Transaction Modeling IDs Best Deal

Topic: Transaction Modeling

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

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

Make the Match

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

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

Lease vs Sale

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

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

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

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

Real Estate for Health Care or BioTech

CHC Ofc

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Real Estate For Clinical Health Care or Biotech Use

Revenue for a healthcare practice can be uneven, pending results of billing vs collections.

% cash per visit

% private pay

% Insurance collections

% from medicare or medicaid collections; if applicable.

If space changes are planned for your practice, how will your revenue fit with space costs?  Analyze to make the right choice.  Apply Occupancy Cost Ratio, some principles from CAHIMS, and project management via CAPM.  Occupancy alternatives are Lease, Buy, Like-Kind Exchange or Sale-Leaseback.

Cmcl Lease

Lease

Leasing space affords relatively (predictable) fixed costs, includes outsourced management (from the landlord); most of the architectural services, fees and construction costs are borne by the landlord, yet amortized over the life of your lease.  Rent (that often includes electricity) is a business expense, reducing income subject to tax.  The business terms of lease (and renewal) should match the occupancy needs of your practice.

real-estate-deed

Own

Pros: Owning has deductible tax advantages: i) mortgage interest, ii) depreciation, iii) property maintenance and groundscape expenses.  Investment advantages: I) equity appreciation, ii) asset appreciation, iii) adds financial value to your practice.

Cons: I) office space is fixed unless you lease extra space until ready to use, ii) you pay/manage construction/rehab to ready the property for use, iii) unexpected repairs [needing funding and project management] lower profits, iv) months to sell vs move at lease expiration.

Other important space expenses are I.T., phones, furniture, fixtures & equipment (their financing rent, maintenance), gas, electric, water/sewer and trash.

If its cost-effective, property management duties can be outsourced to a fee-based vendor.  The vendor typically explains the terms of their engagement in a Service Level Agreement (SLA). SLAs should be more specific about remediating disputes and what service are not included.  Your business manager should manage the performance of that relationship.

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Like-kind Exchange

If moving to sell / buy is preferred, you can defer the capital gains taxes by making a Like-kind exchange; I review the activities necessary to complete this type of transaction.  In general, you must invest all proceeds of sale into the exchanged property within six months of closing on your existing one to defer capital gains taxes from sale.  There are business rules, tax rules and procedures to comply with.

Sale Leaseback

Remaining in your location may be the best choice, yet you want to exit property management to focus on patient care (and practice operations).  A sale-leaseback sells your property to an investor in exchange for a long term lease (7 years or more); business terms of the lease will be negotiated.  You get a big check for your property and flip property management to the investor.  Some doctors have chosen this route over others in 2011 because loans are available for properties supported by reliable rent from creditworthy tenants.

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Real Estate Analysis

How would you know which choice is best for your medical practice?  Applying Occupancy Cost Ratio and vendor analysis methods from CAHIMS helps to sharpen your short list of choices.  BREG Health Care (with transactional contributors to the 7-Point Service) offers an unbiased neutral perspective of your real estate costs, free from fees of a transaction.  We review your space operating costs to produce a complete, cogent report to suggest tangible ways to operate lean and efficiently.  The team reviews market conditions, runs draft analysis to present a rough idea of market conditions to consider.  You get a financial picture of your options with strategic advice of which option to choose.  (You decide how to apply the net proceeds of sale to your medical practice.)

BREG has brokered 19,000rsf of long-term leases on behalf of health care providers and landlords.  If BREG Health Care and Biotech can be of help to your business, please click “Request A Consultation” at the upper right of the screen, write “Health Care of Biotech” in the subject line; add your comments, name, email address and direct dial number to reach you; I reply within 24 hours.  Thanks for reading, perhaps we’ll talk with each other soon. ###

Navigate Your Next Real Estate Transaction

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

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

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

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

Lease or Buy

The space your business operates from represents an investment of available cash to bring a product or service to market to generate a return on investment. I have preached for many years that real estate is a tool to operate a business. This tool must be flexible in use and marketable to relet or sell when its no longer useful to your business. Space size and price do not offer enough of a means to compare options to choose from. Factors to consider include physical space, price, acquisition costs, holding costs/benefits, tax effect, return on investment. Merely looking for space within a budget leaves you vulnerable to taking ill-fitted space that you’ll live to regret using. A savvy Tenant Rep will show you the qualitative and quantitative modeling of how to look at your space options to decide which deal meets your operating needs. Such modeling has worked well for my clients since the late 1990’s.

