Saving money through creative financing, good management or cost segregation is always a good thing. It doesn’t make any difference where the savings or increased value comes from, it only matters that you realize the gains. This blog will attempt to answer your questions about cost segregation.
Here’s a video that should help you understand cost segregation and I’ve answered some specific questions below. (Please note that I’m not endorsing the company represented in the video, but am referring to them for general information purposes only.)
Cost Segregation (CS) – what is it? CS can help lower your business costs, and could also assist with jobs retention. The process involves a review of your business operations to separate items that are subject to long-term depreciation from those that are eligible for shorter-term depreciation through the IRS. For instance, your computer mainframe will not necessarily be subject to the same depreciation schedule as the ceiling, doors, fixtures, etc. Simply put, accelerating the asset depreciation on Federal taxes can save businesses money.
Depreciation through Cost Segregation is based on whether specific items (inside the building) were built pursuant to code requirements, or are for technology, service, treatment, aesthetic, or other purposes. Building-related items are typically subject to a 39-year depreciation schedule; non-code items can be eligible for five, seven, or 15-year depreciation. The result of segregating these costs could be significant for your business.
What types of properties qualify for cost segregation?
Real property eligible for cost segregation includes buildings that have been purchased, constructed, expanded or remodeled after December 31, 1986. Any size property will qualify. A study is typically cost-effective for buildings purchased or remodeled at a cost greater than $200,000.
When is the best time for a cost segregation study?
The best time for a cost segregation study is the year the property is placed in service by the current taxpayer, but it can also uncover retroactive tax deductions for older buildings which can generate significant short term benefits due to “catch-up” depreciation. Whether new construction or acquisition, it is generally most beneficial to maximize depreciation deductions from year one.
How much does a cost segregation study cost?
The classic answer is…it depends. The fee for a cost segregation study can vary greatly depending on the property type, size and complexity as well as the quality of the provider and their work product. The good news is that fees have come down considerably over the past four or five years. A study that would have cost $30,000 or more 5 years ago will probably price in the $10,000 – $12,000 range in today’s market.
How much should I expect to save with a cost segregation study?
It is not uncommon for a cost segregation study to generate hundreds of thousands or even millions of dollars in net present value savings. The average study will allocate, or reallocate in the case of a look-back study, anywhere from 20 – 40 % of the depreciable cost basis to a shorter life. For every $100,000 moved from 39-years to 5-years the 10-year net present value savings is approximately $28,000 (based on a 40% tax rate and a 6% discount rate). The 40-year net present value saving is approximately $20,000.
Hopefully, this blog has answered some of your questions about cost segregation. If this looks like it could work for you, I suggest that you discuss this with your accountant or if he can’t help you contact a specialist in this field. Sometimes our accountants aren’t as aggressive as we would like them to be. As you can see, this could cost you vital money and be the difference between a money making or losing investment.
As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.
If you own commercial real estate, I believe that the ten best ways to increase their value is through rent increases, operating expense decreases, making improvements to the property, adding amenities or exploring other income producing ideas, review/challenge the existing property taxes, change the management company and/or leasing company, change the zoning or use of the property, have tenants pay for the utility costs, divide the property and creatively negotiate the leases whether they expire now or later.
1. Increase Rents
Increase below market rents when leases expire: Review the market to determine the average rent; if you are below the average for your type of property, increase the rents accordingly. Increase the rent over time for existing tenants; however, when renting a vacancy, charge at the new increased rate. You can check rental rates by going online to search for “rent rates” or by contacting a local property manager or leasing company in the area.
Expand existing tenants into larger space.
Improve credit-worthiness of tenants when filling vacant space (improves the cap rate) by marketing vacancies to regional or national tenants. You don’t necessarily need to increase the rent, you should be able to sell the property at a better cap rate with better credit tenants.
2. Decrease Operating Expenses
Compare your expenses to market: Review all of your expenses carefully and analyze them on a per unit basis and a cost per square foot basis, as these are industry standards. Compare each expense with your other properties. Talk with your property manager or a local experienced property manager to compare with other properties in the area. If some of your costs are higher than the standards, you’ll know you need to explore ways to decrease them.
Competitively bid all of your contracts, including insurance.
Convert gross leases to net, double net or triple net leases.
3. Make improvements to Your Property
For office buildings, shopping centers and industrial buildings, cosmetic improvements can make a big difference – and may enable you to increase the amount of rent you charge. Give the exterior a makeover, improve the lobby, or repave the parking lot to enhance the property.
In the case of apartment buildings, you’ll get more mileage out of fixing up the interiors, installing new appliances, or doing a landscaping face-lift.
4. Add Amenities or Explore Income Producing Ideas
Amenities you might add:
• concierge services
• a fitness center
• a conference room
• a business center with a fax machine and copier
• a coffee bar
Income producing ideas include:
• renting your roof space for cell towers
• adding a laundry room and coin operated machines to an apartment complex
• renting your common areas for art shows, car shows or kids rides.
5. Property Taxes
Get an appraisal for your property and appeal the appraised amount if the appraisal is lower. Retain a real estate attorney who specializes in tax appeals to assist you, or hire one of the companies that get paid based on the savings they get for you based on the appeal.
6. Change Management or Leasing Companies
Sometimes all that’s needed is looking at your property through a new pair of eyes. Different energy or philosophy can add value to your property. New managers or leasing agents may be able to give you ideas on increasing income, decreasing expenses and giving your property a fresh, new look and feel.
7. Zoning or Use Change
Changing the use of a property can significantly change the value of the property. Examples are:
• changing an industrial space into a retail use
• renovating a hotel to apartments
• adjusting regular office space to medical office space
8. Have Tenants Pay for the Utility Costs
If you are paying for the electricity, gas and/or water usage in office buildings or apartment complexes, look into separately metering or sub-metering the utilities, and pass the costs on to the tenants.
