Tag: commercial real estate investment

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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.

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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Top 10 Reasons Not to Hire a Commercial Real Estate Broker

Working with a commercial real estate broker is not for everyone. Commercial real estate investors and tenants choose not to hire a commercial real estate broker for several reasons. Here's a free checklist for you to use the next time you're wondering whether hiring a commercial real estate broker is really for you.

Top 10 Reasons Not to Hire a Commercial Real Estate Broker

10. You can save the commission.

9. You have found tenants for your building in the past.  You can do it again, filling your space for market rents, faster than your neighbors.

8. No one represents you better in a negotiation than you. You're objective and rarely lose your cool.

7. Marketing your opportunity won't be a problem. You know everyone in your commercial real estate investment market.

6. You made your money from off-market deals.   In fact, you've never bought a property listed by a commercial real estate broker.

5. You know the best lenders, commercial real estate attorneys, commercial real estate lenders, architects, engineers, environmental engineers, and construction firms in your commercial real estate investment market.

4. You have your CCIM designation.

3. You have a career's worth of experience in commercial real estate investing.

2. You spend 8-12 hours every weekday speaking with property owners, lenders, tenants, and commercial real estate brokers in order to stay current on the market and ahead of the best commercial investment property opportunities.

1. Your commercial real estate investing has fared well, there's absolutely nothing you would change, improve or could do better.

If you have suggestions for improvements to the "Top 10 Reasons Not to Hire a Commercial Real Estate Broker" list, please feel free to email me.  I'm happy to discuss any additions or alterations to the list you'd like to see.

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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Selling Your Commercial Real Estate in a Down Market

When do you know that selling commercial real estate in a down market is the right decision? Ask Sam Zell.  He says, "Everyday you're not selling, you're buying."  If he's right, then how do you make a decision about the right time to sell commercial real estate in a down market? Read more

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Why Understanding Demand is Critical to Success in Commercial Real Estate Investing

A few weeks ago I had the privilege of teaching with one the CCIM Institute's most experienced and knowledgeable instructors.  He has spent a career mastering one of the most important, and often overlooked, components of commercial real estate analysis: identifying and quantifying demand.

He says that demand for space is 80% of the real estate decision and that financial analysis is the other 20%.  Too often, according to my colleague, investors and users focus on the 20% without really digging into what drives the numbers, who's going to be using the space, and why the proposed use makes sense.

Here's an example of why this is so important--overbuilding.  How many developers have you seen in the past 3-4 years losing gobs of money in real estate because of a shift in demand? And do you think the numbers they used are worth anything today? Here's why it matters. Essentially, jobs drive demand for office and industrial space.  As jobs are created, households are created, people get married, have kids and need housing and retail services.  They consequently create a demand for retail space and homes.

So what happens when the jobs go away, as in Massachusetts, which is currently reporting an unemployment rate of 8.6%? Demand for office space and industrial space declines,  creating more vacancies, which leads to a decline in demand for retail space and housing--i.e. a report out this week that multi-family vacancy rates nationwide have it a 22 year high.

The question is, when will the "death spiral" end?  (See Seth Godin's blog). The Death Spiral ends when businesses start reinvesting and hiring.  This is what I tell those who ask me when I think the housing market will recover.  Once the job losses stop and people start feeling more secure about their incomes, they'll start buying lattes and homes again.  Then as companies  ramp up to meet increased demand for their products and services, they'll soak up additional space at lower rates, hire more employees, and we'll see an uptick in consumer spending that will follow the initial consumption uptick of those with job security. My concern, however, is that our government will increase taxes and raise interest rates to pay for their meddling in our private industry, which would forestall the recovery and expansion as well as keep us in a protracted and skittish recovery for years to come.  What do you think? Would you like a demand analysis performed for your properties? If so, email me at Jeremy@Mansardcre.com with the words "How much demand is out there for my property?" in the subject line.  Include your name, when you would like to be called, and the best number to reach you. I will contact you to schedule a time for you to invite me to your office for a free consultation.  If there's a fit, you may retain us to conduct a demand analysis of your properties, their position in your market area, and identification of the top users with contact names and phone numbers to help you gain transparency into your tenant market.  If there isn't a fit, we'll tell you we cannot help and will refer you to another firm that may be a better match. Get free weekly email updates of this blog. About the Author:Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com.

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What Does Pele Know About Commercial Real Estate?

Fans used to ask Pele, the great Brazilian soccer player, how he achieved such mastery of soccer.  He used to answer,"Everything is practice." Pele understood that the path to greatness wasn’t spending hours perfecting the most complicated plays of the game, rather endlessly trying to master the fundamentals.  Mastery of the fundamentals, his most difficult endeavor, catapulted him to soccer stardom. Pele teaches us that when we’re looking for increasingly complex solutions in a market of disarray, through mastery of investment analysis fundamentals, we gain the ability to see through the chaos to what really matters: understanding risk, return, and making well-informed, profitable investment decisions. Learn about applying the discount cash flow model to price commercial real estate investments, which allows us to value deals with multiple variables in a clear, coherent, and informed manner.    Once you master its application, you’ll find yourself taking stock of tenant risk, interruptions in cash flows through these uncertain times, pinpointing exit assumptions, and making adjustments today to create investments that meet your acquisition criteria. I learned my basics through the CCIM Institute. If you're interested in taking a CCIM course, email me Jeremy@Mansardcre.com and tell me your name, the course you'd like to take, when, and list the questions you have about what to expect.  I'll respond to your email within 24 hours of reading it with insights into the CCIM designation and what to expect when you enroll in your next session. About the Author :Jeremy Cyrier, CCIM is a principal with MANSARD Commercial Properties and member of the CCIM Institute faculty. He offers advisory services and brokerage expertise to commercial real estate owners and tenants. You may reach Jeremy at Jeremy@Mansardcre.com .