|How can Gainesville possibly support all these new retail stores being built in Butler Plaza and elsewhere?|
|On the surface it seems hard to imagine supporting over 1.5 million square feet of new retail in our town. But almost all of the new stores are national chains. These chains, like Dick's Sporting Goods or Bass Pro, know who their customers are. They have proven formulas that study regional demographics and determine that between local shoppers and those that will travel from Ocala or Lake City or Bronson there are enough buyers to stay in business...at least that's what they're betting on.|
|I’ve heard Alachua County’s property taxes are so high because so many parcels aren’t taxable. Is this true?|
|In short, yes, but our millage rate content plays a small role too. According to the Florida Department of Revenue’s Property Tax Portal, the total just value of all real estate in Alachua County is about $24.4B (billion). Of that, $12.3B (50%) is non taxable so we all have the joy of picking up the tab to compensate. Of the $12.3B, government owned real estate is $6.7B (think UF, the city, the county, the state, etc.), Save Our Homes, non homestead increase caps, and agriculture exceptions are $1.8B, institutional exemptions are $1.5B (think churches, Shands, not for profits, etc.), and the balance are other various exemptions. By comparison, the State of Florida as a whole is about 34% non taxable.|
How do I find out if my business is permitted in a given location?
|We often see people looking to locate their business in an area where they aren't allowed to operate. Ouch. Land use and zoning determine what commercial uses are allowed where. The safest thing to do, depending on whether you want to be in the city or the county, is to call Planning and Zoning. With a street address or a tax parcel number they will tell you whether you're allowed to operate in that location. You should then fill out a Zoning Compliance Permit and have it approved by city or county officials. This can save you a lot of time and trouble.|
|According to lenders, what are their Top 5 Favorite and Least favorite commercial real estate deals to finance?|
|I surveyed several local lenders and here were their combined average answers: Top 5 Favorite (1 being favorite): 1. Owner occupied anything (esp. SBAs), 2. Stabilized income producing commercial, 3. Stabilized income producing multifamily, 4. Landlord improvements on stabilized income producing assets, 5. New construction development for signed lease tenants Top 5 LEAST Favorite (1 being least favorite): 1. Raw Land, 2. Restaurants (non brand), 3. Speculative mixed use development, 4. Speculative residential development, 5. Tenant improvements for businesses|
|I’m a new business looking for commercial space to lease. How do I calculate my monthly rent when everything is quoted per square foot?|
|Office, retail, and industrial real estate is most often quoted as a $/SF, or dollar per square foot. For instance, a 1,500 SF office along NW 43rd Street may be quoted as $16.00/SF. To calculate the rent you multiply 16 by 1,500 to get $24,000 in annual rent. To calculate monthly rent, divide the $24,000 by 12 months to get $2,000 per month. Rates are also quoted as Gross, Full Service, N, NN, NNN, and absolute net, which we’ll address next week.|
What does it mean when commercial real estate rents are quoted as Gross or Net?
|It all has to do with who is paying for operating expenses (OE), the Tenant or the Landlord. Expenses include property taxes, insurance, and CAM (common area maintenance). Tenants typically pay their own utilities and janitorial. This is an example of a Gross Lease and the Tenant’s rent includes all OE; typically found in office and industrial leasing. In a Full Service Lease the Tenant’s rent includes all OE plus utilities and janitorial; typically found only in office leases. In a Net, Net, Net (NNN) the Tenant pays property taxes, insurance, and CAM in addition to rent; typically found in retail leases.|
|I recently bought a commercial property. The seller never told me that the roof leaks badly. Is there anything I can do?|
|Always consult your attorney, but buying commercial property is caveat emptor, or buyer beware. You are generally permitted to do any inspections you want but you’re not required to do any. If there turns out to be a problem after closing, it’s your problem. Unlike in residential property, the seller isn’t required to disclose any defects. The seller, however, cannot make false statements like "The roof doesn't leak a drop" if indeed he knows it does. We advise our buyers to have a property inspected and, typically, suggest having an environmental study done. Better to spend a little now rather than a lot later.|
A friend of mine sells houses. Can I ask him/her to help me buy an office building?
|I certainly understand wanting to work with a friend, but here’s the reality. While some residential Realtors are well versed in commercial real estate, most aren’t. So it’s kind of like asking your dentist to do your taxes. Commercial real estate and houses are very different arenas with different protocols, forms and requirements. By using a residential Realtor you may potentially cost yourself money or end up with a property that blindsides you with serious issues.|
|I am about to sign a lease and the owner wants me to personally guarantee the monthly payments. Is that necessary?|
|Unless you are a McDonald’s or UF type credit tenant the landlord will likely insist that you (and likely your spouse) personally guarantee rent. Most small companies are corporations or LLC’s which can disappear leaving the landlord with no recourse. If you leave after the first year of a three year lease your company may not have any assets for the landlord to hold to guarantee payment. So they ask you to personally promise to pay. A lease is a binding contract; don’t sign unless you expect to pay the promised amount for the full term. Nearly every landlord in every market requires that you personally guarantee all rents.|
I want to sell my retail building. What’s the quickest way to get it sold?
|Curb appeal counts. Make your property look as nice as possible. Leave the utilities on and maintain the landscaping. All this optimizes your chances for a quick sale. Also, hire a commercial Realtor…ha, you knew I would say that. But it’s true. A good commercial Realtor has a data base of potential buyers they’ve been assembling for years. They can also advertise your property on many websites you can’t access, email to thousands at a time, social media coverage, direct targeted mailing, and dozens of phone calls to name a few tactics. Plus, they can price it right and generally negotiate better than you.|
What is one of the best commercial real estate tools the public has access to?