If you have a boiler, you may want to install baseboard heating in each unit so the tenants can control their heat and pay for it.
9. Divide Your Property
If you own land, breaking it down into smaller parcels can get you more per acre or square foot. Also, you could put in roads, add utilities, or entitle the property, all of which can substantially increase the value of the property.
10. Negotiate Existing Leases
If you are trying to sell the property or borrowing money on the property, it’s better to have long term leases in place. A five or ten year lease with rent increases is worth more to investors and lenders than a one year lease. Renegotiate or extend existing tenant leases to maximize the value of your property. Whenever the tenant asks for something that is not your obligation, it can be a time to negotiate something out of the lease. In other words, if they ask you for something, it’s time to ask for something back. Improve your leases whenever you can.
As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.
Commercial real estate marketing involves the disposition of your property. And if you have invested wisely, worked smart, and created value – and inflation and appreciation have played their roles – then it’s time to sell your commercial property and harvest the wealth you have built through property equity.
You must now make the decision of what you want to do with the profits. You can take the money, pay your taxes and run. You can exchange the property to push the taxes to a later date. You can offer financing on the property so that you receive an income without worrying about managing the property. Or, if you have your business in the property and you need cash, you might want to consider a sale leaseback.
Whatever you want to do with that equity, your next step is to create a sales promotion that attracts buyers who will pay the price you want. You can develop the strategy on your own or you can work with a commercial real estate broker to come up with a commercial real estate marketing strategy. Either way, you need to be involved in the strategy decisions so that your property stands out and attracts buyers.
The first thing that you must do is to offer your property at a price that your target market will pay and at a price that provides you a profit. You shouldn’t stroll down the path that others go on by marketing your property at a price that accomplishes neither a buyer’s goals nor your goals. Rather, design a value proposition that attracts, persuades and closes the perfect buyer.
This value proposition integrates four essential elements:
(1) the investor; (2) your competitors; (3) the benefits that you will be offering; (4) your pricing and terms.
The Investor
Which investors should you appeal to? A few types of investors include:
• no cash buyers
• no credit buyers
• first time investors
• lease-option purchasers
• professional investors
• specific product investors
• conversion specialists
Your Competitors
Who are your potential competitors? Competitors can include:
• foreclosures
• new buildings
• distressed sellers
• sellers who carry financing
You need to understand your competitors’ locations, their features and benefits, and their pricing and terms.
Benefits Offered
What benefits and features should you emphasize and offer for effective commercial real estate marketing? Examples include:
• special landscaping
• unique architecture
• ability to expand the property
• special touches
• interior improvements
• seller financing
• strong appreciation potential
• positive cash flow
• low cash requirement
• minimal management
• tenant pays all expenses
Pricing and Terms
Here you need to compile your information and then compare and contrast, mix and match the different types of potential benefits, potential investors and potential competitors to arrive at a price and terms that provide the targeted buyer a great competitive value and provide you the profit you seek.
How you answer these questions will determine how successful you will be in selling your property at a realistic price to a targeted investor in a reasonable period of time. You achieve these results by asking players in the market, inspecting, comparing and contrasting properties, discovering the properties that sell fastest and at the best prices, reading articles on property renovation and thinking about what features/benefits/contract clauses will provide you a competitive edge against the other properties and a cooperative edge with your buyer segment.
As you can see, selling your property is not just about putting up a “for sale” sign and taking the calls if you plan to get the maximum for your property in the shortest amount of time. It’s about developing a commercial real estate marketing plan for your specific property. Knowing your property and your market are the keys to success.
Once you have identified potential buyers for your property, gained an understanding of your competition, defined the benefits of your property and determined the pricing and terms that you want, it’s time to develop a real estate marketing plan.
Here are the next steps in the selling process that you need to do to get the maximum price and the quickest close:
Staging the property
Stage the property keeping your potential buyer in mind. If you’re selling a luxury property, then make sure that your property is fixed up to match that buyer. If, on the other hand, you’re selling a lower end property, clean the property up so that it shows well, but don’t go overboard.
At a minimum, the property should be safe to show and cleaned up. Most retail spaces should be put into a “vanilla shell” condition for showings. Office spaces should have the carpets and windows cleaned and the walls repaired. Industrial spaces should be made safe and clean throughout. Landscaping should be free of litter, pruned and spruced up.
Advertising the property
• Signs on the property – Signs should be done professionally and the contact numbers (telephone and email) should be clearly spelled out. Some of your best prospects come from sign calls, so make sure that you return all calls promptly.
• Fliers describing the property, including its features and benefits – Fliers should be printed or designed for internet marketing, and the strong selling points about the property should be emphasized.
• Local advertising – Local advertising can include newspapers and other local publications.
• Internet advertising – Internet advertising as part of the real estate marketing plan can be done through such companies as LoopNet, CoStar, Catalyst, eProperty and a host of other sites for selling commercial property.
• Mailers to potential buyers and brokers – Mailers can include fliers mailed and/or emailed to all potential buyers and brokers in the market.
You can also attend local, regional and national conventions and meetings where you will find opportunities to market your property. Another resource is broker and/or investor meetings which are held monthly in almost every local area.
Lenders
While you don’t need a loan to close the property, it’s wise to have a couple of lenders review the property to give you an idea of lending programs that might be available for potential purchasers so you can refer them and possibly close the sale faster. Prequalifying the property is always a good idea as part of the real estate marketing plan.
Due Diligence
Put all of the information together that will be needed for the buyer’s due diligence. Having this ready to go once you have signed the purchase contract can save you time in getting the property closed and keep things running smoothly.
Pre-Qualify Buyers
Have a system in place so you can pre-qualify the buyer prior to getting into contract. Understand their motivations, their ability to finance the property, and their history of closings.
Doing the above items should help you to maximize your sales price and to have a smooth closing.
As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me, I truly want to help. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.
