Transaction Modeling IDs Best Deal

Topic: Transaction Modeling

Financial projections don’t lie, yet the accuracy of each projection lies with the integrity of the numbers. If you’re a single user of property or space, transaction modeling is vital to negotiating the sharpest deal terms. Real estate options should not be limited to discussions supported by rough back-of-the-envelope analysis. A good deal per market conditions may not meet the economic (and layout) needs of your business. Evaluate your options via formal transaction modeling (e.g., Pro-Calc, ROI-Muse, etc.) that is presented by an established and mature commercial real estate agent. (Note: It’s not likely you would accept accounting or legal advice from an inexperienced CPA or attorney.)

Intangibles (eg. loss factor) and tangibles (eg. free rent, escalations, and layout via Tenant Improvements (TI)) become a baseline [of costs and concessions] to add to relocation expenses. The goal is to compare projection results in a structured matrix to identify deal terms that meet your specific needs. This approach will help you identify deal terms that meet your specific needs, and arrange opportunities in succession of preference. Be prepared to select opportunities that meet your needs AND be prepared to choose none (starting over) if your terms cannot be met. Your real estate agent can suggest enough lead time for the search, secure, and build process to afford you leverage to negotiate for a space at your pace.

Make the Match

Identifying deal numbers reveals the “price” of each [building] choice to decide its worth/fit to your business. Commoditizing each deal positions you to focus on how the attributes of a choice meets the operating needs of your business and staff; prioritize choices to fit your needs. Your commercial real estate agent (a/k/a Tenant Rep) should be working closely with your real estate committee or designated project manager to ensure your space options are aligned with space needs, budget constraints, and legal flexibility of use. (Note: An agent with a QPCR or MCR designation from Corenet Global will refer to this as Enterprise Alignment engineered with a Work Place Solution.)

Deal terms can be sharpened by knowing the owner’s cost to carry the building (i.e. operating, maintenance, utilities, TI costs, mortgage(s)) and softness for legal terms. An established commercial real estate agent who is well-versed with the local market may have these answers. (Note: I identified this for most deals I made; it contributed to negotiating sharp deals (business and legal terms) for each choice.)

Lease vs Sale

Lease. The business terms of a lease are created by crossing the cost and profit needs of the owner, with your budget needs, with the market value for the space. Knowing the owner’s rough property costs and softness for legal terms will help guide you to negotiate the sharpest business and legal terms of the lease. The content of each term sheet drives the financial model of the deal. (Note: renewal options and expansion rights are negotiable; each property owner addresses them to match the needs of their property).

Sale. Whether you’re selling a property or buying one, the most effective means of identifying its market value is to compare its capped NOI to comps adjusted to the property. Rent of all space, less expenses, equals NOI, divided by a capitalization (cap) rate. (Accurate income and expense figures will produce an accurate NOI.) The offered price can be tuned up or down via the cap rate (1 point = 100 basis points). Compare the estimated property value to comparables, adjusting the comps up or down for differences to your property. The result will give you the property’s market value (and its ability to compete with comps). Capitalized Price Estimate

Caveat: When buying income-producing property, ask the seller to represent that the income and expense figures are accurate. Sellers often require buyers to sign a Non-Disclosure Agreement (NDA) before issuing their data; ask the Seller to add that representation to the NDA. (Note: If you’re dealing with a slippery seller, your CFO or CPA may need to negotiate obtaining reliable property figures.) Risk from questionable income and expense figures can be factored by raising the cap rate with a risk premium (e.g., tenths of or full basis point(s)). Your analyst’s model of the data will reveal which property you’re reviewing is worth buying and is the most financeable. A sale contract (and deed) that protects the seller and buyer fairly is critical.

If your commercial real estate (brokerage or investment) business needs a savvy analyst for a lease or sale deal, who can also present with charisma, please contact me to discuss your specific needs. If I can be of help to your transaction, see Publisher’s Corner to learn how to hire me and my read my bio.

Over-valued Property

If you received a notice of proposed market value for the next property tax year, that attempts to “mark your property to market”, overvaluing your property, it’s likely the proposed market value is based on comparable properties that are incomparable to yours.  You could retain legal services to contest the assessment to lower the market value.  However, if your property needs capital improvements, a cost approach is needed to convince the small claims judge and assessor that the market value of your property should be based on comparable properties less the aggregate value of construction bids to perform basic and reasonable capital improvements.  The following is a multi-point approach to contest your assessment to mark your property to market accurately.

–

 

Preparing to Contest Your Assessment.  Schedule a meeting with a member of the assessor’s office to discuss the source of the proposed market value and discuss the procedure to contest the proposed assessment.  Take detailed notes; they will guide you to plan to file the grievance claim and how to present it well in small claims court.

