Things to look for when valuing investment real estate

By Alec Pacella, CCIM
Managing Partner at NAI Daus
apacella@naidaus.com
(216) 455-0925
Twitter @dausyouknow

Double Vision
If you are a frequent reader of this column, you’ve read about various highlights of my youth. I’ve shared stories about my Aunt Norma’s unspeakable sauce (Prego), my Uncle Ralph’s cool gifts (Swiss Army knife) and the untold fortunes lost when my mom pitched my baseball card collection (welcome to the club). Another such event involves comic books, one of my favorite pastimes.

For anyone that has ever read 1970s era comics, you likely recall the pages of advertisements peddling various trinkets – sea monkeys, t-shirts and the famed x-ray glasses. This last one was just too much for me to resist – what 10-year-old could turn down the ability to see right through just about anything? So one day I collected up a hard-earned $2.00, filled out the order form and dropped it in the mail. Six weeks later, I was greeted with a package. As I tore open the box, I’ll never forget what was inside – a pair of plastic framed glasses with cardboard lenses and a small round hole in each. A feather was sandwiched between the layers of cardboard that formed each lens and partially obstructed the holes. This caused the light to slightly diffract, resulting in a shadowy image of whatever you were looking at. Creepy – yes, but certainly not x-ray vision. And thus an early lesson that things are not always what they may first appear. This month, we are going to discuss a few interesting instances of this in the context of valuing investment real estate.

Leasehold interest
A great example of things not being what they may first appear is a leasehold interest. The majority of real estate valuations involve what is commonly termed a “fee simple interest.” This means that the property includes the ownership interest in the land as well as the improvements. But there are times where these two components are owned separately.

For example, suppose that Mr. Jones owns a one-acre parcel at the corner of the proverbial Main and Main, the absolute best location in the city. Click to read entire article. 

Understanding Third-Party Service Provider Contract Agreements for Property Management

By Ira Krumholz
President of NAI Daus Property Management
ikrumholz@naidaus.com
Twitter @IraKrumholz

One of the primary duties of a property management firm is to ensure that a real estate asset is being properly maintained.

While some firms are set up to complete the majority of these services in house, most will use third-party service providers to perform at least some of these tasks. Therefore, the contract between the management company and the service provider becomes a critical document. This month, we are going to review some of the key components that any property management service contract should include.
One of the most important things actually isn’t a component at all, it’s the document. While nearly all service providers will have a standard document associated with their specific business, we recommend that the property manager not only have a standard document of their own reviewed by counsel, but push to use this with all of the service providers. In doing so, this will ensure that the most important components are included and enforceable. As with any negotiation, leverage is the key here – whoever has more leverage will usually be able to influence whose form is used. However, this is one of the items to which we try to strongly adhere.
There are five basic components that should be included. The first is the very reason the agreement exists – general guidelines and performance. This outlines the nature of the work or services that are to be completed, how it will be done, where it will be done and for whom it will be done. Think of this as the summary of a book, as it provides an overview of the agreement.
The second component details the ex-act scope of services to be completed. This section outlines the specific service needs of the property and expectations of the provider. For example, a snow removal contract will include under what conditions that snow and ice will be removed, what areas will be plowed or shoveled, when they will be treated and other requirements. The more specific this section is, the less chance there is for misunderstandings to occur, so be sure that this component is detailed and precise. Click here to download entire article.

Looking for Commercial Property Information Online?

By Alec Pacella, CCIM
Managing Partner at NAI Daus
apacella@naidaus.com
(216) 455-0925
Twitter @dausyouknow

A few months ago while attending a conference in Austin, Texas, I had my first experience with Uber. Although I certainly knew about this service, I never had the occasion to give it a try. But on this particular evening, several of my conference colleagues had consumed enough rubber chicken dinners and decided we should head out on the town – a perfect opportunity to give Uber a try.

For any of those who have never used this service, I would highly recommend it. The driver was there within minutes, the car was new and clean and the entire process was painless. Oh – and it cost a whopping $3.75.

Uber is a great example of how technology has turned the personal transportation industry upside down. Traditional competitors such as taxi and limousine companies are scrambling to figure out how to deal with the disruption that Uber has created.