A letter of intent (LOI) is the initial offer to the seller of a commercial property that you want to buy. The commercial real estate letter of intent should tell the broker and/or seller that you’re a serious buyer who is ready to close at the price and the terms you have spelled out, provided that you can work out the details of a contract. Your letter of intent should get the ball rolling.
The main purpose of a letter of intent is that it’s a simple, time efficient way to get the basic points of a deal down. Besides, a one or two page document is easier to get a seller to agree to right away so that you can go on to making the deal. The disadvantage is that you don’t have the property under contract until the formal agreement is fully executed, thus make sure that you get the formal contract out quickly.
The easiest way to explain a LOI is to give you an example of a standard one as shown below, however please note the following as it relates to the LOI:
The opening clause lets them know that you are a serious buyer. I always suggest that you put in and/or his Assignee so that you can assign it to a company or LLC that you might want to set up or in case you have a problem trying to close this deal, you can either partner up with another party or assign the Contract and probably make some money on the assignment. There are many ways to make money in real estate and assigning contracts is one of them.
Under Property Description, do as thorough a job describing the property as you can.
Your due diligence period should be the amount of time you anticipate that it will take you to do your inspections. Make sure that your period doesn’t start until the seller has given you all of the required information and that it is acceptable only in your discretion. You will also want to waive these rights or accept the information in writing only.
Your deposit delivery and closing timing are negotiable, but should be reasonable.
The loan contingency usually will prompt a discussion with the seller wherein they will want to know if you have a good source for a loan or if you have received loans in the past, etc. You should be ready to convince the seller that you are experienced at getting loans or that you have a broker that is experienced.
Closing costs are a negotiated item typically based upon what is normal in your particular market. You can ask an escrow officer or a real estate broker in your area about this.
One of the most important clauses in the letter of intent is the clause spelling out that the letter is not a contract and not legally binding until a contract is fully executed.
As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me, I truly want to help. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.
SAMPLE LETTER OF INTENT
Date:
Seller or Seller’s Agent Address:
Re: LETTER OF INTENT FOR THE PURCHASE OF (Subject Property):
Dear [Name]:
This Letter of Intent sets forth the terms and conditions upon which [Name of Buyer] and/or his Assignee will purchase the above-referenced property. It is understood that this constitutes an expression of our intent only and that any final and binding agreement shall be subject to the preparation, negotiation and execution of definitive legal documents (hereinafter referred to as the “Purchase and Sale Agreement”). Subject to the foregoing limitations, it is our intention to enter into a Purchase and Sale Agreement that contains, among others, the following terms and conditions:
1. Purchaser: _________________[Name of Buyer] and/or his Assignee or Nominee.
2. Seller: __________________[Name of Seller]
3. Property Description: (Address) __________________________together with any and all improvements therein and all of Seller’s right, title, and interest in all common areas, amenities, appurtenances, fixtures, chattels, and all personal property and the underlying fee land (collectively referred to as the “Property”). Seller shall sell Purchaser a 100% fee simple interest in the Property. Assessor’s Parcel Number: ________________.
4. Purchase Price/Terms: The Purchase Price of the Property shall be $___________, all cash. The Purchase Price shall be adjusted in accordance with generally accepted accounting procedures and customary real estate practice for pro-rations, credits and other adjustments, including, but not limited to, credit to Purchaser for security and other deposits paid by tenants.
5. Purchase and Sale Agreement: Seller and Purchaser, shall in good faith, prepare and execute a mutually acceptable Purchase and Sale Agreement within ten (10) business days after Seller has accepted this Letter of Intent. Seller shall not accept any offer with respect to the sale of the Property during the duration of the contingencies.
6. Other Conditions: Conditions precedent to closing this transaction shall include:
A. Due Diligence Period: The satisfactory approval of Purchaser’s inspection of all aspects of the Property during an investigation period of ___________ (__) days (the “Due Diligence Period”), which will commence on receipt of all of the due diligence materials (“Due Diligence Information”) shown on the attached Exhibit A. Within ten (10) business days after the execution of the Purchase and Sale Agreement, Seller shall make available to Purchaser the Due Diligence Information. Review and acceptance of Due Diligence Information is subject to the approval of Purchaser, in its sole and absolute discretion.
B. Title/Survey: Seller, at Seller’s expense, shall cause the title company [Title and Escrow Company] to issue a preliminary title report (the “Title Report”), accompanied by legible copies of all recorded documents relating to easement, right-of-way, and all other matters of record affecting the Property. Seller, at Seller’s expense, shall cause to be delivered a current ALTA plat of survey of the Property, prepared by a duly licensed land surveyor acceptable to the Purchaser and the Title Company (“the Survey”). The Title Report and Survey shall be updated by Seller within ______________ (___) days of closing to the satisfaction of the Purchaser.
C. Deposits/Closing: An earnest money deposit of ________________ ($____________) to be held for the benefit of the Seller and applicable to the Purchase Price, shall be delivered to the Escrow Agent within two (2) business days of execution of the Purchase and Sale Agreement. The deposit will become nonrefundable only: (1) following Purchaser’s satisfactory review of the Due Diligence Information; and (2) upon delivery of title and survey to Purchaser’s approval. Closing shall occur within __________ (__) days following the end of the Due Diligence Period.
7. Financing Contingencies: This offer is contingent upon Buyer obtaining from an insurance company, financial institution or other lender, a commitment to lend to Buyer a sum equal to at least ______% of the Purchase Price, at terms reasonably acceptable to Buyer. Such loan (“New Loan”) shall be secured by a first trust or mortgage on the Property. If this Agreement provides for Seller to carry back junior financing, the Seller shall have the right to approve the terms of the New Loan. Seller shall have 7 days from receipt of the commitment setting forth the proposed terms of the New Loan to approve or disapprove of such proposed terms. If Seller fails to notify Escrow Holder, in writing, of the disapproval within said 7 days it shall be conclusively presumed that Seller has approved the terms of the New Loan.
