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.

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. ###

Too Much Space? Sublet, Divest or Move

Has your sales or business operations changed to need less commercial space than you signed [a lease] for? Is your rent bill using too much of your operating budget? If you face this problem, a prompt strategic approach to solving it is necessary. Look at the financial impact and legal exposure of your options. I explain below how to approach this dilemma, how to solve it and free up your operating budget.

Assess the problem. What’s causing your business to use less space than you signed for? Were signs of change let go when you signed the lease, or is this a new emerging trend likely to stick? If a percentage of staff will be let go, how would you re-seat the staff kept to free up space to divest? Is additional rent more than you expected (and planned for)?

How many years are left on your lease? If less than 4 years and space is in move-in condition, the space could be relet for a longer term at current market rate, ending your lease.

What are your space and location alternatives? Finding the right building, in the right location for your business can be challenging. The scope of Tenant Improvements to the new space will dictate the base rent and lease term. What lease term can your business accept with some uncertainty of its future? (Note: Keep the math difference in mind that less construction cost equals fewer lease years, more construction cost equals more lease years (until rent exceeds construction cost)).

Compare Lease Terms of Buildings. Key clauses to review are operating pass thru’s, expense stops and operating increases. Paying the difference between year to year operating expenses is best; paying increases over a base year gets expensive to your operating budget.

Transaction model. The most effective way to compare deals is to prepare transaction models. (Your Tenant Rep broker has software to do this.) Modeling shows the financial difference between deals, some of which may look alike in the offer.

Personal Guaranty and Good Guy clause. If there’s a default of rent payments, the person guaranteeing the lease is responsible to pay. Good Guy clause versions are a) keep the rent paid through the lease term or b) leave the space broom clean, pay all rent due through the last due date, return the keys to be legally released from further lease obligations. Work to secure (b) because it releases you from rent you will not/can not pay and gives the Landlord back a space to relet without paying to evict you.

Sublet terms. What legal rights does your Landlord have to list your space for sublet? The time frame to list affects how quickly you can dispose of the unneeded space. Remember the leasing commission [and any construction costs] you’ll pay to sublet.

Delivery of Space and Move. Sublet of the vacant space or moving should be done during the least intrusive time of your business year. Expect to take 45 days to plan the move and another 30 days to execute/close it. That time needs to be compatible with your subtenant or your new Landlord.

Sublet. Sharing up to 3,000rsf of unused space is a quick solution; costs are limited to a background check, a credit check and fees to Landlord. If you’ll be compatible sharing the common areas of the space, pursue a space share.

If you must separate the vacancy from your space, expect to pay an architect and construction costs. Only choose that option if costs are dramatically less than your potential moving costs, future additional rent and escalated rent you’ll collect from the subtenant. Always review at least the two most recent years of signed financial statements from the Subenant and talk to 2-3 creditors to ensure they can afford to pay you their rent.

Divest. Sometimes, there’s a market for your vacant space to the Landlord, either in whole or as part of an adjacent space. However the market exists, hire a Tenant Rep broker and Tenant Rep attorney for a consulting fee to ensure your lease is amended with less space to bill for with your interests in mind.

I trust this post has been a simple read for you and helpful if you’re faced with this issue. I’ve helped companies deal with this issue in the past. If BREG can help you, please click “Request A Consultation” link in the upper right of the screen. Enter “Sublet, Divest or Move” 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. ###

Buy Property

CONSIDERING TO BUY A PROPERTY vs. LEASE FOR YOUR BUSINESS? If you’re considering to own the space your business operates from, have you identified how financial benefits can lower your cost of occupancy? Imagine the lift to your P&L… Financial planning is as important as preparing the building for use. The goal is keeping space costs known, predictable and low while adding property value to the value of your business.

The physical and financial aspects of the buy can be plugged into transaction software that changes with scenario models. A comparative quantitative analysis helps to reveal your cost of occupancy. The final transaction model will serve as a guide to negotiate the closing terms of the buy as well as drive the project management of the build.

I’ll show you how a mortgage, tax, utility and economic development benefits will help lower your acquisition, development and operating costs of the property. We’ll review each scenario to the extent you need to create options to focus on. Our review of options will include how we’ll respond if the seller (and other players) cannot meet your transaction or development needs.

Five (5) Key Factors affect a property purchase:

  1. Physical building and location. What kind of building and layout does your business need? Where should it be located?
  2. Development. Does the building need retrofitting, rehab or is land development your best option?
  3. Financing (including IDA financing). Your credit status will dictate the lending terms you can secure.
  4. Economic Development benefits from utilities, job creation, construction. Location of the business, employees relocated, new hires and how you power/light your property will all help identify the economic development benefits available to you to lower your cost of occupancy.
  5. Tax benefits (mortgage interest, depreciation, property tax abatements, effective tax rate). Property tax abatements, plus tax deductions for interest will be factored into the transaction to show its financial effects on your cost of occupancy.

Considering to buy a property requires quantitative and qualitative analysis. I discuss the report with you in layman’s terms to make a choice giving a predictable outcome. The financial and physical outcome of acquiring commercial real estate requires some degree of predictability to focus on operating and improving the performance of your business. This consulting service is available for an hourly fee or is included in the commission fee [I’m paid by the seller of the property].

If you agree that this analysis service would be useful to you, please click “Request A Consultation” link in the upper right of the screen. Enter “Acquisition Modeling” 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. ###

Deal Get What You Need?

Before you sign a lease or contract for new space for your business, do the negotiated terms get what you need? Just because the deal is market competitive (and perhaps a good one), is that deal good for your business? Don’t sell yourself on a deal that didn’t get what you should have. (The deals to my past customers were always good for their needs and at market competitive terms.)

Brokers’ efforts are often driven by their need to generate commissions to feed the overhead of their business. Landlords make deals to realize property returns on investment and feed overhead cost s of building operations. Clients and Tenants respectively often give up too much to secure space they need.


How can your broker secure the terms your business needs to operate with? They learn about the issues important to you, what your interests and positions are of those issues, identify creative ways to secure your needs with the landlord or seller, and educate you of the risks of picking the wrong deal or property you ask them to secure. (Note: Savvy realtors have staggered payouts coming to them regularly, affording them the ability to engineer deals that are right for their clients and market competitive.

I suggest taking 2yrs to secure the space you want for every 7500rsf of office space and 15Ksf of industrial you need. The conversation begins to identify who the stakeholders will be for the move, a consensus of important issues among stakeholders, what the interests are among those issues, what interests are critical, important or tradeable. Your broker’s job is to identify creative options of how your interests will be secured, solving your issues, how to get the seller’s issues secured and how the agent will be paid to represent you. There’s a methodical process to prepare for negotiation and a methodical way to negotiate that keeps all stakeholders happy with each other.

The 2yrs lead time gives your broker the ability to find the best options for you to consider, secure the deal that’s best for you and is market competitive. The next time you begin to think about a need for commercial space, hold a holistic view of your assumptions and begin to create objectives. From that you will be ready to meet a savvy commercial realtor to help you identify and secure the terms worth signing for. I have worked this way for 10+ years. If I can be of help to you, please click “Request A Consultation” at the right of the screen, write “Interest-Based Negotiation ” in the subject line; add your comments, name, email address and direct dial number to reach you; I reply within 24 hours.) ###

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

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…