Tag: ccim

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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.

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.

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How to Price a Risky Tenant When Investing in Commercial Real Estate

When successful commercial real estate investors lease their commercial real estate to a tenant of varying creditworthiness, they adjust for risk by altering rental rates, security deposits, guarantees, and improvement allowances, not the fees they pay commercial real estate brokers. Often, commercial real estate investors confuse the tenant's risk associated with the commercial real estate broker’s fee.  Andy Zezas, SIOR, a well-respected tenant rep broker, explains that if the landlord perceives the tenant's to be high risk, he tries to withhold or reduce payout, and if he perceives the tenant to be low to moderate risk, he may pay a market rate. Andy describes this practice as asking the broker to guarantee the tenant's creditworthiness below:

As for brokers acting as guarantor of the tenant’s creditworthiness and performance of lease obligations, that’s about as absurd as brokers guaranteeing landlord credit and performance. Brokers are fee-for-service professionals, not credit analysts, nor guarantors.

Andy's right and here's why. Imagine that you are a bank. Let's call your bank LBCCIM Washington Bank.  You lend money to generate fees for profit, which keeps your investors happy and continually making deposits with you. Your secret is that you are a savvy commercial real estate banker and lend intelligently to 3 types of borrowers:

1. AAA credit company.  You like the certainty of knowing that this borrower pays the loan on time and satisfies the covenants agreed to in the mortgage and promissory note. Because of the certainty of getting paid, you offer this borrower a low interest rate.

2. BBB credit company. They pay their bills. Sometimes they're late and they've renegotiated loans in the past.  You're aware that you carry some risk with this borrower and you offer them a higher interest rate.

3. CCC credit company. They are high risk, yet fit your lending profile and you're eager to get some money on the street.  You make the deal.  What interest rate will they pay?

It’s simple. The higher the risk the borrower poses, the higher the interest rate offered.  Higher risk = higher reward. Here’s one consideration for you. Nothing above has changed, except that borrowers AAA, BBB, and CCC have been introduced to you by an intermediary (let's call him your mortgage broker).  He is aware of the risks associated with each borrower, yet he knows that they all meet your lending criteria. You and your mortgage broker have agreed to a fee, equal to a percentage of whatever loan amount you lend. Who, then, should you be spending your time negotiating with when you are reviewing the AAA, BBB, and CCC borrowers, your borrower or your broker? Commercial real estate landlords face the same dilemma with tenants for their vacant space and the brokers who represent them. The next time you're concerned about your tenant's risk profile, ask your real estate advisor to analyze their financial statements and guide you to accurately price the tenant's risk into your commercial real estate investment plan.

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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.

Commercial Real Estate Investment - What a Sniper Can Teach You

Few commercial real estate investment decision makers succeed when they make fast decisions, based on little information and gut instinct. The odds may play in your favor, but the lack of a commercial property investment plan that includes due diligence, market intelligence, timing, decisiveness and massive action will mean that your outcome be survivable. Understanding commercial real estate investment can be taken from U.S. Army sniper school.  When you undergo training, you are taught to stalk a target for days and that you may or may not ever get a shot.  You have to be willing to walk away from your mission without ever taking out your target, without being emotionally invested in the outcome such that you would endanger your life or those around you. You learn that your window of opportunity may last for seconds and that if you are distracted, you may miss your chance.  You rely on your spotter to assist you in identifying your target and helping you research the field as well as time your shot.  You don't shoot off mission.  If your target does not present itself, you walk away. Here are some tips to help you slow down your commercial real investment decision making to create fast results for your property portfolio: 1.  Define your real estate investment target. Why are you buying investment property? And what kind of property are you trying to buy? 2.  Take the high ground.  Use available resources and commercial property listings databases such as commercial real estate brokers, CoStar, Loopnet, and CCIM resources to scout out the market, gather intelligence, and get the information about where the flow of opportunities in your market. 3.  Use a spotter.  Consider hiring commercial real estate agents to source, qualify, and confirm that your target has been acquired. 4.  Be willing to walk away. If the deal isn't right for you, don't do it.  You'll often make more on deals you don't do. 5. Don't get distracted.  Other targets will present themselves. If they aren't a match, don't invest in them. 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?