Buyer hereby agrees to diligently pursue obtaining the New Loan. If Buyer shall fail to notify its Broker, Escrow Holder and Seller, in writing within ______ days following the Date of Agreement, that the New Loan has not been obtained, it shall be conclusively presumed that Buyer has either obtained said New Loan or has waived this New Loan contingency.
If, after due diligence, Buyer shall notify its Broker, Escrow Holder and Seller, in writing, within the time specified in the previous paragraph hereof, that Buyer has not obtained said New Loan, this Agreement shall be terminated, and Buyer shall be entitled to the prompt return of the Deposit, plus any interest earned thereon, less only Escrow Holder and Title Company cancellation fees and costs, which Buyer shall pay.
8. Conveyance and Encumbrances: The property shall be conveyed by recordable grant deed, free and clear of all liens and encumbrances, excluding: (a) real estate taxes, which shall be the obligation of the Seller until date of closing and subject to pro-ration; and (b) such liens and encumbrances as Purchaser elects to have remain against the Property.
9. Closing Costs: Seller shall pay the costs of ALTA title insurance, transfer or sales taxes, and any title curative work it elects to undertake. Purchaser shall pay recording fees, extended title insurance costs and all costs in connection with the physical inspection, accounting audit and other investigations made in connection with Purchaser’s due diligence review.
The Purchaser and Seller shall each pay for their respective attorney fees and out-of-pocket expenses. All escrow fees shall be paid equally by Purchaser and Seller, except as otherwise provided in the Purchase and Sale Agreement.
10. ADA: Please be advised that an owner or tenant of real property may be subject to the Americans With Disabilities Act (the ADA), a Federal law codified at 42 USC Section 12101 et seq. Among other requirements of the ADA that could apply to your Property, Title III of the ADA requires owners and tenants of “public accommodations” to remove barriers to access by disabled persons and provide auxiliary aids and services for hearing, vision or speech impaired persons by January 26, 1992. The regulations under Title III of the ADA are codified at 28 CFR Part 36. We recommend you review the ADA and regulations.
11. Hazardous Materials: Owner agrees to disclose to Broker and to prospective purchasers and tenants any and all information which Owner has regarding present and future zoning and environmental matters affecting the Property and regarding the condition of the Property including, but not limited to, structural, mechanical and soils conditions, the presence and location of asbestos, PCB transformers, other toxic, hazardous or contaminated substances, and underground storage tanks, in, on, or about the Property. Broker is authorized to disclose any such information to prospective purchasers or tenants.
12. Brokers: In the event [Name of Buyer] completes a successful purchase of the property, Seller shall pay ___________________ a sale commission equal to ____ percent( %) of the sales price. The sale commission shall be paid upon closing and through escrow.
13. Representation and Warranties: The Purchase and Sale Agreement shall contain such covenants, agreements, representations and warranties as Seller and Purchaser may agree upon, including but not limited to Hazardous Materials; Mold, Mildew and Fungus, etc.
14. Assignment: Purchaser shall have the right, after giving written notice to Seller, to assign its rights under this Letter of Intent and the Purchase and Sale Agreement to any entity controlled by, or under common control of, Purchaser.
This letter/proposal is intended solely as a preliminary expression of general intentions and is to be used for discussion purposes only. The parties intend that neither shall have any contractual obligations to the other with respect to the matters referred herein unless and until a definitive agreement has been fully executed and delivered by the parties. The parties agree that this letter/proposal is not intended to create any agreement or obligation by either party to negotiate a definitive lease/purchase and sale agreement and imposes no duty whatsoever on either party to continue negotiations, including without limitation any obligation to negotiate in good faith or in any way other than at arm’s length. Prior to delivery of a definitive executed agreement, and without any liability to the other party, either party may propose different terms from those summarized herein, or unilaterally terminate all negotiations with the other party hereto.
It is understood that the foregoing outline is not a binding agreement. Furthermore, it is understood that the purpose of this outline is to work toward acceptable terms by which to draft a Purchase and Sale Agreement which will be mutually acceptable to both parties. If the above terms are acceptable to Seller, please so indicate by executing below and returning the enclosed copy by the close of business [Date].
Sincerely,
AGREED AND ACCEPTED:
Simply put, an IRC 1031 tax deferred exchange allows owners of real or personal property to defer the recognition of a capital gains tax when they have sold their property.
They have been around in one form or another since 1921 and in its current form since 1986.
An exchange is structured just like any other sale or any other purchase, but with the inclusion of a qualified intermediary to structure the transaction as an exchange. It is very important to involve the qualified intermediary before you start your transaction.
Exchanging allows you to reinvest money into a new business or an investment property that you otherwise would have had to pay in taxes to the government.
If you prefer a video on 1031 Exchanges, please look at this one from the REI Club. Below the video is additional important information about the 1031 Exchange.
What types of properties may be exchanged?
Exchanges can involve real property or personal property. Property to be exchanged must be held for business or investment purposes and not primarily for resale purposes or personal use.
The properties that are exchanged must be “like kind” to each other. Concerning real estate exchanges, the properties do not have to be the same type. As long as they are both held for business or investment purposes they are considered like kind. Personal property like kind rules are generally more restrictive.
As an exchanger you have the opportunity to purchase replacement property of any type. As an example, you can sell vacant land and purchase a strip mall; or sell an apartment building and buy an industrial complex. Although 1031 exchanges are governed by federal law, it is state law that determines what is and what is not real property. Exchanges of real estate interests such as air rights, easements, timber, conservation easements and development rights may be possible. Thus, all property held for business or investment purposes is like kind to all other property held for business or investment purposes.
How long do I have to identify property?
When completing an exchange, an exchanger has 45 days from the date of the sale of the first relinquished property to identify potential replacement property or properties; and a total of 180 days from the original sale date to purchase the replacement property or properties.
