Anyways….

One of the biggest lessons I have learned in my limited time in real estate investing is that the people to learn from are those with real experience.  As with many of you, I started with books and “boot camps”….and in some cases that works well with residential investing.  But with commercial real estate, the stakes are much bigger and the learning curve is much steeper.  But the “gurus” don’t tell you that.

My biggest mistake was I did not research the people I was learning from.  Learning how to invest from a “guru” that had limited experience with commercial real estate was a big mistake.  Even more of a mistake was learning from gurus who were using other people’s experiences and successes as their own to sell their program.  Yes…this happens a lot more than we think.

Luckily, I was so hardheaded and ignorant, that I took the information with confidence and pushed through.  Sometimes you can push so hard that you take down a wall.  Fortunately, at the time, it was the right wall.  But, with that said, there were a lot of mistakes that only guidance from experience professionals could have helped me avoid.

Now…what I am NOT saying is…”it takes years of experience to start investing in commercial real estate.”  That is not what I am saying at all.  But….what it does take is the correct education and guidance.  Honestly….this is the best way and your success can be realized much faster than you think or what others tell you.

So…you are probably expecting a sales pitch here….but on the contrary, here are some tips on how to get started on your own….that is right…. how to get started without a flashy package and a smooth talking guru….

Rob’s thoughts are ideas on getting started in commercial real estate:

1)  Keep your money for now. Thinking about spending 2K, 5K, 10K on a good looking”how to invest in ……” package where the marketing says “20K in value…but for a limited time….only $4,999.00 you can have the plan to wealth…and my personal phone number.”  When you hear that….tighten up…have a cup of joe….and remember my words here…KEEP YOUR MONEY.

2) Buy a good book on commercial real estate. Don’t buy a book from a “guru” where all the information in the book is to push you to a boot camp.  Now…there are good books out there that are trying to sell you something, but they give you a lot of value too.  One of my favorites is Investing in Commercial Real Estate for Dummies by Harris and Conti.  A great book in explaining the basics.  Another of my favorites but will bore you to tears is The Handbook of Commercial Real Estate Investing by John McHan.  The importance of reading up on commercial real estate is to see if you even have a true interest.  If the books above get you excited, you may have commercial real estate in your blood.

3) Take a Real Estate Licensing class. I recommend Kaplan based on my experience.  The licensing class does not mean you have to get a license.  It is a good course to get you familiar with the laws, codes, etc., in your area for not only real estate but property management as well.  I learned a lot in my licensing class.  More than I thought I would.  But I also learned that one of my instructors had no clue about commercial real estate….just residential 

4) Take the Certified Commercial Investment Member (CCIM) courses. This is the boot camp you want to attend.  Yes…it is somewhat expensive and time consuming.  There are four classes and each class lasts five days.  But, if commercial investing is where you want to be, this is the course you want to take.  This will help you analyze projects at depths you had no idea existed.  You will also learn how to do demographic studies, leases, etc.  Plus the networking at these courses are invaluable.  When you finish all the courses, you will have an opportunity to get certifed but you will have to meet some strict and demanding guidelines just to qualify to take the final test.   But…I digress.

5) Find a friend, make a friend. Find someone in your local area that is successful at doing what you want to be doing and follow their lead (also known as modeling).  This is by far the best advice I can give you.  If you have a great interest in commercial real estate, finding someone who is a success at it is the best thing you can do for yourself.  This may take some time and it is uncomfortable at first….but well worth it.  Chances are this person/mentor will be a real estate agent/broker/CCIM investor.

If you do all the above and still want to go to a smooth talking guru…..by all means….but I definitely went full circle starting out with gurus and ending up with the “right way.”  Real experience from real investor is by far the best way to find success in commercial real estate.

