Listing your Industrial property

Let's assume that you were just notified by your previous industrial tenant that they will be moving out at the end of their lease.  If you own an industrial property,  and have had a long term tenant,  there are several things to consider.

First and foremost,  make sure, you are not the reason they are moving.  If they are moving out because you refused to give them a break on the price,  then you might want to crunch some numbers before you make a hasty decision.  I will do that for you below.

SAMPLE NUMBERS

Consider a $1,000,000 property
Taxes sample $8,000
Insurance sample $6,000
Maintenance sample  $4,000
Interest  approximate $55,000
Total Cost  Estimated $73,000.

If you do not have a tenant,  you will pay over $6,000 per month out of your pocket.

If you are receiving $100,000 annually,  and your tenant wants a break on price, consider the net effect on your pocketbook.  You can say no to a decrease,  and hope for another tenant.  If it takes two months, then you lost $12,000, plus real estate commission.  If it takes a year,  you lost $73,000.  If you cut their price by $20,000 you covered your cost, and maybe have a long term tenant.  Remember,  any vacancy month is $6,000.  Any occupied month is profit,  tax breaks, and appreciation on your side of the ledger.  Keep that in mind in this market,  and work with your tenants

Second, good tenants are hard to find,  especially those who pay on time.   What you were receiving from them will not match the current market rate.  There will be a sticker shock on what your next tenant offers.  Third,  there are a lots of properties out there,  and even if yours is the best,  your price may not give your property a chance to prove it, as most people are shopping prices right now.

If you want to lease it right away,  then you make your property the lowest price in your area, for your type and size property.  If you want to be in the middle of the pack,  then you wait for the others to rent,  or the quality, or unique traits of your property to surface.  If you insist on listing above the current market,  then you must be prepared to wait,  and then negotiate if someone finds your property while driving by.

As with most owners just stepping back in the market,  you will see that all properties have dropped in price per square foot.   And there is much more competition.

Although I don't do this on every property,  here is a sample of some marketing efforts I have given my properties.  It will be listed on MLS,  and Loopnet,  the Commercial MLS,  as well as CBC worldwide. We have two different Commercial brokers meetings each month,  where all the area commercial brokers meet to exchange listings and interact with each other.  These meetings give us an opportunity to stand up and discuss properties with the 75 or eighty brokers present. Everyone in our database who has a business,  or expressed interest in Industrial property leases, will get an email or a call.  I can purchase a web address,  and provide the link to anyone on Linked-In and Face Book.  It will be listed on my website,  and I will also distribute the flyer to all of the CBC brokers as well as all CCIM's in SW Florida.

When you are forced back into the market, be prepared. Expect that the tenants will have the upper hand because there are less of them,  and more competition for their dollars. They will be ruthless, as you would be if the tables were reversed.

If you need help securing new tenants,  then call me.  Good Luck!

Heading the wrong direction, the right way.

My neighbor is moving North, from Southwest Florida,  in December.  He never does anything conventionally.  Yet he is a very successful salesman.  He is driven by a different and constant beat,  that most of us cannot hear, much less keep up with.

He is a Real Estate Agent, and before that he sold cars.  He's just a young guy in his twenties.  When he finished school,  he had some good jobs, but moved a few times, because he could not find anyone to give him a chance at sales, which is what he really wanted. He finally answered an ad to sell cars.  Within a month,  he was their number one sales person.  Within a year he was their finance manager,  and after another year,  their sales manager.

Eventually he talked himself into residential real estate.  I was surprised,  by the move,  because of his success.  He had a house, a boat, a Harley, a Corvette, a Cadillac SUV and a Rolex.  He had all the toys.  So why move to Real estate when most people are bailing out because they cannot make a living.  Some people, like this guy, can make anything work.  And he did.

He told me the car business was in shambles,  and he had gone about as far as he could there,  and he wanted a new challange.  You have heard the story,  "when others are selling,  you should be buying."  Well a guy like this can make money no matter what is happening.  In his first fiscal year in real estate, 2009/10,  he did about twenty transactions when veteran realtors were lucky to do ten or twelve.   He was buying houses for 'flippers, geting them repaired and turning huge profits for his customers and himself.  It was amazing.  I thought flipping was dead,  he knew better.

Now he is moving North,  just before our 'Season' begins down here,  and the snow buries the North.  Most Realtor's are looking forward to the influx of buyers moving south. He's heading North.  I have no doubt he will be successful up there.  Everything he touches seems to turn to gold.  I hope you can learn something from him.

He is shipping his vehicles North,  at a hugely discounted rate,  because the trucks are bringing cars south for the 'snow birds' but going back empty.  He makes money on everything.  He bought a box truck from a guy who had used it to move here but had no further use for it, so my neighbor bought it for a song.

My point in all of this, disregarding the fact that it is an interesting story about a truly amazing guy,  is there is always a way to be successful in any venture, market or investment. Make your goal to satisfy the needs of others, who's need, fulfills your need. Their win, becomes your win.  The truck drivers did not want to go back North empty,  my neighbor helped them.   The people buying fixed up properties could not afford to buy them at auction and fix them up,  but could afford to buy  a nice low price home with a mortgage. My neighbor helped them.

Learn from my neighbor.  You could do what he did,  or you could find a need,  that will help someone, which in return will help you.  Think about the commercial real estate in SW Florida.  Who can you help? You will end up helping yourself.

How do others make money and you do not?

I am in a unique position in commercial real estate. I sell real estate and I also sell businesses. For a while it seemed that when one market was down, the other was up. Unfortunately, commercial real estate and business opportunities are both down now.

I really thought that the softening of the market, low building prices,  low interest rates and foreclosures filling every commercial and industrial park, that investors and users would be snatching properties so fast that it would start the recovery.

With high unemployment, certainly there are brave souls out there willing to jump into the entrepreneur arena and start paying themselves. But it seems that we are a nation of followers. Everyone is waiting on the crowd to start the momentum for us.

I had an investor tell me today that dispite the fact that they had a property in our area that had been vacant for two years, they really liked the area, and they wanted to look at acquiring another property. That is what I have been expecting from those who own the big houses and have multiple cars. I assume they were buying when others were affraid. I think the numbers of those who do, are far less than I expected. Maybe that's why there is such a huge disparity between the 'haves' and the 'have nots.'

Here is a relevant poem written by somone unknown to me.... Sorry pardner, I acknowledge that I did not write it, you did, but I don't know who you are.

Investors Lament
I hesitate to make a list of countless transactions I have missed;

Bonanzas that were in my grip - I watched them through my fingers slip;

The windfalls which I should have bought were lost because I over thought.

I thought of this, I thought of that, I could have sworn I smelled a rat,

And while I thought things over twice, another grabbed them at the price.

It seems I always hesitate, then make my mind up much too late.

When Newport Beach was cheap and barren land, I could have had a heap of sand;

When Palm Springs was the place to buy, I thought the climate much too dry.

Invest in Orange County – that’s the spot! My sixth sense warned me I should not.

I chose to think, and as I thought, other’s bought the deals I should have bought.

Today I cannot be enticed for everything seems so overpriced. The market’s soft, it’s this it’s that.

At times a teardrop drowns my eye for deals I had, but did not buy.

For now life’s saddest words I pen – "If only I’d invest NOW…and then!"

Multi-family vrs Single Family properties

If you are new to commercial real estate as an investment vehicle, then perhaps you should consider multifamily rather than single family residential.

People look for single family properties they can rent because they have the expertise from a lifeime of buying single familiy properties for themselves. The entry to the investment is cheaper, and does not require a lot of knowledge or number crunching. The question is, "Will it produce rent, and will I net enough to cover the mortgage and make a profit?" If it has never been rented before, then it's unlikely that you will know the answers, unless there are other owners of similar properties who are doing the same thing. But even so, the numbers and vacancy rates you hear about, may not be the real story.

