Tag: Boston MA Commercial Real Estate

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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.  

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Which Sales Approach Gets You the Highest Value - Pricing Low or High?

Could every landlord and seller have it wrong when it comes to making people buy at the highest possible price?  In my experience, commercial real estate investors believe that starting with a high asking price is the best way to achieve maximum value.  It makes sense and here's why.

• It's expected that people make you offers for less than you're asking because it's the American Way.
• When the initial price is set high, potential buyers are likely to think it's worth more.
• You hope that someone will pay you more than you're willing to accept because you asked.

Here's where common sense and science disagree. Science has proven that lower asking prices can lead to a higher final sale price. Gillian Ku, a behavior scientist, and her colleagues studied this question (Read More in "Yes!" by Cialdini, Goldstein, and Martin) and concluded that there are 3 reasons why the lower asking price results in a higher final sale price than the other way around.

1. Higher asking prices act as a barrier to entry. It's true that the larger your buyer pool, the more likely you'll receive the final sale price you desire.  Lower prices encourage participation by as many people as possible.
2. The increase in buyer activity afforded by the lower asking price buyers acts as social proof to other prospective buyers that the opportunity is valuable. Remember, everyone wants what everyone wants.
3. Buyers who spent time with an opportunity early on are likely spend more time and effort trying to buy. They're playing not to lose.  If they've  spent time and energy investigating the opportunity, they're more likely to stay with it and pay more.

There is one caveat, however.  Gillian Ku and her colleagues found that buyers must know that other buyers are interested, otherwise you constrain your traffic and your lower asking price is less effective.  For example, if your retail opportunity is listed under office buildings for sale, you have a problem. Here's how you apply this scientifically proven method to commercial real estate.

• Start with a lower asking price.  Yes, it may feel awkward, but it works.
• Don't participate in a "no asking price" offering. You'll alienate buyers who need guidance in the opportunity and don't have transparency into how much demand exists for the property. Plus, it will upset them and they'll refuse to compete for the opportunity, perceiving it to be a waste of time.
• Make sure your commercial real estate broker provides your buyers and tenants with social proof for the opportunity by sharing metrics about lead flow, tours, proposals, etc.  Again, everyone wants what everyone wants.
• Never limit your offering to a narrow pool of buyers.  Ask your broker if your opportunity is being offer to his "list of buyers" or the entire market.  Many buyers and brokers like the limited pool of buyer approach because the broker doubles his commission and does less work.  The buyers have less competition among each other. Ultimately, you pay more.  Insist that your opportunity be made available to the entire market immediately to generate the highest interest level possible.

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The 2 Most Important Words in Commercial Real Estate Investing

What are the two most important words in commercial real estate?  Some of you may have answered any of the following:

• Cash Flow
• Cap Rate
• Income Property
• Value Add
• Debt & Equity
• Sales Price
• Purchase Price, etc.

If you answered the question with any of these two word commercial real estate investing combinations, I'd agree with you.  These are important words, but the most important words are yes and no. You do not have the opportunity to move forward with your opportunity without the words yes and no. Here's why:

• Binary (yes/no) answers provide transparency into your deal.  You discover what's possible and what's not, allowing you to move your process forward.
• It’s simple, limited in scope, and easy to understand. An owner wants to sell or he doesn't.  You want to buy or you don't.
• “Maybe’s” and “I’ll think about it” are worthless.  The deal’s available or it isn’t. Most property owners are card players.  Their favorite expressions are designed to delay decision making for as long as possible while they gather more information from you and decide whether they want to do business.  These expressions are polite ways for them to say "no".  Give them permission to say "no" when you first meet, telling them there are no hard feelings if the opportunity is not a fit.  Not only will you diffuse the situation, but you'll uncover reasons why the deal may work for both of you.
• With yes and no answers, you attain superior market intelligence because you see “what’s really out there.” When you obtain a yes/no outcome for  deals you evaluate, you gauge return expectations in the market, price flexibility, term possibilities, and an understanding of the problems owners face as well as whether you can solve them.
• You accelerate your investment decision making and avoid wasting time on dead-end opportunities.
• It’s guaranteed to produce investment opportunities unique to you.   If you're evaluating and opportunity that has been reviewed by many of your competitors and the answers they obtained were "maybe", "I'll think about it", "Why don't you come back to me with something", then no commitments exist for moving the conversation forward.  When you obtain a yes/no outcome with the opportunity, you choose to spend more time with the deal or move on, thereby increasing the number of opportunities you evaluate and likelihood for success.
• When you have more information than anyone else, you minimize your risk and maximize your return.
• Because no is a difficult word to say and when you or your adversary may be uncomfortable, therein lies your opportunity to unlock value.

