Category Archives: Commercial Property

Tips to Hire a Commercial Real Estate Agent

If you don’t want to handle your relocation project or commercial lease renewal yourself, you can go to a commercial real estate agent. All you have to do is choose the right professional for your needs. Given below are 6 things you may want to consider during your evaluation. Read on.

Likability

A relocation or lease renewal is similar to a construction project. The difference is that it takes a bit longer than expected. So, it’s a good idea to go with someone who you like. This way you will enjoy throughout your journey and the process of negotiation may also go well.

Trust

Make sure the professional agent that you are going to hire can be trusted. It may be difficult to find out who can be trusted but it can be done during the interview. By asking a few relevant questions during the interview, you can get a pretty good idea as if they are trustworthy or not.

Conflicts of Interest

What does a conflict occurs? Actually, the conflict may occur when you go with an agent who already is a representative of many property owners in the same area. Now, the agent wants to serve you despite that the fact that they have given their word to the property owners that they will find a way to earn them the highest rate of rent possible. So, you may want to get a clear idea of the conflict severity and its importance for you.

Experience

Experience of the agent is of utmost importance as far as choosing the best professional is concerned. Ideally, it’s a good idea to go with a commercial real estate agent who has over 10 years of experience in the field. Their grey hair may be a sign that they have been in this business for years. You can ask about their experience during the interview.

Age

Age of the professional should not be taken as an evidence of their experience in the field. The million dollar question is how long have they been actively involved in the business. You need to keep in mind that commercial real estate is on the list of those businesses that people do part time. So, make sure you choose a professional who has been working full time as an agent. What matters is experience not the age of the agent. After all, age is just a number.

Specialization

Typically agents specialize in two ways. They can do it by industry vertical or location. As far as importance is concerned, location specialization carries more weight. An agent with location specialization has a pretty good idea of what is happening in the market. They know about the best deals and best property owners. Aside from this, their negotiation style is pretty impressive.

Long story short, if you have been thinking of hiring the services of the best commercial real estate agent, we suggest that you take these factors into consideration. This will help you choose the best service provider.

How to Get Ahead Financially By Investing in Commercial Property

Think of all the investment commercials you have heard and seen that admonish/encourage you to start saving money early in your working life. Messages like, “Take advantage of your company’s 401k program,” and “Start an IRA program,” are like investment mantras and there is a great deal of wisdom in those messages. But what also can be important is expanding your mindset to additional investment opportunities like investing in property.

Risk and challenge

Property investing is often described as “high-risk, high-reward.” It may not be the ideal investment plan for the faint of heart. But it can be a good match for the investor who:

• Likes a challenge.

• Has an enormous amount of patience.

• Can commit to a hands-on approach to managing the investment.

• Is willing to learn the business of investing in commercial real estate.

Reducing risk

The first “risk” to reduce is a lack of knowledge in commercial property investment:

• Learn all you can about the subject.

• Find a mentor to further your education.

• Consider partnering with a successful commercial property investor.

• Start conservatively.

Next, don’t try to invest without help from a commercial estate specialist. The person you work with should be a fiduciary (one who will be working in your best interest). Industry writers recommend that your broker should be a member of the National Association of Realtors and adhere to its code of ethics. Most important of all, your broker/realtor should represent only you – not the seller, or not you and the seller.

Making money on your investment

Getting ahead in commercial property investing is accomplished in several basic ways. Your investment can grow through income and appreciation/selling.

• Income generally comes from rent. It also can be generated if your tenants are required to pay fees for contractual options (like right of first refusal on an adjacent space).

• Appreciation is another investment/money-making option. This is where the adage, “Buy low, sell high,” applies. Experienced property investors will buy the property at a low price, put a finite amount of rehab work into the property, possibly redefine the property to a more marketable purpose, and sell at a higher price. These investors make their money on flipping the commercial property, not on rental income.

Types of commercial estates and income potential

The type of commercial property in which you choose to invest can affect your earning potential. Consider the income opportunities in these properties:

• Motels/hotels located in tourist or major business travel areas.

• New commercial construction can be highly profitable but requires serious knowledge of the industry (and significant financial backing).

• Small commercial properties like strip malls and small office buildings often have long-term tenants.

• Industrial properties include manufacturing sites, distribution centers, and warehouses. A financial plus here is that these tenants are usually responsible for most repairs and maintenance.

• NNN leases are often found in larger businesses and with stable tenant companies that lease long-term (like 30 years at a time). These tenants are responsible for all expenses, including property taxes and insurance.

There is money to be made for the commercial property investor who is willing to start slowly, become knowledgeable, be focused, act conservatively, exercise patience, and work hard.

Rarely will commercial property investment be your get-rich-quick ticket. But over time, it can significantly augment your retirement fund or provide you with the financial resources to fulfill other dreams and plans.

Handover Procedures in Commercial Property Leasing

In commercial property the handover of premises is a critical time to take note of important issues and matters requiring attention. These notes can later support the tenant or the landlord in any matters of debate or dispute. There is a handover and the beginning of occupancy and again at the end of the occupancy.

In all respects the occupancy of the tenant and the premises handover should be in accordance with the lease. This says that you as a property or leasing manager must read the lease and understand it. Even in a single property with many different tenants, the leases can be different and usually are. The ‘make good’ clauses and the ‘handover provisions’ of the lease are unique and should be understood relative to each tenancy.

Taking photos also is part of the documentation of premises at handover time. It is recommended that the photographs taken are date and time stamped in the camera, and the photographs are later saved as ‘gif’ files and not ‘jpg’. This is because ‘gif’ files are a more stable and fixed format that cannot be manipulated by software editing tools such as ‘Photoshop’. If you want the photograph to be evidence of something important, then the ‘gif’ format is a reliable choice.

Whilst every tenancy is unique, let’s set some rules to give you some benchmarks to work with at handover time. You can then add some other matters that may be applicable to the location or property that you work on.

  1. Take ‘gif’ format photographs as evidence of important things and levels of presentation
  2. When taking photographs it pays to put a scale reference such as a ruler into the picture
  3. Take notes of any comments or agreements from any parties to the lease
  4. Check all walls and painted surfaces for damage and or current condition, taking photographs as appropriate to record the current condition
  5. Check ceiling tiles and t-bars for ceiling presentation and integrity
  6. Look above ceilings for the satisfactory removal of any unnecessary cabling that should have been removed
  7. Check all floor coverings for any damage or deterioration beyond normal ‘wear and tear’
  8. Look for any floor or wall penetrations that exist or need to be remedied noting that any penetrations must be fire rated to the standards of the local building codes.
  9. Check air conditioning function and note any need for air conditioning balance due to fitout or altered or installed partitions in the leased space
  10. Check lights and light switches for function and safety. It may be necessary to replace all tubes in the light fittings as part of the make good provisions of the lease
  11. Check all doors and locks for safety and security. Do not overlook the need for doors and locks to comply with all building codes. All keys to the doors should be provided or returned as appropriate. If a master key system is installed in the building then check that the keys all comply with the master system
  12. Check windows for function, security, and safety
  13. Check electricity supply to the tenancy and any metering of consumed energy
  14. Check the installation and compliance of any signage for the premises and that such is in accordance with architectural rules set for the building.
  15. Look for any matters of change to the structural integrity to the building and the premises
  16. As part of the checking process it sometimes pays for the landlords contractors to inspect the premises and provide a full report of any complex or sensitive issues. This will support any later legal dispute over make good terms and conditions.

When keys are exchanged between the tenant and the landlord, or the landlord and the tenant, a receipt should be obtained as a record of handover of the keys. The real estate agents actions in the handover to any tenant should also be supported by notes. It is surprising how many disputes arise later when you least expect it; in such case your notes are invaluable.