Multi-family property investments are simple, especially if you use a broker who can crunch the numbers and explain them to you. They require a similar set of knowledge and skills as single family and there are so many different types, to choose from, one will certainly fit your investment style and comfort level.

Apartment buildings are one place to start. Remember for either investment of single or multi-family you will need the ability and willingness to hold for multiple years. Single-family properties require more management and maintenance, because each single family property issue is infront of the individual tenant. When a tenant moves out, you will have no income until a new tenant moves in. Maintenance is necessary for each property you own. Multi-family properties are easier in comparison to manage and maintain because of the consolidated maintenance and the rent security of multiple tenants for each property.

The property knowledge required for Multi-family is similar to single family, as it is still living quarters, but it will have common areas and amenities that can be shared by all tenants.  With a Multi-family building,  with a good rental history, then it is likely to continue based on that history. If something changes in the market, it's generally a percentage change over a period, and rarely 100%.

With multi-family properties, you will pay more to get started, but the idea is to find a property that will pay your debt service and then let the tenants pay your expenses. If you buy a solid property, well constructed, in a good location, then chances are good it will stay rented and not show wear and tear before you start making a profit. There are many sizes and types to fit practically any budget. Concrete, block or brick construction will last longer in most parts of the country over wood. The best properties can sometimes be the ones with a motivated seller. The worst will be the ones where the seller knows something that will effect the future revenue stream, that you do not know. We solve this with some due-diligence. Part of your due diligence will require you or your broker to drive the area to see if there is anything new which might effect your prospect property.

Consider multi-family properties over single family residential to reduce your vacancy risk, provide a greater return and bigger future upside.

Barriers to Entry

When evaluating a business investment, one of the many factors for making a decision should be whether or not your future business is going to be unique. Can it be started by anyone, or is there something that keeps others from opening up the same type of business across the street, or even next door.

Lots of people call me to purchase a service business. One of these service businesses that attract attention are pool services. In Florida, if you own or rent a home with a pool, the pool will need regular service, otherwise, it will turn green. People hire pool service contractors to prevent this from happening. Overtime they learn what it takes to maintain the pool, and after a while start to service their own. Pretty soon they are offering the service to their neighbors and relatives. The next thing you know, they want to buy a neighborhood route from a pool service company.

The business itself is relatively easy, but it's time consuming and not very profitable if all you do is service pools. A license for servicing is not hard to get, but, as you will find, the real money is in parts and repair, and therein lies the 'rub.' In Collier and Lee Counties, in Florida, to get a license, it requires two years experience of pool service and repair, which must be proven or vouched for by other licensed persons. After completing the experience requirement, you must pass a difficult test. If you want to repair a pool pump or pool heating system, you need this license. This is a sample of 'barriers to entry.' If you are willing to scale the barriers, then you will have less competition.

If you are thinking of opening a business, then something unique and difficult will make it less attractive to competitors. When entry barriers are high more people will be reluctant to enter that type of business.

If you are successful, eventually others will want to feed off of your success by opening something near you. Why do you think there's a Walgreens and CVS Pharmacy on opposite corners of major intersections. The sad truth is, profitable markets that are successful will attract new competition. More competition will indeed increase traffic, but most likely decrease profitability. If you pick a shopping center where you can write some sort of exclusivity for your particular type of business, then you certainly should. That is another example of a 'barrier to entry.'

Business is hard enough without having competitors nipping at your customer base. If there are barriers to entry, you can hold them off long enough to recapture your investment and make a good profit. Good luck. Call me if I can help you.

What is it worth?

We recently invited a respected appraisal company to speak to our commercial brokers. We are in one of those periods where the old rules of value do not apply. Lately an appraisal is only viewed as representative of the correct value by one party to any transaction. If the appraisal is high, then the seller will quote it as gospel. If it's low, then the buyer becomes a convert. But who really knows right now.

It use to be, back in the 'good ole days' that as commercial agents we could use three methods to value a property, and depending on your belief in the strength of the under-lying numbers, one would lead you to the correct value. For this discussion we will not discuss 'Highest and Best Use' of the property. We will assume we need to value for purchase or sale and its use will not change.

The appraisal company's position was, "when the majority of the comparables are 'shorts' and foreclosures, those prices become the comparable." He specifically said that the three methods of valuing commercial real estate are not valid in this market.

Here's a recap of the three methods and my thoughts on each.

Cost Approach - considers the current cost to reproduce a property minus 'wear and tear.' This assumes that a savvy investor would not pay for an old building if they could build new for the same or less. This was sound logic, when we had builders who had a normal work load and charged a fair price. With building work scarce, some are asking less than a fair rate. Maybe they want to use up materials or just have some cash flow, that might lead to more projects. This method is not consistent right now.

Income Approach - considers that a close relationship exists between the income a property produces and its value. This was my favorite, and seemed to me to be best when used by investors who were looking for a return. The problem now is that all tenants are asking for reduced rent. Most landlords have figured out that it is better to have some income, rather than none. So if and when we recover, the rents may or may not return. Do you rate value on current income, or lease contracts. Tricky at best, and hard to place the right value at this time.

Sales Comparison Approach - considers value to be a reflection of what other buyers are paying for similar properties. The problem with this is that most properties in commercial are different and the motivation of each buyer and seller is also different. Most buyers are demanding a bargain. Sellers want to avoid bankruptcy, others want some cash so they may hold on to other properties. Not many are selling now to get a good price. So, this method, which is the one the appraisers must use, is unreliable.

If you consider that our values might have been inflated by the idea you could buy anything, for any price, and still make money, then perhaps those values were wrong before we got into this mess. There was a greed and haste that led us down this path. Is this where we should be, or is it just an adjustment period correcting what was wrong before? Either way. it will work itself out, eventually. Business purpose leads to commercial sales, and when the bargains are gone, and the economy improves, then optimism in a business venture will draw investors and business users back to the market to chase income opportunities.

Other People's Money

We got where we are in this real estate mess because everyone was trying to make money in Real Estate. That is not possible. Someone has to lose at some point in the investment life of a property. But for some reason, not only did the investors believe they could, the banks believed the investors could too. The Stock market doesn't work that way, why should the real estate market.

While all investments share the same elements, some issues are only found in Real Estate investments. One is the ability to buy it with OPM. Other People's money.

All investments have risk, and liquidity issues. Some investments require you to actually manage them to get your return. Since there is a basis in the investment and an income stream, hopefully, there will be tax considerations. But, other than perhaps a margin account, you will have to put up all the cash for all other investments except real estate.

Using OPM is called leverage. If you can make more income than the cost of the debt service, then it's called positive leverage and that is a good thing.

Let's crunch some numbers to show the effect of using OPM, rather than your own.

Source of Funds                                    Bank                        Bank Account 
Investment                                      $2,000,000.                    $2,000,000.
Out of Pocket                                      200,000.                      $2,000,000.

Cash Flow Year 1
              Income                                     $175,000                     $175,000
              Interest                                        77,126                                0
              Cost Recovery                              9,828                            9,828
              RE Taxable Income                     88,046                         165,172
              Tax Savings                               $24,653                          $46,248

After Tax Investment Return                       28.36%                         17.61%

You can calculate this with a financial calculator or you can let me use a spreadsheet and run various scenarios for you. As you can see when you have less money at risk, and the investment returns more in income than the cost of the money, then in the term of the investment you will get a better return by using OPM. It has a lot to do with the spread between the Interest Rate and the Cap Rate on the investment. It also has to do with the tax advantage of deducting the interest against the income before calculating the tax. In this case, with the sample numbers shown the return is 11% greater with financing.

