Wednesday, May 16, 2012
We’ve been following a discussion on a commercial real estate group on LinkedIn.
Recently, someone started a discussion which read:
The Tenant’s Advocate – we represent tenants only with negotiating commercial office leases only. Our fees are paid the by the landlord, not the tenant.
A few comments ensued, mostly around the follow-up question from a group member who replied:
I was really interested in your comment. How do you work for the tenant, but get paid by the landlord without having a conflict of interest?
We thought it would be helpful to share our response. We hope it shines some light on the vital role a tenant representative plays in the office leasing arena.
Our response:
I totally agree with your post. I have been a tenant rep/buyers agent for over 26 years and my motivation is to obtain the best outcome for my client. In addition, a “true real estate professional” is negotiating much more than rate per square foot. The long-term office lease represents one of the most complex relationships in modern commerce. It spins an intricate web of mutual obligations between tenant and landlord, which can endure up to a quarter century or even longer. It survives a succession of real estate and business cycles, employees and other relationships. For the corporate or institutional tenant, the lease is often its largest single financial commitment. For the landlord, it may determine the property’s long-run financial viability. Entering into such a commitment demands technical expertise of the highest caliber. In the current real estate climate – where the non-rent variable has emerged as the most significant factor in leasing economics – demonstrated effectiveness is required. A tenant must consider an almost endless list of variables, such as negotiating tax and operating expense escalations, work letters, electrical charges, sublease and assignment rights, alterations, and options to expand or renew.
Have you used a tenant representative/buyer agency in a transaction? What were your experiences?
Wednesday, April 25, 2012
CCIM, which stands for Certified Commercial Investment Member, is a designation requiring more than 200 hours of classroom training and other professional experiential requirements. There are more than 9,000 CCIMs in the U.S. (I earned the designation this past fall).
Each quarter, the CCIM Institute teams with the Real Estate Research Council (RERC) to survey the CCIM membership. The two organizations use the information to create the RERC/CCIM Investment Trends Quarterly, which features statistics regarding the economy, investments and commercial real estate investment trends.
In the latest edition, CCIM members increased their performance and return ratings for commercial real estate and continued to give commercial real estate a higher investment rating than stocks, bonds or cash.
Respondents remained cautious, however, by giving a “hold” recommendation the highest rating (6.6) when compared to “buy” (6.4) and “sell” (5.8). Those numbers are on a scale from 1-10, with 10 being the highest.
Investors continue to believe that the return for commercial real estate outweighs the risk, with the apartment sector scoring the highest at 7.1 in the fourth quarter of 2011.
CCIM members noted that the value of commercial real estate in general is higher than its price, and increased their overall value versus price rating to 5.7 on a scale of 1 to 10, with 10 being high, during fourth quarter 2011.
The industrial sector received the highest value versus price rating, with a slightly improved score of 5.6 during fourth quarter.
Make no mistake, by reporting these trends I am not advocating that you “drop everything” and invest your life savings in commercial real estate. This report simply states that “CCIM members seem to be slightly more optimistic as they look to the future” despite the very real headwinds the economy still faces.
In which sector of commercial real estate would you be most inclined to invest: retail, industrial, office, apartment or hospitality? Why?
Thursday, October 27, 2011
The current economic downturn has resulted in historically high vacancy rates in most markets and sub-markets, which presents an opportunity to re-negotiate a lease in the favor of the tenant. Landlords are anxious to both fill vacant space and to ensure the retention of existing tenants. For tenants, the upside can be achieved via “blend and extend”(renewal) amendments to a lease, which provide for downward adjustment in existing rates, as well as the chance to lock in those better rates for a longer terms going forward.
$.75 Could Save You Thousands!
The profitability of your business is directly impacted by the cost of leasing office space – your occupancy cost. A $.75 difference in rent on a 10,000 square foot office lease over a five (5) year lease term is $37,500.00 off the bottom line. Wouldn’t you rather keep that money?
365 days a year Landlords negotiate leases how often do you? Most likely every five years.
To achieve the most aggressive lease transaction, you need to sit at an even negotiating table with Landlords. The leasing of office space is the Landlords business. The Landlord is fully informed as to the terms of the market place, are you? You would never go into court permitting the opposing party to represent your interest, or into an audit without your accountant, why would you go to the real estate negotiating table alone?
Start Early!
While most office leases provide for a tenant’s renewal notice to be submitted no later than nine to 12 months prior to the current end of term, the best period for “blend and extend” negotiations is typically 18-24 months in advance.
We are the best deal in town!