Never hand back any bond money or bank guarantees to tenants until you are absolutely certain that all make good requirements of the lease have been satisfied. It is also of note that all make good must have been done at and before the expiry of the lease; it is not something that is done after lease expiry.

Efficient make good and handover procedures are a critical skill for the real estate agent to develop and implement on every lease situation.

Reasons For Due Diligence and Buying Commercial Property

If you have decided to get into the commercial property business, you may have been advised to practice due diligence. Though it sounds logical, you have no doubt wondered just what does due diligence actually mean. There is a lot more detail involved in due diligence than you might think.

No matter what kind of commercial property you want to buy, you will need to do your due diligence. It might be a giant mall property, or a smaller commercial business – but the process is the same. You need to know what kind of condition your property is in.

Why do due diligence?

You will want to do this not only to make a sound business investment but also to ensure that you know what your property needs so your tenants will be able to set up shop in a safe building free of any liabilities. You will also be investing in your business for a long time, so you need to be sure that there won’t be any long-term issues that end up reducing your return on investment.

Getting started

To start the process, visit the site with your commercial real estate broker and potentially even the seller. This will give you a good overview of what it is you are getting into, and what you are getting. You can develop a list of questions that you need answers to and points to follow up on.

Part of due diligence also means reading all of the documents carefully so you understand all of the terms and you know what kind of warranty regarding building condition is granted. Looking over all of the documents might take some time, but it can save a lot of frustration and expense down the road. Don’t be afraid to ask the seller for any documents from when he or she purchased the property.

This request can include any inspections or land surveys done by the current owner during the time he or she owned the property. You can also ask for a list of current tenants and how the property is being used. Is it a commercial building in an area being zoned for redevelopment? This will enable you to convert the property if you so wish. In many urban areas, abandoned warehouses have been turned into ultramodern condos. Imagine the possibilities!

Government document searches

You may also want to do a records search at the county or city records office. This search can include any inspections conducted by that government agency, any tax liens or other pending action on the property, and any environmental inspection reports.

It wouldn’t even be out of reach to pull up the original plans and specs for the building so you can see what modifications have been done over the years. The current seller might not know all of this, particularly if he or she bought it as a foreclosure or just didn’t do his or her own due diligence.

There are so many other things to look at when doing due diligence. It is a solid investment to consult a real estate attorney to assist you in the process so nothing gets missed. Due diligence can be time consuming to be sure, and potentially carry some costs, but it is very worth it in the end.

The Advantages Of Getting Commercial Property Management Firms

People who own a commercial property can get more than enough cash flow from their commercial property and definitely have guaranteed financial security for your future. Of course, both of these benefits do come with a price. One of these is the property has to be in good condition to maintain or increase its value. Otherwise, you will have to spend more money on maintenance and taxes.

Considering commercial property management firms is an excellent solution. Instead of you, and a handful of people you know, running your commercial property, you get another company to do the managing so it will be less hassle and stress-free. Check out some advantages that you can get from getting these services from professional property management experts.

– You will be able to provide the very best service to tenants. A commercial property firm will have the systems and the people in place to address every kind of tenant concern, from the smallest utility issue to the more serious security problems. Even though you own a fairly small commercial building, servicing tenants and making sure they are satisfied (and safe) can be time consuming as well as energy draining. Unless you have nothing else to do with your days, then you could better serve your tenants by hiring a business management firm to do the job for you.

– You can get better tenants for your commercial property. One of the ways to maintain profits is to get the best tenants. This means tenants who pay on time and who also take care of their leased spaces as their own. Delinquent tenants not only dissolve profits, but they also create a lot of stress.

– Property professionals have the experience to manage your property. From collecting rent to implementing maintenance work, these business managers can handle every aspect of running any building. They do the job for you so you don’t have to be stressed out or be hassled.

– A well-managed property will never fail to yield revenue. With expertise and experience at the helm of your business venture, you are sure to turn over a good profit every time. Some of the best leasing companies even assess your terms and make appropriate recommendations so that you not only reduce problems but also boost revenue.

– You need to relax and enjoy your investment. Finally, what good is a property investment if you can’t even find the time to relax and enjoy the profits you have earned? With the right management firm, you can do that now. Click here to know more.

Will Commercial Zoning Increase Your Property Value?

If you have the correct combination of items and you have a large enough pocketbook, this may be your ticket to retirement. But sometimes, it’s your ticket to the poor house.

I looked at a home that is zoned mixed use. In this area, this means that you can either use the residence as a home or use the residence as a commercial site. These types of sites are usually limited to low impact items such as office buildings, apartments, etc.

What’s the catch? Well, you’ll have to own a large enough parcel of land to make a commercial deal work. This is why you see five homes along a busy street all for sale at once and the zoning is commercial. This is because in order to be approved for commercial development, there must be a large enough parcel to make the commercial development work.

Usually, for mixed residential zoning, these areas are close to town or close to other apartments or business in the area. I’ve appraised several of these types of property. Many times, advertising the zoning as mixed use is enough to sell the home for more just because it may appeal to that specific buyer that wants to live in the same home and run a business out of the home. One home that I appraised offered a living area on the main level and a daylight basement offered office buildings that were rented out.

My understanding is that some banks that specialize in residential zoning will not loan money on mixed use properties. This, of course, is a downfall, if you’re trying to get a residential loan. Some buyers will not want to use their residential home for office use. This will limit the number of buyers that may want to buy your home.

So, will commercial zoning increase your property value? If your home is a residential home with the best use as a residential use, commercial zoning may decrease your home value and make it difficult to get a loan and make it difficult to sell, because you’ll be located on a busy street. If your home is residential use and the highest and best use is to build a commercial structure, most often, your land used as commercial use will be more valuable than your home used as residential use.

So, the moral of the story is to keep an open mind on these types of properties. I looked at some homes the other day where the home is an older residential home with a larger lot. The zoning can be switched from residential to commercial for $1500. Residential homes with larger lots with similar zoning were selling for $350,000 to $400,000. Residential homes that have been switched to commercial zoning were selling for $500,000 to $700,000. So for $1500 and some time, this would be a good investment for your money.

Which Types of Commercial Property Should You Invest In?

When it comes to commercial real estate investment, investors often want to know which types of properties they should consider investing in. This article discusses about 5 groups of properties and reasons why you should or should not consider them.

1. Land: the people who invest in raw land often hope to buy agricultural land near commercially-zoned land at a few thousand dollars per acre. They dream their lot will be re-zoned to commercial in the near future which is worth hundreds of thousand dollars or more an acre. People who convince you to invest in raw land often try to sell you this dream. While this dream actually happens just like it’s possible to hit the jackpot in Las Vegas, the reality is most investors lose money or get little return in land investment. It is a very risky investment as land generates either no or very little income. From an income tax viewpoint, land does not depreciate in value so you cannot claim depreciation. On top of that the interest rate to land loan is also very steep compared to other types of commercial properties. So each month, you would need to come up with money to pay for the mortgage while collecting none. You should consider invest in land if you

– Know how to develop so you could convert raw land into a shopping center.

– Know exact what you do and have deep pocket.

– Own the land of a shopping center (you don’t own the buildings).

2. Apartments: this is a management intensive investment as the turn over rate is high. The leases are short-termed often at one year of month to month. As tenants move in and out, you would need to spend money to get the unit ready for occupancy. Apartment tenants tend to have higher late payments history than other tenants as they are more often have a tighter budget. If you don’t like the headaches dealing with lots of tenants, you probably want to stay away from apartments. The key to successful apartment investment is to

– Control or minimize the expenses. This may sound like a trivial task until you see the expense list provided by the property manager. These expenses include: advertising, accounting, bank fees (for insufficient funds), capital improvement, coin laundry subsidy, cleaning, collection fees, garbage disposal, insurance, landscaping, legal (eviction) fees, maintenance, offsite property management, onsite property management, pest control, painting, repairs, sweeping, security, property taxes, utilities and water.