Lease, Renew or Relet

You can choose to move to lease, exercise an option to renew or to relet space within your building at new terms. Critical questions to ask are space amount, engineering of use, layout, construction and space equipment costs, moving costs, budget and cost of capital, tax effect, flexibility of use (sublets/assigns, expansion or contraction rights). Each space considered should be presented in column format to facilitate a decision of accept, fine tune terms or drop the space from consideration. This format also enables preparing fighting alternatives to secure the deal you need. Overall, this method of comparison uncovers fine points of options to root out the right one for you. Give your business enough time to conduct this search and analyze project at a leisurely pace, relative to market conditions. Signing the term sheet of the deal testifies that the choice made from the search process is to move, exercise an option to renew or draft a new lease for your space met the operating needs of your business with a predictable outcome.

Purchase. Purchasing calls for placing available cash for acquisition costs, construction and property management, mortgage and property taxes; all other costs being equal if leasing. Analysis performed by your Tenant Rep shows how your investment will perform as compared to placing the money in other investments and how the real estate adds value to the business. If you’ll lease the unused portion of the property, the Tenant Rep prepares a financial model about how the net profit from Tenant(s) would be invested to enhance investment yield. A financial model for purchasing space shows how your cash will work for you plus net proceeds of sale, projected over a holding period.

Sale-Leaseback. If you own your property and are considering to unlock its cash value from a sale-leaseback, a financial model will show the present value of the property, the interest rate to pay rent, any operating costs, how investor’s holding period may affect your rent responsibilities. Tax impact influences your consideration to complete a sale-leaseback transaction.

Comparing to lease, buy or sale-leaseback shows your cash outlays, productivity of staff from space design and location, and shows tax impact.

If a change of the real estate for your business is on your horizon of projects, I encourage you to contact me to talk it out. Please click “Request A Consultation” link in the upper right of the screen. Enter “Real Estate on My Horizon” in the subject line; please include your name, email address and telephone number in the message body; I reply within 24 hours. Thanks for reading and listening.

Business Analysis = > Tenant Rep

Corp Advisor(Post updated 01/26/2019) If your COO thinks its time to change the space your business uses, a great deal, in a seemingly good space, could become a (operating and financial) debacle you’ll seethe from long-term. (i.e. bad layout, a long inflexible lease, construction cost/time overruns, poor construction finishes, unexpected extra fees in the monthly rent bill). Blah, blah, blah you say? I’ve seen it happen many times; some clients were referred to me to solve such problems with their space.

A space debacle is avoided through planning – AND – using time to your advantage. When neither of these two elements are used, you pick the short straw and overpay. Analyzing your business carefully, to identify its needs [from workflow] and resources, become the baseline to negotiate the deal that meets the operating needs of your company.

Basic “Business Analysis” questions to ask:

  • How is the business operating today from its space?
  • Does the space facilitate productive workflow for ALL your staff (from baseline workers to C-level executives)? Is the work environment functionally collaborative and comfortable?
  • Does the space layout, location and rent bill foster productivity and profitability?
  • Can your space size change as your business does?
  • Does your office furniture, equipment and phones foster your comfort, efficiency and work pace?
  • Does your lease (or sublease) protect your occupancy rights? (this is more a business term that legal advocacy guides you to secure).