Our services are paid by the Landlord. The commission paid by the Landlord is either paid entirely to the Landlords leasing broker (without a tenant rep) or split with the tenant rep. The fee is paid regardless if you are represented or not, there is no cost savings to a tenant by not having your advocate protecting your interest. Be sure to secure a tenant rep that is knowledgeable of current market conditions, has excellent negotiating skills, and a good reputation among his peers. Contact Mike Kushner at Omni Realty Group to find out how he can save you money.
Don’t go to the table alone!
Wednesday, September 21, 2011
In our blog last week, we revealed that Mike will be taking the Certified Commercial Investment Member (CCIM) exam.
We thought it might be helpful to share with you the requirement s to earn the coveted CCIM designation.
In short, candidates are required to:
After applying for membership, the candidate will need to complete the required coursework, which includes 184 hours; each required course is 40 hours (each elective is eight hours in length) and negotiation training hours of classroom instruction including: four courses in commercial real estate practice and investment, an online ethics course, eight hours of negotiations training, and two elective courses.
Another requirement is the submission of a portfolio of qualifying experience, which demonstrates the depth of the candidates’ commercial real estate experience.
Candidates must document the following:
Finally, a candidate will need to pass the comprehensive “final exam,” which will test his or her knowledge of the CCIM skills learned in the required courses.
Mike will take his exam in October, which will enable him to join the 9,000 elite members who have already earned the CCIM designation.
Click here for more information about the CCIM designation requirements.
Share with us what goals you are working toward?
Wednesday, August 24, 2011
A quick glance at the Omni Realty Group website will reveal one thing: no property search! Why is this? The philosophy at Omni Realty is that we like to get to know our customers’ needs, wants, and circumstances. The process of buying commercial real estate can be a lengthy one, which will likely require communication by both parties in order to meet the needs of the customer.
If a commercial real estate broker is willing to put forth such an effort to get to know their clients, shouldn’t clients also spend some time getting to know their broker?
Absolutely! If you are considering purchasing or renting commercial real estate, it is imperative that you do your research, ask the right questions, and really get to know a buyer agent/ tenant representative. When you hire an agent, you want this person to treat your investment with the same care as if it were his or her own. The following are four questions that you should consider asking a potential buyer agent/tenant representative.
Are they protecting your best interests?
In order to answer this, you must first think about what your interests are and clearly communicate these with the broker. However, it would be best to ask the broker what their goals are before telling them yours. It is crucial that you find a broker that provides you with complete transparency. This is the only way that you will be able to identify a potential conflict of interest. If you feel this is the case, you should continue your search.
Are they driven by experience or instincts?
There are many people out there who claim to “have a feel” for the business, but can you take their word for it? Instead of putting your trust in a feeling, put trust in experience and a process. This experience will be made evident by a clear and well developed knowledge of the legalities involved in executing preliminary and final lease contracts, as well as absolute market knowledge.
How do they measure results?
Unfortunately, there are many real estate brokers out there who measure results solely by how much money they earn. The more money they earn means the more money you pay. This does not help you. It goes back to the matter of interests. It is in your interest to save the most money, and the broker must demonstrate to you that they will be able to help you do this.
Finally, how are their negotiation skills?
This is something you may be able to get a feel for in the first interview. For others, you will likely need to inquire about their negotiation history and process. How do they prepare for a negotiation? What techniques do they use during the process? And, what do they consider a successful negotiation? Remember, this is your money that is being spent, not theirs, and so their negotiation strategies should reflect that.
These questions offer some guidance when trying to determine who will be the right commercial real estate representative for you, but are not a comprehensive list. Take your time with this process, as it will play a crucial role in your company’s future.
For more information about hiring a tenant representative or buyer agency, click here.
Wednesday, August 17, 2011
In his article, “Debt Deadlock: Federal Budget Cuts Could Have Unintended Consequences for Commercial Real Estate,” Chris Macke starts out with a blanket question: What impact will 
federal budget cuts have on the private business sector, and by extension, the commercial real estate industry? He goes on to show that in years past, when federal spending has increased, that has led to a decrease in government payroll and a subsequent rise in private payrolls. This is because the government outsources many of its expenses to private businesses, with Booz Allen, Dell, Verizon, and IBM raking in the most money from private government contracts.
When government spending decreases, we can anticipate that these private businesses will be the first to feel the financial blow. Macke predicts that the lack of government investment in private business will have a trickle-down effect leading to a decline available funds to private business. This will inevitably lead to a decline in the commercial real estate industry, as business will have less money to devote towards commercial properties.
This dilemma gives rise to two more questions. Will corporate America pick up the slack and invest its own money in private businesses? And if so, will that be enough to offset the loss of government investment? This remains to be seen.