– Invest only in properties in a good location with no deferred maintenance.

– Stay away from areas with rent control, e.g. Berkeley, Los Angeles.

Otherwise you may end up getting little cash flow or even having negative cash flow. If one of your investment objectives is to get high cash flow, you may want to stay away from apartments. In California, if you own a 16 or more units apartment you must have an onsite manager. This increases the expenses further. In general, apartments are easy to buy and harder to sell. There are always lots of them on any markets. The upside about apartments is they tend to have high occupancy rate as everyone needs a roof over their heads. Due to this fact the interest rate for apartments is often ¼- to ½ percent lower than other commercial properties.

3. Special Purpose Properties: These are properties designed for a specific business, e.g. restaurants, gas stations, and hotels/motels.

– Restaurants: some investors like to invest in brand name fast food restaurant like Burger King, Pizza Hut, Jack In The Box, KFC. These are single tenant properties with long term absolute triple-net lease which often require no management responsibilities from the landlord. However, the rental income or cap rate for these restaurants is often lower in the 5-7% range. Emerging regional brand name restaurants like Johnny Carino’s, Back Yard Burger, Zaxby’s or Tia’s TexMex tend to offer higher cap rate in the 7-8.5% range. However, when you look deeper in the financial statements they may not make a profit yet. The restaurant operators sell the real estate to investors higher cap rate and lease back the property for 20 years. They in turn use the sale proceeds to expand their business by building more restaurants. So if you are willing to take higher risks, you will be rewarded to high income with these emerging restaurants.

– Gas stations: when you buy a gas station, you buy both real estate and the gas station business. Most gas stations also have convenience stores and sometimes several car repair bays. The profit margin for gas is fixed at 10-20 cents per gallon [many customers wrongly blame the high gas prices on the innocent gas station operators] but is pretty high for convenience store. This is considered an owner-occupied property which qualifies you to a SBA loan with as little as 10% down payment is required. If you don’t plan to get involved in running the gas station, auto repair and convenience store business, you may want to stay away from gas stations as gasoline is a chemical that could contaminate the soil. Once a leakage occurs and contaminates the environment, it takes years and lots money to clean up the soil. You may even be liable to damages from owners of adjacent properties as contamination may spread out to their properties. It’s almost impossible to sell your property as no lenders want to loan the buyers the money to buy it.

– Hotels/Motels: once you buy a hotel/motel, you buy the real estate and a 24-hour-a-day 365-day-a-year business. This business requires hard work, and marketing skills to get the rooms filled. The rooms are worthless if they are vacant. The business tends to be seasonal and may be affected immediately by economic downturns and political events, e.g. 9-11. Many of these properties are owned by Indians with the last name Patel as they seem to work harder and know this business well.

4. Office Buildings: these properties are single or multi-story buildings. The older two-story office buildings without elevators tend to have trouble finding tenants on the upper floor as many service businesses may have physically-challenged customers who cannot walk up the stairs.

– Single-tenant buildings: the properties are used as corporate headquarters of big corporations like Cisco. These big buildings tend to be more sensitive to the economy. Once vacant, it’s hard to find a replacement tenant.

– Multi-tenant buildings: these properties are leased by small businesses, e.g. real estate, tax accountants. Investors who purchase these properties want to spread out the investment risks. When one tenant vacates a unit, you lose just a small percentage of rental income.

– High Quality Tenants: most of them have good credits, lot of assets and promptly pay the rent when due.

– Leases: The leases for office building vary from full service [landlords pay property tax, insurance, maintenance and utilities] to NNN [tenants pay property tax, insurance, maintenance and utilities]. The NNN lease is a litmus test on whether the office building is in high demand by tenants or not.

– Medical buildings: these properties are leased primarily by doctors and dentists. A good medical building should be in front of or across the street from a hospital. This makes it convenient for doctors to go back and forth between hospital and their offices. Some investors prefer medical buildings as medical tenants are very recession proof.

5. Shopping/Retail Centers: These centers are mostly single-story and can accommodate wide varieties of tenants: retail and service businesses, restaurant, medical, school, and even church. As a result, this is the most popular type of commercial properties that investors look for. They are always in high demand as there are more buyers and few sellers.

– Multi-tenant strip: the advantage of this investment is when a tenant moves out, you only lose a portion of the total income while you are looking for a new tenant. So you spread out the risks in this property.

– Single-tenant building: The advantage is you just have to work with one tenant. Some of the tenants, e.g. Costco, Home Deport, Walmart, CVS Pharmacy sign 10-20 year lease and guarantee with their corporate assets which could be worth billions of dollars. This makes your investment very safe.

– High Quality Tenants: most of them have good credits, lot of assets and promptly pay the rent when due. They often sign long term 5-30 year leases so you don’t have worry about finding new tenants every year. They keep your property in good condition and sometimes even spend their own money to make it look better in order to attract the customers to the stores.

– Triple Net (NNN) Leases: the leases for retail centers are often in favor of the landlord. The tenants pay a base rent and reimburse the landlord for property taxes, insurance, maintenance and sometimes even property management fees. This takes away a lot of risks from you as an investor. The NNN lease in a sense is a litmus test on whether the property is in high demand by tenants or not.

– Ground Lease: occasionally a retail center with ground lease is for sale. When you buy this center, you only own the improvement but not the land underneath. It could be a trophy property but you should think thrice about investing. Once the ground lease expires and the land owner refuses to extend the land lease, you own nothing! So it’s easy to buy this center but very hard to sell.

Starbucks Coffee – What Commercial Real Estate Investors Should Know

Company Summary

Starbucks Coffee, sometimes referred to as Fourbucks Coffee is the largest coffeehouse chain in the world. It opened its first store in 1971 in Seattle’s waterfront Pike Place Market by three partners: Jerry Baldwin, Zev Siegel, and Gordon Bowker to sell high-quality coffee beans and equipment. In 1982, Howard Schultz, the current Chairman and CEO joined the company as the Director of Marketing. He was impressed by the popularity of the espresso bars in Italy after he traveled to Milan in 1983. Back to the US, he convinced the founders of Starbucks to sell both coffee beans and espresso beverages. However, the idea was rejected so he left the company and founded Il Giornale coffee bar chain in 1985. In 1987 Howard Schultz and Il Giornale bought Starbucks with $3.8M and renamed Il Giornale coffee bars to Starbucks and turned it into the Starbucks you know today. The company went public with the symbol SBUX in June 26, 1992 at $17/share with 140 stores. Since then the stock has split 5 times. As of May 2008, SBUX is traded at about $16, down from the high of $39.43 in November 2006.

Starbucks opened the first overseas store in Tokyo, Japan in 1996. The company currently has about 16,000 stores, employs 172,000 partners, AKA employees as of September 2007 in 44 countries. It has annual sales of over $10B with most recent quarterly revenue being $2.526B. About 85% of Starbucks revenue comes from company-operated stores.

Starbucks does not franchise its operations and has no plans to franchises in foreseeable future. In North America, most stores are company-operated. You may see some Starbucks stores inside Target, major supermarkets, University campuses, Hospitals, and Airports. These stores are operated under licensing agreements to provide access to real estate which would otherwise unavailable. Starbucks receives licensee fees and royalties from these licensed locations. At these licensed retail locations, the workers are considered employees of that specific retailer, not Starbucks. As of 2008 it has 7087 company-operated stores and 4081 licensed stores in the US. Internationally it has 1796 company operated stores and 2792 joint-venture or licensed stores in 43 foreign countries. The pace of expansion is slowing down as the company plans to open 1020 US stores in 2008, less than 400 stores in 2009 down from 1800 stores in2007. In addition, it also plans to close 100 stores in 2008.

