Investing 102

[Vegas69]

I'd find a really sharp commercial agent and sit down with them for an hour to discuss the market. Not neccessarily the top salesman, but someone that is knowledgable and has data to share.

What has the median price been doing over the last 5 years in commercial sales?
What has the days on market been doing?
Is the supply increasing or decreasing?
Are any major businesses leaving town?
What are leasing rates doing?
What are businesses doing demographically? Are they moving into newer spaces or staying put?
Are new spaces being built that will increase supply?
How is the local economy performing?
What are your other options in the market place? That will help you establish value where you reside.
What's it worth to you not to have to move your facility?
What does a sharp commercial agent feel your place is worth? You could offer them a fee to analyze it and be the middle man in negotiations and close the sale.

I'm far from a commercial expert, but these are some things that came to mind. I'm sure Greg and the guys have other ideas.

I certainly don't think the sky is falling, but I do think it's time to be patient in many areas.

[ironworks]

Originally Posted by Vegas69

I'd find a really sharp commercial agent and sit down with them for an hour to discuss the market. Not neccessarily the top salesman, but someone that is knowledgable and has data to share.

What has the median price been doing over the last 5 years in commercial sales?
What has the days on market been doing?
Is the supply increasing or decreasing?
Are any major businesses leaving town?
What are leasing rates doing?
What are businesses doing demographically? Are they moving into newer spaces or staying put?
Are new spaces being built that will increase supply?
How is the local economy performing?
What are your other options in the market place? That will help you establish value where you reside.
What's it worth to you not to have to move your facility?
What does a sharp commercial agent feel your place is worth? You could offer them a fee to analyze it and be the middle man in negotiations and close the sale.

I'm far from a commercial expert, but these are some things that came to mind. I'm sure Greg and the guys have other ideas.

I certainly don't think the sky is falling, but I do think it's time to be patient in many areas.

Its probably alot of work, maybe.

But could you answer these questions with info for the area you in. Not just commercial but real estate in general in your area. I'm just trying to learn for myself and learn more stuff kinda like Greg has done with this thread.

The price of oil has really had an effect here on jobs and such but I have only seen the residential real estate market come down accordingly. Lots of places going under in the oil industry that were not saving money when it was going well.

[Vegas69]

Sure, but the data really needs to be local. Your economy is driven by oil, ours is driven by tourism. We get all the retiree's due to no State tax. etc..

The median price of a single family home is up $600 in 9 months after a 52% increase over the previous 3 years. $118,000 up to $220,600

Inventory levels have nearly doubled since the median price hit it's low point in 2012. Resale inventory has stayed steady for roughly 2 years. New home builders are building everywhere. Their median price is $100,000 higher than the resale market. I've seen standing inventory from multiple builders lately and have negotiated aggressively with them for my buyers.

Days on market has stayed pretty consistent.

Ikea just built a new store and the T-mobile arena just opened. From what I see, many are thriving here and spending money again. People are moving here again from CA and all over the country. The census data shows that we've gained population in the last few years. Not by a large margin, however. Many that were upside down have found freedom with the rising home prices and are moving away. We are growing...

Residential median lease rates have climbed $125 per month in the last 5 years.

I hired a new assistant last week. I had roughly 60 applicants in 48 hours for a $15 an hour job plus bonuses.

I'd have to research the rest of the questions.

I'm seeing a bunch of first time buyers, some relocations, and move ups and downs now with the new found equity in the market. I think the market has some good life left in it and seems fairly stable.

I'd sit down with 2-3 commercial agents and bounce some of this stuff off them if you are thinking of making a major play.

[68Cuda]

Originally Posted by Vegas69

Inventory levels have nearly doubled since the median price hit it's low point in 2012. Resale inventory has stayed steady for roughly 2 years. New home builders are building everywhere. Their median price is $100,000 higher than the resale market. I've seen standing inventory from multiple builders lately and have negotiated aggressively with them for my buyers.

Days on market has stayed pretty consistent.

Where are you located?

The market here is crazy, rental rates for residential are stupid high, and it seems resale inventory is real low and moves fast. It seems like a bad time to buy.

Everyone here is building, both residential and commercial.

[ErikLS2]

Originally Posted by Vegas69

Thanks, Erik!

I'd be seriously looking at your local market and making a firm decision on whether it's time to "Take your money and run". If the decision is no, you should be ready to ride out the next low cycle. I know commercial leases can run through cycles, but if that business was to fold, you could be left with a vacancy.

I'm on the residential side, but I have some commercial knowledge here. What seemed to happen with the last cycle was that tenants migrated into newer, nicer spaces for a similar outlay. That left many of the older buildings with vacancies.

Going back into debt or getting back into the market is EASY. Those liabilities and opportunities are plentiful. Timing dictates the latter...