|Visit http://mapgenius.alachuacounty.us/ and enter your address or other identifying info in the search field. This is a tremendous map based tool we use multiple times a day. On any Alachua County parcel you can find out owner info, taxes, property age, square footage, construction type, sale info, zoning and land use info, allowed uses, and environmental info like whether there are wetlands or if it's in a flood zone, the type of soils, the topography, and the likelihood of high radon levels. The site also tells you whether there are any business incentives, what political district the parcel is in, and lots of good demographic census info. Go ahead, look your property up, you may be surprised what you learn.|
As a tenant, does it cost me money to hire a commercial broker to find me space?
|Generally speaking, no. Nearly every commercial space is represented by a Listing Broker who, in their listing agreement with the owner, has agreed to share their commission with a Tenant's Broker. The owner pays the Listing Broker a full commission whether there is another broker or not. It only makes sense to call a broker to represent you BEFORE you begin your search so they can assist in finding and negotiating the deal, at no cost to you, because there is already a commission being paid by the owner. In most cases, if you make contact with the Listing Broker before you've hired your Realtor, the listing broker will likely NOT pay your broker because he or she did not procure the listing. If that is the case, you can either pay your broker to represent you or go it alone. Also, if an owner hasn’t listed his property at all and also refuses to pay a Tenant’s Broker, you would have to decide to pay a broker to help you or go it alone. Naturally, we strongly suggest you hire a broker regardless. It would be money well spent.|
|I have a buyer for my commercial property but can't close because the title company says there are open permits?|
|It's a common oversight for sellers. Before going to market, check for any open or expired permits on your property. It's easy. Do a Property Search with the city or county, which costs around $50 but reveals open permits. Open/expired permits are for work that a contractor did on your property and they didn’t have the final inspection performed by a building official. Sometimes to close the permit the original vendor just has to reopen the permit and have the building official inspect it for final closure (assuming the work was done properly). Other times the building inspector may require the contractor to perform more work in order meet current building codes. Get all this taken care of before going to market or it could really hold up your closing, or worse, kill the deal if too much time passes! Anytime you as an owner have work done requiring a permit, you should insist that vendor bring you a "Certificate of Completion" showing the permit is closed, preferably before your final payment to them. This simple step can save time and money.|
I don’t want to overpay for a property so I want to make my first offer really low. Is that a good idea?
|There is a term in our business called “low-balling” and refers to making an offer way, way below asking price. In my experience, this backfires more often than not. It tends to offend the seller and gets negotiations off to a very bad start. The seller will often not even respond and any further discussions become a test of egos. It’s a better tack to have your realtor do a market evaluation and let you know what the fair market price would be. You can then make an offer somewhat below market but reasonable depending on how much you want the property. Your realtor can even include the justification for the offer in the presentation. The seller will likely respond with a price closer to what he or she will actually accept.|
What are the Top 3 most popular corridors in Gainesville to lease office space?
|The corridors with the most lease transactions completed over the past three years by Realtors are (in order): NW 43rd Street, Newberry Rd and Tower Road. Major reasons for the strong desire for these three corridors are their proximity to many other businesses, grocery stores, quick service retail, restaurants, and their proximity to where most business owners and their customers live. Business people prefer not to be isolated and their customers prefer not having to travel too far if possible. Our closing data for that time period also tells us that roughly 85% of all office lease transactions by Realtors were done west of 34th Street.|
|I'm a tenant in an office building and a tree fell on the roof from the hurricane, destroying $30,000 in equipment and shutting down my business for the next 2 weeks. The landlord says it isn't his cost?|
|The landlord is correct, unless someone has documentation the landlord was made aware prior to the hurricane that there is a dead tree on the property that needs to be cut down and he/she ignored those warnings. Otherwise, this is why adequate renters insurance exists for tenants…. to protect your belongings and your business's income from losses like this. Assuming proper coverage, the landlord's insurance will handle repairing the building so you can re-occupy and so that they'll continue receiving rent from the insurance company if you aren't able to pay per the lease.|
|I want to sell a commercial property that I’ve owned for 20 years. What tax costs should I be concerned with?|
|Of course check with your CPA but, in general, you’ll have 2 tax concerns: depreciation and capital gains. You have most likely been depreciating your initial investment each year. A percentage of that base value has been an annual tax deduction and now you get to pay for that privilege at the sale. 25% of the total depreciation must now be paid as a “recapture” tax at sale. In addition, you will owe capital gains on any increase in value in your property. Your CPA should calculate this for you as it isn’t just your sale price minus what you bought it for and the rates vary from 15-20% depending on the investor. There are other considerations like closing costs, commissions, attorney fees, and capital expenses that get factored in. You can defer the taxes by making a 1031 Exchange but that’s a topic for another day.|
What are the Top 3 Criteria For Hiring a Competent Commercial Realtor or Team?
|1) Experience in the form of deal making, you want to see significant sales/lease volume and lots of deals. The more sales and deals the better and make them provide their stats. Do you want a heart surgeon that does 100s of surgeries per year or one that does a couple? 2) They are extremely dialed in and savvy in the use of technology. They have an outstanding contact database, access to all the listing websites including the local MLS, LoopNet, Costar, all the social media platforms, use of video, big data, mailing services, and the list goes on. 3) Lots and lots of written testimonials from clients. What better measure of a commercial Realtor than to hear from dozens of their customers (many of whom you may know) who speak highly of the their performance. If the Realtor can't produce at least 15-20 immediately, then you may want to look further.|
I understand there is a way to sell my commercial property and defer my tax obligations?