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Commercial Real Estate Investing Tip for Working with Brokers

Honestly, I confess that if you've used this expression "I'm just looking for a deal that makes sense," to share what you're looking for, it's not your fault. It's ours--the commercial real estate broker community. Here's a real estate investing tip. In the real estate investing advisory business, we believe that there are no bad prospects, only bad salespeople.  This means that if you've been frustrated with the lack of performance and results you've achieved from your conversations with commercial real estate brokers, then it's our fault for not asking you to be more specific about what you're looking for. Unfortunately, commercial real estate brokers accept that statement because it's easy. They'll add you to their database, possibly send you a list of properties from one of the commercial real estate listing services such as CoStar or Loopnet, and then leave you to fend for yourself.  After a few weeks, you haven't heard anything , so you repeat your investment property search--frustrating. Next time you call our office, we pledge to ask you to be more specific.  If we can help you locate what you're looking for, we will.  If not, we'll tell you and refer you to someone who may be able to satsify your requirement. And the next time you call on a commercial real estate broker, try this experiment.  Don't use the words deal, sense, cash flow, creative, good, add value, or upside.  Instead, describe the property type, location, type of owner, yield requirement and price range you're looking for and see what happens. Your specificity will produce more commercial real estate investing opportunities for you to consider and your commercial real estate investment broker will have a clearer picture of what you're hunting for and who to call first when they see it.

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Buy Low, Sell High

Buying low and selling high is a great idea, unless everyone else is thinking the same thing.

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Costly Mistake To Avoid When Investing in Commercial Real Estate

Many of you would like to close more commercial real estate deals but see your commercial real estate opportunities crushed when the first agreement is circulated. The problem is that too many commercial real estate investors make the mistake of mishandling the transition of the meeting of the minds to the written word. They short circuit their deal by circulating a written agreement that introduces new terms, pricing, and conditions that have not been discussed or agreed upon.

Here are 3 steps to ensure that your deal survives the transition of the meeting of the minds to the written word.

1.  Break down your agreement into business terms and legal terms. Negotiate your business terms in great detail.  Thoroughly. Create a term sheet to document the agreement.   Have all parties sign off on the term sheet. 2.  Prepare each party's expectations for legal term negotiations. Set expectations that the legal terms of the agreement will be revised so that your deal will have a greater likelihood of a successful outcome. 3.  If business terms reemerge, stop negotiating your legal terms and obtain consent from all parties to revisit your initial discussions. Be open and notify all involved that the conversation has changed.   You will build trust and emotional capital in your transaction that you can use to navigate challenges that will arise later in your deal. Once agreed, circulate a final copy of the written agreement for signatures and keep your deal moving.

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How to Tenant Your Commercial Property at Closing

Ever dream of buying a commercial property for sale that's vacant and then tenant it the day you close? It's the best of both worlds.  You get the forced appreciation that the tenant creates and you buy at a value based on zero income. We've worked with investors who've structured such deals. Here are 4 tips on how they've done it: 1.  Find a broker selling an empty building and ask them about tenants interested in the property. Work the tenant relationships through the broker to purchase and tenant at closing.  Remember, most owners selling vacant buildings don't want to reinvest in the property, so they won't have interest in tenants wanting their space.  They want to sell. 2.  Find a broker with a tenant or two in his pocket in the market for space.  Offer to buy them a building when they find what they want.  When you're in the right place at the right time, you can hit a double, triple, or even a home run. 3.  Prospect tenants directly.  Call on your relationships with companies looking to relocate and offer to assist them as an owner-partner. You'll handle the acquisition and build out of what they need if they'll agree to commit to a long-term leasing relationship.  Retail developers who work with CVS, Walgreens, Walmart, etc. know what they're seeking. They find it, obtain commitment, then build it. 4.  Call local and regional contractors who contacted by companies pricing build-to-suit projects.  Offer to acquire the site and finance the construction. They earn fees. You keep the building and tenant. Our most successful transactions have involved repositioning empty buildings by obtaining letters of intent from tenants and then sourcing investors to purchase the property.  Our seller clients are happy to sell and our investor clients are thrilled at obtaining a building at a discount with immediate upside built into the acquisition because of the new leases we put in place.