–

Assess the condition of your property.  If it was sold, what capital improvements and remodeling would a reasonable buyer make to modernize the property?  (Note: the more reasonable your presentation, supported by fair documentation, the more likely it will be approved.)

–

Comparables.  Make an earnest and diligent effort to source comparable properties to yours, whether listed or sold within the past 12 months.  An accurate comparison helps to make your grievance case more reasonable in court.

–

Cost Approach.  Evaluate your property thoroughly, from top to bottom.  What capital improvements would a buyer make to modernize the property with basic capital improvements.  It would be a good idea if you recruited the help of a friend who is a general contractor for the property type you own.  Spend an hour or so touring the property with them to evaluate what basic improvement would be reasonable to make upon closing on the property.  If it’s a home, what basic capital improvements would a new homeowner need to reside in the home with safety, efficiency, and low cost operations?  If it’s a commercial property, what basic capital improvements would be needed to make the property attractive to renew a lease or relocate to?  Examples are changing old inefficient windows, modernize the furnace, fix broken sidewalks, remodel where necessary, etc.  Some physical parts of your property could be functionally obsolete.

–

Prepare a detailed presentation of current property state, proposed market value, accurate comparables, formal written estimates for capital improvements, and clear pictures of each part of the property you plan to improve.  Pictures help to tell the story of why the market value of your property is less than the assessor’s office proposes.  Take the package to a local lender or mortgage broker to determine what loan would be offered to a buyer.  Those underwriting terms would help prove the market value you’re proposing for your property.

–

Contesting the Assessment.  The goal of the paperwork you submit and the verbal presentation in small claims court is to prove, beyond a reasonable doubt, that your property would sell for less than the market value proposed by the assessor due its physical condition.  Be prepared to continue the contest through all phases of negotiation; you may need to provide additional information during that time to secure the market value you seek.  Also, be prepared to contest the assessment each year until you have won a market value that matches the value of your property; an annual contest may be necessary to maintain an accurate market value of your property.

–

I have taken several continuing education courses in property valuation, that education has often enabled me to value a property within 7% of the closing price per sale.  An accurate market value keeps your property taxes fair and enables you to list the property for sale at a competitive price.  If you’re faced with an overvalued property from your assessor’s office, BREG can guide you to prepare to contest the assessment.  Please click “Request A Consultation” link in the upper right of the screen.  Enter “Over-valued Property” in the subject line; please include the name, email address and telephone number of you or your executive assistant in the message body; I reply within 24 hours to arrange an exploratory conference call.  Thanks for reading and listening.###

Navigate Your Next Real Estate Transaction

If your CXO suite is planning a change of its real estate, learn to navigate market conditions effectively. There’s many moving parts to source and secure the right space and business terms to meet the operating needs of your company. Learn which questions to ask or how to position your business to get the deal terms it needs. I am currently offering conference room presentations as special guest to CXO meetings for businesses employing up to 150 staff. Request a topic from the blog posts here in “Mayer’s Blog” relevant to your needs.  Two presentation formats are available.

–

• 15 minute presentation of basics, take a business card to ask questions via a planned follow-up call or meeting.
• 30 minute presentation of full topic, plus 15 minutes of Q&A.

–

Should your CXO decide to discuss Tenant Rep services from me, all exploratory discussions of your needs are interactive via a white board, whether held in your conference room or via Skype.

–

If you’d like to invite me to present in your CXO meeting, click “Request A Consultation” link in the upper right of the screen. Enter “CXO Presentation” in the subject line; please include your name, email address, telephone number and topic subject in the message body; I reply within 24 hours. Any presentation requires five (5) business days lead time to schedule into my meeting calendar. (Any requests for custom made topics require fifteen (15) calendar days’ lead time to research and prepare for.)  Thanks for reading and listening, perhaps I’ll hear from you in the future. ###

Forensic Lease Audit

If your business leases commercial space, does your additional rent billed seem abnormally high? Is the source befuddling you?; a Forensic Lease Audit can identify the source. A Forensic Lease Audit is a complete review of your lease language with related billing. The goal is to verify the accuracy of rent billed to your business by your landlord. The auditor becomes your advocate to identify the correct amount of overcharges billed by your landlord, to be reimbursed to your business or credited to your rent account; future billing normalizes to match your CFO’s rent expectations. The categories listed below are often a source of overcharged additional rent:

–

• Building Maintenance costs
• Capital expenditures passed along as ordinary repairs and maintenance
• Costs non-compliant with lease terms
• Double billing of costs
• Overstated gross–up calculations

–

Leases often have a short window of time to audit rent invoiced to dispute the charges. Lease clause language and their actual application to the billing of escalation charges (eg. Operating Expense Costs, CPI, and Porter Wage) are quite unique. Savvy financial advocacy can get overcharged additional rent found from a Forensic Lease Audit reimbursed or credited to your rent account and normalize future rent billing. The Forensic Lease Audit is a niche financial service that differs from the services offered by accountants or attorneys.