|You’re talking about a 1031 Exchange. There are legalities that must be observed so first consult your attorney, but the essence is that you can “roll” your equity from a commercial sale into another commercial property and defer the capital gains and depreciation recapture taxes. Owners will do this for a variety of reasons, such as a purchase offer too good to refuse, wanting a newer property with less maintenance, wanting fewer tenants, wanting to own a property with fewer headaches. The basic rules are you have 45 days from closing on your current property to identify 1-3 properties you want to purchase. And you have to close on one of those properties within 6 months of your property closing. I’ve simplified the process greatly but it’s not that complex and is done by savvy investors all the time.|
What are the Top 10 items to check before buying commercial real estate?
|Firstly, hire a qualified real estate attorney and Realtor. Then, together you’ll want to: 1) make sure zoning allows your use, 2) get a survey done and make sure it matches the description, 3) typically have a Phase 1 Environmental done, 4) make sure title is clean, 5) make sure access to property is still legal and insurable, 6) if it is income producing be sure to obtain detailed rent rolls, 3 yrs of profit & loss statements, delinquency report, vendor contracts, utility bills, property tax bill, copies of leases, and list of capital expenditures done, 7) hire a building inspector to look at roof, electrical, plumbing, structure, fire safety, HVAC, elevator, etc. 8) make sure there are no open permits or liens of any kind, 9) in Alachua County you may want to hire a professional to check for sink holes as we have many, and 10) make sure the location is an area with future promise, not stagnation or decline.|
|I'm selling my office but I've owned my property for 30 years and don't want to pay for title insurance. Why should I?|
|It will be very difficult to sell a property without being able to prove you have clear title. In most of Florida, the seller typically pays for title insurance. By doing that you're saying you have the right to convey the property. Even if you've owned a property for decades there may still be outstanding permits or problems with the survey or easement challenges or a myriad of issues. No one wants to buy a property with "issues" that may limit their ability to maximize the use potential. The cost of obtaining a reputable title insurance policy is small compared to the value of being able to say I'm selling this property "free and clear".|
|I want to lease commercial space that will need some improvements for it to work. Who pays for that?|
|Those are called Tenant Improvements and who pays for them depends largely on four items: 1) How long you plan to lease. The longer you can commit the longer the period of time the owner can amortize costs and thus spread out the cost. 2) Your creditworthiness. The more financially stable and experienced you and/or your business are the more willing the landlord is to contribute toward improvements. 3) The type of improvements. If you're needing improvements that are specific to your kind of business and not others, the less likely the landlord would be willing to contribute or even approve the alterations. In the landlord’s mind, they are not “improvements”. And 4) The lease rate you pay. Sometimes the landlord will pay for some or all of the improvements and finance the costs back through a higher lease rate.|
I've heard you can own commercial real estate without any landlord responsibilities? Is that right?
|Yes, for the most part, you can buy what is called "Absolute Net Lease" investments. These are commercial real estate investments in which there are no landlord responsibilities. The tenant is responsible for all repairs of any kind, including structural repairs to the roof, air conditioners, parking lot, etc. The tenant is also responsible for paying property taxes directly to the respective municipality, insuring the building, and handling all common area maintenance (CAM) including utilities, janitorial, lawn maintenance, garbage, and so on. As brokers, we call this "mailbox money" because all you do as a landlord is go to the mailbox to get your rent check. These investments typically are with very high profile, high credit tenants that are very strong financially. The tradeoff is the returns are typically less than other more landlord intensive investments.|
What is a land lease?
|For a myriad of reasons some commercial real estate owners prefer to have ongoing income from their investments rather than a lump sum of cash from a sale. A land lease, AKA ground lease, is just like any other lease except there are no buildings. You're just renting the land from the owner. These are typically 20-99 year leases with options to lease beyond that. You need enough time to build your building and operate your business to justify the expense of the lease. Also the bank financing the construction of your building will require you to have a long enough land lease to ensure you have enough time to pay them back. Land leases are popular with fast food franchises and hotels. More often than not they are offered only on very well-located properties.|
|My business requires industrial space, why are all the warehouse listings grouped together on the far outskirts of town?|
|There are several reasons why industrial zoning is on the outskirts of town. Specifically, 1) it reduces any environmental and social impact to urban cores, 2) it concentrates infrastructure in one place for necessities like railroad access, port access, 3-phase power, high-end communication cables, high-volume gas lines, etc. 3) it attracts other businesses wanting to take advantage of all the infrastructure in one place and to be around other like-kind businesses, 4) it reduces the traffic of large delivery vehicles in the urban core, and 5) industrial areas are generally not the most attractive looking properties so it's better to put them on the perimeter of town. Generally speaking, having to drive a little farther to the outskirts of town to get to your business has more benefits to you and to the community.|
I’d like to buy some investment property and keep hearing about CAP rates. What is it?
|A CAP (short for capitalization) rate is simply the annual rate of return for an investment property. Just like bonds or CD’s, different investments have different returns depending on the amount of risk. It’s calculated by dividing the NET Operating Income (income minus expenses) by the purchase price. If an office building nets $35,000 in income and you buy it for $500,000, the CAP rate is 7%. This number is calculated without factoring in any loan costs you may have. An investment with minimal risk, such as a McDonalds, would be sold at CAP rates approaching 4%. A riskier apartment complex that has shaky tenants in a non growth location may sell at a CAP rate of 10% or higher. The CAP rate is a benchmark used by virtually all investors because it seeks to quantify the question of risk vs. reward.|
What are the Top 10 mistakes in commercial real estate deals?
