I Want To Buy My First Commercial Real Estate

How to Buy Commercial Real Estate For the First Time

“Hey Peter, I want to get in to commercial real estate and buy a building, can you help me?”  I hear this refrain often from colleagues, friends and family.  The short answer would make for a BORING and not very helpful blog.  “Yes, yes I can help you”.  Blog over.    Just kidding.  Listen, while we CAN help you buy a commercial building I believe it is imperative for you to help yourself first!  There are several steps to buying your first commercial space and many questions to be answered.  While this may not be a “complete” guide it should get you started.

Steps to Buy Commercial Real Estate

1.  Learn some commercial real estate vocabulary.

ROI – Return on investment

NOI – Net Operating Income.

CAP Rate – Capitalization rate (One way to determine if the investment makes sense)

Cash on Cash Return – Annual income on investment over a year.

Ad Valorem – Basis for taxes

Rentable Square Feet versus Usable.

The list is endless but locate and learn the basics.  You would not want to invest in something you do not understand.  No need to go get a commercial real estate license … however, an educated buyer always makes better decisions.  And I am assuming that you do want to sleep at night, correct?

2.  Get Clear on Your Goals

What do you want?  Simple question…leads to an awful confusing answer sometimes.  In commercial real estate we work backwards.  We work with the end in mind and then go out and assist you in accomplishing your goals.  Are you wanting to lease it out?  Are you looking to be an owner and have your office in the building?  What is the plan with your accountant?  Are you willing to be a landlord?  Will the building numbers work in your proforma?  Are you considering a partner?  What is the exit strategy?  What is your situation regarding cash?  So many questions….but to be CLEAR in vision is most important.

3.  Be Sure to Get Out and See the Market.

A well informed buyer always makes better choices.  Get out and visit buildings similar to the one you are considering.  Be sure to really understand the market.  Once you do you are then able to analyze the numbers with better clarity.  You can feel more comfortable in your decisions….remember that good night of sleep we were discussing??  Even in commercial real estate the old adage of Location, Location Location still stands.  To be certain, it is still the most important ingredient in a good real estate decision.

4.  Your Team.

Early in the process, possibly the very first thing to do is to assemble a great team.  A team that works well together in a collaborative effort to defend your money.  Yes, defend.  There are a lot of moving parts and one can spend a lot of money on needless items throughout the process.  And sometimes… sometimes it just makes good business sense to walk away from money spent in an effort to not spend more bad money.  Your team should be able to help you.  Who is on your your team?  Your Lender.  Your Broker.  Your Accountant.  These 3 hires are critical.  Many people say that you make your money when you buy your property (in other words if you buy it correctly you later can sell for a profit), I would argue that you make your money when you hire the RIGHT people to help you.

5.  Financing.

Step #1.  Find a great lender.  One that has the heart of a teacher.  One that will be brutally honest with you.  One that is willing to speak to your accountant or financial advisor along the way if need be.  So many people just hire a friend or someone that was recommended to them (by someone that has never done a commercial real estate deal) or just use their Big Bank that they keep a personal checking account at.  DO NOT DO THIS.  Ask around.  Randomly call a few commercial real estate brokers and ask who they use.  Ask your Broker for 2-3 names.  Interview them.  Have your financial advisor interview them.  Your advisor may have someone.  Take this seriously.  It is important!

6.  Offer

In commercial real estate you may not go straight to writing an offer after you found your dream location.  You will likely write an LOI first.  Wait….just wait.  I know you want to know what that is.  It is a Letter Of Intent.  This letter is drafted typically by your Broker.  It lays out only the Big Rocks….not the details.  Price, timelines, commissions, deposits, etc….   When both parties agree to the LOI there is typically a 30 day window in which they will then work towards drafting a formal offer.  This offer is likely going to be drafted by the attorney.  This is the formal legally binding agreement.  It will contain the details.

If you are ready to take on the process of buying commercial real estate….let’s chat.  Call us today and let Kima Commercial at KW Commercial become your resource for all things commercial!

Go get em!

Triangle Commercial Update: Beer, Buses & Opportunity Zones

MY Goodness, look at the growth in Raleigh!  Opportunity Zones, Beer, Buses!