Risks to Real Estate Investors

Starbucks coffee buildings remain a popular investment for many investors. When you consider investing in a property occupied by Starbucks, you need to understand the following risks of your investment:

  1. Recession-sensitivity: a hungry man can survive with a Big Mac & fries but can live without a four-buck Frappuccino. This means Starbucks is very sensitive to economy downturn as seen in 2007 and 2008 compared to Burger Kings and McDonald’s. This may be the main reason sales at stores in the US open at least a year are expected a mid single-digit percentage decline, the first drop ever. It triggers Howard Schultz to return to the CEO post. The company plans to double its marketing spending to $100M in 2008 to drum up sales. It began an aggressive coupons campaign offering free drinks every Wednesday through May 28, 2008. This may be a sign of desperation. On April 22, 2008 Starbucks cut its outlook for the year citing weak economy.
  2. Calorie & Sugar: Starbucks drinks have more sugar and calorie in which consumers are more and more concerned due to explosion of obesity and diabetes epidemic in the US. For example, its Strawberries & Crème Frappuccino® Blended Crème – whip has 120 grams (over 1/4 lb) of sugar, and 750 calorie on its Venti 24 oz size. If it becomes a trend that consumers decide to cut down on the sugar drinks, or stick to low-carb diets then it will have impact on Starbucks revenue.

  3. Competition: McDonald’s, Wendy’s and Dunkin Donuts now also offer espresso at lower prices to compete with Starbucks. They will capture some revenue from Starbucks, especially from cost-conscious customers. The current Starbucks prices are already pretty high; it’s very hard for Starbucks to increase the prices in the near future without affecting the traffic to its stores.

  4. High-expenses business model: while Starbucks profit margin is high as it pays an average $1.42 per pound for the unroasted coffee, its business is very labor intensive just like any other foods businesses. It takes between 10-20 employees to run one store. All eligible part-time and full-time partners in the US and Canada receive benefit package consisting of stock option plan, 401k with company matching, medical, dental & vision coverage. Starbucks is voted as the 7-th best company to work for in the US in 2008 by the Fortune magazine employee’s survey. What is good for employees may not be good for the employers. These benefits are normally only available to key employees or managers in the restaurant industry. Historically, the costs of these health benefits rise faster than the rate of inflation. In the long run, they may have negative impact on Starbucks bottom line. Should Starbucks not perform well, it may be under pressure as a public company to close more stores.

  5. Special-purpose building: Starbucks freestanding building is a special-purpose building designed specifically for Starbucks. Should Starbucks decide not to close or not to renew the lease, it’s hard to re-lease the property. There are few tenants out there willing to pay the high rent like Starbucks. It’s hard to use it as a fast food restaurant due to a relative small square footage. Besides, it does not have a commercial kitchen. Once vacated by Starbucks, the property value will most likely go down.

Starbucks Real Estate Operation

Starbucks divides the US & Canada into 17 real estate territories, each has its own store development office to develop the market in its territory. The developers constructed freestanding buildings about 1800 SF with drive through in a location with high visibility, heavy traffic. Once the location is approved by the territory office, Starbucks typically signs a 10 year NNN lease with 2 five year options in which landlords are responsible for roof and structure. All the leases normally have corporate guarantee which means Starbucks will continue paying rent in the event it has to close the store. The lease often has 10% rent increase every 5 years. The rent is between $1.65/SF in a store in Utah to $5.84/SF in New York. This rent survey is based on the rents at just 30 Starbucks properties, 18 of them are free standing, on the market for sale through out the US as of April 2008.

Starbucks Location with Minimal Store Closure Possibilities

During tough times, e.g. in 2008 when sales are declining Starbucks will attempt to cut costs and close underperforming stores. As a real estate investor considers investing in a Starbucks building, you don’t want to invest in a property that will be closed in the future.

Location—— 1mile——3miles——-AHI/yr—–Size (SF)—-Base rent /yr—Rent/SF/mo –Price—–Cap(%)

Ohio……………296……..2609………$88375….1613………$58,590……….. $3.03……….$868K…….6.75

Florida………..9186……55270……$68595…..1816………$75,000………..$3.44……….$1.2M………6.10

Georgia………5717……57201…..$143936….1750………$74,000………..$3.52……….$1.091……..6.75

Mississippi….188……..4923……..$77372…..1816………$112,184………$5.15……….$1.558M…..7.2

Texas………….5944…..40970…….$75043…..1752………$92,914………..$4.42……….$1,327M….7.00

Table 1: Rent Comparables for Free-standing Starbucks Buildings

Location——SBUX rent/yr—SBUX Size—SBUX rent/SF/mo—Other tenant Size—Rent/SF/mo—Difference

California…….$30096……..1248 SF…..$2.01……………………1245 SF……………..$2.50………….-19%

Kansas……….$43200……..1600 SF….$2.25…………………….1600 SF………………$1.33………….68%

Utah……………$38568……..1950 SF…..$1.65…………………….1200 SF……………..$1.86…………-11%

New Mexico..$92004………2000 SF….$3.83…………………….2500 SF……………..$1.92…………100%

New York…….$125004……1785 SF….$5.84…………………….2819 SF………………$2.75…………112%

Table 2: Rent Difference in Multi-tenant Starbucks Retail Centers

Since Starbucks does not release sales revenue for a particular location, you just need to make an educated guess. Based on annual revenue and numbers of stored operated by Starbucks, the average annual revenue per store is about $1M. In addition, if the annual rent to revenue ratio is less than 10% there is a good chance the location is profitable. For example if the base rent for the Starbucks in Ohio is $58,590 then the annual revenue should be more than $585,590. Besides picking a store at a good location (refer to the article titled “What ‘Location’ Means in Commercial Real Estate” by this author), and the cap rate you should consider the following:

  1. Densely-populated area: more people mean more customers size and thus more revenue. The Starbucks in FL, GA and TX on Table 1 are more promising. Note: the author tries to be sensitive by not disclosing the exact locations.
  2. Low-rent: the Starbucks in MS pays $112,184 for base rent. To be reasonably profitable it needs to have annual revenue of $1.12M. However, since there are only 188 people within 1 mile and 4923 residents within 3 miles radius from the store, it’s less likely the store ever achieves that revenue. Besides Starbucks pays $5.15/SF which is very high compared to just $3.52/SF in a fast growing, high income, densely-populated in GA where there are 57,201 residents within 3 miles radius and Average Household Income (AHI) of over $143K/year. It’s hard to understand how the Starbucks in MS could be an irreplaceable location in an area with just 188 people within 1 mile radius from the property! While offering the highest 7.2% cap, this property appears to be a good investment but it actually has the highest risk of underperforming and could be closed down in the future. Alternatively, Starbucks could attempt to renegotiate the lease with lower rent during tough times. While Starbucks has not asked for rent reductions yet, it is not surprised if Starbucks will do so to improve its bottom line in the future. In either case, the property value will go down.

  3. Rent premium: while most Starbucks properties are freestanding in which it occupies 100%, you may see a Starbucks in a small multi-unit strip center with a few other tenants. It normally occupies the end unit with drive through and thus is expected to pay a premium compared to the adjacent unit. However, most of the time Starbucks pays substantially higher rent. For example, in Table 2 it pays $5.84/SF compared to just $2.75/SF by a tenant in the unit next door in a center in New York or 112% higher. In this strip center should the rent for the unit occupied by Starbucks be reduced (due to closure or lease renegotiation) the value of the center will be reduced substantially. You certainly don’t want to invest in this property.