Investments can be risky, not everyone can make money. Don't make it worse and risk your own money if you don't have to.

Is it a good business to buy?

I am a business broker, besides being a Commercial Real estate Agent. I make part of my living helping others buy and sell businesses. My role is transaction broker. I provide a limited form of representation to a buyer, a seller, or both, but do not represent either.

When people ask me if I think it is a good business, I have to tell them, "I am a salesman, I get paid if you buy, or if the owner sells. " do you really want to rely on my opinion?"

I try to use the businesses I put people in, so I would prefer that they are happy with their purchase. The trouble is, I have sold lots of them, and many were restaurants. If I frequented all of them, I might be much larger than I already am. But the key is, I try to help them through the transaction so that they have all the facts, so, if they buy, they are happy, even if I do not visit them regularly.

I do not know what makes a business successful. I don't think everyone who buys a successful business, will be successful. Nor will those who buy one that has failed will fail again. It is a formula which I do not have. I think you need the right mix of people, products, atmosphere, supply, demand, elbow grease and luck. Your business will need management, and decisions that will affect your day to day success. Some businesses succeed through sheer hard work. Others need something else. I suggest that you buy something, in which, you have experience, or at least enough knowledge to understand how it makes money and how to continue doing so.

Buy a business that needs your skills and is something that you will enjoy. Buy something for which you have passion and truly believe that you can make better.

Success will depend on you and the business. Lots of people buy a business to create a job for themselves. That is okay as long as you are qualified to satisfy the customers of that new business. Those customers are your new employer. If you make them happy, then you have a better chance at success.

Am I trying to scare you? No. All business involves risk. I just want you to be so sure that you can make it work, that it is worth that risk to you.

Creative Building Finance

If you are like a lot of business owners, your cash flow has been down the last three years. And now of course, the price of buildings have dropped dramatically. Interest rates are also way down, but you do not have the down payment to allow you to buy today. I am working with a company now who is facing these same issues. If they purchased, the monthly debt service on the building purchase would be less than their monthly lease payment.


I went to the building owner and offered a creative plan to get everyone what they wanted. I asked the owner to give the buyer the right to lease the building now, under some reduced rate and allow them an option to buy within twelve months.


This was a new building, and the buyer needed some customization improvements to make it fit their need. They had someone to do these improvements for them so it would not involve the landlord footing that bill.

I wrote a letter of intent to the owner for a three year lease, and asked for two months free rent to allow the buyer to move and improve the space as needed. I then asked for three months rent at half the normal rents with regular rents thereafter. I included an option to buy the building in the first twelve months at a rate comparable to other spaces selling in the area, with a little premium for the seller. I included a clause that after twelve months the purchase price would increase to the greater of three percent or the average price of sold listings for comparable properties in the area.

This is what I call 'Creative Finance.' This particular buyer had expectations of some growth and needed additional space. They were expecting a big contract in the next few months which would allow them to buy. This plan allowed them to move now, with significant reduction in out of pocket expense, tie up the building they wanted, so they didn't lose it and then give them a lease price comparable to match their budget, but in new space that they could own when their cash flow improved.

The building owner was getting the cost of carrying a vacant building paid for, a market rate lease if it didn't sell , and the liklihood to sell at a good price when buyer got their big contract. It was 'win-win' for both parties.

Sometimes you need a broker on your side to find a solution. We don't make any money unless some property changes hands, so in this market, we have to be creative. Call me to discuss your situation. Let me be find a creative solution for you.

4.25% Interest Rate on Commercial Loans

I mentioned a perfect storm in a previous blog, which was lower interest rates and lower prices for commercial property.  But now the rates are coming down even more,  and I have to bring it up again, with more detail, so you don't miss it.

Some Commercial lenders have lending rates that mirror the Bond Market. Interest rates are tumbling in the Bond Market, so the these Commercial loan rates by lenders are spiraling down as well. This is one of those times where business owners who are dissatisfied with their facilities need to look closely at what they are spending on rent.

Let's crunch some numbers: Renting 8,000 square feet at $10 per square foot is $80,000 annually, or $6,666 monthly. If the space is for sale for $100 per square foot, as many are right now, that's $800,000 purchase price.

In order to qualify for rates like these, you need at least 20% down and occupy more than 50% of the space.

$800,000 X 20% Down payment = $160,000
Purchase price $800,000 - $160,000 = $640,000
Annual debt service on $640,000 at 4.25% with a 20 year amortization = $47,557 or $3,964 monthly.
Even if you are paying less than $10 per square foot to lease, it is still phenomenal.

Lease rate samples:
$8 X 8,000 sq ft = $64,000 $5,334 Monthly
$7 X 8,000 sq ft = $56,000 $4,667 Monthly
$6 X 8,000 sq ft = $48,000 $4,000 Monthly
$5 X 8,000 sq ft = $40,000 $3,333 Monthly

You cannot make your cash work for you better than building equity in your own property. If you can pay less, then it is outside of reality.

Here are some amortization numbers on some other sample amounts, You should be able to estimate your actual numbers from these

Loan Amortization samples:
Loan $ 500,000 at 4.25% amortized on a 20 year scale with five & ten year balloons $ 3,096
Loan $ 250,000 at 4.25% amortized on a 20 year scale with five & ten year balloons $ 1,549
Loan $1,000,000 at 4.25% amortized on a 20 year scale with five & ten year balloons $ 6,192
Loan $2,000,000 at 4.25% amortized on a 20 year scale with five & ten year balloons $12,384
Loan $3,000,000 at 4.25% amortized on a 20 year scale with five & ten year balloons $18,578

With these kinds of numbers, you might want to invest in your company instead of the stock market. Call me, let me help you find better space and a better bottom line for you and your business.

Counting Customers

When you buy a business or commercial property, you will request time to perform Due Dilligence (DD). The Purpose of DD is to research anything that may affect the income, cash flow and value of the investment. I no longer practice accounting, I am merely the transaction broker for the business sale, so I cannot help you. You must rely on yourself, or your own team of experts. The bigger the investment, the more likely you will involve your attorney and or accountant to help you analyse the investment.

I sold a Lawn Service business once for $49,000. It had two employees, a good commercial grade mower, lots of poorly maintained equipment and seventy-five customers. The Buyer eventually lost the investment and walked away from the business. I hope there is something you can learn from their loss.

The difficulty in due-dilligence in a business this small is to verify the customers without notifying them of a change, and allowing them to consider their own change. Do not let that deter you. When you are buying a 'route' of customers. You must verify that those customers are current clients, not 'former' clients. The only way to do this is to see when they last paid and tie that out to your list and billing cycle. If you take the buyer's word, then you may be paying for customers who have fired you long ago, and your employees are still mowing their lawn.

The buyer's accountant suggested they mail a letter to the customers. The seller did not like this idea, as it might signal a change in ownership and move the customers to some sort of change, before the transaction was complete. Another suggestion was to tie out the deposits from each customer to a bank statement to show that they were actually customers. The problem was that this was Winter (in Florida) and the grass does not grow alot in November and December, so there would be several who had not paid lately. Also some people only paid periodically; quarterly, semi-annually etc.

As you might expect, the client accepted the client list and retained the same employees. It was a small investment and if it produced twenty-five percent less, it would still make money. I can give you a littany of things that went wrong in this transaction, but the biggest thing was not enough DD, and verification of the customers. Those customers who were no longer customers and were getting free lawn service. Dishonest employees who stole and sold everything not tied down, and ran up personal charges on the gasoline card for thousands of dollars. The same employees who dumped the $8,000 commercial mower upside down in a canal and turned it into spare parts instead of their main mower.