What’s Happening In Triangle Area Commercial Real Estate:

Opportunity Zones

Invest long term in more under performing areas of our country and be rewarded handsomely with tax incentives.  Your federal taxes will be waived (some).  The hope is that some investment dollars will be redirected to regions that typically do not see them.  The IRS says the goal is to “spur economic development and job creation in distressed communities”.  While we may question some

Opportunity Zones in NC

Opportunity Zones in NC

of the areas chosen to be opportunity zones (East Franklin Street in Chapel Hill and the Durham Bulls Athletic Park area) there is no questioning that the large majority of opportunities zones are in areas of needed growth or redevelopment.  How do they work?  Well, an investor can take A property, sell property and take the capital gains from that real estate deal and invest it in to an opportunity zone (B property).  Once is sold, get a reduction in original capital gains tax and then pay no taxes on the capital gains of the sale of B property.  One could essentially pay less in taxes to sell B (the higher investment) than the sale of A.  Want to know more?  Contact us at Kima Commercial and let’s chat.

200, 206 and 210 S. West Street Raleigh, NC – 40 Story Tower?

Raleigh’s new Transportation Center plans are YUGE (said in President Trumps voice).  These 3 contiguous properties are being considered for a rezoning that would allow for the new HUB to have a 40 stories!  That’s more stories than James Patterson could tell…bad attempt at

Raleigh Union Station

Raleigh Union Station

humor, I know.  The Research Triangle Regional Public Transportation Authority – known to the rest of us as GoTriangle – is asking for the rezoning so that a 40 story Bus Transportation HUB can be built.  The skyline is changing in the Raleigh warehouse district.  Conveniently the new station will be placed right next to the Raleigh Union Station.  Best part?  The rezoning includes a residential component and AFFORDABLE HOUSING!  The applicant has indicated that they intend to retain the historical significance of the surrounding areas.

 

NC State’s Hillsborough Street Gets 93 New Luxury Condo’s Correction 180 Apartments!

Yep, if you have not driven up and down historic Hillsborough Street near the campus of North Carolina State University lately you may not recognize it any longer.  And if you are one of “those” people that don’t venture back to campus very often you may fell, well, lost.  Adding to the make-over of the prodigious street is a new project featuring 93 luxury condos named The Turnhill at the corner of Hillsborough and Turner Streets.  The 1.72 acre assemblage was purchased and approvals given….WAIT!  What?  The developer is shifting gears and now that tract will be home to 180 apartments for rent.  Location.  Location.  Location.  The rezoning to NX-5 will allow for a 5 story building.  Three blocks from Meredith Collage and certainly placed, we expect this one to be a success.

Hillsborough Street, Raleigh NC

Hillsborough Street, Raleigh NC

Wake Forest, NC – Come Get Your Brew On?

The once sleepy little town of Wake Forest, NC actually may have a “scene”?  What?  In the early 2000’s the only places to meet out for a “cold one” we a few hidden bars no one talked about publicly and the soon to open Applebees!  Insert that sound of a cassette tape fast forwarding here – Gang, not only is there a wonderful scene for those that like to have a cold beer, a glass of wine or maybe something a little stronger with places like White Street Brewing Co., Bodega’s, Over The Falls, Tonic, Real McCoys, Gatehouse Tavern and several others…TWO new places are coming to town.  Almost ready to open is The Lonerider itself.

Lonerider Tap Room

Lonerider Tap Room

Tap Room at the old go cart place at The Factory.  And Pam Tarangelo is selling La Foresta to what rumor claims is full Brew Pub.  Stay tuned as the once Nearly dry town continues to reinvent itself.  And if you want to discuss any of this in person, please contact our team here at Kima Commercial.  As a part of KW Commercial Internationally, we have the resources to assist with all of your needs.

 

 

 

What’s One Reason to Buy & Build in Wake Forest & Raleigh? Quality of Life!

One of the most basic datasets considered when a client is thinking about purchasing land to build or expand a company is the population and growth of the surrounding community.  Among other things, clients want to know:

  • Are there enough people to supply an immediate demand for their products/services?
  • Is the area growing, and will that growth be sustainable?
  • Will the growth trends contribute to a long-term demand for their products/services?

We can easily help clients find data detailing different types of growth—increases in population, new businesses, and household income; pending residential/commercial development; etc.—but because we want our clients to be successful, we encourage them to consider not just the growth itself, but also what fuels that growth.  It is frequently the overall “quality of life” that most affects an area’s growth and contributes to a company’s success or failure.  A few factors that contribute to an area’s quality of life include:

  • the quality of public education
  • proximity to and quality of higher education institutions
  • social opportunities through local customs and traditions
  • recreational activities and the ability to connect with nature
  • suitability for families
  • cost of living

Since most of our team members have lived in the Triangle area for many years, we can personally—and easily!—elaborate on the quality of life the area affords.  But we wouldn’t expect our clients OR you to just take our word for it!  Experts from around the nation, even around the world, have researched the Raleigh and Wake Forest areas and have drawn their own conclusions.  Let us share with you a little bit of what THEY have to say!