But the personal transportation industry isn’t alone in facing major disruptions thanks to technology. Virtually any industry you can think of has been forced to adapt. Banking, retail, newspapers and music/entertainment all look drastically different today as compared to just five or 10 years ago. Certain segments of the real estate industry have also been impacted. Companies such as Zillow and Trulia have opened the door for consumers to search for homes and research prices, while Quicken Loans has become a dominant online home lender. The commercial real estate segment has not been under as much siege as the residential segment. But I think that could change in the near feature. To find out some of the potential catalysts for disruption, read on.

Information is a pivotal component in the world of commercial real estate. Tenants and buyers alike need to know what properties are available, commonly known as listings. And they need to understand the sale price or lease rate for similar properties, commonly known as comparables. Traditionally, real estate brokers have possessed much of this information but this is ripe for change. Several states have well-developed commercial multiple listing systems (MLS), including nearby Michigan. These are free for the public to access and search listings. (Michigan’s MLS contains nearly 14,000 commercial listings, for instance.) But there is no free system on a nationwide basis and if you are in Ohio, there is also no statewide MLS that focuses on commercial real estate. There are a few national data vendors that are active here, including Co-Star and Xceligent. And while their listing data is very good, both companies only offer certain information to the public for free, instead focusing on paid subscriptions. Several tech companies have attempted to fill this void, including 42Floors and Hubble. However, to date, all have met with limited success, especially when focusing on commercial space that is available only for lease. Click here to read entire article.

 

A Taxing Situation – Appealing Property Taxes.

By Ira Krumholz
President of NAI Daus Property Management
ikrumholz@naidaus.com

A few months ago, most property owners received a letter from their county auditor that revealed their new 2015 re-assessment. Every six years, the Ohio Revised Code requires each county to reappraise all of their respective taxing parcels. These reappraisals are updated every three years, a triennial update. In 2015, all of the parcels in Cuyahoga, Lake, Lorain and Portage counties were updated. Mistakes can sometimes happen, especially considering these four counties include the re-assessment of approximately 800,000 parcels. In this month’s column, we are going to discuss some nuances associated with the appeal process, as not every property owner may agree with the new value that was determined as a result of this re-assessment.

Considering most of the readers of this column are likely to be very familiar with the legal aspects of a tax appeal, the focus of this column will be on real estate related aspects. These generally fall into a few categories – true market value, timing and sale comparables being among the primary topics.

True Market Value (Valuation)
These days, it is commonplace for the property owner and the taxing district to each engage the services of a real estate professional to provide an appraisal or opinion of value for a property. There are many different types of value, but for taxing purposes, the goal is to determine the true market value. This is the price that a property would achieve in a competitive and open market under all conditions associated with a fair sale. Although this seems straight forward to determine, for many properties it can be anything but. For example, suppose a property is located at a very busy intersection in a desirable community. It includes a small, older building occupied by a barber shop situated on a two-acre lot. The property was valued at $200,000 but upon re-assessment, the new value is estimated to be four times greater than the former value. Further, assume that one of the properties located at the opposite corner has a similar size lot and transferred within the last couple years. The existing structure was torn down and replaced with a new drug store and the transfer price for that parcel was $1.5 million. This is a classic example of a dramatic difference between value-in-use and true market value. There is no way that a small, older barber shop could quadruple in value. However, the market data certainly suggests that the value of the underlying real estate has clearly increased. That is the goal of an appraisal or opinion of value – to determine the true market value. Click here for to read entire article.

Multi-Tasking Tool

By Alec Pacella, CCIM
Managing Partner at NAI Daus
216-455-0925
apacella@naidaus.com

Among the favorite memories of my youth were birthday celebrations – most notably, mine. Both of my parents had six siblings and even though all of my aunts and uncles worked hard to make ends meet, they would always remember my birthday.

The gifts were typical fare for that era – Matchbox cars, puzzles and baseball cards. But one of my uncles, Uncle Ralph, would always get me something cool. One year, it was a game program from Super Bowl IX and another year, it was a Guinness Book of World Records. But the one that really stands out was a Swiss Army Knife, a pocketknife that included not only a blade but also a screwdriver, can opener, bottle opener, wire stripper and nail file. I had never seen anything like it – one tool that could do multiple tasks. This month, we are going to discuss another such tool – time value of money (TVM). TVM has been frequently discussed in this column over the years but typically in the context of determining value or evaluating a loan. And while these two concepts are the “blades” of TVM, this tool can certainly complete many other tasks.