Slow down when you are looking to spend money. If the Seller is in a hurry, then you should be even slower. Don't trust people you do not know, until they prove themselves trustworthy. Determine what has the biggest value, and verify it's real value. Don't make drastic changes until you have spent time to determine if they are really necessary. And most important, do not leave new employees unsupervised, especially if they know more than you. Good Luck.

Pre-screen Tenants or it will cost you!

I saw the movie Pacific Heights, in 1990, about a young couple ( Melanie Griffin and Mathew Modine) who bought a large house in San Francisco. They planned to renovate it, live in part of it, and rent the rest to cover their own living costs. A prosperous looking tenant (Michael Keaton) moves in but never pays any rent, drives the other tenants away and systematically ruins the house and the lives of the owners.

I remembered this movie recently as my neighbor, who lived a few houses away, had a tenant trash his house and left owing him three months rent.

His issue, as with many landlords, was not pre-screening tenants. Landlords want prospective tenants to move in quickly. Don't fall into that trap. Remember this, it is harder to get people out than in some times. You must make sure your tenants are the type of people who you would like to have a long term relationship. When selecting tenants to rent space in your commercial properties, make them fill out an application form. Check their credit, employment and rental history. It will cost you something, but will save you a lot in the long run. Do not take any deposit money from them until you are satisfied with their background. It is more expensive to use the sheriff to evict a bad tenant than to let it sit empty for a couple of months.

I want to sell you commercial properties, but unless you are going to use all of the the space for yourself or your company, then you will rent to people you do not know. So let's crunch a few numbers so you know what a pre-screening will cost.

There are many companies that can do these things for you. If you are going to be doing a lot of rentals, you should form a relationship with one so you get a flat rate. A simple internet search gives you a smorgasbord of services and prices. You can get complete searches for $34.95, National Criminal checks for $15.95. People Search for $9.95 and General Background checks for $19.95. For $50 you get: Nationwide Tenant Background Check which includes, SSN Verification, Address History, 7-Year National Criminal Database Search, Courthouse Verification of Criminal Database Records, National Sex offender Registry Check, all covering 43 states and the District of Columbia, including courthouse verification of all potential records associated with the subject. Including SSN verification, address history, a nationwide National Sex Offender Registry, and options to add a Federal Criminal Search, Education Verification, and Employment Verification.

So as you can see, it's only a few dollars, but it could save you a lot of money and aggravation down the road.  (by the way the movie is rated R and has lots of violence....so it's not for everyone.)

Bob Parsons, an interesting guy

In 1984, he founded Parsons Technology in Cedar Rapids, IA and began selling MoneyCounts, a home accounting program out of his garage. Not only did Bob create Money Counts, but he also was selling a word processing program and a spreadsheet program at that same time for $99. This was unheard of, as business application software was several hundred to thousands of dollars, and out of the reach for most individuals.

In late 1987, Parsons was able to quit his job and focus completely on selling and programming MoneyCounts. I met him in the mid 80's. His daughter and my son were the same age and eventually went to school together. I started a software company in 1982, in Cedar Rapids. I spoke to Bob a few times over the years. He was a delightful, interesting man, and always treated me with respect. He was a legend, and he treated a small software vendor with respect. I never forgot that. One difference between our software and his, was that Bob, was trying to sell hundreds of thousands of copies of his software at a low price, and we were trying to sell $100,000 software to a select few. Bob's idea worked out better.

Bob also created a tax program which he sold for $39.95. Intuit's program was much more expensive, but not any better. Parsons Technology grew to be a 1,000-employee privately held company and in 1994 Bob sold his company to Intuit for $64 million. Whether Intuit used Bob's program, or their own really doesn't matter. The key was, Intuit eliminated the competition, and as Paul Harvey used to say, "Now you know the rest of the story."

Today, Bob is the CEO and founder of The Go Daddy Group, Inc., a family of companies comprising three domain name registrars, including the one you are certainly familiar with, GoDaddy.com

While following his success over the last twenty-five plus years, I have always been facinated by the way he did things. He seemed to swim against the current, when others were swimming with it, and he seemed to have the right formula in business. When I found his rules for success, I knew I had to share them on my Blog and tell this story.

Bob Parson's 16 Rules for Success

1. Get out and stay out of your comfort zone
2. Never Give up
3. When you are ready to quit, you are closer than you think
4. Accept the worst possible outcome
5. Focus on what you want to happen
6. Take things a day at a time
7. Always be moving forward
8. Be quick to decide
9. Measure everything of significance
10. Anything that is not managed will deteriorat
11. Pay attention to your competitors, but pay more attention to what you are doing.
12. Never let anybody push you around
13. Never expect life to be fair.
14. Solve your own problems
15. Don't take yourself to seriously
16. There's always a reason to smile

These rules are exactly what I would expect from Bob Parsons.  Whether you are investing in a business or a real estate venture,  if you want to have success, then I suggest you take what you can from Bob Parsons 16 rules for success.  If it works, for you,  someone might ask you, the ultimate compliment "Who's your Daddy?"

Capital Gains - Selling to chase the tax rate?

If you are an investor, you know what capital gains are, so they need very little explanation to most. But considering that some may be investing, or planning to invest/or sell an investment property for the first time, I will provide a simple explanation and crunch some numbers.

When you buy a property and sell it for a profit, or more than you paid for it , then you had a capital gain. If you held it longer than a year, then it is considered a Long Term Capital Gain, and thus subject to a more favorable tax rate.

Number crunching example: Property purchased for $100,000 in January 2008 and sold after January 2009 for $160,000, is treated as a long term capital gain. The $60,000 you made will be subject to a 15% tax, or $9,000.

I am going to ignor ACR ( accellerated cost recovery) and it's effects, to make this a single focus of the Capital Gain Rate. Ask your accountant to help you if you have an investment, and are making plans to sell.
Most of you have heard in the news that President Obama has a tax plan which will effect the Capital Gains rate. When Ronald Regan was President, the rate was 28%, during the Bush administration it was cut to 15% and is still in effect until the end of 2010. President Obama's is planning to raise it to approximately 23%. This may not be the same rate for all tax brackets, so see your tax advisor for your specific set of circumstances.

I have read about some experts suggesting that there will be a huge sell off of investment properties before the rate expires. It sounds logical......maybe.  If this is the case, then that may mean taking a lower price/profit, to get it sold, to avoid paying 8% more in tax on the profit.

Let's crunch some of those numbers so you can see the opportunity, or insanity of such a move.

If you sold your property, for $150,000 at the end of 2010, to take advantage of the 15% capital gains rate, then the tax would be $7,500. (ignoring ACR) If you waited until after the tax change, and sold later at the new tax rate, then it would cost you $11,500 or $4,000 more in taxes. But consider that many others may be selling at that time, and you only got $150,000 when it was actually worth $160,000. If you waited, your gain may have been $60,000 and your tax under the new rate would be $13,800. Look at the net cash to you. Selling quickly made you $50,000 - $11,500 = $38,500 net. Selling later, (possibly) $60,000 - 13,800 = $46,200 net. You might have made more, when less people were selling, if you ignored the tax increase. I don't have a crystal ball,  and cannot predict the effect. 

I don't think anyone can predict the real effect of a tax rate increase on your situation. Bigger or smaller numbers may change the results. Just consider that you should sell properties based on a plan, or the market, or your needs, or the value of your property, and not to chase a tax rate.