These questions are basic yet with privately held businesses, I’ve often seen little thought, planning and execution done in 24+yrs as commercial Tenant Rep. The best plan to change your space is a flexible one that’s able to make reasonable compromises as they arise. Identifying why your business is failing to meet executive vision, with worker comfort, leads to a baseline of expectations for new space. Let your Tenant Rep interview executive management, mid-management plus a few line workers; the data gathered will lead to an understanding of information flow, what defines a) a comfortable, efficient working environment, b) flexible occupancy, c) a flexible lease, d) sufficient utilities to meet operating needs.

If your business occupies 7Ksf [or more] of space, budget at least 2 years prior to occupancy to address your change vision at a leisurely pace; that puts time to your advantage to secure the right deal for your business (vs. a good deal for the landlord).  A virtual test-fit (1) of your space helps to create a short list of spaces/properties to focus on.

If you agree these suggestions are sensible for you, request a free 45 minute consultation with me by clicking the link at the right. Please put in the subject line “Business Analysis meets Real Estate.”; I reply within 24 hours. We hold a substantive face to face conversation, and see if our personalities are compatible to work with each other. Thanks for reading, perhaps I’ll hear from you soon. ###

  1. Kirsch, B. (2016). The value captured through a faster tenant test-fitting process, REFM, 03/15/2016.

How to Hire Me

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

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

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

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

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

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

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

Highly Successful Helping Businesses Grow

Learn Real Estate Costs Ahead of Needs

Small-Mid size users of commercial space (5K-100Krsf) often analyze their space needs just before starting a search; such timing would likely cost your business the wrong space size, overpriced deal terms and bloated operating costs. Also, merely comparing market rates to your rent [or mortgage] does not accurately measure the economics of your space. Do you know how much your occupancy costs take as a percentage of revenue [generated from the space ]?

The costs to operate space are: rent (or mortgage and property taxes), utilities, IT network and phones. The one-time costs to expand/relocate can include: movers, architectural and/or project management services, construction (beyond landlord’s work), furniture & fixtures, voice and data wiring, phone and computer equipment. If changes to your space are in-review [among executives], knowing both the revenue generated from the space and its occupancy costs will help expedite planning and decision-making within budget.

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A triumvirate of academics and experience are blended to deliver this service; it sets me apart from conventional real estate analysts. i) a complex understanding of commercial real estate, ii) academics and hands-on experience assembling/interpreting the economics of business operations, iii) training/experience with spreadsheet software.

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I often performed this analysis for clients as commercial realtor; I was a virtual real estate department to emerging businesses with 5-100 employees in metros New York and Atlanta, 1995-2007. (Figures and space needs came from collaborating with the Comptroller and CEO). The results enabled me to source the right spaces and negotiate the sharpest of terms a landlord could afford; those business terms matched or cut the client’s projected occupancy costs.   I deliver this service in five steps:

  1. Identify gross revenue from space / current occupancy costs (by category) = % occupancy costs claim from revenue.
  2. Estimate future space needs and occupancy term; scrub to market conditions.
  3. Project revenue from new space. How much more revenue could be kept as profit if occupancy costs were less?
  4. Identify space costs for the next occupancy term via a projection of entry costs, rent and operating costs (mentioned above).
  5. Compare sales projections to projected occupancy costs to reveal how much space is needed and what to budget for it. Add one-time relocation expenses outlined above.

(Note: Your results from this service will be most effective when completed two (2) years before operating from new space (up to 20Krsf; up to 4 years prior for 100Krsf). The lead time positions your business to negotiate from strength.)

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I can work directly for your company, collaborating with your Comptroller, or as subcontractor to the CPA firm you work with. I work per diem or by project; I estimate 24 hours per assignment; the work is completed in 5 consecutive days. If you’d like to talk with me, please click “Request a Consultation” at the mid right of the screen and fill out the form; I’ll reply to you within 24 hours. I trust that the content of this post was helpful to you. ###

Real Estate Investment Valuation: Few Comps

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

ADD

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

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

SUBTRACT

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

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

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

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

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

NET OPERATING INCOME

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

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

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

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

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