“You miss 100 percent of the shots you never take, and if you think it’s expensive to hire a professional to do the job, wait until you hire an amateur”.
by Patrick J. DiCesare, CCIM
Lenders have overhauled their lending criteria and underwriting guidelines, so why shouldn’t buyers do the same? During these challenging times, property investors must refocus on the fundamental aspects of investment analysis to properly substantiate value in the purchase price.
When a seller gives you the property’s tax returns and operating statements, it’s time to be diligent. The value of investment real estate primarily is a function of net operating income. Therefore, an investor should dissect each component of the NOI during the financial analysis of a property.
The first aspect to examine is the property’s income. It may sound basic, but it is imperative to ascertain an accurate picture of the actual income the property generates now and in the near future. The following major categories deserve intensive study to determine a property’s income.
Base Rent. This largest portion of the property’s income is often overlooked because it is such an obvious category. But collection loss is major issue, and investors need to have as much information as possible about tenant payment histories before placing an accurate value on a property.
The priority here is to make sure that the correct rents actually are being collected, for the right amount, and on time. Ask the seller for actual copies of rent checks received for the last three months from all of the tenants, or, at the very least, from the larger tenants. Compare the rents received with the rents listed on the operating statement and in the leases to make sure that all three are consistent.
CAM Charges, CPI Increases, and Reimbursements. In my experience, some owners do not accurately bill tenants for common area maintenance, consumer price index increases, tax escalations, utility reimbursements, and the like. Additionally, in today’s difficult economy, some owners may not bill in a timely fashion for these items or even at all to avoid losing a tenant. I also have seen owners who do not have sophisticated enough management systems to accurately bill for these charges.
Owners who do bill these items may have arrangements with tenants to pay over time, thus potentially delaying the new owner’s ability to collect. This is more common with mom-and-pop-type tenants in smaller properties, but this is a large sector of the commercial leasing market, and one that has been hit hard by the economic downturn.
Buyers should insist on seeing billing statements for these items and, more importantly, corresponding checks from tenants proving these items are paid. If the owner represents uncollected charges as fully received on the operating statement, that amount must be discounted to reflect a lower effective gross income.
Rent Increases. In today’s tough leasing market, rent increases are not immune from negotiation. Just because a lease calls for a scheduled increase does not mean that an owner actually is collecting the increase. For example, some tenants have negotiated temporary relief from monthly lease obligations, thereby making their current payments even lower than the base rate at lease commencement. Investors need to be wary of these situations and should address these issues prior to closing, either in the form of escrowed sales proceeds or a separate agreement with the tenants, so there are no surprises after closing.
In addition to income, investors should pay careful attention to the following items.
Expenses on operating statements and tax returns. While analyzing tax returns, buyers should question whether capital expenditures should be re-categorized as operating expenses. Operating expenses reduce the NOI, while capital expenditures do not. It’s a fine line, and one that must be examined carefully. In the wrong category, $10,000 translates into $125,000 in value at an 8 percent capitalization rate.
Insurance. If the property has had a recent insurance claim, or even if there has been a recent incident from which a claim could arise, insurance costs will go up. The property’s premium could increase by as much as 50 percent, even when the claim has not yet been paid. Investors should request a loss run from the property’s current insurer to safeguard against such potential increases in expenses.
Taxes. When property ownership is transferred, the taxing authority often will begin calculating the taxes on the new sale price, which presumably is higher than the current assessment. Astute buyers will consider the difference between the current assessment and the new assessment in their financial analysis.
Negotiating the Sale Agreement. Procure the right to interview the tenants to ensure that they are happy and do not have plans to move. Demand subordination nondisturbance agreements to confirm that all is in order with the tenants and their demised premises. Ask for a long period of representations and warranties so that the seller is liable for a longer time should any inaccuracies arise. Specify that all documents requested are part of the due diligence package. For instance, if you want to review all service contracts, specifically ask for that as a condition of the sale.
A few extra hours spent analyzing an asset before the closing could save investors many years of financial hardship.
Phoenix Commercial Real Estate and Investment Real Estate: Investors and Owner / Users need to really know the market today before making a move in owner user Commercial Properties, Investment Properties and land in Phoenix / Maricopa County, Pinal County / Arizona, as the market has a lot of moving parts today. What is going on socio-economically, what is going on demographically, what is going on with location, with competing businesses, with public policy in general — all of these things affect the quality of selling or purchasing your Commercial Properties, Commercial Investment Properties and Commercial and large tracts of Residential Land Therefore, you need a broker, a CCIM (Certified Commercial Investment Member) who is a recognized expert in the commercial and investment real estate industry and who understands Commercial Properties and Investment Properties. I am marketing my listings on Costar, Loop-net CCIM, Kasten Long Commercial Group. I also sold hundreds millions of dollars’ worth of Investment Properties / Owner User Properties in Retail, Office Industrial, Multi-family and Land in Arizona and therefore I am working with brokers, Investors and Developers. I am also a CCIM and through this origination ( www.ccim.com ) I have access to marketing not only in the United States, but also internationalClick here to find out what is a CCIM: https://en.wikipedia.org/wiki/CCIM
Please call or text me on my cell: 520-975-5207 or send me an e-mail firstname.lastname@example.org
- DEMOGRAPHIC FACTS ABOUT MARICOPA COUNTY:
- The average age of the population is 34 years old.
- The health cost index score in this area is 102.1. (100 = national average)
- Here are some of the distributions of commute times for the area: <15 min (22.7%), 15-29 min (36.8%), 30-44 min (25.1%), 45-59 min (8.6%), >60 min (6.8%).
Feel free to contact Walter regarding any of these stories, the current market, distressed commercial real estate opportunities and needs, your property or your Investment Needs for Comercial Properties in Phoenix, Tucson, Arizona.
Kasten Long Commercial Group tracks all advertised apartment communities, including those advertised by other brokerages. The interactive map shows the location of each community (10+ units) and each location is color coded by the size (number of total units).
Walter Unger CCIM, CCSS, CCLS
I am a successful Commercial / Investment Real Estate Broker in Arizona now for 20 years. If you have any questions about Commercial / Investment Properties in Phoenix or Commercial / Investment Properties in Arizona, I will gladly sit down with you and share my expertise and my professional opinion with you. I am also in this to make money therefore it will be a win-win situation for all of us.
Please reply by e-mail email@example.com or call me on my cell 520-975-5207
Walter Unger CCIM
Senior Associate Broker
Kasten Long Commercial Group
5110 N 40th Street, Suite 110
Phoenix , AZ 85018
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