Example #1 – An investor is evaluating the purchase of a cell tower lease. The lease is for five years and the rent starts at $12,000 a year with 2% annual increases. If the investor has return requirement of 9%, what would the investor be willing to pay for this lease? How to solve – In this instance, we are going to discount a series of future cash flows back to a net present value. Looking at each of the five financial components, we know time (denoted as N), which is five years. We know payment (PMT), which is the rent to be receive each year. We know interest (I/YR), which is the investor’s return threshold of 9%. Finally, future value (FV) is assumed to be zero, as there will be no underlying value once the lease expires.

We will again utilize the CCIM T-bar to assist with the setup, as illustrated in Figure 1 (above). Once this is correctly constructed, solving is a snap. Simply enter each of the components into a financial calculator, solving for present value (PV) and shazam – this lease would have a value of $44,418 to this specific investor and under this set of assumptions. Click to read full article.

Time Value of Money (TVM)

Multi-Tasking Tool

By Alec Pacella
Managing Partner of NAI Daus
apacella@naidaus.com

Among the favorite memories of my youth were birthday celebrations – most notably, mine. Both of my parents had six siblings and even though all of my aunts and uncles worked hard to make ends meet, they would always remember my birthday.

The gifts were typical fare for that era – Matchbox cars, puzzles and baseball cards. But one of my uncles, Uncle Ralph, would always get me something cool. One year, it was a game program from Super Bowl IX and another year, it was a Guinness Book of World Records. But the one that really stands out was a Swiss Army Knife, a pocketknife that included not only a blade but also a screwdriver, can opener, bottle opener, wire stripper and nail file.

I had never seen anything like it – one tool that could do multiple tasks. This month, we are going to discuss another such tool – time value of money (TVM). TVM has been frequently discussed in this column over the years but typically in the context of determining value or evaluating a loan. And while these two concepts are the “blades” of TVM, this tool can certainly complete many other tasks.

Example #1 – An investor is evaluating the purchase of a cell tower lease. The lease is for five years and the rent starts at $12,000 a year with 2% annual increases. If the investor has return requirement of 9%, what would the investor be willing to pay for this lease?
Click here to download entire article. 

2016 Predictions for Cleveland Commercial Real Estate Market

By Ira Krumholz
President, NAI Daus Property Management Division
ikrumholz@naidaus.com

Momentum was certainly a key word last year. At the top of the list was the great positive momentum associated with Cleveland’s multifamily sector. Much of this was associated with Cleveland’s central business district, which grabbed most of the headlines. During 2015, nearly 500 new units were completed in the downtown area, but despite this additional inventory, occupancy rates continued to hover near 100 percent. There are approximately 275 units under construction with another 4,000 in various stages of planning. While new apartment construction outside of downtown has been limited, occupancy rates are also strong across the region averaging in the mid-90 percentile for most areas.

The industrial sector also had a strong year, as illustrated not only by high occupancy rates and increasing rents, but also with nearly 1 million square feet of speculative construction underway. Examples include new warehouse facilities in Euclid, Twinsburg and Stow – all of which were started without substantial leasing commitments in place.

The retail sector has also recovered nicely with several new retail developments underway. These include projects such as Pinecrest in Orange, Costco and Bass Pro Shops in Boston Heights and Cabela’s, Menards and Meijer in Avon.

The fourth primary commercial sector, the office sector, is the only one that has been a mixed bag. On the positive side, the overall level of leasing activity has picked up and certain traditional office corridors are performing well. However, there is still a substantial amount of vacant office space in the market and overall job growth in the office sector has been sluggish.

Looking ahead, a key word for 2016 is – cautiously optimistic. The commercial real estate market is approximately 24 months into this current expansion. Considering the depth and breadth of the most recent historic downturn, it is reasonable to think that the expansion will continue for at least another 12 to 24 months. This isn’t to say that sale prices and lease rates will increase at the same pace that has been illustrated over the last few years. In general, the velocity for both leasing and sales activity should remain solid throughout 2016.

Each commercial real estate sector is at a different place and each faces some risks. The multifamily sector is clearly the furthest along in terms of recovery and, as such, poses some potentially significant challenges. One of the largest is the threat of over-building, especially in the downtown area. While the demand has outpaced the supply, the projects that are in the development pipeline are more complex and thus, more expensive. There is a clear danger, not only that supply will start to exceed demand, but also that the rental rate needed to support these newest projects will be higher than the market can support. Click here to download the entire article.