Until next time…..rob

Level 1

Financial

• Current rent rolls

• Operating and capital budget

• Operating statements YTD or 12 months running (certified)

• Discrepancies between rent roll and actual occupancy

• Unit mix or certified square footage

o Respective rents

• Existing financing or liens on property

• Check of value

o Cap rate

o Cost/Unit

o Cost/Sq Foot

o Gross Rent Multiplier

o Replacement Cost

• Understand staffing costs

o All current employees

• Name

• Job title and description

• Pay rate

o Benefits

General

• Physical confirmation of property conditions through site walkthrough

• View all vacant spaces to determine what capital would be required to induce a

new tenant

• View all common areas and base building areas

• Interview management team, leasing personnel, handyman (scope of work,

employee or contract labor, rate)

• Machinery/Equipment

o Office Equipment

o Maintenance Equipment

o Tools

o Vehicles

o Other

• Supplies

Physical

• Physical confirmation of property conditions through site walk through

• Property zoning classification

• View all base building areas, all floors, central plant, roof, exterior wall

• View all areas of building exterior and interior common areas

• Walk property line, photographs

• Night Inspection

o Security and lighting

• Review all architectural and engineering documents related to property

• Street size, congestion, condition, accessibility into property

• Biggest recurring maintenance problem

• Vacant sites on property (potential to expand existing property)

Level 2

Financial

• Add: Rent rolls, Operating Statements (certified), Capital Expenditures past 3

years

o Operating Income statements for past 3 years

o Balance sheet statements for past 3 years

o Tax returns for past 3 years

o Chart of accounts

o Accounts Receivable:

• Rents (Rate, due dates, history)

• Misc. Income sources

• Home sales, leases, rent/lease option, notes, contracts

• Bank accounts, deposits, other financial assets

o Accounts payable:

• Purchase orders

• Open/credit accounts

• Petty cash

• Notes payable

o Approved vendors

o Contracts

• Copies of every lease on rent roll

o Include names, addresses, current amount, deposits, rent history, estoppel

certificates, late fees, NSF, collection)

• Schedule for rent increases

• Estoppels from no less than 75% of tenants in commercial building, including

ALL tenants expiring or renewing in next 3 years and ALL tenants leasing over

10% of the building area

• Determine if any change in property taxes (Do taxes break out cost of land?)

• Pull original land purchase price on project

• Understand all transaction costs

o Real estate commission, if any

o Legal fees pursuant to transaction

o Accounting fees relative to financial statement review and pro forma

preparation

o Possible acquisition fee if an advisor’s services are utilized

o Title-related costs (insurance)

o Mortgage costs (points and closing fees)

o Appraisal

o Inspection

o Engineering reports/survey

o Environmental study

• Recalculate:

o Cap rate

o Cost/unit

o Cost/sq ft

o 1st year cash-on-cash

o 1st year total ROI

• Investigate financing possibilities

General

• Thorough understanding of the workings of the property under current setup

o Policies/procedures Manual

o Move in & move out procedures

o Existent files for residents, vendors, etc

o Emergency notebook

o Leases (written or verbal)

o Deposits/administrative fees

o Software used including maintenance and support

o Office supplies

o Forms/letterheads

• Interview all tenants on estoppel list to confirm information provided by seller

o Ask about problem areas—Management, physical property/structure, etc

• Delinquent units

• Confirm all information received against information developed through

investigation

• Develop a trust quotient with Seller

• Name and contact info for existing Insurance agent and coverage

o Copy of existing policy

o Workmen’s comp, liability, bond, hazard

• Local commercial agent

o What do apts sell for

o What are current rents

o What would comparable structure sell for

o Sales info for other groups in same area

o Average per capita of storage square footage

• Local residential agent

• Look into local advertising

o Current yellow pages cost

o Yellow book

• What percentage of competitors are in Yellow book

o Other avenues

• Local transactional real estate attorney

• Local Industry contacts i.e. Applicable associations

• Location of local:

o Post office

o Bank

o Schools

o Stores

o Employers

o Public Transportation

• Local rent survey, average rates for standard units

o Last 2 completed by Seller

o Over last 5-10 years if possible

o Check local newspapers for ads, etc.

o Local telephone directory and Yellow book for ads

o List of local competing retailers

o Evaluation Seller’s currently used ads, signage, brochures, etc.

o Chamber of Commerce packet

o Verify occupancy, rates fees charged, security systems

o Phone call and physical visit to each competing property (See

supplemental “Market Study” form)

• Pictures if permissible

• Interview managers

• Name of off-site management company

• Need copies of permits:

o All city and county permits

o Storm water management permit

o Consumption use permit

o Water supply permits

o Pool, Jacuzzi, etc.