|1) Don't get greedy. Weigh the costs of your property sitting on the market vs. doing a deal. 2) Don't reach too high on list price. Trying to set a world record for pricing can cost time and money. 3) Avoid ego. Don't try to "win" a negotiation; keep your head in the game and focus on solutions for all. 4) Don't be a know-it-all. If you're not immersed in real estate, don't dictate terms against the advice of those who do real estate for a living. 5) Don't dilly-dally. Time kills deals in real estate. You need to respond to offers within 48 hours. 6) Don’t be your own attorney. Get legal advice from a real estate attorney, not your brother the divorce attorney. 7) Don't make changes out of left field to a contract at the 9th hour. That ticks people off and they'll walk away because they don't trust you. 8) Don't ignore simple math and market data. It doesn't matter how much money you have in your property or what your cousin said you could sell for. 9) Don't take it personally. Let’s face it, some people have irritating personalities. Stay thick-skinned and work to make a deal, not prove a point. 10) Be sympathetic to the other side and try to understand their needs. The objective should be win-win.|
Can getting a mortgage loan to buy commercial investment real estate increase my returns?
|Simply put, using less of your own money to earn the same rental income will yield a higher rate of return. Here is a simplified example. If you bought a $100,000 property with cash with NO loan, and it earned $10,000 in net income (income minus expenses), that would be a 10% rate of return on your money. Using the same example, if you obtained a $75,000 loan to buy the property, you'd now only be using $25,000 of your own money. That $75,000 loan, using today's average commercial terms, would cost you about $5,700 a year in principal and interest payments. Stick with me here. If you subtract the $5,700 loan payments from the $10,000 in net income you'd now have $4,300 in cash flow that you're earning on your $25,000 investment. This equates to a 17.2% return! It pays to use someone else's money!|
I’m interested in investing in commercial real estate for income. What type of properties have the best return with the lowest risk? Retail, Office, Industrial, or Multifamily?
|All of them and none of them. Not to get cute but the return vs. risk equation can really be the same for each of those commercial classes. Your return is not determined by the asset class but more by the quality of the property, reliability of the tenant, ease of re-leasing the space, cost of maintenance, and likelihood of appreciation. In other words, you can make a great return from a retail, office industrial, or multifamily property or you can get whacked by any of them. The trick is to buy wisely and weigh those factors carefully. The more successfully you can do that the better your return.|
Has there ever been a commercial real estate closing on Christmas day in Alachua County?
|In the review of the Alachua County Property Appraiser database, which dates back to 1962 for info, the answer is “no”. In fact, the only closing of any asset type to ever occur on Christmas Day was the sale of Parcel # 09020-010-000, which is a single family home located at 1634 NW 14th Avenue in the Hillside subdivision. It sold on Christmas Day in 1991 for $92,500. It sold again in 2006 for $325,000. This is a 2,226 SF concrete block home built in 1952 and located just off NW 16th Avenue between NW 13th Street and NW 34th Street. Apparently someone got one heck of a gift from Santa in 1991!|
Why do some landlords put restrictions on which restaurants can come in their retail center?
|This is typical in retail real estate. Long story short, tenants invest hundreds of thousands into their build-outs and in their business so they need to protect themselves from a similar concept coming in and "eating up" their sales. The tenant makes it a condition of leasing there that no other restaurant can come in to the center that competes with their food niche. The landlord then tries to narrow that niche as much as possible so their food exclusive isn't too broad. As a landlord you certainly don't want tenants going out of business but the less restrictive you can make the exclusive the better. For instance, a Starbucks will initially say "there can be no other coffee served in your center". Well, of course, that’s ridiculous. So after negotiations it will end up that no other tenant whose primary sales are from branded coffee can come in to the center. For a commercial real estate landlord, it is extremely expensive to lose any tenant so you want to do everything you can, within reason, to help that tenant be successful in your center for as long as possible.|
What is your crystal ball on commercial lending rates in 2017?
|In preparation for answering this question I leaned on a number of commercial lending colleagues to obtain their thoughts on the subject. The consensus is that while The Fed has hinted to as many as four increases in the rate during 2017, my lender friends believe it will be between two and three rate hikes. As for the cumulative amount of the increases, the answers ranged from 25-125 basis points for the year with the majority saying between 50-75 basis points. (A 100 basis point increase is equal to a 1.0% increase in the rate.) Most felt there would be three increases of about 25 basis points each. In case you’re not in the business, that’s a significant increase and can have huge effects on asset value, purchase prices, holding costs, and so much more. Key issues and trends my lending friends said to keep an eye on were nearly all linked to the incoming Trump administration. This includes the Dodd-Frank banking regulations, construction costs, GDP growth, wage growth, inflation, foreign trade, tax policies, federal spending, foreign investment in the U.S., and the Brexit fallout and the resulting increased cost of capital for European banks to fund U.S. deals. Should be fun.|
Is the Property Appraiser’s website a good indicator of the value of my commercial property?