Todd, I wish it were that easy, but it's a Walgreens store and it's in TX. The loans for these types of properties are kind of like bonds to the investors (lenders) in that they want all the return they signed up for at the outset. This means there's a significant pre-payment penalty, called a defeasance penalty. So, it rarely pays to sell (or refinance) early. The penalty on this property 4 years out from loan maturity was around $600K!! That's the price for getting a fixed rate loan vs. an adjustable rate. In the meantime, Walgreens is about as solid a tenant as you can get, it's a 75 year lease and unless this 100+ yr old company goes out of business it's guaranteed and it's NNN so there's nothing to do except make sure the money is in the bank every month. Oh, and we still get to depreciate the building and contents, even if Walgreens buys new ones!

Originally Posted by ironworks

Todd - Do you mind sharing some of the key factors your talking about in the real estate market. I'm looking at purchasing a the building we currently occupy and have found the open lease space ratio to be getting higher but not alot for sale just yet. But I'm wondering if this is the time. I think things are gonna go on sale and I seem to keep hearing that the sky i falling and alot of smart guys are prepping for market correction. CASH is KING. Just trying to learn all I can.

Todd gave you some good advice. Some of the bigger firms that would know what your building is worth are CB Richard Ellis, Marcus & Millichap, and Hendricks & Partners. All should have offices in your area and any of them would be happy to give you an opinion of value and tell you all you want to know about your local market. In your situation though I don't think I would have them handle the purchase/sale. I'm assuming that you know the current owner (you're making lease payments to them right?) so there's no need for them to do so and their contracts are great at protecting them but don't do much for you or the seller so you really need a lawyer to review the contract anyway, and they get a healthy commission, mainly for putting buyer and seller together and it sounds like you might already have that part handled. I would highly suggest if you want to buy it that you just find an experienced commercial real estate lawyer draw up a contract and have the seller's lawyer review it and negotiate that way. You'll be much more protected that way too.

You probably know this already but I would also add that if you can swing it to own the building the tax benefits can be considerable, you have the business LLC (or however it's structured) lease it from another LLC (or similar entity), both of which are you. You'd basically just move money from one bank account to another and deduct a lot from your income taxes along the way. How the rich get richer! I wouldn't suggest you have one entity own both the business and the real property, but I'm not a lawyer and Calif is especially unique in it's laws for most of this kind of stuff so do your homework. Good luck!

[Vegas69]

Originally Posted by 68Cuda

Where are you located?

The market here is crazy, rental rates for residential are stupid high, and it seems resale inventory is real low and moves fast. It seems like a bad time to buy.

Everyone here is building, both residential and commercial.

I'm in Las Vegas. I've really grown to like the philosophy of doing the opposite of the majority.

[glassman]

Originally Posted by ErikLS2

Todd, I wish it were that easy, but it's a Walgreens store and it's in TX. The loans for these types of properties are kind of like bonds to the investors (lenders) in that they want all the return they signed up for at the outset. This means there's a significant pre-payment penalty, called a defeasance penalty. So, it rarely pays to sell (or refinance) early. The penalty on this property 4 years out from loan maturity was around $600K!! That's the price for getting a fixed rate loan vs. an adjustable rate. In the meantime, Walgreens is about as solid a tenant as you can get, it's a 75 year lease and unless this 100+ yr old company goes out of business it's guaranteed and it's NNN so there's nothing to do except make sure the money is in the bank every month. Oh, and we still get to depreciate the building and contents, even if Walgreens buys new ones!



Todd gave you some good advice. Some of the bigger firms that would know what your building is worth are CB Richard Ellis, Marcus & Millichap, and Hendricks & Partners. All should have offices in your area and any of them would be happy to give you an opinion of value and tell you all you want to know about your local market. In your situation though I don't think I would have them handle the purchase/sale. I'm assuming that you know the current owner (you're making lease payments to them right?) so there's no need for them to do so and their contracts are great at protecting them but don't do much for you or the seller so you really need a lawyer to review the contract anyway, and they get a healthy commission, mainly for putting buyer and seller together and it sounds like you might already have that part handled. I would highly suggest if you want to buy it that you just find an experienced commercial real estate lawyer draw up a contract and have the seller's lawyer review it and negotiate that way. You'll be much more protected that way too.

You probably know this already but I would also add that if you can swing it to own the building the tax benefits can be considerable, you have the business LLC (or however it's structured) lease it from another LLC (or similar entity), both of which are you. You'd basically just move money from one bank account to another and deduct a lot from your income taxes along the way. How the rich get richer! I wouldn't suggest you have one entity own both the business and the real property, but I'm not a lawyer and Calif is especially unique in it's laws for most of this kind of stuff so do your homework. Good luck!

Erik, what is NNN? Also, thanx for the new word of the day, "defeanance".