Due Diligence Checklist for Commercial Property for Sale

Before buying a piece of commercial property for sale, it is important to thoroughly investigate the premises for problems before finalizing the purchase. This type of inspection is known as due diligence and typically involves the use of an inspection checklist. Some of the most important factors to consider when purchasing commercial real estate include environmental safety hazards, the physical condition of the premises, location, code compliance, and title issues.

Environmental Safety Hazards

Order an environmental assessment of the commercial property you are interested in. The environmental assessment will provide details of the environmental condition around the premises and the history of the environmental factors, including the presence of hazardous materials such as lead paint, asbestos, and radon. In addition, hire a property inspection firm to check the premises for the presence of mold. The inspection should assess water and earth samples. If traces of lead or asbestos are found, hire a consultant to determine the cost and practicality of removing the hazardous materials. Consider the cost of repairing the real estate before deciding to close the sale.

Location

The environmental assessment should help you find out if parts of the real estate are located in a shoreline, wetland, fault line, flood zone, or a home for endangered species. Hire a consultant to help you determine water, oil, gas, mineral, and timber rights for the real estate. Find out if the commercial property for sale has any FAA building restrictions such as height restrictions or noise restrictions. In addition, find out if you will be required to obtain environmental operating permits for the building. As a buyer, consider obtaining copies of all existing permits and contact relevant agencies to determine if there are any past violations and issues to ensure you will not experience any problems transferring the permits in the future.

Physical Condition

Hire a licensed engineer or building inspector to check the interior and exterior structural integrity of the building. The inspector should also check if the building is handicap accessible and has proper drainage features. Obtain copies of all ongoing construction and design contracts to find out if building contractors received their full payments and if you will be required to obtain lien waivers.

Other important factors to research include available parking around the building, proximity to public transportation, and the amount of electricity received by the building. Find out if the building is accessible from public streets. If not, contact the relevant departments to find out if improvements to the access road can be made and how much they would cost.

Before closing on a commercial property for sale, find out if the building complies with relevant safety, building, and zoning codes by contacting appropriate regulatory organizations. Local building and planning departments should provide the information you need regarding building code compliance or violations. Because building codes change with time, find out if the property violates new codes and whether planned changes or improvements will violate codes.

Different Methods Of Selling Your Commercial Property

The information we provide you below will assist you in understanding as to what it takes to adopt a particular method so that you can finalize a method most suitable to you.

You should appoint only one agent

You can enter into exclusive agreement with just one property investing agent. The benefit here in this type of arrangement is that the agent will work with more dedication and focus to locate genuine buyers for your property at possibly best price. You may also have to spend less of your money and time in marketing and advertising for your commercial real estate sale.

Appointment of one agent but with a Multi-List Agreement

Here, the agent you appoint will be working with several other agents in the market for selling your property but cost to you remain the same as in the above discussed method. The main difference here is that agent you appointed in the first place shares the commission he will get from you with the other agents in the field who help him in securing the buyer for your commercial property

Selling the Commercial Property by an Auction

In this procedure there is no set commission to be paid to the agent. There is obviously a time limit for auction and this creates a time bound competitive environment for the real estate agent. Here the agent works even harder and you earn more profit in less of time.

Appointment of many real estate agents

In this method, you usually rope in many real estate agents to execute the sale. Buy you need to pay commission to only that agent who introduces you to the purchaser of you property.

Selling the commercial property on your own

Here you can decide to sell your commercial real estate by yourself in order to save on the commission you usually would pay to the real estate agent. However it is not easy as you will have to handle advertising and marketing for searching the prospective buyers. Above all you need to have sound knowledge of all legal formalities required for property transfer.

I am not in the favor of this method and would not recommend it as I firmly believe that your main goal is to be a real estate investor, so you should act in a smarter way.

Hence, as we see, there are many methods to sell your commercial real estate. Appointment of an agent is safe and the easiest way to achieve the results and it is always nice to go with just one agent.

Commercial Property for Lease

Getting hold of a commercial property is tough. This cannot be compared with getting a residential property for lease. There are many factors which can turn the most lucrative deal against you. Also there exist a lot of factors that can affect the business opportunities as well profitability if such a property is not chosen without thinking about the pros and cons.

To choose a proper place we need to look for the right place where we can have our business running smoothly. In such cases many people rely on their own instinct and go ahead with their own strategy and plan to get a lease. They may succeed or they may fail. But if you are looking to get a commercial property for lease, you must always find a broker who knows the tricks of the trade. Getting a broker will help you in selecting the right properties in the area of your choice.

Getting a commercial broker is not at all difficult as they are more than willing to find you the right place if you sign a small representation agreement and part with a little incentive. As they will be getting most of the fees from the owner, they will definitely secure you with the best deal available. If you are trying to lease a place in a small town where commercial brokers may not be available, you can search the public records yourself and have a deal fixed with the landowner. But choosing a broker in a big city will help you as the brokers work for the commissions and they will definitely try to get you the best deal available. Finding such a broker is not difficult at all especially if you are working with any real estate attorney.

As is the case while renting a residential property, you will find that the lease agreement is generally more inclined towards the benefits of the landlord. You have to be very careful about the terms and conditions as there are a few snags that remain almost in every agreement and if not addressed at the beginning, could dent your financial plans. Any commercial property for lease market is a cut-throat market, and any agreement should be prepared so that both the tenant and the owner get to receive benefit from the contract. As of current situation there is no fixed security deposit that you must pay and it varies a lot. You can use your negotiation skills to reduce the amount though.

The general areas that may or may not be mentioned specifically in the agreement need to be addressed properly and you should come to a decision regarding the up keeping of the common areas. However, even if not mentioned, you are responsible for maintenance and utility of the area you have taken on lease. The tenure of lease may be fixed by both the parties and can range from anything from 2 years and more. If you want to leave the place before normal deadline, you must be ready to pay out the remaining period by giving a termination fee.

Proof of Funds for Commercial Real Estate Investors

Creative Financing

When a Commercial Real Estate Investor is looking to purchase income producing property utilizing any number of creative financing methods, one of the most important keys to their success is that their ability to provide adequate, verifiable proof of funds – P.O.F.- to both the seller and the lender. The verification of funds can enhance the investors credibility with the seller as well as satisfy the lenders requirement to know that the borrower has necessary funds to complete their transaction.

Proof of Funds

There are a few ways acceptable to lenders and sellers to show P.O.F. to close your Commercial Real Estate transaction:

  • Bank Statements or Bank Verification
  • Brokerage Account Statements or Verification
  • Escrow Account Verification

“Bank Verification” This is the most acceptable and widely used method to confirm the investors can complete the proposed deal. As such money must be put into a bank account and confirmed by statements or letter from the banker.  This is a “hard” (versus soft) method of verification, because money are deposited in an account in the buyers name to serve as proof the buyer can complete the transaction.

“Brokerage Account Verification” Similar to bank accounts, brokerage accounts show acceptable means to complete a purchase transaction. Likewise, statements or letter from the brokerage house representative will meet the requirement to prove adequate financial strength. This is also a “hard”  method.

“Escrow Account Verification” This is the one method that can be hard or soft evidence of necessary assets as the escrow agent simply needs to write a letter of confirmation attesting that the borrower has finances available to complete the transaction. It becomes hard when money is transferred  into an escrow waiting for the closing.

Companies

Finally, there are companies whose sole purpose is to provide evidence of the financial ability of Commercial Real Estate Investors to complete their transactions. Many of them provide “Proof of Funds” and Transactional Financing. P.O.F. is necessary at the beginning of the deal and Transactional Financing is for the day of closing only. Both of these methods are a necessary part of an investors arsenal when utilizing creative financing.