  1. In what may be the most current praise, Raleigh was ranked just last month (March 2019) as having the 3rd “Best in Quality of Life in the World” by NUMBEO. FYI, this twice-annual accounting ranked Raleigh between 2nd and 3rd for each of its last FIVE reports!!
  2. Kevin Litwin’s July 2017 article, “Why Wake Forest, NC is a Great Place to Live”, for com sites several reasons for his claim, among them the median annual income and high education level of the population, but it also includes fun stuff, like the vibrant downtown and numerous nature and cultural opportunities.
  3. Raleigh ranked #2 on the October 2018 “Forbes List for Businesses and Careers”, in part because they were the “most consistent performer” for 16 straight years. This ranking from Forbes was Raleigh’s third straight trip to the #2 position due to the “strong economy and educated workforce”.
  4. In February 2019, Chris Kolmar compiled com’s fifth edition of “These are the 10 Best Places to Live in North Carolina for 2019”. Six of the “10 Best” are located right here in the Triangle…including our lovely Wake Forest!
  5. In a November 2018 article by Shaina Mishkin and Allana Akhtar, Money Magazine puts Raleigh in the #2 spot of their “10 Best Big Cities to Live in Right Now”. Part of their reasoning for such a great ranking includes Raleigh’s job growth record of 17.25% in the past five years, as well as its cultural offerings.  The article cites one of Raleigh’s nicknames, “Smithsonian of the South”, reflecting the numerous museums available in Raleigh, often free of charge!
  6. Cheria Brickhouse ofcom used six criteria to complete the site’s February 2019 ranking of the “2019 Most Family-Friendly Cities”: school quality, park availability, cost of living, safety, childcare availability, and commute length. Raleigh came in at #2!
  7. For clients who need a strong, “fresh out of the gate” workforce for their company, again, Raleigh’s got them covered! Raleigh ranked 10th in MarketWatch’s May 2018 ranking of “The 10 Best  Cities for New Grads Starting Out”.  In his summary, Andrew Wang cites the offices of “numerous multinational companies in technology, life sciences, and finance”.

There are many, MANY other articles we could site—there’s no way we could list them all!  You can check out some of the info on Raleigh here and on Wake Forest here, and of course, you are always welcome to give us a call!!

 

KimaCommercial.com

How Long Can A Good Thing Last? – A Market Update

How Long Can A Good Thing Last? - A Market Update

How long can a good thing last?? Our nation has enjoyed a bull market for nine years—the second-longest stretch since World War II! With such a mix of things to consider these days—low unemployment, increased wages, the impact of new tariffs, new tax laws—individuals and businesses alike are figuratively holding their breath as they wonder how long it can go.

Predictions for the continuation of the bull market were carefully made in LPL’s March 5, 2018 and March 12, 2018 publications. (Note: These predictions were made just as the tariffs on steel were being announced, and before the announcement of trade tariffs on competing countries, so the market fluctuation experienced in the past few weeks due to these tariffs are NOT considered in their analyzation. It will be interesting to see how these changes play out among the indicators by the time of LPL’s next analysis.) To make their predictions, LPL analyzed and explained what they call the “Five Forecasters”: the Conference Board’s Leading Economic Index (LEI), the US Treasury’s Yield Curve, market breadth, market valuation, and the Purchasing Managers’ Index (PMI).

The LEI is a grouping of ten different economic indicators, “including data on employment, manufacturing, housing, bond yields, the stock market, consumer expectations, and housing permits”. In part because it is so diverse, it gives a solid snapshot of the economy’s general health, and has proved to be quite reliable in predicting early warnings of a recession. As of the latest reading, conducted in January 2018, LPL asserts there is a “low probability” of the US going into a recession over the next twelve months.

The US Treasury’s Yield Curve is said by LPL to be “one of the most reliable leading indicators” of an impending recession, as for the last 50 years, the curve has batted .1000 in this arena. When the Federal Reserve raises the short-term interest rates above the long-term interest rates, it creates what’s known as an “inverted yield curve”, and every time this has happened in the last 50 years, a recession has begun within 5-16 months. Right now, the curve is still “fairly steep”, and the estimation is that it could be at least two years before the Feds could raise the short-term rates high enough to trigger the inversion, suggesting the bull market may have quite a ways to go before it is finished.

Market breadth is measured by the number of stocks climbing in value as opposed to falling. As of LPL’s latest analysis in early March, there were no “major warning signs or any concerning divergences” between the breadth and the NYSE Composite Index, which is the comparison for this particular analysis tool.

