Investing

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MANSARD Featured in CIRE Magazine - "Marketing for Today's Market"

Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education.

CIRE covers market trends, current developments, and business strategies within the commercial real estate industry.

MANSARD is featured in the article "Marketing for Today's Market" on page 40.

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How Much Should You Set for Reserves?

If you are planning an acquisition or budgeting for your existing portfolio, you have asked yourself the question, "how much should I set for reserves?"

Recently, my friend John and I were chatting about how smart money follows a basic premise when making an acquisition decision.  John is a building engineer and his job is to analyze the segmented components of office buildings so that investment firms can understand what the useful life of each piece of the building may be.

John explained that on one building, his company learned that the window systems installed on the high-rise had 5 years remaining and that the report they produced noted the system's end-of -life and provided the client with an analysis of costs to replace the windows.  The client used this key report to set their reserves target over the 5 year period and plan adequately for the window system replacement.

One mistake we see many investors make is not adequately understanding the useful life of the building systems owned or being acquired.  When adequate reserves have not been set to meet the replacement and repair of the property, the owner scrambles to draw on credit lines, refinance the property, spend tenant security deposits, raise money through a capital call, or even resort to not repairing the problem.  Such behaviors can also raise the bank's attention to maintenance of the property and pose some problems for the owner when he is asked about necessary repairs.

If you are budgeting your reserves and are wondering how much to include, consider hiring a building engineer to analyze your property.  You might be delighted to know that planning for reserves is much easier when you have an idea of what to expect versus wondering what might go wrong in a few years or putting some money aside because that is what your colleague or banker told you to be the correct amount.

And if you are buying a building and have already planned for your engineering study, here is a tip:

Remember that reserves are savings.  They are not expenses because they are not recurring annual costs to operate the property.  What do you think the IRS would say if when you filed your return, you deducted reserves as an expense?

Reserves are designed to be spent as capital expenditures over a 5, 10, 15, or 20 year period.   That means when you calculate your net operating income, reserves should be placed below the line, not above it.  Most appraisers and banks will disagree because they like to account for reserves above the net operating income line partially because it ensures that sufficient cash flow is in place for replacements, but also because the added reserve line item reduces the net operating income and subsequently decreases the loan amount offered to the borrower.

When it comes time to sell the property, you either liquidate the reserves as part of your reversion, or leave the fund in place for the next owner.

About the Author: Jeremy Cyrier, CCIM is the President of MANSARD, a market research driven commercial real estate brokerage and advisory firm, and member of the CCIM Institute faculty.  You may reach Jeremy at Jeremy@Mansardcre.com. Get a free copy of The Essential 7 Step Guide to Filling Commercial Vacancies. Contact MANSARD's Brokerage Services here.

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How a Growing US Deficit Impacts Commercial Real Estate Values

The late economist Herbert Stein coined the phrase "if something can't go on forever, it will stop," which is the point Joseph G. Carson, US Economist and Director of Global Research for Alliance Bernstein makes in his recent white paper "What Will Prevent a US Fiscal Train Wreck?"

In the white paper, Carson explains that the US government has accumulated $6 trillion in new debt since the beginning of the Great Recession and has proposed adding $8 trillion over the next ten years, which could lead to economic paralysis for the US. If we assume that the spending will continue over the next ten years, how might this bloated deficit affect commercial real estate values?

First, the government will increase tax revenues by changing the capital gains rate.  This tax change will allow them to capture more tax on the sale of assets, which will ripple through the commercial real estate market as an adjustment to values. Commercial real estate investors will think twice before selling properties because the tax on sale will account for a larger portion of their cost of sale and they will also adjust their expectations on their acquisitions.  This means that when an investor plans his entrance and exit from the commercial real estate asset, he will have priced the increased capital gains rate into his return assumptions, which amounts to his offering less for the property in order to net more than he would have originally anticipated.  Read more here.

