Tools of The Trade – Analyzing Investment Deals

toolsofthetradeinvestment-1

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

I always appreciate when readers of this column take the time to reach out to me. Sometimes I know the person and sometimes I don’t but regardless, it is certainly always a delight to hear your comments. Last month, while at a real estate event, I was engaged in a discussion by a reader. This particular individual had one pressing question. No, they didn’t want to know about my favorite ‘80s-era supercar (512 Testarossa) or how my Aunt Norma made her lasagna (old Italian women never reveal their exact recipe). This avid reader simply wanted to know what software I used to analyze investment deals. Simple question, not so simple answer – but it was asked so I’m obligated to answer.

Financial calculator
Although technically not software, it is an invaluable tool. I’m partial to the Hewlett Packard 10B but there are many alternatives available from calculator giants such as Texas Instruments and Sharp. Financial calculators have a few significant benefits. They are very powerful and capable of performing all sorts of financial calculations in seconds. Despite this power, they are very affordable. Most cost less than $50 and iPhone and Android emulator apps are available for even less. And they are extremely portable. Calculators can be stashed in the pocket of a sport coat, purse or briefcase and used quickly and easily in a variety of settings. If you are using an app on your phone, there is an even greater chance of having this powerful tool at your fingertips. However, all of this portability and affordability comes at a cost – namely, functionality. While determining the IRR of a series of cash flows will take just seconds, determining that series of cash flows will involve countless calculations, probably with a good dose of old fashion pencil and paper thrown in. And good luck if someone asks you to email the analysis to them.

Microsoft Excel
I use Excel more than any other tool, as it offers many significant advantages. At the top of the list is flexibility. Excel can handle anything from a single-tenant cap rate analysis to a multi-tenant discounted cash flow analysis to a tenant occupancy costs analysis. In many ways, the software is only limited by the underlying skills of the user. Financial calculations, such as IRR, NPV and loan functions are inherent. It’s easy to build templates that can be used and re-used without having to re-create the proverbial wheel each time. And it’s universal, so I can send the analysis to someone without worrying about them having difficulty in opening the file. Click here to continue reading entire article.

Understanding Third-Party Service Provider Contract Agreements for Property Management

PropertyMgtContracts-16By 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.

A Taxing Situation – Appealing Property Taxes.

NAI Daus_Vol 2_No 2_HR-3

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.

2016 Predictions for Cleveland Commercial Real Estate Market

NAI Daus_2016_1_HR-2By 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.

Rent to Own, Part 2

Properties_January_Page_1Last month, we introduced a discussion that compared leasing real estate versus owning. The focus of that article was on some of the primary advantages and disadvantages of each and included at least some degree of subjectivity. This month, we are going to look at a much more objective measure.

There are actually two different analytical measurements that can be used. One utilized the net present value (NPV) of each alternative while the other utilizes the IRR of the differential between the two alternatives. We will focus on the NPV measurement in this month’s article, as it’s a little simpler and more intuitive. I’ll save the IRR method for a future article, when I’m franticly scrambling for a topic. The NPV method uses the aftertax opportunity cost to compare the purchase and lease alternatives. It is important that all of the components in this analysis are after-tax, as taxation has a different impact on leasing versus owning. Also, I am going to use a simple example but will point out where additional considerations may be needed.

Let’s look at the lease alternative first. We first need to calculate the annual cash flows after tax from leasing for each year of the projected occupancy period. To calculate after-tax cash flows, we determine the tax reduction by multiplying the annual lease cost by the tenant’s tax bracket. We then subtract the tax reduction from the annual lease cost. Putting these words into action, suppose a company is considering a lease alternative as follows: a 15-year lease term with a flat $120,000 net rental rate throughout the term and a 34% ordinary income tax rate. We will also assume that the company has an after-tax opportunity cost equal to 7%. This means that their internal margin or profit rate is 7%, after tax. Click here to download entire article.