Identification rules make it easy for exchangers to pick multiple properties that they might purchase, but the fact is that once the 45 days are up, the exchanger’s choices on that list are set in stone. The identification is a written letter or form which is signed and dated by the taxpayer, and contains an unambiguous description of the property. A property which is identified is not required to be under contract or in escrow to qualify. Exchangers acquiring an undivided percentage interest (“fractional interest”) in a property should identify the specific percentage that will be acquired.
However, there are restrictions on the number or value of the properties an exchanger can identify. To qualify for the exchange, the exchanger must comply with the following identification options:
1) The Three Property Rule; The three property rule allows an exchanger to identify up to three replacement properties. There is no value limitation placed upon the prospective replacement properties and the exchanger can acquire one or more of the three properties as part of the exchange transaction. The three property rule is the most commonly used identification option, allowing an exchanger to identify fall back properties in the event the preferred replacement property cannot be acquired.
2) The 200% Rule; The exchanger can identify an unlimited number of properties, provided that the total value of the properties identified does not exceed 200% of the value of all relinquished properties. There is no limitation on the total number of potential replacement properties identified under this rule, only a limitation on the total fair market value of the identified properties. In other words, if an exchanger sold relinquished property for $1,000,000 under the 200% rule, the exchanger would be able to identify as many replacement properties as desired, provided the aggregate fair market value of all of the identified properties does not exceed $2,000,000 (200% of the $1,000,000 sales price of the relinquished property).
3) The 95% Exception Rule; The exchanger may identify an unlimited number of replacement properties exceeding the 200% fair market value rule, however the exchanger must acquire at least 95% of the fair market value of the properties identified. This rule is utilized in limited circumstances as there is a much higher risk of the transaction failing. In other words, assume an exchanger identifies ten properties of equal value. In order to satisfy the rule, the exchanger would be required to acquire all ten identified properties within the exchange period to complete a successful exchange. If one of the properties fell through, the entire 1031 exchange would be disqualified because the exchanger did not acquire 95% of the fair market value identified. This rule should only be utilized in situations where there is a high level of certainty pertaining to the acquisition of the identified properties and the other two rules do not meet the exchanger’s objectives.
In addition, to obtain a complete deferral of the capital gains tax, the taxpayer must acquire replacement property of equal or greater value, obtain equal or greater debt on the replacement property, reinvest all the net proceeds realized from the sale of the relinquished property and acquire only like-kind property.
What is the structure of a delayed exchange?
In the case of a simultaneous or delayed exchange, the exchanger first enters into a contract to sell the relinquished property or properties. Contrary to popular belief, there is no “exchange contract” for a delayed exchange. The exchanger enters into a contract that they would normally use if they were not structuring the transaction as an exchange. However, the addition of an exchange cooperation clause is recommended to secure the cooperation of the buyer or seller of the relinquished property or replacement property. A person or entity that is not a disqualified party, usually a Qualified Intermediary, thereafter assigns into the rights, but not the obligations of the contract. This assignment creates the legal fiction that the Qualified Intermediary is actually swapping one property for another. In reality, the exchanger sells the relinquished property and purchases the replacement property from whomever he wishes in an arms length transaction.
In addition to the assignment of contract, there must be an exchange agreement entered into prior to the closing of the first property to be exchanged. The exchange agreement sets forth the rights and responsibilities of the exchanger and the entity acting as a qualified intermediary, and classifies the transaction as an exchange rather than a sale and subsequent purchase. In addition, the exchange agreement must limit the exchanger’s rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property before the end of the exchange period. In other words, the exchanger may only use the exchange funds to purchase new property and to pay most of the expenses related to the sale and purchase of the properties.
Once the exchange agreement and assignment of contract are executed, the exchanger sells the property; however instead of collecting the proceeds at the closing, they are sent directly to the Qualified Intermediary. When the replacement property or properties are located, the exchanger enters into a contract to purchase same, and thereafter uses the exchange funds to complete the purchase. This, in a very basic form, is the structure of a delayed tax deferred exchange.
What should I look for in a Qualified Intermediary?
When choosing a Qualified Intermediary it is important to look for the following items:
1) What is the experience of the person who you are speaking with? How long have they been in the industry? Are they a tax or legal professional such as an attorney or CPA? Remember, the person on the other end of the phone may be from a big company but they may only have a few months experience. It is important to ask.
2) Does the Qualified Intermediary segregate the exchange funds into separate Qualified Escrow Accounts as provided in the Treasury Regulations or do they co-mingle the exchange funds? A Qualified Intermediary that uses internal “memorandum accounts” is not providing you with the maximum protection that the Safe Harbors of the Treasury Regulations allow.
3) Have you received a copy of the Fidelity Bond and Errors and Omissions coverage before you have started your exchange? Is the amount of coverage for each transaction greater than the cash proceeds that you will be sending? Have you verified the Fidelity Bond and Errors and Omissions coverage are in full force and effect? Does the Fidelity Bond provide for principal liability? Many fidelity bonds only provide protection from employee malfeasance but leave the exchanger uninsured in the case of malfeasance of a principal.
It goes without saying that service is an extremely important part of an IRC 1031 tax deferred exchange and that exchanges are subject to strict guidelines and requirements. Having a financially strong, experienced and capable Qualified Intermediary is an important step in getting you through the tax deferred exchange process.
As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me, I truly want to help. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.
Most successful investors only work on deals that they feel they can close. This means that you need to have a plan in place that eliminates the deals that won’t work for you. Here’s how to develop that plan:
• Develop a qualifying system of identifying the types of properties that you want to buy using factors such as age, condition of property, upside income potential, rehab or rezoning possibilities, etc.
• Approach each offer with a strategy that will work for you such as knowing the amount of time you’ll need to do your Due Diligence, how much money you can put down, etc.
• Lastly, put together a system for making offers:
(a) Set up your parameters for the deal such as the top price you can pay to get the return you require.
(b) Have a follow-up system to make sure that your deal is moving along.