• Learn about local laws

o Leases

o Evictions

o Regulation

o Licenses

Regulatory Agencies

• Board of health

o Copy of license

o Property records

o Pool and Jacuzzi reports

o Violation notices, if any

• Building department

o Talk with inspector

o Planning for other similar projects

o Ease of permitting

o Name of good roofer

o Name of good inspection company

o Building costs

o Name of good appraiser

o Certificates of occupancy

o Permits in force

o Local codes

o Known violations and records thereof

• Engineering Department

o Drainage information

o Local soil maps

o Proposed area improvements and related assessments

o Impact fees

o Utilities concerns

• Sewer, water, electrical and gas

• DER-EPA (Dept of Environmental regulation and environmental protection

agency)

o Wastewater treatment plant discharge permit

o Effluent testing results

o Flow records

o Treatment plant violations

o Domestic water supply permit

o Domestic water test results,

o Domestic water violations

o Domestic water flow records.

• City Planning—talk to senior planner

o Current new building permits for projects under development

o Path of development

o Floodplain maps

o Impact fees?

o Barriers to entry

o Ease of permitting

o Zoning in 4 mile radius

o Zoning in our area

o Special zoning?

• Map

o Thoughts of over-building of ________(student housing, self storage, etc)

• Tax assessors

o How much will property taxes be after sale

o How often do they reassess

o Name of good appraiser

• Better business bureau

• Chamber of commerce

o Growth statistics

o Boom bust economy

o Typical job types

o Projected growth areas

o Path of development

• Register of Deeds (or possibly a title company)

o Property ownership

o Eases and Encumbrances

o Legal description and acreage

Utilities

• Copies of meter record for both treatment plant and water supply wells

o Sewage treatment plant and water supply records

• Approvals for water sanitary collection system

• Approvals for domestic water distribution system

• Utilities Department

o Sewer and water rates

o Tap-in fees

o Impact fees

o Sewer and water capacity requirements

• Utilities commission

o Rules, regulation and status of utility

• Drainage district

• Name and contact info for gas and electric utility company

o Types of approved units

o Who owns and maintains

• Name and Contact info for telephone company

• Trash collection

• Name and contact info Cable television

o Who owns system

o Who maintains system

o Who invoices users

o Existence of a formal agreement between property and cable company

• Can it be renegotiated

Physical

• Professional contractor inspection

• Maintenance

o Evaluation

o Deferred maintenance items

o Obsolescence (how/why)

• Night Inspection

o Security and lighting

• Street plans with utilities identified

• Roof condition

• Boundary survey including all easements and encumberances

• Retrieve air quality samples

• Drainage type and adequacy

• Sewerage handling and adequacy

• Irrigation system

• Floodplain presence

• Vegetation and maintenance

• Environmental issues

• Inspect all maintenance records and interview supervisors in charge of critical

areas

• Receive copies of all documents related to mandatory inspections ADA/TDLR

compliance, ACM inspections, etc.

• Develop 5-10 year Capital plan for property, price projects, schedule out

o 2 Bids on cost of major improvements

o Cost for installing security, alarms, video

• Research any problems with elevators, other equipment

Fire/Life safety system status

• Type of building structure, any below grade levels, soil type

• Type of building cooling and heating systems

• Vertical transportation systems

• Type, age, and condition of roof (warranty)

• General assessment of leaks and exterior wall condition

• Elevators up to ASME A17.3 standards (Texas)

Red Flags

• Seller balks at providing records or access as committed in contract

• Stained ceiling tiles around the perimeter of the building (or shrinking

gaskets/joint failure)

• Dirty mechanical and electrical closets

• Poor maintenance and inspection records

• Financial records or estoppels not available

• Significant error in process or accounting

Ok, may be my headline was a bit of hyperbole, but NNN leases will at least open your eyes to an entire new way to do business in commercial real estate. True and complete oneness with the universe might a take a little more time and work. So, in the mean time NNN leases and commercial real estate investment can make you some money and cover your earthly needs.

We’re all aware of standard leases. The run of the mill leasing agreement stipulates the amount of rent you will pay, the duration of the agreement, penalties and other fees you will be responsible for and so on. Many novice investors or those interested in investing shy away from commercial real estate because they assume there will be headaches with tenants, fees, costs and other troubles. NNN leases answer a lot of these concerns.