New Location - Lease versus Own

Okay, we have done all our homework, considered all the associated costs to move your business. Together we have found the ideal location. Now we need to decide if you are leasing or buying the building.
Maybe you are not sure if you have the ability to buy the building. There is a substantial down payment to consider. But remember, there is also a first and last lease payment and damage deposit due the landlord. Think about the lost cost of leasehold improvements, which become the improved value of the landlords property. Think about all the upfront out of pocket. They may be more similar than you first thought.

There are two different methods when calculating lease versus own. They are, Present Value and Internal Rate of Return. We will compare the after tax cost of leasing versus owning using Present Value. If I were helping you, I would calculate both, but for illustration here, I am only providing PV. I have spreadsheets to assist with these calculations, using both methods, and would provide them to your accountant for their verification. There are a lot of assumptions in any calculations like this, so you need the independence of your accountant or attorney to look closely at all the numbers I provide to see if they fit your specific situation.

With the Present Value method, we add all the related income and expenses for each line item in leasing or owning and come to a bottom line, cash flow after tax. Using those numbers, we then select a PV calculation rate, (which equals what you would receive in an after tax investment, or perhaps the after tax cost of capital) We then reduce the after tax cash flow from leasing and owning to its present value. Remember, the cost of ownership, also comes with selling the property at the end. This includes some of those assumptions I was speaking of earlier. We have to assume that we would sell at some point, and include the estimated cost and estimated appreciation associated with the sale.

Whichever method gives us the lowest present value ( leasing or owning ) will be the one that we should select. If you are confused, let me do it for you. Call me.

Moving your business - More cost or profit?

It is one of my underlying commercial real estate philosophies that business owners, do not give one of the most important decisions in their business life the importance it deserves.  I mean,  the choice of where we locate the business.  We have a general idea of where to locate,  but have you really thought about all the numbers.  Sometimes, overlooking a few can be very costly.  I have met business owners whose business location or building is actually hurting their business. If they looked at the whole financial picture,  they would be gone already.

If you are considering a new location, here's just one item to consider for example:  Will your service or delivery vehicles be closer or further away from their customers?  Six additional miles may not seem like much until you crunch the numbers.  Six  times eight trucks times 600 trips per year adds up quickly.  At a reasonable seventy-five cents a mile,  that's over $20,000. Also consider an additional twelve minutes per employee per trip. Even at minimum wages,  that's about $10,000.  Now consider that you moved six miles closer.  These become savings or additional profit.

You know your business better than I do,  so think about your customers,  your employees,  your vendors.  Can you save money, or improve your service by moving.  If so, then it is the right decision.

There are many more factors to consider when we start to look for a new location for you.  Not the least among those are lease versus buy. But we can crunch those numbers  once we find a place to move and calculate its value to you.      

Would Realtors buy now - July 2010?

I went to a real estate seminar recently and the speaker asked the realtors present, to raise their hands, if they would buy some real estate today, if they had cash to buy. The entire room of realtors, raised their hand.

That should tell you something about this market. Realtors are immersed in it, they live it every day, and despite the media and the problems, every realtor in that room knew there are good properties out there. If you are a buyer with cash you should be looking to make an investment that will make your money work for you.
I hope you are not one of those waiting for prices to go down further before you buy. Instead you should be looking for investment properties that fit your investment profile that are fairly priced now. Waiting for a five percent decrease might lose you ten percent return. We are in a unique market in SW Florida. There are many owner/investor groups who own properties which may only be a very small percentage of their portfolio. Oh yes, we have very wealthy people in our market. They can afford to wait for the market. You have to forget about those owners and find the ones who cannot afford to wait.

Serious sellers are motivated. Interest rates are at an all time low. Properties that are priced right, sell in any market. Buyers with cash should raise their hands, and say you understand the market just like the realtors.

Reaching a Target Yield

How many times have you looked at an investment in Commercial Real Estate, and liked it, but it was only showing a 6% CAP. I am going to show you how to go after the property you want at a price that will get the yield you need for the risk.

Face it, in 2005, all of us were willing to take a 6% return on a commercial properties, because, we perceived there was very little risk, and we knew that the potential for appreciation would make it worth the wait and risk. In 2010 we are not wasting our time on 6%, 7% or even 8%. If it is not returning 9% or better, investors will not touch it. I have seen some really good TRIPLE NET Leases recently at 9% or better, on large publicly traded company properties. These are held by groups who have to sell them to raise quick cash so they can keep other properties, or acquire even juicier properties.  So it is a good time to be looking,  if you have cash.

Let's crunch some numbers to see how it works. If an owner lists a property for $1,000,000 promising a 6% cap, then they are telling you that you will 'net' $60,000 per year on this investment. The current owner calculated the property's expected net income, then backed into the value, dividing the net, by the cap. $60,000 divided by 6% = $1,000,000. Some owners can afford to sit on properties until the 6% market returns, but those that can't will be willing to give you your yield.

To calculate the price to pay, to get your yield, just back into it. Net Operating income, divided by desired yield equals the initial investment price, or stated another way, the Net Present Value of this property to YOU.

Divide NOI $60,000 by Desired yield 9% = $666,666.67. So instead of paying one million, you offer what it takes to get the yield to 9%, which is $666,666.67. Whenever I write an offer for a buyer for a substantial price reduction under what the owner is offering, I accompany the offer with my calculation and explanation, so the current owner knows where we got the number and what yield we need to make this investment. It keeps the owner from trying to counter back closer to their listing price, because they see quickly what we want, why and that we know what we are doing.

Try it yourself. It works. Or call me and let me crunch the numbers for you.

Commercial Real Estate Owners, It's time to sell

The market in Naples has adjusted itself for the desirability factor of our subtropical upscale location. The buyers are not who made our prices shoot through, and past the ceiling of reasonableness. It was everyone who took advantage of the increased interest by over extending and overbuilding as if there were no end to the increases.

If you have a commercial property for sale,  it's time to cut the price and let it sell.  Allow someone else to make a profit too.  Take your profit and run. No need to be greedy, or hold out for an even bigger profit. It is not a bad thing to double your money. If you have done that, leave some future growth and profit for the next investor. Even if you only made thirty percent.  Try getting that in the stock market. 

The problem with most commercial properties that are still sitting on the market for these past twelve months is that owners are worried that they are leaving profit on the table. Trust me, you will never know when the right time has arrived. When the market hits bottom, it will not notify you. Drop your price so you can sell what you have now and move on.
The commercial market has plenty of buyers. Lots of them now are searching for 'steals.'  But there are legitimate owner/users out there who may need your property for their business.  Allow them some profit growth room. 

Take your small profit, all the way to the bank, or let me help you find another.  It's a great time to be a cash buyer, and even better to be a seller.

The Perfect Storm

NOW IS THE TIME TO FINANCE COMMERCIAL REAL ESTATE! June 8th, 2010. The SBA lowered their interest rate to 5.29% and will accept as low as 10% down on commercial real estate.

This is the lowest it has ever been and probably the lowest it will ever be! If you are on the fence about purchasing business assets, commercial real estate OR purchasing businesses that include commercial real estate, PLEASE, consider the SBA. Call me and I will introduce you to a lender. This is truly unbelievable.

Banks and other lending institutions offer a number of SBA guaranteed loan programs to assist small business owners. While the SBA itself does not make loans, it does guarantee loans made to small businesses by private and other institutions.

The SBA (Small Business Administration) offers guarantees on loans for small businesses or entrepreneurs who have cash flow but do not have the necessary principal to obtain a loan for expansion or for a startup. The SBA has many different types of guarantees that they will give to private lenders, each has its own interest rate.