All of this is still speculative as we do not know when these government budget cuts will go into place, how much will be cut, and from where this money will be taken. There is a possibility that these cuts will not affect the commercial real estate industry. For any of those who are interested in investigating this matter further before making a real estate investment, feel free to contact us at Omni Realty Group with your questions and concerns.
Wednesday, July 20, 2011
Hiring representation (i.e. a real estate agent) when you sell a property is a no-brainer for most people. But what about hiring representation when you’re looking to buy or lease? Who’s working for you? If you contact a typical commercial real estate agent, they’re working for the landlord or owner. How does that help you? It doesn’t. But Omni Realty Group is different. We work for you, and make it our business to get you the best deal.
Hiring a buyer’s agent or tenant rep is not required by law in Pennsylvania, but I always recommend it. Purchasing a property or leasing office space is a huge financial commitment. Having a buyer’s agent or tenant rep on your side can provide the expertise you need to find the ideal property and negotiate the best possible price.
They can help you understand real estate and legal jargon in lease and property contracts, which can be confusing. This helps to ensure you aren’t agreeing to terms you don’t fully understand or that you don’t overlook anything that could turn into an unwelcome surprise. All discussions with the agent are also confidential.
Our tenant representation and buyer agency services are completely free to you. Here’s how it works. Owners/landlords hire real estate agents to sell or lease their properties. We are simply paid a portion of that fee. There’s nothing extra you have to pay.
We provide buyer’s agency and tenant rep services at Omni Realty, and we pride ourselves on providing highly personalized service. Our philosophy is to take on fewer transactions so that we can spend more time on each individual deal and get the best deal for each of our clients. We strive to exceed our customers’ expectations by accepting nothing less than the highest level of performance.
So when debating whether or not to hire buyer’s representation, consider this: The seller or landlord likely has an agent on their side ensuring their best interests are met, why shouldn’t you have the same on your side of the table? You wouldn’t enter a large contract for a business deal without consulting a lawyer, so it makes sense to have an expert on your side when making other big decisions such as purchasing or leasing property?
Monday, March 14, 2011
It’s Almost Tax Day – What type of lease do you have?
With tax day quickly approaching, we’d like to address a greatly misunderstood area of corporate real estate leasing – capital leases versus operating leases.
In the accounting world, payments for leased corporate assets must be accounted for correctly, and the Financial Accounting Standards Board (FASB) has developed criteria to help you as a manager identify your type of lease. What it comes down to is whether the risks and benefits of ownership rest upon the owner or the lessee:
Capital Lease – Assets appear on statements as if they had been purchased, so the rental payments are treated as interest on a loan taken out to pay for them. The asset (and its accompanying liabilities) is capitalized either by recognizing the present value of the minimum lease payments or the value of the leased assets – whichever is lower. The leased asset is depreciated in the same way as if they had been purchased by the company while its associated liabilities decrease as the rent is paid.
Operating Lease – Payments are simply expensed as they are made because rent is treated as a straightforward expense. The leased asset itself (and associated liabilities) is not recognized.
Until the FASB established its legislation in the 1970s, leasing assets was a common way for companies to avoid declaring their obligations in financial reporting. They only had to disclose leases in statement footnotes, rather than record them as liabilities and so leasing assets was essentially a means of financing a company off the balance sheet. But that changed in 1976, when the FASB issued “Statement no. 13, Accounting for Leases,” which established four questions that would determine whether a lease should be defined as operating or capital:
1. Is ownership of the asset transferred to the lessee during the term of lease?
2. Can the lessee buy the asset at a nominal price – $1, for example – when the lease expires (the “bargain purchase option”)?
3. Will the asset be leased for at least 75 percent of its economic life?
4. Is the present value of the minimum lease payments at least 90 percent of the value of the asset?
If the answer to all these questions is “no,” then the agreement should be treated as an operating lease. If the answer to any of the questions is “yes,” it is regarded as a capital lease.
Questions? Feel free to contact Omni Realty Group, 717-657-5833, ext. 3 (office), 717-991-6384 (mobile) or mkushner@omnirealtygroup.com.
Monday, February 28, 2011
Reducing Your Property Taxes
Dear Property Owners:
Q: What two events are undesirable yet inevitable?
A: (1) death, (2) receiving your annual property tax bills
There’s not much you can do about your mortality, but there is a way to lower your tax bills. As a property owner in Pennsylvania, you have an annual opportunity to reduce your tax bill, and tax bills for years to come, by appealing your property’s assessed value. It’s called a property tax assessment appeal. Simple enough, right? To be successful in a property tax assessment appeal, you just need to know a few basics for filing in Pennsylvania. Did we mention that for many of you the deadline to do so is Aug. 1? Let’s get started.