On another note, while were talking investment stratagies,
I've been interested in purchasing some investment property here in the town of Dublin where my business is based. The buildings (as builts) and land here are too large for my business, just about everything starts at 2 mill and goes up from there. I just don't have the kohones to do it, it will be about 11,000 to 12,000 a month. And while we (the business) can swing it right now, i'm preparing for a slow down( i bought the business 20 years ago in a recession and went through the 09'/'10). So, using the past for guaging the future is what i'm talking about. We are in talks right now with our former landlord about relocating some of or all our business back to that site, for a savings of 60% less per sq ft.
Meanwhile, fully funding the companies pension(income tax differed), keep piling some cash into my diversified Dividend stocks, and continue to learn how to manage the growth.......thanx to this thread (Greg, yes i'm talking to you lol, thanx a BUNCH for you input!!!! Wish i would of heard it in my 20's LOL).

[Vegas69]

Originally Posted by ErikLS2

Todd, I wish it were that easy, but it's a Walgreens store and it's in TX. The loans for these types of properties are kind of like bonds to the investors (lenders) in that they want all the return they signed up for at the outset. This means there's a significant pre-payment penalty, called a defeasance penalty. So, it rarely pays to sell (or refinance) early. The penalty on this property 4 years out from loan maturity was around $600K!! That's the price for getting a fixed rate loan vs. an adjustable rate. In the meantime, Walgreens is about as solid a tenant as you can get, it's a 75 year lease and unless this 100+ yr old company goes out of business it's guaranteed and it's NNN so there's nothing to do except make sure the money is in the bank every month. Oh, and we still get to depreciate the building and contents, even if Walgreens buys new ones!



Todd gave you some good advice. Some of the bigger firms that would know what your building is worth are CB Richard Ellis, Marcus & Millichap, and Hendricks & Partners. All should have offices in your area and any of them would be happy to give you an opinion of value and tell you all you want to know about your local market. In your situation though I don't think I would have them handle the purchase/sale. I'm assuming that you know the current owner (you're making lease payments to them right?) so there's no need for them to do so and their contracts are great at protecting them but don't do much for you or the seller so you really need a lawyer to review the contract anyway, and they get a healthy commission, mainly for putting buyer and seller together and it sounds like you might already have that part handled. I would highly suggest if you want to buy it that you just find an experienced commercial real estate lawyer draw up a contract and have the seller's lawyer review it and negotiate that way. You'll be much more protected that way too.

You probably know this already but I would also add that if you can swing it to own the building the tax benefits can be considerable, you have the business LLC (or however it's structured) lease it from another LLC (or similar entity), both of which are you. You'd basically just move money from one bank account to another and deduct a lot from your income taxes along the way. How the rich get richer! I wouldn't suggest you have one entity own both the business and the real property, but I'm not a lawyer and Calif is especially unique in it's laws for most of this kind of stuff so do your homework. Good luck!

Sounds solid and complicated... Can't beat that tenant! I own NNN if you are referring to the stock.

Disclaimer: This is coming from a licensed real estate agent. ha A skilled agent can give you insights that could be a big negotiating factor. I do agree that an attorney is crucial for a commercial deal, but their focus is law, not market dynamics and what should be expected in a negotiation. Bottom line, the money you pay them could be a wise investment. The attorney will ensure the deal is sound.

[WSSix]

Congrats Todd and Don on being debt free. Keep up the good work!

[ErikLS2]

Originally Posted by glassman

Erik, what is NNN? Also, thanx for the new word of the day, "defeanance".

NNN stands for Triple Net. It means that in addition to rent, a tenant on this type of lease also pays for basically all other expenses related to the property, i.e. property tax, common area management, and any building repairs including a/c units, roof, etc. All upgrades and repairs are still owned (and deductetd) by the property owner though, a nice side benefit. Basically the landlord/property owner has to do nothing other than make sure the money comes in every month.

Originally Posted by Vegas69

Sounds solid and complicated... Can't beat that tenant! I own NNN if you are referring to the stock.

Disclaimer: This is coming from a licensed real estate agent. ha A skilled agent can give you insights that could be a big negotiating factor. I do agree that an attorney is crucial for a commercial deal, but their focus is law, not market dynamics and what should be expected in a negotiation. Bottom line, the money you pay them could be a wise investment. The attorney will ensure the deal is sound.

I agree that in Rodger's case it would be wise to get a sense of the market from a licensed agent familiar with his type of property, but they do that for free. Since in his case there is already a buyer and a seller there's little else for the agent to do other than draw up a contract (which again mostly protects THEM) which each party should have a lawyer review anyway. If the agent handles the contract I would negotiate a much lower commission from the standard 5-6% which includes marketing, advertising, etc. I'm not against agents at all but on these commercial deals they do everything they can to keep the deal "in house" so they get both the buyer/seller commissions. I've done 3 fairly big deals and every one was a dual representation deal.