7(a) Loan Program:
This is SBA’s primary and most flexible loan program, with financing guaranteed for a variety of general business purposes. It is designed for start-up and existing small businesses, and is delivered through commercial lending institutions.
CDC/504 Loan Program:
This program provides long-term, fixed-rate financing to acquire assets (such as real estate or equipment) for expansion or upgrade to your business. It is designed for small businesses needing financing against their assets. and is delivered by CDCs (Certified Development Companies) which are private, non-profit corporations set up to contribute to the economic development of their communities.

Business owners in search of small business loans have a government agency working on their behalf  and that is the SBA. They encourages local banks to lend money to local businesses.
If you apply for a small business loan at a bank, the bank will check your application and supporting documentation to see if you qualify for a small business loan. If you do not qualify for a regular small business loan, the bank can check your application against the SBA guidelines. If your application meets the guidelines set by the SBA, the bank can offer you a loan that is guaranteed by the SBA. This means that in the event the business owner defaults on the small business loan, the SBA will pay the bank some money to help offset some of the loss it could experience.

One thing to know, the SBA will require you to commit to unlimited personal liability for the loan, but if it helps you grow and or succeed, then it may be worth giving that promise to the SBA.

It is truly the perfect storm in Commercial Real estate. Prices are coming down, and there are cash stressed owners willing to offer a deal to get some cash. Combine that with this news and you have all the notice you need that it's time to get serious about a business purchase or commercial real estate.

Let me crunch some numbers for you. I can run a discounted cash flow analysis, with financing , against your investment to show you if it will cash flow with the reported earnings and SBA loan. Everything is coming together for you, and the wind is starting to blow. Don't wait this storm out.

Time to buy a warehouse!

I listed a small individual 1500 sq ft warehouse space in 2006 for $275,000. It was a prime space in this park. I researched every other unit in the same industrial park to discover what everyone paid and when. Looking at the history tells you a lot. My seller had not bought at the bottom of the market. There were several units purchased after them that were considerably lower. This was the only way you could know when the market bottomed out and started back up. My seller didn't buy it at the bottom, but they bought it for a reasonable price, and they made income while holding it. If they had let me sell it for the amount of the offers we received, then they would have made a profit even though they didn't buy at the right time, or right price. What else is important?

But I wanted to crunch some numbers for you so you could see where we are today in 2010. My owner paid $163,000 in 2004. They purchased from someone who bought brand new in 1998 for $79,900. This is American capitalism at its finest. The first buyer purchased in 1998 and sold in 1974, six years and made 104% on their investment. I had offers of $199,000 when we were listed at $275,000 which were turned down. My owner dropped the listing after one year and sold in late 2007 for $129,900. Greed got the best of them while listed, and panic forced them to sell at a giveaway price. Instead of making 22% and being pleased with the investment, they lost 20%.

There are two listed in the same park now, both 1500 sq ft, Here's how they stack up:

Property                            1                                  2
Purchased new                  1998                           2000
Purchase new price          $77,500                       $117,900
Sold                                  2005                            2003
Sold/ Purchased Price     $120,000                      $137,500
Listed                               2010                            2010
Listed Price                    $169,000                      $199,999

You can easily see what timing, history and markets have to do with this pricing.

Property 1 bought early, and held for seven years and made 55% on their investment. the new owner has held for 5 years and is trying to get a 40% return. I would have you offer $150,000 or less. They get 25% or less return for their five years. Very fair.

Property 2 bought late, held for three years and sold three years later and made almost 17% on their investment for their three year investment. The new owner is trying to get 45% on their investment after 7 years. I would have you offer $170,000 or less. They get 24% or less return for their seven years. Very fair.

This analysis is of two units in the same park. It does not account for build out amenities or park location. We would need to look at your needs and then the units. But you can see, crunching the numbers helps alot.

Property Improvements - Cost Recovery & Class Life

There is an annual deduction against taxable income of the investment base of your improvements to a property. If you build a building on land you own, the tax laws allow you to 'recover' your cost over the life of the asset.

Class life is set by legislative statute. Properties are either classified Residential or Commercial. Residential Improvements to land are written off, or the cost recovered over a period of 27.5 years. Commercial is recovered over 39 years. These are set by statute and cannot vary.

What is even easier, is that you are required to use Straight-Line Cost Recovery. This means that you divide the property improvement by the Class Life, 27.5 or 39 years and you get to deduct that much against taxable income, to reduce your tax bill.

The only kicker, or twist is that since we do not acquire everything on January 1 of each year and sell it on December 31, then the rules have a formula for the month of acquisition and or disposition. It requires you to reduce what you can take in those months. there's a table, so use that.

Property purchase price (sample)             $565,000
Allocated to land ( see allocation blog)   $120,000
Allocated to Commercial Building           $345,000
Asset Class - Commercial
Cost Recovery for 39 years $345,000 divided by 39 = $8,846.15
Acquisition year from table $345,000 times 2.457% =  $8,476.65

This means that in the year you acquired the property you can deduct the smaller number from your taxable income to figure your tax. In subsequent years you will deduct the larger number until the year you dispose of the property, then it's back to the smaller number. This is a 12 month number. You will divide these numbers by 12 and only use the portion to the month you acquired it in.

Allocation of Basis

When commercial property is acquired, it consists of land and improvements to the land (generally a building). The new owner needs to know how to allocate the price paid between the two, because improvements are allowed to be written off (depreciated, cost recovery) over their useful life. Land is not.
There are many ways to do this. Appraisals can be used, tax assessments, or any other reasonable method. One of the easiest defensible methods is to use the tax assessment. If you look at the tax property record you will see where the county assessor or appraiser has allocated the taxable value of the property between the land and the improvements. If you use these for allocating your basis, you won't get much argument from the IRS.

Assessor records sample:

Land                                $75,000 = 25%
Improvements                $225,000 = 75%
Total Assessment          $300,000 100%

Your sample property            Purchase Price

Land                                        $600,000   X   25%  =   $150,000
Improvements                           $600,000   X   75% =    $450,000
                                                                         100%     $600,000

Use this simple and reliable method until you find a more advantageous defensible method that your accountant is satisfied with.

CAP Rate or Return on Investment

These are two common terms you will encounter in commercial real estate investment. I wanted to make sure you understand the difference between them so you are not confused when making a decision.

Capitalization or CAP Rate - the percentage result of dividing the future (or expected) net operating income by the investment.

Return on Investment (or yield) this is a measure of the entire investment, for the entire period of the investment. While you can certainly calculate it on a single year, it is the net present value of all dollars in, and out, taking into consideration exactly when those things happened.

Consider three different investments, which all yield 10%.

                                   A                 B                   C

Initial Investment (1,000,000) (1,000,000) (1,000,000)

NOI                          100,000          50,000     150,000

Sale Price              1,000,000     1,050,000     950,000

CAP Rate                  10%                5%            15%

Quick math shows you that in each case you netted $100,000 on your million dollar investment. But the CAP rate for each is different.

CAP Rate is stated in terms of a year. You want to know what CAP you will get on your investment. But if the investment extends over multiple periods, then you want to know what you will yield over the entire period.

Same numbers above for A, B & C, except :

NOI yr 1                                   100,000 50,000 150,000

NOI yr 2                                   100,000 50,000 150,000

CAP Rate                                    10%       5%      15%

Yield for entire investment          10%     7.41%  12.65%

Use your HP 10BII as follows:

1 Shift P/YR

Shift C ALL

1,000,000 +/- CFj Displays -1,000,000

100,000 CFj Displays 100,000

1,100,000 CFj Displays 1,100,000

Shift IRR/YR Displays 10% and if you change the income & sale it will display the other percentages above.

The difference results from when you got the money, and how much.