The Purchasing Managers’ Index (PMI) is based on the “front lines” of manufacturing, despite the fact that manufacturing does not make up a large portion of our economy when measured by GDP. Why? Because the “demand for manufactured goods has been a timely barometer for all types of economic activity in recent decades. In the past, the peak of manufacturing has preceded recession by a period of nearly four years. LPL attests the PMI shows there is “no sign yet of a meaningful peak” in manufacturing, indicating the bull market is still running strong.

Market valuation—though not effective as either short-term or intermediate investment timing tools—have been “solid indicators of long-term stock returns”, and are therefore strategically quite useful. This indicator is the ONLY one of the five indicates a bear market may be coming soon. The reasoning is that price-to-earnings ratios are typically high at the end of a bull market, and that is the case at this point in time. However, as earnings estimates rise—as they have done “significantly” in 2018—this ratio becomes more stable and nearer the long-term averages, thus removing any cause for an earlier-than-anticipated end to the bull market.

Now, what does all of this financial mumbo-jumbo mean in terms of commercial real estate? If you’re a CEO or a Developer, it means you need to strongly—and perhaps quickly—consider your growth plans. Although purchase prices are up from the “dirt cheap” prices of years past, the market is still on an incline and property values have not yet hit their high point, so it’s reasonable to expect prices to continue rising until the market officially shifts to a bear market. All things considered, it’s still a reasonably good time for land transactions.

We look forward to working with you!

Understanding Capitalization Rates and Debt Coverage Ratios

Understanding Capitalization Rates and Debt Coverage Ratios

Capitalization Rates or “Cap Rates” and Debt Coverage Ratios or “DCRs” are highly effective and popular commercial real estate metrics that can be used for valuation analysis of real estate, property trends, and to help make purchasing decisions. Provided below is a basic overview of how Cap Rates and DCRs are utilized.

First, what is the definition of a cap rate and what is the formula for determining a cap rate? The definition of a cap rate is the ratio of Net Operating Income to the Asset Value. To obtain the cap rate, simply use the following formula: Cap Rate = annual net operating income/cost (or value). For example, if a property is on the market for $1,000,000 and the net operating income is $150,000, the cap rate is 15. Using another example where the net operating income is $7,000 and the property is listed for $100,000, the cap rate is 7.

cap rate definitionSo what can we learn from using cap rates and what do they tell us about a potential real estate investment? One thing we learn from the cap rate is the return on investment an investor can expect to earn on a purchase using all cash. The examples in the above paragraph would, therefore, yield returns of 15% and 7% respectively. Another thing a cap rate is helpful for is evaluating risk. For example, two equally sized office buildings in the same neighborhood can be evaluated for risk based upon cap rates, all other things being equal. The higher the cap rate between the buildings, the greater the risk premium. Investors often use cap rates to evaluate the risk of certain investments in making decisions about their portfolios.

Cap rates can also help to identify trends in a particular market over time. For instance, if cap rates are trending lower in a market over a period of a few years, the market is growing more competitive. Whereas, higher cap rates over the same period indicate less competition for that particular product. This, therefore, provides some insight into the performance of the particular markets over this time period. Utilizing this simple analysis can help to evaluate risk for the purchaser.

It is important to remember that cap rates are much more accurate an indicator of property performance when the source of Net Operating Income is relatively steady. A discounted cash flow analysis may need to be used when a Net Operating Income stream is complex and/or irregular.

Another example of important real estate investment metrics is the debt coverage ratio or DCR. Examples of how the DCR is utilized are outlined below.

The Debt Coverage Ratio (DCR) is used to determine the ability of an income stream from a property to pay its operating expenses and mortgage payments. Banks and investors will set a limit on their tolerance for this ratio and expect a particular project to remain at or above this ratio for the duration of the loan or investment term.

The larger the DCR the better the investment is covering its debt service. A DCR of 1 means that the investment is meeting its obligations to the bank or investor but with no free cash flow left over. Therefore, it is not unusual for a bank or investor to require a DCR of 1.25. This provides 25% of each dollar in excess of expenses as a cushion for the bank or investor. To calculate the DCR, simply add all operating expenses and debt service, including interest, and subtract them from gross revenue. This leaves Net Operating Income. An example of a DCR of 1.25 would be Net Operating Income of $150,000 on Debt Service of $120,000 ($150,000/$120,000 = 1.25). This simple calculation can be critical when pre-qualifying your investment to ensure you are heading down the correct path. As interest rate and amortization are functions of this ratio, these are important to consider when calculating your DCR.

Utilizing Cap Rates and Debt Coverage Ratios will often be the first things your commercial real estate broker will do for you when assisting you with your project. Therefore, it is important to utilize a professional when determining the best plan of action for your commercial sale or purchase.

We look forward to working with you!