–

If your rent bills are abnormally high, we recommend contacting The Lease Audit & Review Co. directly.  They have extensive expertise in escalation lease interpretations and their compliance.   They’ve helped many commercial Tenants over 30 years to recover overcharged additional rent. Reach The Lease Audit & Review Co. at theleaseaudit.com or reach Tom Woodward, Principal at tkw@theleaseaudit.com, 201.264.5265.

–

If renewal or relocation is warranted to lower your real estate costs, BREG collaborates with The Lease Audit & Review Co. to ensure the language in your new lease guides the Landlord to prepare rent bills fairly. If you’d like to discuss BREG’s Tenant Rep services, please click “Request A Consultation” link in the upper right of the screen. Enter “Help Lower My Rent Bills” in the subject line; please include your name, email address and telephone number in the message body; I reply within 24 hours. Thanks for reading and listening. ###

–

–

–

forensic lease audit overcharged rent commercial rent charges metro NYC new york city new york commercial real estate office loft warehouse industrial flex showroom medical space

How to Hire Me

-After substantive conversation, if you choose to hire me, the principal of your firm signs an “Exclusive Right to Represent Agreement” from me that designates me to handle your firm’s real estate needs, regardless of how the space is identified.  I also offer analysis or consulting services through your service providers (i.e. CPAs or Attorneys) through a Consulting Agreement.

–

-My commission /fee  is borne by the landlord/seller you buy space from or at an hourly rate that we agree to, paid by your firm.

-I can work by sole transaction, by multiple transactions with a strategic goal, provide strategic planning advice or as project consultant.

-Rate: Without commission, $50/hr for the first 3 projects (prove service), then usual rate of $225/hr.

-Four hour minimum for initial project review ($50 rate), paid upon submittal of the review.

-I prefer clients to furnish me their accurate financial data after I sign an NDA (which I can provide).  This helps to budget real estate into your finances.

-In consulting assignments, I can present results you approve to parties of the transaction as needed, at the hourly rate.

–

Highly Successful Helping Businesses Grow

Real Estate Investment Valuation: Few Comps

If your property is located a bit off the beaten path and sale comps are few, how do you value your investment for loan or sale? Don’t guesstimate by market conditions; capitalize Net Operating Income (NOI). Here’s how:

ADD

Rent. Every space has a rent value, there are enough properties near yours competing for tenants that offer rent comps. Identify the accurate rent value of your space (adjust rents for plans to rezone a part of your property. For example, converting unfinished storage space into workspace supported by adequate parking and/or elevators.)

Land Value. If your building has substantially more land than building, with air rights for more than 3-4 floors, add land value to identify the property’s market value. How? All land can be rented. Land is typically 22% of the market value of a property; land rent is capped at 10%. (This rate assumes all public utilities are installed to develop the land.) For land with air rights of more than 3-4 floors, air rights are a commodity, market conditions dictate value; demand with low supply drives up value; add land and/or air rights to market value.

SUBTRACT

Operating Expenses. What’s does it cost to run your building every month? Assure to add a % of gross operating expenses as buffer for unexpected maintenance needs.

Capital Expenses. Costs to improve efficiencies of building operations; not subject to depreciation.

Capital Improvements. Investments to physically improve the building, subject to depreciation (after NOI).

Tenant Improvements. Costs to build tenant space, recaptured in rent over life of lease.

Brokerage Commission. Like TI, brokerage fees, recaptured in rent over life of lease.

NET OPERATING INCOME

Result. (Existing rent + rent from rezoned space) – Operating Expenses – Capital Expenses – Capital Improvements – TI – Brokerage Commission = Net Operating Income.

Cap Rate. A divisor that leads to Market Value. The capitalization rate (cap rate) is directly affected by the term of the lease, the integrity of collecting rent from leases, the credit quality of tenants, and sometimes the use of space.

Market Value. Adjust sale comparables to the capped NOI of your property, the result equals the market value of your property.  This case study is about a property sold for mixed-use redevelopment.  Add the capitalized value of land and/or market value of air rights [per buildable foot] to this result.

Uses of Market Value. Use market value to secure a mortgage, a take-out or sell the property. Confirm the market value with a commercial appraisal; no one can dispute a reasonable appraisal approved by an M.A.I.

Hire Me. If you’re planning to sell your property or need to identify its market value for a transaction, I can perform the analysis to identify its market value.  In the past, my results came within 5% of an M.A.I’s appraisal or the sale price.  Please fill out the form in Request a Consultation with your information; I’ll reply within 24 hours.  Until the next post…