It IS Time to Buy Commercial Real Estate

Found this on a cre-advice.com and it mirrors what I'm starting to hear in the market and what I've been screaming from the roof-tops:

Investors have to do something with their money: You can buy in to the investment grade bond market and earn a whopping 3.75%, or you can buy NNN leased, credit tenant real estate and more than double your return. As Bill Gross of PIMCO points out as a cost of capital sitting on the sidelines: “an effective zero percent interest rate, as a price for hiding in a foxhole, is prohibitive.” In 2010, buyers will exit the payless funds earning close to 0% in search of manageable risk. Quality commercial real estate will receive considerable attention in this context.

Because problems with debt structure will motivate a large number of sales, pricing will remain in flux in the next year. As a result, headline measures of cap rates will fail as indicators of the underlying variation in property trades. Rather, buyers and sellers alike will be depending on their Advisor’s knowledge of the market and of the emerging mechanisms of exchange – such as auctions – to guide their investment strategy. Investors with strong operational capabilities who are seeking to acquire assets over the next year are in an ideal position. This group will be able to purchase assets during a period of dislocation, before asset prices normalize and while long-term yields are at the their peak.
What do you think? Would you rather sit back and 'enjoy' 2-3% returns when you know that inflation will eat up most of your buying power over the next several years, or get into a solid commercial real estate investment where you should be able to crank out at least 7% for the forseeable future?  Sounds like a simple choice to me.

Ready to buy?  Contact me.

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Of Course It's For Sale!

Back in the spring, I did a piece on selling your business and was featured on our local Chamber of Commerce Podcast site as a result. Since I'm taking a bit of a break right now, I thought this might be a good syndicated post to share about getting ready to sell your business.

Syndicated Post

I sent a friend who was interested in owning a business to visit a shop in town. I had told her the owner had just bought the place and had done a really good job of getting more customers into the store.

When I saw my friend the next day she told me she had visited the store and was surprised to hear the new owner say she wanted to sell it. I was surprised to hear that, so when I was in town a couple of days later I made a point of talking to the owner. She remembered my friend and all her questions. "That woman was so interested in the shop I asked her if she wanted to buy it." She went on to explain: "It's a business. It should always be for sale - for the right price."

Many business owners become so emotionally attached to their business that they don't consider selling until it's too late. If someone asked you to name a price for your business what would that price be?

Many entrepreneurs start businesses planning to sell them within a few years. Others just struggle to actually become the owner of the business instead of its only employee - if you thought working for someone else was bad, try working for yourself!

To be the business owner is to think of your business as an asset, something like a car or a house that can be sold on the open market. What gives the business value is its assets and the ability to generate positive cash flow.

No matter how you feel about your business, we can calculate what it's worth. For example, most business brokers will probably tell you that a typical business is worth 1.5 to 3.5 times discretionary cash flow plus the value of the tangible assets. In this case, discretionary cash flow is total cash flow plus the expenses that a new owner would not be obligated to pay - depreciation, owner's salary, auto expenses, loan payments, retirement contribution, travel and entertainment, etc.

Knowing what it's worth now will allow you to make the changes that will increase its value in the future. It will probably require increasing revenue, but if you increase revenue at the expense of margins you will actually be decreasing the value. Pay attention to the cost of that additional revenue. Do you need to do more marketing, increase production capacity, or add employees? Very often these steps can be taken incrementally to lessen the impact on cash flow but achieve the same long term goals. The key is planning and having the patience and persistence to achieve the results.

Do you know what your business is worth? If not, how would you know what to say if someone offers you a million dollars cash for yours? Maybe it's time to find out.

Dave Ferguson is a business coach and the owner of Lake County Business Coaching, Inc., a coaching firm dedicated to helping people in business to improve their performance and their results. More information is available at http://www.LakeCountyBusinessCoaching.com.

Article Source: http://EzineArticles.com/?expert=Dave_Ferguson


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Five Fool Proof Ways to Brighten Up Your Commercial Property


This looked like a great post for the end of the year; great tips on brightening up your commercial building to keep and attract the best quality tenants.


Enjoy!


Syndicated Post

1. On Cleaning Up and Success Team

So far, I have viewed and analyzed no less than 3,000 properties internationally. And I have discovered that most owners tend to overlook this very simple but vital task. Shocking, isn't it?

Irrespective of whether you are planning to rent out or sell your property, clean it up completely. This means the interiors as well as the exterior. Of course, unless you enjoy physical work and don't mind getting your hands dirty, you can always engage others. There are freelancers available through outsourcing website who wants to earn some extra bucks. It is recommended that you work with a "Success Team" to keep your properties in tip-top condition and make your investments more fool-proof and blissful. Ideally, members of your success team should include plumbers, electricians, handymen, painters, cleaners and other professionals like lawyers, valuers, real estate negotiators, property managers and interior designers. There are also professional cleaning companies with the equipment that can make your place shine like brand new.