Second, the government will increase the marginal tax rate, which will allow them to collect more revenues from payroll taxes, adjusted income, and cash flows on your commercial real estate properties.  As you plan your future cash flows from operating your commercial real estate portfolio, you anticipate your after tax cash flows to account for the mortgage interest, cost recovery, and operating expense deductions.  It is your cash flow after debt service, or cash flows before tax, that the US will examine for additional revenue.  And when your marginal tax rate increases, so will the percentage of your cash flow before taxes paid to the deficit.

Third, the government will increase interest rates.  To stimulate demand for our country's debt, it will be necessary to originate debt that pays a higher return. And when our debt is more expensive, borrowing money to finance commercial real estate will be more costly, which will chill the market and lead to a flattening of values.

In our view, and in agreement with Mr. Carson, the time has arrived for policies that lead to a better budget balance, either through spending cuts or tax increases.  And our number one priority in the US must be to reduce the deficit.

About the Author: Jeremy Cyrier, CCIM is the President of MANSARD, a market research driven commercial real estate brokerage and advisory firm, and member of the CCIM Institute faculty.  You may reach Jeremy at Jeremy@Mansardcre.com.

Get a free copy of The Essential 7 Step Guide to Filling Commercial Vacancies.

Contact MANSARD's Brokerage Services here.

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4 Reasons to Consider a Sale and Leaseback Transaction

"Real estate is not a core business of Bank of America," said Bank of America spokeswoman Kelli Raulerson.

In a Boston.com article published on February 14, 2012 by Todd Wallack and Casey Ross, Raulerson noted that the bank is considering selling office buildings across the country.  She explained that the sale of office towers across the United States would allow them to streamline their operations.

Many businesses own their own real estate, but consider equity invested in real estate to be too expensive on their balance sheet.

For example, if Bank of America makes a 12% return on their investment owning office towers across the United States, but earns 18% on capital invested in their business, why not free up the capital earning 12% and reinvest it at 18%?  (These numbers are for example purposes only. We do not purport to represent Bank of America's weight average cost of capital).

A sale and leaseback provides you with:

• Control: You still have it when you are leasing
• Opportunity Cost: Capital often earns higher returns in your business
• Flexibility: Leaseback affords you flexibility to expand and contract
• Accounting: Get that debt off your books and capitalize your real estate across your lease term

Bank of America has concluded that their money is best spent elsewhere, and that given the recovery of the commercial real estate market, it is time to sell off billions in non-core assets, which it has been doing over the past few years.

Why then would you consider a sale and leaseback of your commercial real estate?  Not everything that is good for Bank of America is good for you, but it maybe they are onto something worth considering.

About the Author: Jeremy Cyrier, CCIM is the President of MANSARD, a market research driven commercial real estate brokerage and advisory firm, and member of the CCIM Institute faculty.  You may reach Jeremy at Jeremy@Mansardcre.com.

Get a free copy of The Essential 7 Step Guide to Filling Commercial Vacancies.

Contact MANSARD's Brokerage Services here.

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Do Low Prices in Commercial Real Estate Really Win?

Price is important, but it should not be the only lever you use to attract tenants or buyers.

As your competition prices tight to market and differentiates its properties with aggressive positioning campaigns, they are filling and selling their buildings fast. They have discovered that as people rely on the internet for property searches, buyers and tenants see commodities where the lowest price wins. They also know that differentiating by price is a race to the bottom, which is not a race worth winning.

Take a lesson from Apple. People line up to pay hundreds of dollars more for their products because Apple's customers believe in buying something unique, special and different.

Here is how to make Apple's technique work for you.

Identify your property's point of differentiation and exploit it. All properties own a point of differentiation, even yours. It could be an owned attribute, preferred location, heritage, architectural significance, popularity or the newest product in the market.

Our clients have applied these ideas and in weeks have raised rents 15%, reached 100% occupancy (with a waiting list), as well as sold troubled investment properties to the right buyer in 81 days. By establishing a position of difference in the space and investment market, you, like Apple, attract people who recognize your property’s value and pay you for it.