6 Commercial Real Estate Myths

There are a number of misconceptions floating around in the market when it comes to commercial real estate and it becomes important to identify them. These misconceptions can deter investment and risk-taking behavior that is required in this market to be a successful investor.

You need considerable funds to start

This is one of the most common misconceptions in the real estate industry, you don’t need to be swimming in funds to invest in your first property. Banks don’t only look at your balance to approve your funding, they look at the potential profits of your deal as well. The more appealing the deal is the more likely you will be to get your funding, however, you don’t need to rely on just your banks there are always private money lenders who’d be willing to help out if you check out.

The numbers are too hard

These days there are plenty of software options in the market to do the legwork for you, you just need to know your figures and the software will compute the rest for you. The rest just boils down to you being able to interpret the figures to make informed decisions when it comes to your real estate needs.

Most commercial properties are advertised

Contrary to popular belief most of the available commercial properties aren’t listed in newspapers nor will you find any bandit signs advertising the properties of your desire. You will need to consult a real estate broker who has considerable contacts among investors and property owners alike to get a comprehensive list of all the available properties in the area of your interest.

Managing commercial property is much more of a hassle than residential property

Managing a property is no joke, but the hitch is that the proceeds with commercial properties is much more than that of residential properties. So one can afford to hire a management service that operates in your stead and takes care of all the management aspects of your property, including using their comprehensive list of vendors.

Good deals are difficult to find

No matter the market situation it will always be possible to find a good deal in the real estate market, there are always certain types of properties and other factors that make this reality a possibility. All this is dependent on you making a reasonable effort to make the deal happen though.

A single agent can fairly represent both sides

An agent will invariably have the interests of the landlord at heart and not the investor or the buyer, the agent will always have vested interests and therefore act as a dual agent in a way. So it’s always better to hire your own agent to represent your interests.

These are some of the common myths surrounding the commercial real estate industry.

Pros and Cons of Owning Various Commercial Property Types

Looking to invest in commercial real estate, but don’t know which property type to consider? Here’s a comprehensive guide on the five most common types of commercial properties.

1) Multifamily (Apartment Buildings) – Multifamily refers to apartment buildings of all sizes. It is categorized into garden apartments, walk-up apartments, mid-rise apartments, high-rise apartments, and special-purpose housing.

Garden apartments are low-rise apartments with typically less than 3 stories, built in a garden-like setting. Walk-up apartments are 4-6 story apartments without an elevator. Mid-rise apartments are 4-8 story apartments with an elevator. High-rise are 9+ stories with at least one elevator. Special-purpose housing is a multifamily property that targets a population segment, which includes student housing, senior housing, subsidized housing, etc.

Pros of Multifamily Properties:

• Easy to get into with smaller properties and slowly transition to larger properties

• Tax benefits

• Use rents in place for financing

Cons of Multifamily Properties:

• 24/7 tenant management

• Pro-tenant legislation

• Rent control

2) Industrial – Industrial is typically used for producing, manufacturing, or storing products. It includes warehouses, garages, distribution centers, etc. It is oftentimes separated into heavy manufacturing, light assembly, flex warehouse, and bulk warehouse, depending on the size and use of the property.

Heavy manufacturing oftentimes heavily utilizes machinery and usually requires a substantial amount of renovation before renting to another tenant. Light assembly includes storage, product assembly, and office space, which is easier to reconfigure than heavy manufacturing. Flex warehouse normally includes both industrial and office space, making it an easily convertible space. Bulk warehouse are massive properties, typically 50,000-1,000,000 sq ft space, usually used for regional distribution of products.

Pros of Industrial Properties:

• Deal with single tenant

• Long term and stable leases

• Relatively small initial investments

Cons of Industrial Properties:

• Area specialization, making it harder to find new occupier

• Hefty and extensive reconfiguration expenses

Higher tax rates, depending on area

3) Office Buildings – This category includes single-tenant properties, small professional office buildings, downtown skyscrapers, and everything in between.

Office buildings are either Central Business District (CBD), which is in the middle of a city, or suburban office buildings. There are three categories: Class A, Class B, or Class C, which is determined by the quality of construction and desirability of the location of the office.

Pros of Office Buildings:

• Less turnover

• Longer lease terms

Cons of Office Buildings:

• Less frequency to raise rents

• Emphasis on parking

• Expensive financing options

4) Retail/Restaurant – Retail includes strip centers, community retail centers, power centers, regional malls, and out parcels.

Strip centers are small retail properties that may have an anchor tenant, which is a larger, more well-known tenant that will attract small retail tenants. Community retail centers are between 150,000-350,000 square feet with multiple anchors, usually grocery stores and drug stores. Power centers have several smaller retail stores with a few box retailers such as Wal-Mart, Lowes, Staples, Best Buy, etc. occupying between 30,000-200,000 square feet, containing several out parcels. Regional malls are between 400,000-2,000,000 square feet with a lot of anchor tenants. Out parcel is land set aside for individual tenants such as fast-food restaurants or banks.

Pros of Retail/Restaurant Properties:

• Security and profitability of an Absolute Triple Net (NNN) lease

• Less turnover

• Less tenant management

Cons of Retail/Restaurant Properties:

• Less frequency to raise rents

• Dependent on tenant performance

• Location and foot traffic is extremely important

• Emphasis on parking

• Visual upkeep

5) Land – Land is fairly self-explanatory. It is often categorized as Greenfield land, Infill land, and Brownfield land.

Greenfield lands are underdeveloped land such as farms and pastures. Infill land is vacant land located in cities that have already been developed. Brownfield lands are usually environmentally impaired land that was previously used for other industrial or commercial use. The land is available for re-use.

Pros of Land:

• Tax benefits

• Less expensive

• More rental possibilities (depend on location)

Cons of Land:

• No immediate income from tenants

• Few financing options

• Requires ground-up development

The above are the most common types of commercial property types. There are several others that have not been discussed above such as hotels, funeral homes, nursing homes, theaters, etc, which are special-purpose type properties.

Choosing a Commercial Property

When leasing or buying commercial property, there is a great deal of things that you need to consider. This may determine how well your investment will be able to perform in future and so it should be done with the greatest care.

You need to consider the property and this should include all improvements as well as land. You also need to consider the business component or lease. You should investigate and also analyze all the pros and cons of every component and how it will measure against the entire strategy of the investment.

Commercial property

When you are investing for the purposes of capital growth, there are certain kinds of retail, commercial or industrial properties that can be a very superior option. It is important to know that not all kinds of properties will perform the same. There will always be differences.

When you start to analyze the great potential of a physical property, location and position need to be considered and should actually be the key elements in the process of making a decision. In property, the capital growth of an asset comes from the increase of the land value and the location influences the demand and supply for the land and this then determines the value. A good example is a central business district where the value of land is very high and this actually drives the capital growth.

When the land value goes up, then the value of all the improvements or even the building itself will depreciate with time. This means that the land appreciation should be sufficient enough to counter the building depreciation and also to grow the asset value with time.

Position means how easy it is to access the property. You should ensure that the location matches with the kind of business that you are planning to operate in the area or premises. A good example is a distribution center that needs to receive shipping on a regular basis and needs to dispatch as well. It should have a great space and road access that isn’t hindered. This may be a good match for a city fringe or a place that is near to the port. Arterial roads make it even easier to access.

Lease

It doesn’t really matter if you are looking for a capital growth or for rent return. The leasing strategy is very important to the performance of the assets in the long run. A leasing strategy should allow regular reviews on rent so as to be competitive and viable at all times. This should include things like the provision for maintenance of the property as well as fit outs that will make sure that improvements are kept at a standard that is suitable.