|The Alachua County Property Appraiser’s office, in general, does a good job of evaluating property..… particularly when there are lots of recent sales within a property type to pull from. They have a huge number of parcels to evaluate so of course they occasionally miss one. Plus, the Property Appraiser would rather error on the side of caution and prefers to under rather than over-estimate a market value. They use a sophisticated model, which is state approved each year, that combines three methods of evaluation per property. They review 1) the reconstruction value, 2) sales comps for like-kind properties, and 3) the income approach, which considers a property's potential annual net income. Within each of those three approaches are a number of other intricacies that are performed to fine tune the assessed value for tax purposes. You can go to ACPAFL.org to see your appraised value. Remember, the Appraiser’s office does not give you an official “appraisal” for loan or estate purposes. For that you need to hire a commercial appraiser.|
I own a couple of large tracts of land outside the city. How do I estimate the value?
|I called my friend Zak Seymour at Farm Credit of Florida, ACA, who is an expert in agriculture and rural financing and has access to a tremendous database of transactions in the region. His data for urban type counties like Alachua says that cropland and pastureland can range from $2,800-$10,000/acre with an average of $6,400/acre. Pre-merchantable timberland is between $1,700-$4,000/acre with an average of $2,850/acre. Pre-merchantable means the trees are too small to be sold for pulpwood yet. Merchantable timberland is going for $2,000-4,500/acre with an average of $3,250/acre. Farm Credit points out that “where your property falls in these ranges depends on many factors including property size (smaller tracts tend to have a higher per acre value), location, soil types, presence of irrigation, and amount of dry land. The more urban the property also typically results in more value due to potential alternative uses.” These values come from sales between 1/1/2015 and 6/1/2016 in Alachua, Marion, Duval, and St. John’s counties.|
How much office space will $2,000/month rent get me in Gainesville?
|According to our 2016 closed office leasing stats, for $2,000/month, which includes your share of property taxes, insurance, and common area maintenance that all tenants pay one way or the other, that amount will afford roughly 1,750 SF of office space. There are currently 46 active office listings under 1,750 SF (54 actually leased in 2016). There are 71 active office listings over 1,750 SF (only 19 of this size leased in 2016, WOW). Obviously this can vary a good bit depending on numerous factors like location, custom build out cost for the tenant, strength of tenant, and length of lease to name a few. Next week, we’ll reveal what $2,000/month gets you in the retail and restaurant space arena.|
How much retail or restaurant space will $2,000/month rent get me in Gainesville?
|According to our 2016 closed retail and restaurant leasing stats by Realtors, for $2,000 per month, which includes your share of property taxes, insurance, and common area maintenance, that amount will afford you roughly 1,250 SF of retail space or about 950 SF of restaurant space. OF course for restaurants and retail location is everything so rates vary from $8/SF to $60/SF and up. Restaurant space tends to be more expensive because of the specifics requirements many have, such as grease traps, exhaust hoods, refrigerators, etc. And if you want a drive-thru be prepared for a lengthy permitting process. Next week, we’ll discuss what $2,000/month gets you in the industrial warehouse arena.|
How much industrial space will $2,000/month rent get me in Gainesville?
|Industrial as a category includes warehouse space, office/warehouse combos, and showroom/warehouses. Over the past couple of years it has been one of the best performing commercial categories. According to our 2016 closed industrial leasing stats by Realtors, for $2,000 per month, which includes your share of property taxes, insurance, and common area maintenance, that amount will afford you roughly 3,400 SF of industrial space. Closing rental rates in 2016 varied widely from $3.20/SF to $9.33/SF, driven mostly by location, whether it had showroom space or was just raw warehouse, the size of the lot, and whether it was climate controlled. There's been very little new warehouse space built since 2006 but expect that to change.|
When should I look for new space if my lease ends in 1 year?
|That gets tricky. The biggest questions are 1) how many choices are you likely to have and 2) how much if any build-out do you require? If you’re looking for a vanilla 1,500 SF office you’ll have lots of move-in ready choices. You can start looking 2-3 months before the end of your lease just to allow time for the search and negotiations. The larger the office the more time you need because you’ll have fewer options. If you need an existing customized space with lots of build-out, start now. You’ll need time for the search plus architecture, possibly engineering, city or county approvals, and construction. An interior remodel can easily take six months or more to complete. If you’re looking for dirt to build a new building, factor in 18-24 months. Don’t be rushed.|
|I keep hearing office space needs are shrinking and more professionals are working remotely. Where are they choosing to work if not at an office?|
|According to CoreNet Global, of those working remotely, 63% of Americans choose the home office, while only 9% choose a coffee shop and 9% choose shared workspace (also called executive suites). Shared workspaces are office environments where many different businesses rent typically one and two room suites and share in the cost of copiers, phones, internet, utilities, sometimes a secretary, and more. You pay the landlord one monthly rent for all the services and it is usually a shorter term lease than usual. We've seen it in the real estate industry, offices are downsizing. All you need to do a majority of your business is a smart phone and a computer. It doesn't matter where you are. I work from my home office. Todd, my business partner, prefers to work from the beach. Now that's an executive suite!|
|I'd like to buy a sizeable parcel of land as an investment. What are the most important factors to consider?|
|First, does the site have the potential to appreciate in value? Based on the location, accessibility, zoning, and taxes how likely is it that the land will be more valuable in the future? Second, what is your intended use for the property in the short term? Make sure the land has the necessary zoning to allow your desired use? Changing zoning can be a risky and expensive process. Third, does the land have wetlands or is it in the flood plain? Much of Florida is subject to flooding, particularly in hurricane season. There are wetland and flood maps available that can let you know if you're likely to be under water. Wetlands are typically not worth as much as "high and dry" land. Finally, what kind of soil does your property have? The soil type is a big factor in determining potential uses. Land can be a very good investment IF you buy the right piece.|
|I’m relatively new to buying and selling commercial real estate but it seems like every deal is difficult. How do you manage to close so many deals?|
|Ha, I sometimes wonder. Yes, there are very few simple commercial deals. That’s largely because money is involved and so many owners and buyers or tenants approach deals as a test of wills, rather than with rationale and a cool head. Plus, both parties typically have different objectives. Our job as a commercial Realtor, besides procurement, is to be the objective arbiter, appreciating the perspective of both sides and communicating those perspectives effectively to one another. We have to smooth out the rough spots and find the areas of compromise so that both parties are content, if not happy. We have to be the calming influence and problem solver and have the attitude that any challenge can be overcome. That’s why we get paid. As long as God keeps making every human uniquely different, we'll continue to be in high demand.|
I manage my own apartment complex because I want things done right. Is that wise?