Humans are very visually oriented. Thus, they are impressed by what they see, making it paramount that you clean up thoroughly. Yes, that means top to bottom, left to right, and inside out. Most buyers and tenants want a property that has been well taken care of.

2. Trim Overgrown Trees and Shrubs

Where applicable e.g. landed industrial and semi-detached commercial shop offices that come with trees and/or bushes at the front, side or back of the building. By trimming overgrown trees and plants, it instantly brightens up your property, makes it more attractive and opens up more space.

3. Repaint with Lighter Colours

This is weird but true. Using a different colour does give a different effect to the same room. To prove a point, the next time when you see an advertisement by companies marketing paint, pay close attention. The paint boys spend thousands to show you how a colour can make a world of difference in life. Using lighter colours like white and beige to paint your property makes a given space look brighter, bigger and wider. (To get more space, you don't always have to break any walls or buy more land. Just paint with a light colour!)

4. Bring in More Natural Light

Use your own creativity, or observe what your neighbors have done. Explore and discuss with interior designers about ways to bring in more natural light. It could be as simple as enlarging existing windows, or putting in more windows; using more glass doors and partitions; replacing roof tiles with transparent tiles or skylights etc. The outcome are astonishing!

- You do yourself a favour, by adding more value to your property;
- You do your tenants a favour, helping them save on electricity;
- You are also helping preserve Mother Earth, by reducing global warming and reducing the depletion of our natural resources.

5. Add More Lighting Points

Where appropriate, add more lighting points. With commercial properties, it is almost universal that tenants prefer bright places - unless they are in the business of "candle light" dinners. By creating a brighter and more spacious look, you can dramatically improve the attractiveness of your property.

Mike has been writing articles online for nearly 2 years now. Not only does this author specialize in personal investment, productivity, you can also check out his latest website on ftd flower delivery which reviews on FTD Flowers Delivery

Article Source: http://EzineArticles.com/?expert=Mike_Milanez 

 

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You Can Become a Multi Millionaire Through Commercial Property Investment

Syndicated Post

It is estimated that 98 percent of the world's millionaires have either made or parked their money in property. This is clear indication that there is a huge amount of wealth waiting to be harvested through property investment.

And yet, only about 5 percent of the population of any given country are active property investors. Why? Perhaps, the reasons are inexperience about what real estate investment has to offer, or simply the lack of motivation to get started because of limited information and guidance.

There are tried-and-tested ideas, strategies and recommendations which are general in application, giving you the flexibility to invest in any part of the world. In addition, the tools and advice provided will certainly ensure that you invest in the safest and smartest way possible to gain maximum returns on your investments.

They are facts of life in the world of property investment. Facts that have been verified. As Bernard Baruch put it, "Every man has the right to be wrong in his opinions. But no man has the right to be wrong in his facts." With better insight, are you ready to jump on the red-hot commercial property market bandwagon? Never mind if you're in the minority group, the crucial factors are:

1. Get serious
2. Get committed
3. Get started, and
4. Get off your butt, now!

Commercial property investment is an amazing avenue to great wealth. A few right investment can absolutely change your life and lives of your love ones.

Believe that nothing is impossible in a willing heart. All possibilities lie in you being willing to take the first step in the right direction towards financial freedom.

Mike has been writing articles online for nearly 2 years now. Not only does this author specialize in personal investment, productivity, you can also check out his latest website on ftd flower delivery which reviews on FTD Flowers Delivery

Article Source: http://EzineArticles.com/?expert=Mike_Milanez 

 

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Have We Learned Anything From The Meltdown?


TORONTO, Dec. 15 /CNW/ - A new Ernst & Young report reveals that a shifting and vastly different post-recession real estate landscape has executives grappling with lingering challenges.

Top 10 lessons learned in real estate: Ernst & Young

Below are 10 lessons from change that have emerged for the sector, which are also quickly becoming trends for 2010. According to the report, those who take heed of this advice are more likely to continue to adapt and grow in an increasingly global and competitive real estate market:

1. Focus on capital preservation - Most real estate executives are and will continue to be concerned with stabilizing their organizations and enhancing their ability to access capital and improve the flexibility of their balance sheets. Maintaining liquidity is paramount to capitalizing on future opportunities.

2. Form strategic alliances and/or partnerships with foreign investors - Partnerships will be formed to acquire assets on a scale never seen before. Expect Canadian companies with strong balance sheets to venture into foreign markets.