The layout and size of the premises

This is a very important consideration. You should find premises that can actually handle your kind of business in a very efficient manner. You need to consider the structure and its appearance both externally and internally. Consider the height of ceilings depending on what activities you plan to carry out and all the facilities that visitors and employees will be able to enjoy.

Commercial Property Management – Some Simple Points

In this job profession it is a business service that is designed to help assist owners in supervising their commercial properties. A commercial property manager may have several jobs but essentially they are the ones that will take care of details that are related to the following:

• Upkeep of the buildings on the property such as making sure that the lawns are mowed, any repairs needed are done promptly

• Checks out and qualifies potential new tenants who want to rent one of the commercial buildings or stores

• Oversees the leasing of sections of the property such as retail space in a mall

• Collects the rent from tenants on behalf of the owner

A commercial property manage involves overseeing any type of commercial property from multi-storied office buildings to retail space. Many times property owners will use a commercial property management firm to hand all the day-to-day details of operating the property so it frees up the property owners time for other aspects of business. The firm that is managing the commercial properties is generally granted the authority to make any decisions that will impact the amount of income the owner receives from their property. Hiring the right management firm can often lead to securing the best rental rates for the space and having a lower turnover of tenants.

One thing that is the responsibility of a commercial property manager is to screen potential tenants by accepting their application and then doing a background check. If the tenant is approved to rent a space then the manager will prepare the lease. For the duration of the lease the manager will make sure that the tenant is provided with all the responsibilities and benefits that are listed in the lease agreement, including the rental amount, when it is due, etc.

The commercial property manager will also serve as the liaison between the tenants and owner. If the tenant has any problems or needs repairs to their space they will see the manager who will take the necessary steps to resolve the issue or have what is wrong repaired. It is the manager’s responsibility to resolve the matter to the satisfaction of the owner and the tenant. If the tenant is not paying the rent as outlined in the lease or doing anything that is not in the lease the commercial property manager will be the one that is responsible for delivering the eviction notice. Each jurisdiction or state has their specific regulations in regards to eviction. When serving an eviction notice the manager must be sure that they are following every step in the process to the letter. This makes sure that everything is done legally and the tenant cannot complain they were evicted illegally.

Commercial Property Condition Assessment (PCA)

The purpose of all Commercial Property Condition Assessments (PCAs), ASTM standard E2018, is to make sure that the property and building you believe you are purchasing or leasing is actually the property being received. You will have reached that decision, in part, from the information attained via a professional inspection and Property Condition Report (PCR). Every real estate transaction is different and each transaction has its own unique set of considerations and conditions to validate before finalized. The utilization of professional third party experts in the physical property due diligence process is critical to the overall accuracy and cost efficiency of your property transaction.

The Purchase or Leasing of Commercial real estate, whether it be a basic commercial net lease, a commercial triple net lease, the purchase of a church facility, a retail outlet, or the purchase of a million square foot office/warehouse, the prospective buyer or lessee absolutely must conduct an adequate level of due diligence when investigating the physical quality of the commercial real estate they are investing in.

You need to know not only the physical characteristics of the real estate and buildings being acquired, but the approximate condition and age, to assess the good with the bad, such that you can adequately balance the risks and rewards being offered in conjunction with your real estate deal. The single most important part of the real estate transaction process, aside from the purchase price and profitability balance, is a well-documented review of the actual physical condition of the real property. Otherwise, you could find yourself the not so proud owner of a commercial property that, doesn’t suit your needs, costs more than you can afford in upkeep, or the ultimate remorse for investors – capital expenditures are being sunk into a property on a regular basis that someone else is utilizing and making money off of, and you are not. Suddenly, that long term lease with a solid anchor doesn’t seem so attractive anymore.

The process of commercial real estate inspection begins before the offer to purchase real estate is drafted or signed, by visiting the site and discussing the physical condition of the property with the Owner and real estate brokers. This process should be considered invaluable to establishing relationships required to obtain the information that will be necessary to concrete your due diligence with a Commercial Property Condition Assessment (PCA).

During negotiations and drafting of the real estate sales/lease contract it is important to recognize seller or lessor reluctance to points such as the existence and availability of important documents such as warranties, maintenance contracts, architectural and engineering plans and/or local municipality reviews and inspections. Negative reaction to the request for release of these documents by seller or lessor can imply possible deferred maintenance and/or inattention related to property and building condition(s) and inspection issues.

Once the commercial real estate sales contract is signed the due diligence period begins, focus on maximizing efficiency of time and cost and prioritizing concerns to start checking off the costly big ticket items from the top down. Assuming adequate documentation is furnished by the seller for review, adequate time should be allotted to verify the information provided. Additional effort and monies that that will need to be spent to make up a shortcoming of available documentation through extra property condition assessment and additional field inspections and/or experts should be considered essential and figured into the cost of the property transaction. Ask the seller for all documents and contacts the seller received during his due diligence process when he purchased the property to speed up fact finding.

Review of existing property documents where available may include:

Accessibility surveys, Architectural Building plans, Certificates of Occupancy, Citations from Authorities Having Jurisdiction, Emergency evacuation plans, Environmental studies, Electrical System Construction plans, Fire-detection test and maintenance records, Fire-door inspection reports, Fire-Protection System Construction plans, Fire and Restoration records, Maintenance records, Mechanical System, Construction plans, Violation Notices from Authorities Having Jurisdiction, Construction Permits, Plumbing System Construction plans, Previous inspection reports, Roofing System Construction plans and Warranties, Safety inspection records, Seller condition disclosures, Sprinkler System Test Records, Systems and Material Warranties, Current tenant information, Current policy of title insurance, Notices of any environmental conditions, Notices of any new or special assessments or taxes, Copies of all current bills for the property, Service contracts, Evidence of current zoning, As-built plans and specifications, All construction related documents including warranties, All past and present uses of the property, Third party reports or inspections, Any surveys of the land and improvements in seller’s possession.

One of the best tools available to the commercial property due diligence team is the interview process which can unlock a plethora of potentially useful information regarding the subject property.

Interview of any available key personnel with specific knowledge of the property conditions may include:

Owner, Tenants, Maintenance Foreman, Contracted maintenance services personnel or other contracted companies that routinely work on the property and/or building.

Property Inspection, Real Estate Inspection, Building Inspection, Due Diligence Survey, as they may be labeled in the due diligence report is essential to ensure sufficiency of construction considering the intended use of the occupants and the surrounding geography and climate. The furnishing of any available plans and specifications should be helpful here, but will not end the investigation. A current commercial property condition assessment should be done by a qualified third party inspection company experienced in the type of property to be inspected. A previously performed property condition assessment or inspection is nearly always furnished for the use of a single party in a single transaction and is protected under law and not reusable nor transferable to any other party. The focus of the inspection should be primarily on site condition and building components such as the site drainage, parking, building structure, mechanical and electrical systems and general accessibility and usability of the property. Various climates and geographical regions will require more specific inspection knowledge, thus hiring a local inspector is always a good idea if possible, in lieu of hiring a company out of Wisconsin to perform due diligence on a California high-rise building on a fault line.

Site Survey and Walk-Through to Observe Existing Conditions may include:

Grounds and Topography, Parking, Paving, Access, Building Exterior and Façade, Building Interior, Roofing systems, Structural systems, Mechanical systems, Electrical Systems, Plumbing systems, Fire-protection systems, Vertical transportation systems, and any number of other specialty systems.

The 2010 Americans with Disabilities Act is the current guideline for accessibility standards nationwide and is a federal law, hence non-negotiable and to an extent, yes, it’s retro-active even for older commercial and public buildings. Many states also have additional and/or more stringent or specific accessibility standards as well. Most professional property condition assessment and inspection companies can also perform both abbreviated and complete accessibility surveys as part of a real estate transaction.