About the Author: Jeremy Cyrier, CCIM is the President of MANSARD, a market research driven commercial real estate brokerage and advisory firm, and member of the CCIM Institute faculty.  You may reach Jeremy at Jeremy@Mansardcre.com.

Get a free copy of The Essential 7 Step Guide to Filling Commercial Vacancies.

Contact MANSARD's Brokerage Services here.

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Where to Find Office Tenants Today

Vacancy.  It is a great word if you are out late on a dark highway and need a place to stay, but not when you own an office building.

Vacancy produces no income, increases your expenses, and leads to perceptions in the tenant market that if the building has been vacant for a long time, there must be something wrong with it.

Here is one technique you may use to accelerate your lease up time and shorten your vacancy period.  At MANSARD, we talk about how birds of a feather flock together.

If you are like most people, you notice that companies of a similar ilk tend to congregate in clusters, much like residents in a subdivision comprise a similar demographic.  Take East Cambridge, Massachusetts for example.  The Kendall Square area of East Cambridge is home to many of the hottest technology and biotechnology companies in the United States.

They have clustered in one part of town because the real estate is conducive to their operations and the area offers a disproportionately high concentration of skilled and talented labor, such as graduates from MIT and Harvard.

If you own an office building in East Cambridge, your work might be cut out for you.  But what if your building is in Boise, Idaho?

Your first step to identifying a prospective tenant would be to profile their business.  You do this by examining the tenant pool in and within 2 minutes of your building. Most commercial real estate brokers have access to database tools that would allow you to create a list of companies.

Next, look for similarities among the companies.  Namely, you want to identify the tenant sectors that have the highest concentration within the area you are examining.

Once you have identified the highest concentrations, take those batches of businesses and identify their NAICS code, which is a government issued industry classification that comes in a 6-8 digit code.

With your batch of NAICS codes, expand your search area from 2 minutes to 20 minutes and create a list of all of the companies with matching NAICS codes that occupy real estate in your building's area.

Now you have your list of high prospect office tenants and it is time to get to work marketing to them.

To learn more about finding tenants for your office building why you should target expanding companies first, download MANSARD’S most recent report detailing how to find tenants for your office building here.

About the Author: Jeremy Cyrier, CCIM is the President of MANSARD, a market research driven commercial real estate brokerage and advisory firm, and member of the CCIM Institute faculty.  You may reach Jeremy at Jeremy@Mansardcre.com.

Get a free copy of The Essential 7 Step Guide to Filling Commercial Vacancies.

Contact MANSARD's Brokerage Services here.

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Free Webinar: How To Target Retail Tenants Using STDB

When Oaktree Development hired MANSARD to market its new $20M smart-growth project in downtown Reading, Massachusetts, it faced a challenge.  How would to identify and attract retail tenants in a down market to a new project.  In this free webinar, you'll see how MANSARD took a $20M smart-growth project and placed 60% of its retail space under proposal, before the old building was torn down.  Click here.

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How to Find Tenants for Your Office Building

Let’s say you own a building in Boston’s Back Bay and are looking for an office tenant to lease space from you. The easiest step would be to call your commercial real estate broker and ask him to list your property. That way, the next company looking for office space would find your property listed, Read more

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Are You in the Real Estate Investing or Tenant Services Business?

You are no longer in the Massachusetts commercial real estate business. You are in the tenant services business. The sooner you realize that you’re in business to service your tenants, who are your customers, the more successful you will be with your commercial real estate investments throughout Massachusetts. Many Massachusetts based commercial real estate investors become complacent and believe that tenants are lucky to use their investment properties. If it weren’t for the owner providing them with the space, they wouldn’t have the good fortune of making a living in it it. Wrong. Imagine you are on vacation with your family. You arrive at your destination and are greeted at the hotel reception desk by a person who seems annoyed that you’ve arrived. They ask you why you’ve come and act reluctant to provide you with your room. Housekeeping has done a poor job preparing for your stay and the pool is dirty. The food at the hotel restaurant is cold. Are you likely to return to this hotel or any of its locations again? Not likely. And your friends, what will you tell them when they ask you about your stay? 