If this is too confusing, call me and I will do it for you.

Effective Rental income ERI

Let's look more closely at ERI and how we get to it and how we maximize it. If you are going to be a landlord, or even a net lease investor, you need to understand how to crunch these numbers.

The difference between Potential Rental Income PRI & Effective Rental Income is vacancy & credit losses. so you need to understand those.

Vacancy and Credit Losses are income lost, or expenses incurred as a result of vacancies and tenants who default on their lease. You will have costs for collection and eviction. Non-payment from bankruptcy, disputes and compromise are some reasons for credit losses.

You can try to minimize your credit losses by taking extra precautions. Requiring personal guarantees, running credit histories, letter of credit, performance bonds and staying involved so you can act quickly in case of a problem.

Generally you calculate PRI & ERI, because the bank or another investor is trying to establish a value of your property based on its net operating income from rentals. These numbers are estimates based on the properties and what you expect to charge. here's the formula for you to remember:

   Potential Rental Income - Total square feet available times price per sqft

- Vacancy and Credit Losses - could be an estimated percentage or experience %

  Effective Rental Income

+ Other income - Vending income, parking income, etc

= Gross Operating Income

- Operating expenses

  Net Operating Income

Consider a 5 unit building which rents each for $950 per month.

$950 X 12months X 5 units = $57,000

Vacancy & Credit losses history from previous years on this property 7%

$57,000 X 7% = $3,990 $57,000 - 3,990 = $53,010 Effective Rental Income

Property Taxes, $3,000, Repairs $850, Water & Sewar $1200, Insurance $2,000

Total operating expenses $7,050
ERI $53,010 - OE $7,050 = NOI $49,060 The bank or investor will use NOI to compute the value of your building based on this NOI. Next time CAP for Value.

Risk Management

Remember that all investments carry some elements of risk. What I want you to consider is that each investment will be different, and each needs to be looked at individually. Some require your time and management, and some will only require your investment.

In the analysis of any investment we must assess the risk. Is the return worth the risk. As an investor, you will each have difference tolerances for risk based on your financial situation and your understanding of what you are buying.

The first numbers you will crunch before any consideration of an investment in commercial real estate is your own. You have to divide your own funds into base capital and risk capital. Use only the risk capital, to invest in Commercial Real Estate or that which if lost will not affect the future support of your current family lifestyle.

Invest so that at the end of the day, your investment success or failure does not have any effect on your base capital, it either increases or decreases your risk capital.

Don't put all your eggs in one basket. You heard that since childhood. My guess is that if you are reading this then you have not yet diversified into commercial real estate, or you are not completely comfortable with this kind of investment.
One way to avoid losing all your investment is to diversify into different investments so that market changes, fluctuations or just bad luck, cannot take all of your risk capital at one time.

Certainly there are forms of ownership that you should consider such as limited liability corporations or partnerships, which limit your loss to your investment, and leaves your base capital intact. Remember, see a lawyer or CPA to get advice on what's best for you.
Do your research into each investment. Use the internet, it is the easiest way to find out as much as you need to know. Ask your broker, ask your lawyers and CPA before you write your check. But before you get there let me crunch the numbers for you.

Loan Calculations with an HP Financial Calculator

I am not sure I can make you an expert on an HP10BII Financial Calculator on my Blog, but I can teach you one of the most basic functions which is solving for an unknown. The calculator can be purchased at an office store for around $25.

Generally in any transaction you need to find out a number that is not given to you. If, for instance you are given a loan amount, points, payment, future value, length of term and interest rate, it would seem that you know everything. You do from your side of the transaction, but you do not know what the bank is yielding. or what your actual interest rate is.

Loan Amount $700,000, 2 points, 7% interest, 25 yr period, Payment $4,947.45

We need to know what this is really costing us, what is the bank's yield.

Calculate the points. $700,000 X 2% = $14,000. You pay this up front to the bank, which means you don't really leave with $700,000, you get a check for $686,000. $700K - $14K in points. Your payment is based on $700K, but you only got $686K. This means the sooner you pay off the loan, the greater the yield to the bank.

If you calculate the IRR - Internal Rate of Return using your new calculator, it goes like this. Clear the Calculator. Shift C = Clear All.  Type 12 Shift P/YR for 'Twelve Payments per year'   Type 25 Shift XP/YR for 25 yrs times 12 payments = 300 periods will display.  Type 686000 PV Type 0 FV Type 4947.45 +/- PMT Solve for I by pressing the I/YR key. It will calculate 7.23 which is the yield to the bank on your 7% 25 year loan

You will probably not hold the investment until the end of 25 years. So we will calculate the yield assuming we paid it off in five years. As a shortcut we could use some of the numbers already in the calculator. But since I want to walk you through, without confusion, I will start at the beginning, and give you the exact keystrokes for this calculation.

Clear the Calculator. Shift C = Clear All. Type 12 Shift P/YR for 'Twelve Payments per year' Type 5 Shift XP/YR for 5 yrs times 12 payments = 60 periods will display. Type 700000 PV   Type 4947.45 +/- PMT   Type 7 I/YR    Solve for FV by pressing the FV key. It will calculate the payoff of the loan after five year. $638,135.35

Now with these numbers we can calculate the banks yield if you pay off the loan early.

Without clearing the calculator: Type FV this will stuff the above number into that field

Type 686000 PV  Type 4947.45 +/- PMT    Type 5 Shift XP/YR for 5 yrs times 12 payments = 60 periods will display     Press I/YR it will show the yield to the bank after 5 years 7.5%
Your 7% loan cost 7.5%, now you know how to do it yourself.  If you didn't get it, call me and I will do it for you.

Fixed Rent versus Percentage Rent

If you rent Office Space, you will generally charge (or pay) a fixed rent per square foot of space rented. But if you rent Retail space, the landlord may want to share in the success of the tenant and charge a percentage rent based on the sales increases of the tenant.


This does not endorse either method. Most smaller tenants refuse to rent where landlords do this. That might be short sighted. Read on. Larger tenants generally pay percentage of their sales as the cost of doing business and being in a location where their sales actually increase because of the location. Also, the landlord has a stake in the success of the tenant, encouraging the landlord to create a good tenant mix and keep the location attractive & up to date.

Fixed Rent means the rate is fixed per square foot for the duration of the lease. Your total useable space times the rate per square foot equals the annual rent. Divide the annual rent by twelve months equals monthly rent, before CAM & Sales tax.

Percentage rent will include a base rent. If the base rent is $144,000 per year, with a 4% rate. then the Breakpoint is $3,600,000 in sales. Base Rent $144,000 divided by Percentage Rate 4% equals Breakpoint. What this means is, the tenant will pay the base rate until their sales exceed the Breakpoint. At sales above the BP, the tenant will pay 4% of the amount over. Sales $3,800,000 - BP $3,600,000 = Excess Sales $200,000 X 4% = $8,000 additional rent for that year. The percentage is the same as if the sales had been 4% of the larger sales. $3,800,000 X 4% = $152,000 - Base Rent $144,000 = $8,000.

So remember, Percentage rents can be a good for both the vendor & landlord.

Internal Rate of Return - IRR

Here's a simple way to think about the investment return: How much did you put into the property, when did you put it in, how much did you get out of the investment, and when did you take it out. IRR tracks every dollar in the investment for the time it is in the investment. It is a great tool for keeping score.

The formula uses these elements. IRV. I=Income, R=CAP Rate, V=Value.

Income divided by Value equals Cap Rate, or Income divided by Cap Rate equals Value.

Sample: $35,000 Income divided by $275,000 Investment equals Cap Rate 12.73%

$35,000 / $275,000 = 12.73%. Or.... $35,000 / 12.73% = $275,000.