Basic abbreviated and full compliance Accessibility surveys may include:

Abbreviated survey looking only for basic ADA Accessibility components visible during the walk-through and documented according to the ASTM abbreviated survey form and checklist gives a quick check as to the general status of compliance. Full compliance survey involves physical measurements of distances, slopes, and push/pull forces required within the accessibility standards to allow for a certain level of physically disabled person to be able to successfully navigate a property, site, and building.

Environmental Due Diligence known as Environmental Site Assessment (ESA) is the most utilized Environmental Inspection Report. The typical level of report preferred by lenders to demonstrate adequate due diligence is called a Limited Phase I Environmental Transaction Screening ASTM standard E1528. This explores the past use of the property and the surrounding properties to identify any potential onsite or adjacent environmental problems or future liabilities. These reports normally require a significant monetary investment and take a number of weeks to complete so they should be done as soon as you have determined you will be moving forward with your due diligence. The purpose of this inspection is to determine if the property contains any hazardous materials or poses a threat in any way to its surroundings. This could be caused by underground storage tanks located on the property or runoff from the property into the water table or any other number of hazards listed by the Environmental Protection Agency. While the report is expensive, the cost of cleaning up an environmental hazard can be astronomical. While not every deal will require you to obtain a Phase I Environment Site Assessment, many lenders will require it as part of their loan guidelines. In case of a fairly new development with a clean environmental record and no neighbors of an industrial nature, a simpler less expensive and much quicker Environmental Transaction Screening ASTM standard E1528 may satisfy lender and legal requirements.

Any basic environmental due diligence report may include:

Research of historical site usage, aerial photography records, property transaction records, construction records, building records, EPA mapping data, local municipality topography mapping, and a through site walk-through to visually identify potential environmental issue indicators.

The information contained herein is purely professional opinion and provided for general real estate inspection reference only and is not intended in any way to be a definitive guide, nor a guarantee of past, present, or future legal or state or federal requirements, nor a measure of performance of any professional services company. Best of luck to you in all of your future property, real estate, and building dealings!

Why Road Frontage on Commercial Property is So Valuable

How many feet of road frontage does the property have?

This question is among the most important when assessing the value of commercially zoned property in a city or county. For some, the reason as to why this question is so important may seem rather obvious. However, there are multiple reasons why investors, developers, builders and business owners want to have large amounts of road frontage on their commercial properties.

For business owners, it is best for them to have their stores located conveniently to their customers. If they are on a main highway or road, they will have great visibility to the traffic going by. This can quite possibly bring customers into their stores that they normally wouldn’t see through their normal marketing. Also, a customer new to the location can find the store much more easily when in the line of sight. Visibility on major road frontage is a huge advantage for the business owners and their stores.

Another reason why business owners like to have their stores along major road frontage is because of the ease in which customers can enter and exit the property. If they are forced to drive through large parking lots, wind behind other major stores, and park on a land locked parcel, there is a possibility that the customer would go to a more easily accessible competitor.

Now, this may be pushing it a little, because a business should be able to bring customers in on its own through effective marketing and good business practices. However, it is definitely more pleasant to access a place of business that is right by the road, rather than search your way through parking lots, other businesses, and who knows what else. The easier the access, the more enjoyable the experience is for the customer.

The two main reasons for business owners to have their stores on major road frontage are visibility and ease of access. Let’s look at why investors, developers, and builders all want the properties they are involved with to have the greatest amount of road frontage possible.

These three people, investors, developers and builders, are the foundation for commercial real estate. They have the money; they have the vision, and they, ultimately, are responsible for building our communities.

More often than not, these people will choose properties to invest in that have the most amount of road frontage, or create the roads so that the office complexes, retail centers, and strip malls have the visibility and ease of access that business owners look for in a profitable commercial property.

The underlying advantage for these investors to develop and build properties with major road frontage is the fact that these commercial properties, known as out parcels, are far more valuable than the land locked in parcels behind them! The difference between these property values can be quite drastic.

For example, recently I was assessing a 56 acre raw tract of land in Rome, GA. It had over 2,000 feet of road frontage on a major highway! The front of the property was zoned commercial, while the back was zoned multifamily. After speaking with the broker and looking at comps (comparable sales), it was clear that the out parcels would be valued at approximately $600,000 an acre developed. (They could be worth more if we were able to get national brand stores on the property). However, those in parcels, without the road frontage, would only be valued at $225,000 per acre. This is a $375,000 decrease in value simply because those in parcels are a few hundred feet away from the actual highway.

This news greatly cut into my overall profit margin.

Not all cases are this extreme. However, it is always true that an out parcel will be more valuable than an in parcel. That is why investors, developers, and builders all want property with major road frontage. It is simply more valuable!

Business owners and investors alike will gladly choose a property with major road frontage over a land locked parcel, or a parcel with little to no road frontage. Use this important fact when you assess properties and the value that they hold.

Contents Insurance Review for House

It’s important for anyone who owns a home to understand in detail the usefulness of home insurance and its contents and how it helps protect you, your loved ones, and your valuable property in the event of a disaster. An insurance policy covers your property and property.

If your house is damaged or a disaster occurs that destroys your home, you are very sure to be protected. Home insurance and content covers your home and valuable property which can include jewelry, clothing, furniture, bedding, equipment, and everything else in the house.

Most people don’t realize the importance of being covered. No one prays for disaster, but in case that happens, how can you be sure to get your property back without damaging the bank? Claims can be made if your house is destroyed beyond repair by storm, fire, water leakage, vandalism, theft, etc.

When looking to take home insurance and content, it is very important to read the terms of the agreement and what they cover before signing the agreement. It is important that insurance covers the costs of rebuilding homes and not just market value. This policy must also include property that is removed from the house which may include your camera, valuables in your handbag and keys. The policy must be able to provide you with an alternative home until your repairs are complete.

Make sure you fully understand the maximum amount that an insurance company is willing to pay and if it is suitable to cover all your expenses. Most people look for prices when asking for quotes from insurance companies. This is good, but the disadvantage is getting a quote that is not quality or that doesn’t suit your needs. If in doubt, contact a customer service representative to double check.

Commercial Property Management

If you own a commercial property, you need to understand commercial property management. Why is that? Because managing property effectively is the key to making an investment pay off perfectly, meaning you will get a profit. Managing property well will help you get and keep tenants and help increase property value so that you can benefit from property appreciation.

When most people think of commercial property management, the focus is on relationships with tenants. All rental property owners need to have tenants so they do not have vacant property that requires money to operate but that does not carry cash.

You need to keep your tenants happy so they want to stay, and you have to make sure that the tenants follow the lease rules so they don’t damage your property or disturb other tenants. You should respond to tenants’ complaints, make repairs as needed if there are problems that affect your tenants, and ensure that you regularly collect rent. If the tenant leaves, you must also find a new tenant to replace him so that you don’t lose rental income.

While tenant management is the cornerstone of property management, it is not the only important aspect of commercial property management. You also need to take care of the building itself to ensure that your property does not become damaged and to ensure that it is in line with competitors’ spaces so that you can remain attractive to tenants.

This means that part of commercial property management is carrying out ongoing maintenance and periodically increasing your space. You don’t want to let go of a problem until it develops into a big problem and you don’t want to delay maintenance until you have a problem. Instead, you must ensure that you always keep abreast of important systems and infrastructure in your building. If the system needs to be serviced, for example, you must service it so that everything works well. The updates that you want to do must be done in accordance with what an apartment or similar commercial building is doing in your area.

Commercial budget is very important. Rental homeowners need to set an operating budget, set a lease and ensure that you have positive cash flow so that commercial property can prove to be a good investment that brings income to you in a sustainable manner.