3. Provide more effective risk management and protection of asset values - Real estate companies are revamping their framework to more effectively manage risk. Pricing risk appropriately will define future growth.

4. Provide an increased focus on tenants - Property owners are becoming more diligent in evaluating the creditworthiness of tenants to determine who might present a risk. In light of this, underwriting will become even more stringent.

5. Evaluate supply chain and contractors - Corporations who hire developers and construction contractors are evaluating the risks of having financially troubled contractors/suppliers who could file for bankruptcy and stop work on a project.

6. Prepare for increased taxes and government regulation - Companies are preparing for regulatory framework - around private equity investment funds in particular, as well as arranging for fuller disclosure of investment plans, asset verification and other information of interest to shareholders.

7. Control costs and streamline operations - Companies are improving their overall performance, with issues such as tying executive compensation to performance resurfacing.

8. Look at Canada's relationship with the US - While there are noticeable differences between Canada and the US in terms of macro-economic structure and real estate fundamentals, don't overlook the influence and effect of our largest trading partner.

9. Accelerate decision-making - Decisions are being made more quickly to take advantage of shorter windows of opportunity and to respond more quickly to adverse developments.

10. Concentrate on long-term growth - Real estate executives are thinking about the future. They're looking at extending their company's market reach, building relationships, thinking creatively and strengthening their management capabilities.

From my perspective one of the most important lessons on this list is number nine, accelerate decision-making. Why? As more and more opportunities come back onto the market it'll become even more important than in the past to be able to make quicker acquisition decisions because there WILL be more competition for those assets. Slow decisions were a problem in the last boom when even well heeled tenants, investors and developers seemed hamstrung by indecision and this will continue to be a challenge going forward.

How do you see your company reacting to new opportunities as they become available? Have you got a plan to be able to streamline your acquisition process when deals are put on your table?

Source: Top 10 lessons learned in real estate: Ernst & Young


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Commercial Real Estate Blues - A Christmas Tune


Via TrafficCourt on RetailTraffic blog.

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He Who Hesitates Is Lost or "If You Wait for the Robins, Spring Will Be Over"

Thanks to TrafficCourt and David Bodamer who picked up William Ackman's ICSC Report in New York:
ICSC Mall REIT Presentation 12-7-2009


Some of the relevant highlights from the above report:

  • The U.S. economy has recovered
  • The U.S. consumer is beginning to bounce back
  • The credit markets have improved
  • Mall REIT balance sheets have strengthened
  • Cap rates have declined substantially
  • Store closure fears were overblown
  • Tenants are much better capitalized
  • Rent relief has been minimal
  • Tenant sales are down, but inventories are down even more while retailer cash flows have improved materially

Which would you rather own?

1) A 10-yr Treasury at a 3.4% yield
2) A 10-yr TIP at a 1.3% yield, or
3) Shares in a mall REIT at a 7.5%, 7.0%, or even 6.0% cap rate

Conclusions:
  • During one of the worst recessions in over 50 years, mall REITs and their tenants have proven to be highly resilient
  • Consumer spending does not need to return to 2007 levels for mall REITs and their tenants to outperform
  • Store closures of underperforming tenants is a long-term positive for the mall industry
  • Tenant cash flows and balance sheets have massively improved over the last twelve months
  • Many opportunistic retailers have substantial growth plans. Retailers on the sidelines are just like those investors who didn’t buy stocks in the spring
Looks like I'm not the only one who thinks that the market is turning for the better! Tell me what you think of this report - are Mr. Ackman and I out to lunch?

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Top 3 Expenses Most Often Missed by New Investors

When calculating return on an investment (ROI) or internal rate of return (IRR) there are a number of expenses to take into account and surprisingly, there are a few that get overlooked entirely. I've noticed that, particularly new investors (and often brokers who should really know better!), miss a few essential expenses far more often than I would have expected.

When working on calculating an ROI or IRR, you always need to start with a reconstruction of the net operating income (NOI). A basic worksheet should look something like this but may be more or less sophisticated based on the asset class:


In researching properties for buyer clients, I always ask for a copy of the income and expenses from the owner or from the broker as reported by the owner if the property is listed. A complete picture of the income and expenses, along with all other pertinent physical, demographic, and economic information about the property and the market, is the only way to properly analyze a property on behalf of my client. Omissions or errors here have a direct impact on the valuation of the property and are therefore essential.

I almost always receive a list of the monthly rents or an annual summary of the gross income - though not everybody seems to grasp the concept of total gross income and often it takes a couple of calls to get all of these figures. I usually get a summary of the expenses as well, though often there are a number of glaring omissions. Either by design, because the numbers are too large and the person providing the information is hesitant to be open with me, or by mistake because they don't actively track their expenses or have a poor record keeping system, or simple ignorance.