Will you recommend that they, too, visit this hotel chain and take their chances on their stay. Again, not likely. You may consider this example to be extreme, but remember that the last time you were a tenant was probably the last time you stayed overnight in a hotel room. Remember, the hotel is lucky to have you and they know that acquiring you as a tenant is expensive, but keeping you as a tenant in the future is profitable. The hotel, your landlord, wants to do everything in its power to ensure that you get as much value out of your stay as possible. Consider treating your tenants as guests. They’re paying you for the right to use your product, your real estate. One of our clients boasts a 91% occupancy rate in their 1.3M SF portfolio because they provide excellent tenant and management services. Their tenants don’t like to move and if they have to grow or contract, they go to another building because they like their experience. (Read more) About the Author: Jeremy Cyrier, CCIM is the President of MANSARD and member of the CCIM Institute faculty. He believes that actions without meaning in Massachusetts commercial real estate are worthless.You may reach Jeremy at Jeremy@Mansardcre.com.  Get a free copy of The Essential 7 Step Guide to Filling Commercial Vacancies.

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Why Sell Your Commercial Real Estate and Pay Taxes?

If you're like most long-term commercial real estate investors, you're holding  your properties to avoid paying the capital gains tax.  I don't blame you. Who likes paying taxes, anyway?

No one.

But if you're like most long-term commercial real estate investors, you're also faced with a dilemma.  You're thinking of selling, but don't want to 1031 exchange into another property and you don't want to pay those taxes.

Should you pay your taxes or take your chances?

There are a few tricks you can use: estate planning, charitable remainder trusts, 1031 exchanges, installment sales, etc.  But what if none of these tactics suit your goals of selling your property, liquidating your equity, and moving on from commercial real estate ownership?

Bad news.  You may have to pay your taxes.

The Bush Tax Cuts provided us with a 15% Federal capital gains rate, which is one of the lowest rates since 1987.  This rate is was extended under the Obama administration through the end of 2012 and after that, all bets are off.

With the spending out of control in Washington D.C., repaying the debt must come from us, and a larger slice of your profits and depreciation will be one of the places the government targets.

The 2012 deadline means that you and I have no idea what the new capital gains rates will be.

Simply, let's say the capital gains rate increases by 10% to 25%, returning to 1996 levels.  A commercial property investor with $3,000,000 in profits would owe an additional $300,000 in capital gains taxes.  This amount may be survivable, but here's the sticky part.

The investor who buys your investment property plans for a 25% capital gains rate when he sells.  If he's planning to improve the commercial real estate by adding value, he's selling the building for a profit in the future. And when he calculates his profits, he allocates a portion of his proceeds to Uncle Sam, which means he'll offer you less for your property.

Now your $3,000,000 in profits equates to $2,500,000 as your buyer reformulates your market value.  You're down $500,000, plus your additional $250,000 in new capital gains taxes, which amounts to a $750,000 difference in your checking account.

Many owners I speak with tell me that they don't want to sell their commercial real estate because of the tax liability.   Who wants to sell a property and send 22.5% to the federal government?

I don't.

I believe, however, that by the end of 2012, 22.5% might seem like a bargain.

It's up to you.

Is it better to get out now and pay your taxes, or wait to see what happens in Washington, D.C? Please comment below.

About the Author: Jeremy Cyrier, CCIM is the President of MANSARD, a market research driven commercial real estate brokerage and advisory firm, and member of the CCIM Institute faculty.  You may reach Jeremy at Jeremy@Mansardcre.com.

Get a free copy of The Essential 7 Step Guide to Filling Commercial Vacancies.

Contact MANSARD's Brokerage Services here.