Step #1: Tax Bill Breakdown
When you get your tax bill, you’ll see your property’s assessed value, which is the basis for municipal, school district and county property taxes. What you owe annually (tax liability) is determined by multiplying the combined tax rate of the three taxing authorities (the millage) by your assessed value, then dividing by 1,000. Obviously, the lower your assessed value, the lower your annual tax liability will be.
Step #2: Calculating Assessed Value
To keep a fair assessed value, your county establishes a “base year,” the year of the most recent countywide assessment, and applies a “common level ratio,” a percentage determined by the State Tax Equalization Board (STEB). Find your county’s common level ratio on STEB’s Web site, www.steb.state.pa.us. Then multiply your common level ratio by your property’s current fair market value to determine your assessed value.
Step #3: Filing an Appeal
To challenge your property’s assessed value, you can file a property tax assessment appeal with your county’s tax assessment appeals board. The appeal must be filed before the deadline, which in most Southcentral Pennsylvania counties is either Aug. 1 or Sept. 1. Make a note in your calendar so you don’t miss these.
Step #4: Supporting Your Case
After your appeal is filed, a hearing is held before the county’s assessment appeals board, where you have the chance to present evidence regarding the value of your property. This can include testimony from you or your real estate appraiser, a written appraisal report and sale prices of similar properties.
Step #5: Reviewing the Outcome
Following the hearing, the board mails in its decision – the new assessed value for your property. Just beware that this could either be an increase or a decrease, so you should consider your chances for a decrease before you spend the time and money to file. If you’re unhappy with the board’s decision, you still have a chance to appeal it to your county’s Court of Common Pleas, and from there to the Commonwealth Court of Pennsylvania.
If you have any questions, feel free to contact us: Ronald M. Lucas, Esq., 717-255-7352, roml@stevenslee.com, and David J. Tshudy, Esq., 717-255-7381, djt@stevenslee.com. We concentrate our practices in real estate matters at Stevens & Lee, and work side-by-side with Omni Realty Group.
Best,
Ronald M. Lucas, Esq. & David J. Tshudy, Esq.
Stevens & Lee
For Omni Realty Group
Note: This column is informational and does not constitute legal advice. Readers must not rely on this column in making decisions and should instead seek professional advice.
Monday, February 28, 2011
5 Cs of Credit: Your Key to a Commercial Mortgage Approval
Just like you have a checklist for real estate that fits your investing or business needs, a bank has a checklist for loan analysis. Simply put, it’s known as the 5 Cs of credit: character, capacity, capital, collateral and conditions. These items are what a bank looks at in making an approval decision. When one of the Cs is lacking, like the overall conditions of the real estate market and economy, it makes the importance of the other Cs that much greater.
Your capacity to repay the loan depends on the property’s cash flow – either your business income or the rent received from tenants. You should aim for a 1.20x debt coverage ratio, meaning that for every $1 in loan payments, your property or business needs to generate $1.20 in cash flow.
A bank will also look at the ability to resell the property at an amount that at least covers the loan. The value of this collateral is determined primarily by comparable sales in the market or the income stream of the property. For income-producing properties, value can be estimated based on a 10% cap rate.
To help protect against declines in value and limit a bank’s risk, as a borrower you are required to put capital into the purchase of real estate. For most types of properties that means a 20% down payment.
Take a look at this example that brings together the 5 Cs: A three-unit office property is listed for sale at $200,000. The total leases (for all three units) provide rental income of $2,750 per month.
| Rent Income |
|
|
| Gross Annual Rent Income |
$33,000 |
|
| Vacancy Allowance (10%) |
($3,300) |
|
| Net Rent Income |
|
$29,700 |
|
|
|
|
| Operating Expenses |
|
|
| Taxes |
$2,500 |
|
| Insurance |
$1,250 |
|
| Utilities |
$2,500 |
|
| Repairs (5%) |
$1,650 |
|
| Management Fee (5%) |
$1,650 |
|
| Total Operating Expenses |
|
$9,550 |
|
|
|
|
| Net Operating Income (NOI) |
|
$20,150 |
|
divided by 10% cap rate |
|
|
| Collateral Value |
|
$201,500 |
|
|
|
|
| Capital (20% down payment) |
|
$40,000 |
|
|
|
|
| Payments on $160,000
(sale price minus Capital; 15-year loan) |
|
$16,75 |
The right combination of capacity (1.20x debt coverage ratio), collateral (a value of $201,500 that is similar to the $200,000 purchase price) and capital (20% down) make a solid deal for an investor and a bank. Don’t forget to add your character to the equation – your credit history can make or break the deal.
If you have any questions, feel free to contact Amy Richmond, vice president and commercial loan manager for Metro Bank, at 717-412-6641. Metro Bank works side-by-side with Omni Realty Group.