Why Commercial Real Estate Is Not a Hammer and Nail Business

You've heard the expression, "When the only tool you have is a hammer, everything looks like a nail."  When you have one formula for capitalizing on commercial property investments, you try to make your deals work one way. A broker called to ask how we sold a commercial property investment he had competed against us to list. We sold the investment for 35% more than he estimated based on his review of the property's numbers.  It didn't add up. He took the owner's gross income, subtracted the vacancy/credit loss and operating expenses to derive the net operating income.  He applied a market cap rate to the deal, derived the commercial property's income value, made his recommendation and hoped to be hired for the listing. They didn't like his price. Here's why his hammer didn't work:

• The owners were debt-free on this specific commercial property.
• There were 3 stakeholders hoping to sell the investment for an above market value.
• Cash flow was important to one because she was retiring during the sale.
• The debt market was frozen and deals were difficult to finance.
• One of the owners sought to pay off a primary residence mortgage with the sale proceeds.

After our stakeholder interest analysis, we presented a solution to the owners that allowed them to convert their equity to cash flow with an installment sale.  To achieve above market value, we sold the commercial property with below-market financing terms that gave the new owner ample cash flow to operate the property, pay his annual debt service, and time to secure new financing once the property was stabilized at its highest and best use. The recurring cash flow supported the owner looking for a retirement income.  We bypassed the debt market because the sellers carried the paper.  And we required the new owner to make a 17% down payment, which extinguished the other owner's mortgage obligation and paid for the cost of sale. If you haven't done an investment deal lately or are having trouble finding the "right" opportunity, start by looking at the property investment strategies you've been using.  Is there a pattern in your deals that could be your hammer and nail? To get different results, you have to try different things.  Put your hammer away and ask questions in the deals you're considering. You may find new information and new opportunities that will become new ways of making your investment goals come to fruition.

Why Your Commercial Real Estate Broker Doesn't Find You Deals

You call commercial real estate brokers in your market, tell them about what you're looking for, and meet with a few.  It feels like you're making progress. The word is on the street, you're looking to buy a commercial real estate investment property with great cash flows, upside potential, and at distressed prices.  Every commercial real estate broker knows.  You wait by the phone and check your email for the wealth building deals to roll in. Here they come....the emails you've been waiting for.  You open them. You see a pattern.  These commercial property listings are all the same.  You chock it up to the fact that you contacted the commercial real estate brokers at the same time and they're sending you what's available on the market.  A few weeks go by, and the investment property sales lists dwindle and no agents are calling. What happened? You're every commercial broker's business and no broker's responsibility. Rewind a few weeks. You're a commercial real estate broker. You receive a phone call from an investor who's looking for a good deal in your market. He wants you to send him a good investment property to buy, so keep your eyes open and start hunting. You want a commission right? Well, sure. But here's the catch.  You get at least one phone call like that every day.  You're asked to find a good deal for this investor, maybe go hunting for him, and start sending him listings.  He's probably not a hot horse who's going to buy a property off the first list you send him and he's likely having the same conversation with other investment property brokers in your market. He's everyone's business and no one's responsibility. You add him to your database. Maybe you put him in your email distribution list and figure that something might happen, but if not, you may get a call one day when he has a property he needs to lease or sell is commercial property. After a few weeks, you stop sending him lists of investment properties for sale because you've also been asked by 15-20 other investors in the same period of time to do the same activity.  Somehow, they think you're out there working for them, too, because they're getting the same listings as everyone else.  What they don't know is that no commercial broker's out there hunting, they're just entering a search and clicking the send button. You've been selling investment properties long enough to know that most of these calls are a fool's errand.  The promise of a commission looms on the horizon, but you know you're going to have to spend more in time and resources to maybe get that commission than you'll likely earn, plus you have no commitment from any one investor that they'll honor your commission if you bring them a commercial real estate investment opportunity.  Pretty risky if you're a broker. You decide you're better served investing in those who have hired you to help them acquire and dispose of investment property. Ultimately, as an investor, ask yourself, when you repeat the same behaviors as everyone else by calling a bunch of brokers to tell them what you want, should you expect an outcome that's different than everyone else who's doing the same? The next time you're on the phone with a commercial broker, try asking him how many calls he's had from investors "looking for a good deal" in the last 30 days.  Then ask him how many of those investors he's spoken to after the initial conversation. Chances are you already know the answer. To get different results than everyone else, change your approach. Ask your investment property brokers how many investors they're representing.  The ones who have clients are getting deals done, while the ones who aren't....well, just check your email box for the latest commercial property listings. By taking a different approach and employing an investment property broker to execute a search and acquisition on your behalf, you may be delighted that when you become someone's responsibility, you're everyone's envy. 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.