NNN is short for net-net-net. Net leases come in a variety of shapes and forms. The basic idea behind all of them is that they assign costs that are normally the investor’s responsibility and distribute them amongst the tenants. In a triple net lease the tenant is responsible for net real estate taxes, net insurance costs and net repair and maintenance fees; hence the name net-net-net. There are also single and double net leases as well as different kinds of triple net ones. For example, an absolute triple net lease holds the tenant responsible for replacing the building if a catastrophic incident should occur or for rents if the building is condemned.

The whole point of net leases is to limit your costs and disperse them amongst your tenants. These kinds of leases work best in multi-unit industrial or retail centers. The costs can be divided amongst the various tenants and prorated based on the size of their unit. The great thing about NNN leases and commercial real estate in general is that you spread the risk amongst many tenants. This way you are not completely out of luck if your sole tenant goes renegade on you.

Reality TV has done its part in convincing the pool of potential investors that the only way to go is flipping and anything else is a sucker’s bet. That’s just not true. In these lean days when double-digit property appreciation is gone, the best way to make money is just like how the turtle ran the race; slow and steady. By getting together a small down payment an investor can purchase some commercial real estate, put in some minor cosmetic improvements and implement a net lease to cover the costs.

With this kind of system set up you are free to collect the profits from the monthly positive cash flows and focus your energy on finding new deals. Who knows, you may also have time to sit under a Bo tree for forty days and work on that pesky oneness problem.

We like shopping! Sucre, Boliva with Food for the Hungry

Greetings from the metropolis of Cedar Crest, NM.  Finally back home from my travels….and wow is it hot at 7000 ft elevation.  I do not remember it getting this hot.  Many homes in my area do not have air conditioning because it is rarely needed…including mine.  Wow….I sure could use an AC right about now.

Anyway….

Today’s post is about my favorite of asset type….retail.  Of all the asset types, and I have owned them all (I think) in one facet or another, retail is the asset that is the most interesting and easiest to manage per se.  From property management to leasing, and from maintenance to tenant default.  Retail is a little more clear cut than the other assets.  This of course is my opinion….although my opinion is based on my own experience.

This is the next post in a series that will highlight the different types of properties available to investors. The posts are an overview of general information. As with all investments, you should properly research the opportunities to determine whether they fit your portfolio.

What Do I Need To Know?
When choosing which retail property to invest in, you need to garner a good understanding of retail operations and understand a retail cash conversion cycle. Cash conversion cycles denote how quickly a retailer sells goods, how quickly it collects customer payments and how long retailers maintain the goods before having to pay suppliers. Ideally, retailers should sell goods and collect payments before having to pay suppliers.

This is also represented by the following equation dictated by myinvestingnotes.blogspot.com:

= Days in Inventory + Days in Receivables – Days Payable Outstanding
= 365/Inventory turnover + 365/Receivables turnover – 365/Payables turnover

Where, Inventory turnover = Cost of goods sold/Inventory; Receivables turnover = Sales/Accounts receivable; Payables turnover = Cost of goods sold/Accounts payable

Realistically, the two most important components of this equation are days in inventory and days payable outstanding. Looking at historically patterns to determine that a retailer has increased days in inventory over previous cycles can show a decline in the profitability of the retailer. A retailer with excess inventory caused by failure to move products off the shelves, leads to decreased revenue because the retailer must then liquidate inventory. Likewise, a retailer is considered exceptionally strong when the days payable outstanding is substantial. When a retailer is strong, then the retailer can negotiate better with suppliers.

What are the basics for retail investing?
Retail can be leased by street frontage or square foot. Street frontage encompasses the amount of linear feet a building occupies on a street. This measurement only accounts for the side of the building most likely to attract customers.

One of the most common types of retail leases is a percentage lease that requires the retail tenant pay a percentage of the tenant’s gross or net income as rent as long as it exceeds the predetermined minimum amount.

Choosing which property to invest in can be difficult. Many high-end retail developments are beyond the scope of a beginning investor. But, small strip malls can be affordable. Make sure when researching a property to study the anchor tenants. Anchor tenants are the largest tenants that offer the largest potential income (usually, the hope is the anchor tenant is a credit tenant as well). It is also important to make sure the property offers a good mix of retail options for the community.