|Probably not. Some investors manage their own property because they've had a bad manager experience. My answer is, get a better property manager. A good manager will more than pay for themselves in increased rental rates, decreased vacancy, quicker turn around on vacancies, and they generally have better "buying power" than you when it comes to getting repairs done or supplies ordered. Think about it, if you were a landscaper, would you give a small apartment owner a better price on maintenance than a large reputable management company that could potentially put you on 25 other properties? Those savings get passed to you. Same with HVAC guys, general repairmen, plumbers, roof replacements, and the list goes on. The value of your asset is tied to your Net Income. Generally speaking, a good property manager will increase your Net Income.|
|I've owned my commercial property for decades, why do I have to buy expensive title insurance for a buyer?|
|Title insurance covers you against an unknown past unlike most insurance, which covers you for the future. If you were the buyer about to spend a million dollars you'd want to know with certainty that the property you're buying doesn't come with costly baggage. Buying any real estate isn't just buying the asset, it is buying all the liabilities connected to the property. Title insurance covers possible issues from past owners, past uses, faulty legal descriptions, encroachments, and contractor or tax liens to name a few. In Florida as a seller you are assumed to be delivering clean title to a buyer so the burden is typically on you to make sure that’s the case. The good news is you only have to pay for it once and it is valid until the property is sold again.|
What should I be doing or not doing so brokers send me good commercial investment properties?
|What you should do: 1) Update your broker a couple times a year to stay on their mind, 2) Show the broker proof of funds with docs from your lender, CPA, or financial adviser, 3) When an investment is brought to you, act extremely fast in reviewing the deal, 4) If an unlisted seller won't pay the broker for procuring you as a buyer, it will go a long way with that broker if you pay him for bringing you a deal, and 5) Close on deals. The more you close, the more deals you’ll see. What you should NOT do: 1) Never go around a broker directly to their client, 2) Don't renegotiate a contract with a seller unless there is some huge surprise 3) Never sit on a deal the broker brings you. It's ok to pass on one, just tell your broker quickly 4) Don't give a broker impossible purchase criteria, and 5) Don't ever that the broker reduce his or her contractually negotiated fee in order to solve a problem in the transaction that has nothing to do with brokerage services. You may violate one of these DON’T'S above and get away with it, but it could cost you in future opportunities you'll never see.|
The FED is raising interest rates again; does that mean borrowing rates are going up as well?
|Not necessarily. Talk to your banker but the interest rate controlled by the FED is the rate at which one bank can borrow from another for a day. Have you ever borrowed money for a day? The mortgage interest rate, which you are more familiar with, is a long term rate that changes based on a myriad of market forces, and correlates with inflation among other indicators. So, the Fed rate (think short term rate) and mortgage rates (think long term borrowing rates) are mutually exclusive. If the "market" thinks higher inflation is coming, long term interest rates will likely rise in order to make up for the perceived loss in your purchasing power. Are you confused yet?|
|I've been working with a commercial agent looking for an investment property. He's shown me several opportunities and is pushing for me to buy. I worry that he doesn't have my best interest at heart. How obligated am I to continue working with him?|
|Unless you have a signed buyer's agreement with that agent you have no obligation. It's great to be loyal to one agent provided you feel he or she is acting in your best interest. A good broker, through communication and market knowledge, should be able to clearly demonstrate why you should or shouldn't buy a given property. If your broker is just trying to make a sale, it may be time to switch.|
What’s with the sudden appearance of all these tall buildings in Gainesville?
|The push to multi-story buildings such as the 10-story Standard on University and NW 13th, is being driven by city and county planners and commissioners. Basically as Gainesville grows we have a choice of going out or up. In other words do you want what planners call “urban sprawl” or taller buildings? In the last few years city officials have pushed for concentrated growth to encourage the ability of people to walk, bike or take public transportation to their destination. There are a number of new 6-10 story buildings in the works so expect a big change to the Gainesville skyline.|
|My broker was telling me about Real Estate Investment Trusts. What are they and how do they work?|
|A Real Estate Investment Trust or REIT is an investment tool that typically combines funds from a variety of sources for the purpose of investing in real estate. A local example is the sprawling Springhill development proposed for the area around NW 39th Avenue and I-75. The property is owned by the Pennsylvania REIT. Some REIT’s are so large that they are publically traded and some are privately owned. Established by Congress in 1960, REIT’s are currently popular with investors because of the strong real estate market and the fact that REIT’s are usually required to pay out at least 90% of their taxable income as dividends to shareholders.|
We need more stores and restaurants in East Gainesville. Why isn't that happening?