There are two methods of presenting an offer to a Seller. One method is to utilize a Letter of Intent and the other is to use a Formal Purchase Agreement. The Letter of Intent tends to save the Buyer time and can quickly tell you whether you and the Seller are on the same page. On the other hand, the Purchase Agreement tends to make the Seller feel like they are receiving a “solid” offer.
My preference – and what is used most often – is a Letter of Intent, but whichever way you go, try to present the offer in person to the Seller and/or their Broker.
If you use a Letter of Intent, make sure that you insert a clause that states that both parties will move forward in good faith toward signing a formal contract within ten days of signing the Letter of Intent so that your offer will look serious to the Seller. Also, make sure that once the Letter of Intent is signed, you write up the Contract immediately.
NEGOTIATING DEALS
A couple of very important tips to successful negotiating:
1. Always start with the end in mind so that you know where you want the deal to go.
2. Understand the Seller and what they need.
You’ll be much more successful in closing deals if you solve the Seller’s problem by understanding what they want. Those buyers who also connect emotionally with the Seller create trust and rapport which opens the Seller up to discuss what they’re really looking for. If you’re sincere and willing to truly listen to the Seller, you’ll be more successful at putting together an offer that may be acceptable to them.
And when you understand the Seller’s motivation, i.e., why they’re selling the property, you’ll be in a better position to negotiate.
Here are some examples of typical deal points that come up for negotiation, with some suggested solutions for each point:
PRICE
If the Seller has to get a certain price and can’t be negotiable on that point, you may be able to negotiate certain terms:
1. Ask the Seller to carry back part of the financing so that you put less money down.
2. Ask the Seller to guarantee income for vacant spaces or spaces coming up for renewal in a short period of time to give you time to lease the space
TIMING
To understand negotiating timing issues, you need to understand that the Seller’s position will be that he’s taking his property off the market with no assurances that you will be able to close.
Here are a couple of examples of timing issues with possible solutions:
1. Seller wants a shorter period to close than is required for you to complete all facets of the Due Diligence, i.e., Seller wants a 30 day close, but you want 30 days for Due Diligence and 30 days to close.
Possible Solution 1: Set up periodic times to waive certain issues in your Due Diligence Process. Example: If you have a list of 40 items that you need to verify during Due Diligence, you can stipulate that you will clear 10 items at the end of 15 days, 10 more items at the end of 30 days, etc. This assures the Seller that you’re moving through the process.
Possible Solution 2: If you need more time to complete certain facets of the Due Diligence process, for example, you don’t have time to have a roof inspection done, you can go ahead and close but set aside funds to pay for any roof repairs which the roof inspection discloses are necessary.
2. The building is vacant and you don’t want to close until you can find a tenant for the vacant space.
Possible Solution: Buy 2 extensions of 30 days each by putting in more hard money. (Note: The money becomes non-refundable but applicable to the sales price.) This gives you 90 days to determine whether or not you’ll be able to lease the vacant space.
By putting in more non-refundable money to extend your time, you’re giving the Seller money in his pocket to pay for taking his property off the market for that period of time. Also, he feels that you have more money in the deal so you’re more likely to close.
These are only a few of the problems and possible solutions you may run into when negotiating a deal. Always try to listen closely and understand why the seller is selling the property or making an objection to the offer. Remember, don’t take anything personally, it’s just a deal point that needs to be dealt with or an objection that needs to be overcome. Try to overcome any objections, but don’t get emotionally tied up in any purchase offer and walk away from properties that do not fit your criteria.
As I say throughout my blogs, if you have any questions please feel free to contact me. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.
As a buyer, the reason you participate in an online auction is because you anticipate getting a good deal. If you are an experienced buyer of commercial real estate you should participate in auctions if you see a property that meets your criteria. As a first time buyer or inexperienced buyer if you are going to participate you should get help from an experienced broker who has helped people buy through the auction process.
Buying property from an online auction requires that you put up a deposit to bid on a property and verification that you have funds to close the deal if you win the bid. If you require financing you will need to have that set up beforehand as you will need to close the deal within 30 days. Financing is not a contingency. All purchases must be funded in cash at closing.
All properties are sold “As Is, Where Is With All Faults and Limitations” so you need to inspect the property prior to bidding on the property. You need to do this process with the professionals that can help you to properly assess the property.
Once the online auction is final, you have agreed to purchase the Property, including those sales which are subject to the seller’s confirmation. That is why it is important for you to conduct all of your due diligence prior to the auction and prior to bidding on the Property. Winning bidders may be subject to liquidated damages if they fail to complete the transaction in addition to losing their bidding deposit. Make sure your carefully review the Auction Terms and Conditions
In addition to the standard and customary costs related to the closing of the transaction such as escrow/closing fees, title updates and reports, the winning bidder will pay a Buyer’s Premium on the transaction’s closing date in an amount equal to five percent (5%) of the Winning Bid Amount (the Buyer’s Premium is added to the Winning Bid Amount to determine the Total Purchase Price paid by the Buyer).
A successful bidder will be required to deposit additional funds with the escrow/closing agent in an amount stated in the Purchase and Sale Agreement. Such funds must be posted within 24 hours of being declared the winning bidder. The winning bidder will be required to pay the Earnest Money Deposit by wire transfer within 24 hours following the conclusion of the online auction. You will be provided with a receipt by e-mail showing that the escrow/closing agent received your Earnest Money Deposit. There are no exceptions to this requirement.
AS A SELLER SHOULD I DO THIS?
The benefits of the auction process are numerous. The major advantages to selling on an online auction are the access to potential investors, the sales process is accelerated and has a set timeframe, there are non-negotiable seller documents, typically no fees are involved, usually there is a massive, multi-faceted marketing campaign that maximizes bidder participation and achieving a price through competitive bidding is, oftentimes, the only method available to determine an asset’s true current market value.
By having access to several potential investors the price of your property may get bid up as a bidding war may commence if two parties feel that they have to have the property.
