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.

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. ###

Pricing Property to Sell

As the economy improves incrementally, commercial real estate is regaining attention as a stable, reliable investment [vs equities or bonds]. Its published knowledge that American businesses (including private equity) kept over $1 trillion in cash profit from sales since the depths of the [Great] Recession; currently cash is king. Banks are lending cautiously, yet in measured amounts. Investors are searching for choices that offer a mix of stable cash flows and future upside. Complete rehabs of functionally obsolescent buildings are an alternative investment, if handled shrewdly.

Plan and Prepare Basics

If you’re considering to sell a property you own, strategy and planning are key to a successful sale and use of proceeds. Stick to your plan; leave a bit of room for flexibility. Recruit multiple offers to assure the sharpest sale terms; have alternate buyers ready to fill sales that break up unexpectedly.

Seasoned, experienced, savvy service providers to process the transaction include a real estate analyst, Public Engineer, CPA and attorney.

a.  Real Estate Analyst. This knowledge worker, whether support staff or private contractor, will project an opinion of value of the property from accurate income and expense figures. (This is my service niche.)

b.  Pre-Inspection. Its to your benefit to hire an engineer (P.E) or commercial inspector to report on the physical condition of the property before bringing it to market. Leaving the inspection report up to the buyer could put you in a materially weak negotiating position, creating a lower perception of value by the buyer.

c.  MAI Appraisal. Order a professional appraisal of the property before sale, approved by an MAI; scrub the results against the opinion of value from your analyst. No buyer can argue with the results of an appraisal from a licensed appraiser and MAI.

d.  Legal. Assure the contract of sale fairly protects you and the buyer; read a sample copy from your attorney before they customize it to your transaction.

Four Essential Questions

Prior to bringing your property to market, ask yourself:

  1. What’s it worth?
  2. Where to place the sale proceeds?
  3. If you make a like-kind, tax-free exchange, identify the replacement property (ies) before bringing your property to market.
  4. Paying capital gains taxes on the sale proceeds? Talk with your CFO or CPA about profits’ affect on your P&L before bringing the property to market.

These preparatory steps include expenses and time worth investing in to avoid losing a sale, or negotiating unexpected material hurdles of sale that could lower the closing price you envisioned. These steps map a path to a smooth close, with flexibility as needed.

1.  What’s it Worth?

These facets of value, some of which are severable from the whole, work in-unison to generate an accurate value for the property:

  • Integrity of income (eg. rent from tenants, billboards and antennas, parking income)
  • Projected rents from lease renewals and potential vacancies
  • Does rent from long term leases (10yrs or more) sustain, lock or step-up revenue?
  • Does the building operate efficiently?
  • Is maintenance effective and costs sharp?
  • Is the assessed value of the property reasonable?

Additionals:

  • Are there hazmats behind walls needing abatement at relet?
  • Do floor plate sizes help/inhibit lease up?
  • Could select floors be re-positioned for better uses at higher rents or sold as condo?

The tangible and intangible variables of a property directly affects the capitalization rate applied to NOI to produce an accurate property value. Some are:

  • Building features (common area cosmetics, telco wiring, green skin and mechanicals)
  • Property’s ability to compete in the community for tenants.
  • Does the legal ease of your lease help, hurt or inhibit property value?
  • Credit of larger tenants

Uses for Sale Proceeds

Sale proceeds are substantial, you’ve agreed with your senior staff about where to place them (i.e. re-invest, pay debts, fund new development, etc). If you’re a single user of owned property, is this sale a leaseback to free-up cash? Proceeds may be divided among facility expenses, short term rent and to fund growth.

Like-kind Exchange. If you’re planning a like-kind, tax free exchange of properties, identify a list of replacement properties that meet your investment goals and core portfolio. Hire an experienced, neutral agent to handle the exchange of properties.

Capital Gains Taxes. If capital gains taxes are to be paid from sale proceeds, have a detailed discussion with your CFO or CPA about how the net profit will affect your P&L.

My Services

If your real estate investment business needs a savvy analyst for a sale project, who can also present the results with charisma, please contact me to discuss your specific needs.  If my skills fit the needs of your sale project, my hiring terms are: