Tag: massachusetts real estate brokers

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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.

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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.

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 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.

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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.