The sale process can be greatly accelerated as a date certain is set and if you receive an acceptable offer the property is sold and closed usually within no more than 30 days. Thus your total process of selling the property can be shortened.
The documentation is usually standard and thus non-negotiable and favors the seller in the transaction. There are typically no fees due by the seller. In the documentation the property is typically sold with the buyer paying all of the escrow fees.
Most online auction companies have a large list of buyers that they mail to, they run advertising campaigns to make sure that the auction is well attended, thus maximizing bidder participation. If your property is in need of repair, the property is typically sold “as is” and the buyers at auction are typically not intimidated by doing repairs and usually feel that they can get a bargain on the property for a minimal outlay of cash for the repairs.
The biggest benefit to sellers is that you achieve a true current market value for your property as the bids set this value. You can set a minimum value to assure that you get at least that price, however this sometimes has a way of setting a price in the buyers mind and you don’t get the bidding war that you expected and possibly the true current market value.
As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me, I truly want to help. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.
One of the most important aspects of commercial real estate investing is finding the right property. And location is a major factor in identifying that property. Location includes many factors as you will see below.
For a retail property especially, it is a big key to its success. A good location attracts tenants – and their customers. The result for you as the property owner is the ability to charge higher rents and to create a higher value for the property.
The features – and benefits – of a good location are:
1. Close to major streets and freeways – This makes driving to the property easy for customers, as well as making the property visible for your tenants and potential clients.
2. Signalized corner – When cars stop at the traffic light, people in the cars have time to see the stores. This also slows down traffic thus increasing the properties visibility.
3. On or close to a busy street with high traffic volume – High traffic is important to the tenants. Always check commercial property listings for CPD (cars per day) or ADT (average daily traffic) information. Also, review this information and compare it to other traffic corners in the area or region. In addition, find out if the counts are going up or down over the last couple of years.
4. Area – Check demographics to make sure the property is located in a growing area with population growth, not in a declining neighborhood. Demographics can also tell you the household income, racial makeup, daytime population, and the number of households in the area. Check to make sure that the tenants match the demographics. An example would be if there is a McDonald’s on the property, you want to make sure that the demographics show a lot of families in the area.
5. Near anchor tenants – Anchor tenants are the major retailers like Home Depot, Best Buy, Wal-Mart, grocery stores, and drug stores. Tenants located close to an anchor benefit from their traffic. Also. make sure that the type of anchors line up with the mix of the other tenants in the property. An example would be that grocery stores tend to bring daily traffic which would be good for fast food tenants such as Subway or a Wal-Mart might tend to bring a customer looking for bargains, so other tenants that are discount oriented should do well in this type of project.
6. Easy ingress and egress – If it’s hard to make turns into the property or there are not enough entryways and exits to easily get traffic in and out of the property, the property is less attractive to tenants because they feel their customers may choose another destination. An example of hard ingress, would be if a property is in a mid block location and there is not a left turn lane into the property and the car has to go past the property and then do a u-turn to come back to the property or you can’t make a left turn out of the property, as you might have to exit right and go down a couple of blocks and do a u-turn.
7. Signage – Good signage – especially a large monument sign in front of the property – makes it easier for customers to find the stores. Also, there should be a uniform signage program for the store front signs. The program should be such that the tenants signs are highly visible from the surrounding streets or even freeways. The signage program should also include that the signs should be illuminated.
8. Parking – Plenty of spaces and a well-lighted parking lot are important. A parking ratio of 4 or 5 parking spaces per 1,000 sf leasable space is preferable. If there is only a food tenant on the parcel parking needs to be greater. The parking lot also needs to be properly maintained with minimal potholes and cracking and with properly marked spaces and drive aisles.
9. Appearance – Properties that are well maintained – good landscaping, clean, well-lighted and buildings in good condition – attract the most customers for the tenants. If you are looking at a property that is not well maintained or have a clean appearance, make sure that you put the costs to upgrade the property into your purchase costs. A good appearance also attracts potential tenants.
One of the tenets that you always hear about when real estate is discussed is location, location, location. As you can see, there are several things that make up a good location. As you review a property you can use the above for the pluses and minuses of a sites location.
As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.
To do a proper commercial real estate analysis, you must understand its market value. Long term successful investors make money when they buy, not just when they sell. You reduce risk and increase your chance for great returns when you buy properties at or (preferably) below their market values.
3 Techniques to Value Properties
Investors, lenders and appraisers rely on three techniques to value properties.
1. Cost approach:
Calculate how much it would cost to build a subject property at today’s prices;
Subtract accrued depreciation;
Add the depreciated cost figure to the current value of the lot.
2. Comparable sales approach:
Compare a subject property with other similar (comp) properties that have recently sold;
Adjust the prices for each positive or negative feature and/or differences of the comps relative to the subject property. Note: It is best to have three or four properties to compare.
3. Income approach:
Estimate the rents you expect a property to produce;
Convert net rents after expenses (net operating income) into a capital (market) value amount. In other words you divide the net operating income of the property by a market cap rate for that particular type of product in the marketplace.
You evaluate a property from these three perspectives to check the value estimates of each against the others. Multiple estimates and techniques enhance the probability that your estimate reflects reality. If your three value estimates don’t reasonably match up, either your calculations err, the figures you’re working with are inaccurate, or the market is acting “crazy” and property prices are about to head up (or down).
3 Factors of Income Approach
Concerning commercial real estate analysis, the approach I put the most emphasis on is the Income approach. The three factors of the Income approach are Effective Gross Income, Operating Expenses, and Capitalization rates (Cap rates).
When looking at effective gross incomeand operating expenses, be careful that you’re looking at the actual numbers – not the “pro forma” numbers. Pro forma numbers are projections and you want to be dealing with actuals. Cap rates are derived from the comparable sales of comparable properties in the immediate market area and/or by the rate of return that you want on your money. If you talk about a 6 cap, then you are saying that you want a 6% return on the existing net operating income of the investment.