The top 3 most often missed expenses are basic to the operating expenses of any property, but they are sometimes the most difficult to obtain. They are:

  1. Property and liability insurance.
  2. Repairs and maintenance.
  3. Vacancy and credit losses.
Why are these left out so often? As I said, these are real numbers that have a direct impact on value, so if there is a particular expense or expenses that would negatively affect value, some sellers will intentionally make it difficult to discover them. Most often though, they are missed through simple ignorance.

Property and liability insurance.
While not necessarily a large expense in itself, if you are looking at a smaller investment where every penny counts, missing an expense of this nature can have a very serious impact on future profitability - even if such an omission is innocent.

Repairs and maintenance.
Usually this one is omitted intentionally. Why? "Because the roof is only 4 years old, and the paving is only 2 years old...what else do you think needs to be done?!" From the inexperienced buyer's perspective, it often is left out for the very same reason - there is sometimes a mistaken belief that just because repairs have recently been made that there won't be any further repairs needed for the foreseeable future. Maintenance items like, snow removal and grass cutting are often ignored by first time investors because they intend to do the work themselves and therefore don't feel it's necessary to account for those expenses. But isn't your time worth anything to you? Even if you plan on doing the work yourself, you should be compensated for your time!

Vacancy and credit losses.
This is the most often missed expense in my experience. If the building is full, why should you account for vacancy? There are a couple of reasons: 1) Your tenants are not invincible - one of your tenants could step in front of a bus tomorrow and you'd be looking for a new tenant. If the property is a small one, and one of your tenants just decides to leave or goes out of business, you could be looking at significant carrying costs while you re-lease the space. 2) In the long term, some credit losses are unavoidable. Even with the best of tenants with the best of intentions, occasionally things don't work out the way everyone hopes and there's just too much month left at the end of the money. 3) The last, and maybe the most important, is that when you apply for financing on any investment property, the bank or lender you use WILL include a vacancy allowance to account for lost income that could affect their ability to collect your payments. Go into the financing application process well informed or you could be in for a rude awakening.

So there you have them, my top 3 most missed expenses by new investors. Tell me what you've experienced as a buyer or as an advisor; ever run into these or other items that have put the brakes on a deal you were hoping to close?

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How to Use Internal Rate of Return as a Measure of Real Performance in Commercial Real Estate

Ever wonder which metric is the best way to analyze a piece of real estate? Me too! There are so many to choose from. Cap rates, ROI, gross rent multipliers, net rent multipliers, leveraged rates of return, yields, etc., etc. ad nauseum. The problem I see with most of these is that they look at a snapshot in time for a given asset and don't take into account increases or decreases in income over time.

Enter the realm of IRR or 'internal rate of return'. The internal rate of return shows the rate of return over a period of time and takes into account variables in income over that period. Rather than looking at just one point in time, you get a picture of the return you should expect during your entire anticipated holding period.

Let's look at a very simple example:

123 Any Street, Peterborough, Ontario is a hypothetical office building of 21,000 square feet with a projected first year net operating income of $105,000. Prevailing market cap rates indicate you should be looking at 8.5% as your 'going-in' rate. This puts a hypothetical value of $1,235,000 on the property (give or take a few dollars). Pretty simple, income divided by cap rate equals value.

What if you did some digging into the rent roll and discovered that one of the tenants, who occupies about 4,000 square feet of the building and therefore generates 19% of the net operating income, had a lease that was coming due in two years, and further that you found that they did indeed plan to move out at the expiry of their lease and have purchased land for construction of a new building two blocks away? That's a significant drop in future income and therefore will have a direct impact on the value of the real estate today. A future event will have direct impact in the present.

As the new owner of the building there would be some period of time when the space might be vacant, and there would be some cost associated with releasing the 4,000 feet including: leasing commissions, build-out for a new tenant, advertising, etc. The series of cash flows over the first five years of ownership (assuming a sale at the end of the fifth year at a similar cap rate) might now look like this:



You can see that there is a substantial difference in the IRR of the two scenarios. This doesn't mean that the property is a bad purchase, it just gives the investor a better picture of the real performance of the property and provides a more realistic idea of actual return over time. Other factors that would change this picture include things like: the effect of financing, rent escalations, economic factors, changes in future cap rates, and competition in the form of new buildings coming onto the market to name just a few.

If the IRR is within range of your expected rate of return then you can move onto doing more due diligence for the property. If it is well below what you expect, then you need to either negotiate a lower price, or keep looking for another property that does meet your investment criteria.

Have you ever used this method of comparison before? Did you find it useful? Let me know, I'd be interested to hear some real world examples.

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