same type of deal new tenants get if he believes you have alternatives and might leave.
5. Get legal advice. Have a commercial real estate attorney review the lease before you sign it.

Been through the process already? I'd love to hear how you made out and what worked best for you in the comments.

If your lease is up for renewal soon, I'd be happy to assist in any way I can. Just drop me a line and let me know how I can help.

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The Top 9 Blogs I Read - Real Estate and Otherwise

Thought I'd share some of the blogs I read on a regular basis; these are the places I go to keep informed.

Commercial Real Estate Blogs:

Deal Junkie
Billed as "A Peek Inside The Commercial Real Estate Sector", Deal Junkie is a good place for quick and timely commercial real estate stories and editorial. Deal Junkie is a commercial real estate blog with a focus on the debt & equity market in US and Canada.

Real Property Alpha
"Investment Real Estate, Incremental Innovation, and Shameless Self-Promotion"
Run by John Reeder of Mimi Song Realty Group and Sperry Van Ness, Real Property Alpha is a great site with lots of well reasoned and well researched articles on commercial real estate and finance. Worth the time to explore this site.

Retail Traffic
"Where real estate, retail and development meet"
This is the blog page of Retail Traffic Magazine and provides insight on the retail sector with comments on the impact of retail on commercial real estate development.

The Dirt Lawyer's Blog
"Digging the dirt on commercial real estate transactions and law in Chicago and beyond"
This is the blog of David Stejkowski, a lawyer in Illinois that I found early this year. He's always got an opinion about timely events in corporate real estate and the industry in general. Highly recommended.

The Commercial Real Estate HandBlog
Informative site with lots of 'how-to's' for investing in commercial real estate. I just found this site a few weeks ago, and I'm impressed with the amount of information that they give away. Worth stopping by.


General Real Estate Blogs:
Agent Genius
"Our primary goal is to educate readers to improve their business as well as the overall industry with the end goal being improvement of the consumer experience." Fabulous site for REALTORS by REALTORS with lots of great tips and ideas on how to improve the brokerage business. Tips on SEO, branding, attitudes, you name it.

The Real Estate Tomato
"Juicy blogging advice for REALTORS"
Loads of great blogging advice for agents including mountains of information on content creation. They must be pretty busy over there however, new content on the site has been very slow in being released recently. If you're new to real estate blogging, you should definitely check it out.

Non-Real Estate Blogs:

Problogger
"Welcome to ProBlogger.net - a Blog that helps bloggers to add income streams to their blogs."
While I'm not trying to monetize my blog, I find the ideas and strategies presented here to be invaluable. Darren Rowse has really figured out how to make blogging work - and he does with class.


The Blog of Tim Ferris
"Experiments in Lifestyle Design"
Tim Ferris is the author of 'The Four Hour Work Week" a much misunderstood title. He advocates only doing those things that excite you and reducing work to the bare minimum to acheive your goals. Not for everyone, but I find inspiration in the dream!



I could go on for hours with great sites that have fantastic content, but this is a good start. Take a look and tell me what you think. What other sites do you recommend that I'm missing?

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What's the Difference Between Market Value and Market Price?

How are values estimated? How do sellers know what to ask for their property (assuming no bank is knocking on the door)? How do buyers come up with a price that they are willing to pay for a property?

Given the lack of deals in the market place today, there is growing confusion about what constitutes 'market value' vs. 'market price'.

One is an estimate of price and one IS the price.

Where there are no, or very few, transactions taking place it becomes very difficult to estimate values. And, where buyers have an expectation (that may or may not be based in reality) that there should be a lot of 'good deals' out there because of the Great Recession, I'm seeing more people grasping for what real values should be.

Market Value is defined by the Ontario Real Estate Association (OREA) as:
“The highest price in terms of money, which the property will bring to a willing seller if exposed for sale on the open market; allowing a reasonable time to find a willing purchaser, buying with the knowledge of all the uses to which it is adapted and for which it can be legally used, and with neither party acting under necessity, compulsion or peculiar and special circumstances.”

A couple of provisos, also from the OREA:
“Market Value is not to be confused with market price: the amount paid, or to be paid, for a property in a particular transaction. Market price is an accomplished or historic fact. Market price tends to closely align with market value in an efficient marketing system involving willing, informed buyers and sellers, given reasonable periods of time with no undue influences. However, successive market prices, in comparable properties form the basis of estimating the market value of a particular property.

Market Value is not to be confused with cost. Expending $2,000,000 in constructing a new development plus $500,000 for the purchase of the land in no way ensures a market value of $2,500,000. However, assuming a reasonably efficient market, the difference between actual cost and market value may be negligible unless obsolescence was built into the property or intervening factors affect the market place: e.g., lack of housing, supply, dynamic growth in a particular market, extremely depressed market conditions etc.”

A lack of 'successive market prices' is the problem facing sellers and buyers today. And, as time goes by, it gets harder and harder to nail down values because more and more time is slipping away. As time goes by, historical data becomes less valuable and therefore the process is exacerbated.

So what is a buyer or seller to do? Let common sense prevail. Where an investment property has solid tenancies and shows promise of long term returns along with cash flow today, why wait to sell or invest? Now is the time to make smart investments. The cost of inaction is just too high.

Source: OREA Real Estate Encyclopedia, Premier Edition, 1997

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Further Indicators That it's Time to Buy?

The Analysis and Opinion

The evidence is compelling and the research is strong. This great article from the National Real Estate Investor, gives some really good background on the spread between US 10 year Treasury yields and historic cap rates.

As of the second quarter of 2009, the cap rate spread ... has widened to more than 400 basis points. We believe this trend reflects increased risk-aversion among investors, who are pricing in a negative outlook for real estate.

During the recession of the early 2000s, cap rate spreads also rose to more than 400 basis points, making real estate appear undervalued relative to Treasuries. We believe that entering the real estate market during such periods of above-average spreads may be advantageous to long-term investors.

When most investors are taking a wait and see approach to investing, it's often the right time for those with the vision to start investing. And there is evidence that you should start soon:

These periods of high cap rates and spreads often do not last long. From 2003 to 2007, spreads narrowed significantly as the economy recovered and property values appreciated.

As the economy begins to rebound and real estate fundamentals improve, investors will likely become less risk-averse. We believe it is likely that more capital will flow into the sector in 2010. Consequently, we expect cap rate spreads to eventually narrow gradually, reverting toward the mean, and repeating the cycle.

My thanks to the Dirt Lawyer, David Stejkowski at The Dirt Lawyer's Blog for finding and sharing this. You should consider following David on Twitter: @DirtLawyer for insightful and timely posts on commercial real estate topics.

Other Indicators

via Retail Traffic today:

Bill Rudin, Rudin Management, and Steven Roth, Vornado Realty Trust, talk about their views on the real estate market - where we are and where we're going.

Steven Roth, "We're optimistic that there things, you know, moving in the right direction."

Bill Rudin talks about wanting tenants to sign short term leases, 2 years or so, so that they can play the market as it goes back up i.e. increasing rents along with strengthening markets vs. the tenants who want to lock in now for longer term leases, 10-20 years, now because there is growing sentiment that this is the bottom and they want to take advantage of that.

Really good take on the US commercial real estate market. Thanks to Retail Traffic for finding and posting this video.

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