I don’t want to own a retail building, but I do want to invest. What are my options?
You may want to consider retail stocks. Investing in the stock market requires a different mind set than investing in commercial property. If retail stocks interest you, be sure to consult an expert in your area and do your research.

We are just at the tip of the iceberg when it comes to retail.  There is so much to consider…but we will wait until next time….rob

Office space? Let's just go play and eat candy!

Greetings from ‘the border town” of El Paso, TX!  Last day in the “sun city” then off to the mountains of New Mexico for a few days….where I make my way to the CIY conference in California.  I am taking my youth group to LA for a week-long conference which I know will be a blast. Looking forward to my travels.  I will be connecting with some of the crew that went to Sucre, Boliva with Food For The Hungry….so I am really excited to go.

Anyway….

I visited almost most of my assets in the El Paso, TX area and I have a mixed bag of thoughts.  Although, overall, occupancy is over 95% in my retail centers.  I have one shopping center that is experiencing higher than normal vacancy.  Which seems to be impacting the area as a whole.  In the same area, I have a smaller center where the existing tenant is doing very well and I have a new restaurant moving in.  The TIs (Tenant Improvements) are being done and the restaurant should be open for business in a couple months.  But I digress.

Today’s post is about office buildings.  Office space as an investment is an odd bird.  Actually it is a straight forward investment when it comes to commercial real estate.  Everything is done in “square feet” which is simple enough BUT office buildings tend to react to market cycles much more strongly than other assets.  That is not to say that they are a higher risk category such as industrial.  Office space, in my experience, is more of a “knee-jerk reaction” segment when the economy slows. Disagree?  Let me know your opinion.  If it is a good comment, I will post it.

Investing in Office Buildings

This is the next post in a series that will highlight the different types of properties available to investors. The posts are an overview of general information. As with all investments, you should properly research the opportunities to determine whether they fit your portfolio.

What are Office Buildings?
Office buildings are properties that lease spaces in which companies or individuals conduct business. Office buildings may be anywhere from 500 square feet to multi-floored skyscrapers. Some spaces lease only to one tenant and others to many.

What Do I Need to Know About Investing In Office Buildings?
Office buildings can be a very efficient way to build your wealth, but you need to do your research to find the right opportunity for you.

Office buildings are divided into three categories: Class A, Class B and Class C. Class A properties are superior to Class B and C; Class B properties are superior to Class C. Class A properties attract the best tenants, are in the most desirable locations and offer the best amenities to tenants. Class B properties offer lower rents but still provide aesthetically pleasing spaces. Class C buildings are more functional than pretty and often are older.

According to real estate lawyer, Joseph Velez, “in the eyes of commercial lenders, office properties are seen as having less risk than other types of investment properties. For this reason lenders have more leeway in terms of Loan To Value and down payments. Loan to Value may be as high as 97% accompanying only 3% down and strong qualifications.”

Like most commercial real estate, valuation stems from actual and potential income. This means that the property’s value is directly related to the amount of income it can generate. If you have high quality tenants and profitable lease terms, the value of the property will be greater.

What Is Different About an Office Space Lease Versus a Multifamily Lease?
Office space leases offer more creativity. Most office spaces provide either triple net leases “NNN”, gross leases or a modified gross lease. According to investorwords.com, the leases are defined as:
• NNN Lease: A property lease that requires the tenant to pay rent, taxes, insurance and maintenance expenses.
• Modified Gross Lease: A property lease that requires the tenant to pay rent and requires the landlord to pay all expenses relating to property operations.
• Gross Lease: A property lease where the landlord pays all expenses normally associated with ownership including utilities, repairs, insurance and taxes.

Obviously, an investor will make more money from NNN leases. Please see our earlier posts about leases for more information. Depending on state laws, landlords may be forbidden from offering NNN or modified gross leases.

In Conclusion
Office Buildings are a common addition to many investment portfolios. If you are considering investing in an office building, take the time to tour other properties in the market and look at each building’s performance. And, as always, if you have questions, contact the experts at The Real Wealth Company.

Until next time…..rob