4 Things to Determine a Good Buy
When I analyze a property, I calculate the following four things to determine if I want to buy the property:
1. Net operating income (NOI): Net operating income = effective gross income – operating expenses.
2. Annual cash flow: Annual cash flow = net operating income – debt service
3. Cash-on-cash return: Cash-on-cash return = annual cash flow divided by down payment
4. Cap rate: Cap rate = net operating income divided by sales price
Other Important Factors
Also note that other important factors in your commercial real estate analysis are the use of/or zoning of the property, the location of the property, the credit worthiness of the tenant(s), the leases in place, the condition of the property, the contracts on the property and any possible environmental problems with the property.
1. Use of/or zoning of the property – Make sure the current use matches the zoning of the property.
2. Location of the property – Is it in a growth area, are there complimentary users around, is there easy ingress and egress, do the demographics match the use, what are the traffic counts around the site, what is the vacancy factor in the marketplace – These are all questions that verify a good or bad location for the property.
3. The Lease(s) – Is it or are they NNN, NN, N, Gross, how much term left, if there isn’t much term left, what is the likelihood of renewal, are there any hidden Landlord costs, what is the entity on the lease and is it guaranteed, is it a standard lease for the marketplace or is it unusual for the area, is it assignable, does it have options, review all amendments – These are some of the things that you need to be reviewing in the lease to make sure you understand just what you are buying – Some people believe they are buying a building while others believe they are buying a lease or leases.
4. Condition of the property – Do a thorough inspection of the property to include the roof, the mechanical systems, the structure, the electrical, the plumbing, the parking lot and all of its fixtures – Estimate the life span of each of these things and make sure that you put this into your financial picture of the property.
5. Contracts on the property – Make sure that you review all existing contracts and the vendors so that you know your obligations and whether they go with the sale – These contracts are also an indication of whether the property has been consistently maintained – If there are no contracts, then you need to take this into consideration so that you can paint an accurate financial picture.
6. Environmental – Are there any obvious environmental issues that need looking into and have there been any environmental notifications sent to the current owner or to any of the tenants – You should also check with the local environmental agency to not only learn about your building, but the area in general.
With careful analysis you can take away some of the risk when purchasing the property.
As I have said before, if you have any questions or I may be of assistance with your real estate questions please contact me. My way of giving back is to give away my knowledge. Thank you for reviewing this article.
In order to understand the closing of a deal when buying commercial property, let’s review the steps of the sales transaction:
1. Buyer submits an offer to buy the property either through a Letter of Intent or a formal Purchase Agreement, any necessary negotiations are completed, and the Seller accepts the offer and executes the Purchase Agreement.
2. Buyer opens escrow by submitting his earnest money deposit. Typically, escrow is opened with a Title/Escrow Company or an attorney.
3. Buyer begins the loan process by submitting documents to his lender.
4. Buyer commences his Due Diligence process and does his physical inspection of the property.
5. Buyer reviews title and proceeds to remove any contingencies in the contract.
6. Buyer and Seller agree on any remaining issues in the contract.
7. Buyer gets a loan commitment from his lender.
8. Buyer receives the Closing Statement and gives his final closing instructions to the escrow company.
9. At closing, Buyer and Seller sign the closing documents and Buyer submits his funds.
10. The Deed gets recorded, the monies are applied and the Buyer takes possession of the property.
An escrow is an impartial party that serves all parties in a transaction to transfer property. Duties that an escrow officer performs include:
• clearing up any outstanding liens
• ordering a title search
• examining the title report
• obtaining title insurance
• handling and disbursing all monies in the transaction
• preparing and issuing the final Closing Statements
• recording the Deed
• sending all loan documents to the lender
After you complete your due diligence and prior to finalizing the deal, I suggest that you go back and review your original thoughts on purchasing the property to make sure that your original assumptions concerning your plan and profit are still true:
• Review your exit strategies again and check your goals to make sure your exit time frames still work
• Make sure that the profit you originally projected still appears attainable after examination of the information you received during due diligence
• Make sure your loan assumptions still work now that you have actual loan information from your lender
• Check that your tax advisor still agrees with your tax goals.
You’ll want to review the final Closing Statement at least 48 hours prior to closing so that if there are mistakes, there’s time to correct them. As a buyer, you should double check everything and take nothing for granted. Some of the items that need close review include:
• checking the loan documents to make sure that they are what you agreed to (check interest rate, loan amount, amortization period, loan term, monthly payment amount, prepay penalty, due date, impounds for taxes, insurance and maintenance reserve account)
• the credits assigned to you
• completed repairs by Seller
• review rent prorations and security deposit amounts for accuracy
• ensure that personal property is being transferred with an appropriate Bill of Sale
• review the Deed for correct purchase price, names and dates
• review all fee amounts for accuracy
• verify that defects in title are cleared
• have your down payment and closing costs ready to be wire transferred
• make sure that you agree with the amount at the bottom of the Settlement Statement
• verify that you are taking title in the entity that you have chosen
The sale officially closes when Buyer has paid all monies due, the escrow officer has received the signed loan documents, Buyer and Seller have signed the final Escrow Closing Instructions and a specific date to record the Deeds is chosen. After escrow gets a check from Buyer’s lender to pay off the Seller’s loan, escrow sends the lender the closing loan documents, releases Buyer’s payment and gives the approval for the Deed to be recorded. After the Deed is recorded, title will be transferred to you and the sale is officially closed.
Congratulations, you are now the proud owner of real estate. Your work has just begun. If you have bought the property right, you are on your way to financial independence. If you have bought a rental property, it is now time to get to know your tenants or find tenants for your property. Make sure that you treat your investment as a business., not a hobby. You should be friendly with your tenants, but businesslike. If it is your responsibility always take care of problems promptly and if it is the tenants responsibility let them know that so that you can keep the relationship open and communicative.
As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.
