Archive for June 2010

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Getting to Cash Flow Positive with your Commercial Investment Property?

An investor asked us to give him a rental rate that would quickly lease his vacant space.  The problem with this question is that it's only half the problem. The other half of the question should be: "At what rate would you recommend I quote in the market to lease my space quickly while maintaining my debt service coverage ratio and building a long term positive cash flow?" How easy is it to get to cash flow positive with your commercial investment property? The first half answer to the question is to lower your rent until tenants start making proposals, being aware not to fix a discounted rate because it could eliminate or trap your equity investment in the property.  The second half answer asked for the following pieces of information: your existing leases, your prior year's operating statement, your mortgage, your note, and any additional information regarding the property that you want us to know. Then you create an analysis of your investment as it operates today followed by the lease up assumptions from the first half answer.  Next, you build your proforma including your lease up assumptions and annual debt service information from your mortgage and note.  Once you've generated a cash flow before taxes analysis, you can see how your investment will operate based on the first half answer.  The second half answer will give you the next 3 steps:

1. What are the required rate escalators to maintain your debt service coverage ratio?
2. If new and existing leases are signed at lower rates, what's the lowest rate you can accept without defaulting on your loan?
3. If you've paid down the principal on your loan, run an analysis on what a new loan payment would be based on the reduced principal balance at today's interest rates.  Would it make sense to call your lender to discuss a modification or refinance?

Upon completion of the following 3 steps, you should have a clear, 5 year plan for turning your property in a conforming, positive cash flow producing investment. You'll know exactly what to do to achieve your goal, and it doesn't look promising or you don't think you can make it happen, you can always consider your other options. Get free weekly email updates of this blog. About the Author: Jeremy Cyrier, CCIM is the founder/principal of MANSARD Commercial Properties and member of the CCIM Institute faculty. He delivers thoughtful, large scale commercial real estate solutions to the individual challenges owners and tenants face. Jeremy Cyrier, CCIM was elected by Banker & Tradesman as one of its New Leaders in 2009. You may reach Jeremy at Jeremy@Mansardcre.com.

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Who Buys Commercial Investment Property Low and Sells for Less Than High?

Two weeks ago, I met with a couple to discuss the market value of their commercial investment property that they had owned for 60 years.  When they heard that their property value was off 25% from 3 years ago, they almost kicked me out of their office.  In 2007, they had refused 3 cash offers for 25% more than the number they were hearing today. Instead of looking at their gains over the past 60 years, they couldn't see beyond the 25% correction over the past 3. If the Zell maxim is true, "If you're not selling, you're buying," they bought their commercial investment property back for 25% more in 2007 than they would get today.  They believe that selling property for 75% of their 2007 value would result in a loss for the following reasons: 1.  They refused higher offers. Therefore the commercial investment property's market value has been proven to be higher than today's number. 2.  They were raised to buy low and sell high, not buy low and sell for less than high. 3. As long as they hold on, they may hit that peak again. Unfortunately, they're focused on the wrong priorities.  Sure, 3 investors were willing to pay a higher price. But when they turned down the offers for their commercial investment property, they refused to accept the peak value and bought the property back at its highest value instead of seeing the big picture--"this is more than we ever paid and more than we think it's worth." They believe the value will return. They belied the lessons their parents instilled in them.  In 1950, they bought low.  In 2010, they can sell high.  True, the price has fluctuated over time and they missed peak property values in the market, but in the long-run they will sell for a profit and will enjoy a healthy gain. As long as their equity remains in the commercial investment property, they will place their personal priorities on hold.  They have plans for the cash that will enrich their personal lives. Those plans will wait.  And they will miss the advantages of owning commercial investment property because they have no interest deduction, their equity is unleveraged, and the property is depreciated to a 0 basis, so they're receiving no tax advantages. Let's face it, unrealized gains are unrealized gains. Let go of the past and move on. If you're holding out for another market peak, be prepared to wait.  While it's comforting to peer into the the rear view mirror at what your commercial investment property was worth (N.B. there's a reason why the mirror says "objects in mirror are closer than they appear"), take it all in and see your long term gains for what they are--profits. And ask yourself, are you building wealth waiting on another hot market, or just missing opportunities because of your insistence on what could have been?

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10 Lessons from a Distressed CMBS Portfolio Assignment

Here are 10 insights I can offer you after completing a consulting assignment on an 850,000 SF portion of a $1B distressed CMBS portfolio sale. 1. The news on the street is not necessarily what's happening with the borrower and his property. 2.  To fill vacant space, discount your rents significantly.  Be the best place for the best price. 3.  Plan to renew at lower rates. Once your in-place tenants see what you've done with rents to fill the building, they'll likely want the same deal. 4.  When the borrowers stop paying, it's because they realize they're chasing losses. Paying to keep the property is worth less than letting their equity go. 5.  Property values are less than the debt owed. Find motivated lenders willing to cut a deal. 6.  Some properties are worth more as land sites than empty buildings. 7. Do your due diligence.  Lenders don't like to foreclose on Phase II and Phase III assets.  Make sure you're not buying a liability. 8.  Plan to carry an asset for 1-2 years to reach stability. 9.  Once stabilized, it may be 36-48 months before you recover your investment. 10.  Don't bet the farm on your exit cap rate.  Cash flow will likely still be paramount when you dispose.

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MANSARD Welcomes Navaneeth Conjeevaram

MANSARD Commercial Properties is pleased to announce the addition of Navaneeth Conjeevaram to its growing investment sales and leasing team. Navaneeth Conjeevaram advises corporate and private investors and users of commercial real estate and prides himself on his careful and detailed approach to understanding his clients’ needs to deliver pragmatic solutions that create value and sustainable relationships. Navaneeth has worked for Insignia, holds his BA in Business Administration, has over 7 years of commercial real estate experience.  He has leased 600,000 SF of office space on behalf of clients such as Tata Tele Services, Sierra Atlantic, Google, Monster.com, Aztec Software, Pizza Hut, and GE Motors. Navaneeth is a CCIM Candidate and may be reached via telephone at 617-674-2043 ext. 205 or by email at Nav@Mansardcre.com.

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Your Commercial Mortgage ... a Time Bomb?

If you still own your commercial real estate and you have tenants with net operating income to pay your debt service, congratulations. You've made it half-way through the downturn. The second half may be uglier. While it may look like you're successfully wading through the weeds, when was the last time you checked the terms of your mortgage agreement? Some owners who think they're in good shape today, may technically be in default or facing a maturity default. Your debt service coverage ratio may be out of alignment with your mortgage agreement. You may have depleted your reserve accounts below the required amount. Or your property's value may have declined up to 40% since you originated your debt 3-4 years ago. More on this topic here. If you haven't done so yet, read your commercial mortgage agreement. You may find that you are in default, or worse yet, headed toward a deadline that may require you to invest more equity into your building that you don't have. Values have declined. Your loan to value ratio may need to be reset when your loan matures. If you don't have the net operating income to support a higher valuation than today's market will support, or the willingness to buy down your loan, you may run the risk of a maturity default. Owners are losing their buildings to maturity defaults today. Look at your mortgage and make preparations to protect your building for when your loan comes due. Get free weekly email updates of this blog. About the Author: Jeremy Cyrier, CCIM is the founder/principal of MANSARD Commercial Properties and member of the CCIM Institute faculty. He delivers thoughtful, large scale commercial real estate solutions to the individual challenges owners and tenants face. Jeremy Cyrier, CCIM was elected by Banker & Tradesman as one of its New Leaders in 2009. You may reach Jeremy at Jeremy@Mansardcre.com.