This is a fun formula and it tells you a lot. We really will crunch some numbers when you start tracking monthly income instead of annual and they are all different. Not complicated, but you will need an HP calculator. I will refresh you on using an HP calculator in future blogs. For now we use simple math.

NOI - Net Operating Income

One of the most important numbers in commercial real estate is Net Operating Income. This is something you need as an investor or user of commercial real estate. NOI tells you everything regarding the investment . It is what the property will produce when all expenses have been deducted from Gross Operating Income. This is an important number in all steps of the ownership process. 

When you buy a property, you want to know the NOI. What is the property producing after all expenses. It is one way to actually value a property. If you put your money in savings and the bank offers 2% interest. You know for a fact that when you take it out, you will have your original deposit and an additional 2% annually in interest. The same for an investment in Real Estate. You want to know the what this property is producing in income from the tenants, and what the costs are that must be spent to earn that income. The difference is NOI.

A real estate investment is different than buying a CD. RE is not as liquid, and you can lose some or all of your investment. For that reason, we require a higher return, for the risk we are taking. You calculate that higher return as NOI.

Think of NOI as what's left for you at the end of the period. It is the return on your investment. The simplest way, is to look at what's left in your bank account, for this property the first year you own it. This is your profit on a cash basis.

Sample: Gross Rents( less credit or collection costs plus vending income) equals Gross Operating Income (GOI) less operating expenses OE: (Taxes, maintenance, insurance, repairs, utilities and management fees) equals NOI. GOI $56,000 - OE $34,000 = NOI $22,000

Now crunch that number and it will tell you what this investment will pay. NOI divided by Investment equals = IRR Investment Rate of Return. NOI $22,000 / Investment $275,000 = IRR 8%. We will talk more on IRR later, but remember, we need to know NOI if we are buying Real Estate as an investment.

Rental Terms & Calculations as a Tenant or Owner

Total Rentable Area, Usable Area & Common Area

Here's something you need to learn whether you are a tenant or the landlord. If you measure a building from the inside rough walls before you add the interior, it would give you the Gross Measured Area (GMA). But... the building will have stairways, elevator shafts and vents. The landlord does not charge for this space. Things that penetrate the floor are subtracted from the GMA to give you Total Rentable Area (TRA).

The interior measure of the walls in each space, will give you the Total Useable Space in each space (TUS). With this information we can 'crunch' some numbers and find out the efficiency of the building being measured.

Total Useable Space divided by Total Rentable Space equals Efficiency Percentage.

Example: TUS 13,500sqft / TRA 15,000sqft = 90%. In this example the building is ninety percent efficient. You can look at it other ways too. TUS 13,500 / E% 90% = TRA 15,000.

Again whether you are the tenant or landlord you need to understand the COMMON AREA and how that expense is allocated from the landlord to the tenant.

Within the TRA are areas 'common' to all tenants, like hallways, the lobby, fire corridors, the mail room, public restrooms, and vending or break rooms. Tenants share this space and are charged based on their prorated percentage of Total Usable space(TUS) in the building.

We can calculate the number by using the other numbers mentioned earlier. Total Rentable Space less Total Usable Space equals Common Area Space. The landlord will incur some costs to maintain this space, CAM common area maintenance. Generally the expenses for cleaning, repair on this area as well as the same on the parking lot , snow removal, painting the building, new roof etc, are also allocated to this category.

Example: assume that one office on the first floor has 4,500 sqft of TUS. That particular space will share the common expenses of the whole building on their percentage of the building's Total Usable space. Tenant TUS divided by Building TUS = Tenant percent of TUS. TTUS 4,500 / BTUS 13,500 = 33.33%. If the Shared expenses to maintain the common areas is $10,000 then this particular tenant on the first floor will be charged one third of it. $10,000 X 33.33% = $3,333.33.

Often when renting, CAM is quoted as a price per square ft. In this example, $3,333.33 / 4,500 sqft = $.75 per sqft. (or 75 cents per sq ft

Please note there are many types of leases, and many types of expenses to be shared or paid by the tenant and or landlord. This example is purely for you to learn how to calculate some of them.

Introduction to Real Estate Number Crunching

A "Number Cruncher," can be an accountant or person who works with a large number of arithmetic operations or even a person who works with large amounts of data which requires calculation for forecasting, and analysis.
If you relate the above to Real Estate investments then you know the purpose of this Blog. The Blogger, Timothy Michael Eovino, CPA, CCIM is a number cruncher, who makes his living in the field of Commercial Real Estate.
This Blog will show you the many ways to crunch Real Estate numbers and how they can help you with your analysis for purchase. You may be an investor, owner, or potential owner looking to crunch some numbers to satisfy your curiosity or comfort level.
Each topic will be both for general knowledge as well as practical use if applied correctly to your numbers. I always suggest the use of a professional, when planning an investment in Real Estate. Since I no longer practice public accounting, I suggest a local practicing CPA or Real Estate Lawyer to assist you. If you are looking for a Commercial Real Estate Agent in Southwest Florida, then I can help you with that. My hope is that you find something useful , in this Blog, that makes you think, or stirs your interest in learning more.

The first term to learn is Square Feet.  SqFt.  Most all properties will be measured in SqFt. A vacant lot might be 125 feet wide and 105 feet deep.  125' X 105' = 13,125 sqft.  An acre is 43,560 sqft. So your vacant lot 13,125 SqFt. / 43,560 SqFt. = .3 of an acre (rounded) An office a retail space or an industrial warehouse will be measured the same way.

In the coming Blogs you will learn about CAP Rates,  learn how to calculate them,  interpret them and use them to your advantage.  Terms like "Gross Rent Multiplier", "Debt coverage Ratio", Cash Flow Before & After Tax", "Cash on Cash Return" Total Yield", and Return on Equity are things I will cover for you.   These are some of the terms we use in Commercial Real Estate.  If you are a buyer, seller or investor,  then you need to know your way around them.  Follow this blog and you will. 

Starting here,  with some basic knowledge, first.  There are four property type categories of Commercial Real Estate, which you should know.  If you want to invest in this market you need to know what to ask for.  Office, Retail, Multi-family and Industrial. 

Office properties are used by practically everyone in business.  Even in a warehouse, there is generally an office space.  Office properties are classified in A, B or C.  If you want walnut paneling and a highrise location,  then you will pay a premium for such class A space.  But if you want a place to keep your parts and bill your customers,  then B or C will work just fine.

Retail is for selling goods and services to customers.  Multifamily can be any type of apartments from duplexes to highrise buildings.  Industrial properties are for production, manufacturing and warehousing.

If you are not going to use your property yourself,  then you need tenants.  No matter what type of property you buy, you will want tenants.  The ideal is to be fully rented all the time,  but that is not always the case.  When investing in a property or selling it,  you will want to know the 'Vacancy Rate.'

Vacant Space,  divided by total space is the vacancy rate. 

Sample: 7,000 square feet Vacant, divided by 100,000 sq ft Total  = 7% Vacancy rate.  Pretty simple stuff. 

Now let's crunch it a bit.  If you know how many square feet,  how much you plan to charge per SqFt., and you can predict your vacancy rate,  then, you can predict your Effective Rental Income (ERI).  Potential Rental Income (PRI) - vacancy and credit losses,  equals ERI.  100,000 sqft X $15 per SqFt = Potential Rental Income time vacancy rate 7%.  Now subtract them.  100,000 X $15 = $1,500,000 X 7% = $105,000.  $1,500,000(PRI) - $105,000 Vacancy = $1,395,000. ERI

Next time more crunching - NOI Net Operating Income.