|When a company, particularly national chains, thinks about a possible location they secure all kinds of demographic data on the area. A couple of the main things they look at are population density and household income. If you look at aerials, the population generally isn't as dense east of Waldo Road as west. There are more wetlands and wooded areas, which are difficult or impossible to build on. Also, the average income tends to be lower. So when a company draws a 1-mile, a 3-mile, and a 5-mile radius around a prospective site and they look at the numbers, their chances of success are generally better on the west part of town. I know there is a concerted effort to change that but currently it's the reality.|
|In honor of Memorial Day, I’m skipping the Q & A. Instead I’d like to take a moment and reflect on the importance of this day. As I read the Sunday newspaper and sip my coffee, I can't help but think about what this day really means:|
|As one of 5 boys in my family, plus my dad, I'm the only one among us who didn't serve in the military. Thankfully they all lived through their wars, but many of their friends didn't. My heart goes out to all the husbands and wives, brothers and sisters, aunts and uncles, boyfriends and girlfriends, partners, sons and daughters, first loves and last loves, and dear friends of those who have made the ultimate sacrifice. Their dedication and selflessness is what enables us to enjoy the limitless opportunities and lifestyle possible as a citizen of the United States of America. A tremendous thanks to our fallen heroes and to the ones who mourn them. Let us never forget.|
|I have what I think is a good commercial property but it’s currently zoned for agriculture. How can I get the zoning changed?|
|First determine if it’s within the city or the county. Then call the appropriate planning and zoning department and see if the land use code will even consider a request to rezone. If the governmental body is even remotely open to a zoning change I think your wisest move is to hire a civil engineer. These are people who work on re-zonings and site-plan approvals every day. They know the codes and equally important, they know the players and the process for getting the zoning changed. Then be prepared to spend some money, sometimes tens of thousands of dollars, and be patient. It can take months and even years to get a zoning changed.|
|I just inherited a piece of timber property. It is mostly planted pines. How do I figure out what the trees are worth and when should they be cut?|
|Timber is a commodity just like oranges or cattle. The price can vary with supply and demand as well as accessibility. If your land is off the beaten path you may have a difficult time selling the timber. Your best bet is to call in the experts. There are Consulting Foresters who know trees and know the market. They can tell you the optimal time to harvest. The other factor to consider depends on whether you want to eventually sell the land. Depending on the future use, a clear-cut property may or may not enhance the value. Check with an experienced commercial realtor.|
I'm looking at a "For Lease by Owner" property because I figure I'll save some money. Good idea?
|Maybe. Some landlords are very knowledgeable and savvy about the market. The question is, are you? You may well be getting a fair lease rate and terms but unless you've done this a number of times how do you know? If you have some market knowledge and experience you are less likely to have unpleasant surprises down the road. If you don't have a lot of market intel, get help. At a minimum go to BeauTodd.com and click on FOR LEASE to see if the lease rate seems justified among other offerings and have your attorney review the lease. A commercial realtor may also assist if he or she can get the owner to agree to pay some commission.|
If I try to lease a space that been on the market awhile am I in a strong bargaining position?
|Maybe. Commercial real estate owners are generally more financially sound than say, a single family home owner whose home may not have sold yet. Some landlords are hungrier than others. Other landlords are financially solid and will wait to get their price. Sometimes you’ll see a sign up on property for months but it’s already leased. The landlord is just using to the sign to generate leads that he can put into other properties he owns. Other times, the lender on a property may not allow the landlord to offer a lower rate because that could affect the bank’s pro-forma financial statement that went with the original loan. In short, it’s worth a try but no guarantee.|
I keep hearing buying apartments for rental income is such a great investment. Why all the buzz?
|I believe through up and down markets, apartments have proven to be your safest bet because people still have to live somewhere no matter what. As home prices continue to rise across the U.S., rental demand is only going up for the foreseeable future. Another advantage is vacancy risk. A $1M apartment complex in Gainesville, Fl may be 20 units. If three tenants move out in one month that is only 15% vacancy and you'd hope to rent those units again within a month. A $1M office investment in Gainesville may have 3 tenants tops. You lose just one tenant that is 33% vacancy and it could easily take 3-9 months to find another tenant. Would your rather have 20 tenants paying down your mortgage or three?|
|I'm good at finding real estate investments, and pretty knowledgeable, but don't always have enough money to invest. How can I stop losing opportunities?|
|If you're truly talented at finding good investment properties and know how to buy and manage them, there is always money available to you. There are structures that exist where you can put in a small amount of money while someone else (the money man) with plenty of money puts in the rest so you can secure the loan. The money man gets what is called a "preferred return" on their capital, which means they get paid first up to their stipulated return on investment, and the rest of the cash flow is shared between both of you, but more in your favor. This uneven sharing after the preferred return is called the "promote" or "waterfall". The more money the property makes, the more you make since you get the bigger share after the preferred return. If the property is doing poorly however, you'll be working for free.|
What are the Top 6 Drivers of the commercial real estate market?
|To summarize notes from a top broker I know in another market: 1) Employment is the #1 driver of a healthy CRE market. Simply put, the more people working, the more they spend, the better our economy. 2) Government Policy can significantly impact the CRE market, particularly regarding the capital gains rate and healthcare. Uncertainty in government policy keeps all investors on the sidelines doing nothing. 3) The Federal Reserve Policy as it impacts inflation and perception of the economy. 4) Inflation and Interest Rates - as inflation increases the Fed raises interest rates, which drives down values but also makes mortgage payments more costly. 5) Housing: the more value a homeowner thinks they have in their home, the more they will spend. 6) Good old supply and demand: typically lower supply with strong demand drives up prices (our current market). Conversely, lots of supply is usually the result of lower demand and hence, lower values.|
|How big a deal for commercial real estate is the current administration's proposed decrease in capital gains tax?|
|Huge. We currently have several investors sitting on the sideline waiting to see what the administration does as it relates to removing the former administration's 3.8% Net Investment Income Tax (NIIT). The NIIT, which is the tax rate on capital gains, dividends, interest, and most other yields on investments, went from 20.0% to 23.8%. To use just one example, we have a family wanting to sell two apartment complexes for $30 million to a buyer we've already secured. They've owned these assets for decades so their basis for tax purposes is nearly zero. After deducting 3% in closing costs they'll be taxed at 23.8% on $29,100,000. They'll owe $6,925,800 in taxes. If the 3.8% NIIT is removed later this year to bring capital gains back down to 20.0%, that same transaction now results in taxes of $5,820,000, a difference of $1,105,800. That's a lot of money. Some owners will sell anyway, many won't. The implications are enormous when multiplied by billions and billions in transaction volume across the U.S.|
|Why do investment "bubbles" happen throughout time? Don't investors for the most part stick to some sort of fundamentals?|
|Ha, one would think but greed always triumphs. A "bubble" is when the selling price of investment properties gets too high to sustain. A top investment broker I follow wrote, “In a perfect world investors would always adhere to sound investment principals which would provide a more stable market… the problem is that only lasts a short period of time because greed always creeps in.” Our market is getting stronger and stronger every day, investors are making more and more money, prices continue to increase until the famous "bubble" is created. Then the market has a correction. Investors freak out and do nothing... they just sit on the sideline until one bold soul does a deal and actually makes money. You know what happens next. Five investors do a deal and make money, then a few years later greed is back to rule. This cycle has always occurred and will continue. Sound fundamental investing will never ever be a long term phenomenon.|
|The commercial real estate market seems really hot, what is some sound advice for investors in this part of the cycle?|
|Robert Knakal, a highly regarded investment broker in NY, had several great quotes I try to remember. "When financing is available for everything from every source, soon thereafter there will be no financing available from any source for anything." Another quote is, "When money is easily accessed by borrowers, sellers are those who receive the benefits, not the buyers." And, "Financial models never incorporate recessions and capital shortages, but reality often does." I also like, "When everyone believes a 'paradigm shift' has occurred and the market will never fall, it is about to." Another favorite is, "The real risk of using short-term financing is debt rollover renewal, not increases in interest rates." Lastly, he wrote, "Leverage is wonderful when all goes well, but extremely punishing when things go wrong." Words to invest by.|
I’m trying to decide whether to lease or buy an office property. How do I decide?
|Many factors must be considered before signing on the dotted line. Let’s first tackle some advantages to leasing. When you lease a property you are simply gaining use of the property, for a predetermined time, with no ownership benefits or hassles, for a certain monthly rent. Leasing typically offers a lower entry cost than owning, and the lease rate can be less than a loan payment depending on location and other factors. Businesses can deduct the entire lease payment, including any operating expenses. A business can usually expand, reduce, or relocate to a different space easier when in a lease. Lastly, businesses could set up in higher class space through a lease that they may not be able to afford in a purchase situation. Many national companies prefer to lease rather than tie up their assets in a purchase. In later weeks I’ll cover the downside of leasing and the advantages of buying.|
|Continued from last week: I’m trying to decide whether to lease or buy an office property. How do I decide?|
|Last week I talked about the advantages of leasing. Let’s discuss some drawbacks. Leasing doesn’t offer as many tax advantages as owning, such as depreciation. Unique interior improvements may not be permitted by the landlord because they may be undesirable to future tenants. Tenant’s don’t get to experience any appreciation on the real estate if local prices go up. Tenants also have limited control over who moves in next to them. Tenant’s have little control over what type or style of renovations or improvements the landlord does to the common areas of the building. And if you don’t have a good relationship with the landlord or property manager too bad, you’re stuck until your lease ends. Next week I’ll discuss the advantages of owning.|
You’ve discussed the pros and cons of leasing a property, what’s the upside of ownership?
|For starters, you get to write off the deprecation on the property and the mortgage interest on the loan. For instance, an $800,000 office purchase that was financed using a 75% loan to value, a 7.0% interest rate, and a 15 year amortization period would allow $20,513 in depreciation per year and $41,257 in mortgage interest to be deducted in the first year! As an owner you also benefit in any appreciation in the value of the property. You would have more control of the property from appearance to the amount of expenses incurred. If you occupy the building you own, check with your CPA on particulars, but you can make lease payments to your own ownership entity. Finally, if you own a multi-tenant building and you’re one of the tenants, you can use the rent obtained from other tenants to pay the mortgage and operating expenses on the property. What’s not to like? We’ll talk about that next.|
|Last week you talked about the upside of owning your commercial property as opposed to leasing. What’s the downside of ownership?|
|Obviously the least desirable part of owning is paying for the property. A large down payment can eat up money that could be used in your business. Your business may not have the stability banks are willing to finance so then you’re looking at paying cash. Property is not liquid so if you had to raise money in a hurry, don’t plan on a quick sale. A rezoning of the area may affect the site’s future allowed use. When you go to sell, it may be at a loss. If you have tenants your liability increases because of safety issues. Those same tenants will be calling you to fix their plumbing unless you take on the extra expense of a property manager. Don’t forget capital improvements like a new roof or parking lot. Sometimes you can’t expand the building because there isn’t enough land. Ownership isn’t for everyone which is why most businesses lease.|