Archive for September, 2009

Real Estate Auctions: accelerated marketing

September 30, 2009

A compelling way to spotlight an asset or real estate portfolio is through the effective use of the auction process – more properly known as accelerated marketing. The title to a handbook could be “How to create a bidding war.”

Nationally, and internationally, auctions are a proven alternative to traditional real estate brokerage. In some countries it is the only method used.

According to the Indiana-based consulting company The Gwent Group, the auction method accounted for nearly $59 billion of U.S. real estate sales in 2002 and over $60 billion by 2004. A few years ago the National Association of REALTORS® (NAR) estimated that by 2010 one in every three U.S. real estate transactions will occur using the auction method. I am not so sure about that, but for many reasons I see strong growth in the auction method of selling real estate.

With accelerated marketing, traditional pricing paradigms are replaced by aggressive marketing. The resulting competition creates an excellent forum to realize a property’s true market value.

Auction Benefits for Property Owners

  • The seller dictates the terms of the transaction.
  • Quickly close transactions and gain liquidity
  • Property is sold as-is.
  • Sale is made without contingencies.
  • Sale is consummated on a specific date
  • Viewing time is limited/controlled by the seller

What about buyers?

The auction method attracts smart cash buyers and accelerates the process of selling any property or asset by compressing the marketing period. No other sales method accomplishes that. Offers and counter-offers, as well as frustrating, slow negotiations, with buyer’s remorse setting in are replaced by aggressive bidding among serious prospective buyers.

Additional considerations:

  • Choose from several auction formats.
  • Appropriate for all types of property-commercial, industrial, office, residential, or vacant land
  • Especially effective for “trophy” and hard to price properties

If you have a relationship with another broker, we can still work together.

Learn More:
To learn more about accelerated marketing please contact me at (800)345-6694 or gary.lillie@svn.com.

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SUPPLY CHAIN MANAGEMENT: what factors affect your real estate investment?

September 23, 2009

Supply Chain Management is the art and science of getting product from one spot to another in as efficient a manner as possible.

Direct cost is one of the obvious concerns in the supply chain, but indirect costs resulting from delays in delivery, lost production and late distribution can be just as important – even more so. Not getting a product to the user in a timely manner may not just cost the user money; it may lose a customer.

But what has that to do with real estate?

Real estate investors often have the opportunity to buy a NNN-leased distribution center. They are probably a good investment, but before committing the investor should drill deeper than the user’s credit rating and the numbers on the spread sheet. Other questions are in order before signing that letter of intent.

What is the long-range strategy of the tenant? Will outside forces such as oil prices cause them to switch from a few big distribution centers to a number of smaller ones – or vice versa? Have they recently had a change of management, which may bring about a change in strategy? What industry or customer base do they serve and how might that drive change? If methods of distribution change how will this building fare; e.g. does it have rail siding or adjoin an airport?

The supply chain accounts for much of a company’s carbon footprint; will the move to “green” affect the business of moving supplies?

Might politics – both foreign and domestic – terrorism, human rights, and environmental demands influence a shift back to local, versus off-shore suppliers?

Changes may be driven by negative influences such as higher fuel costs, or positive influences such as improved technology; but you can and should plan on change. Moving supplies in the future may be as relative to the way they are moved today, as today’s methods are to the way it was done in the 1960s.

So ask questions when considering that distribution center. It is probably a sound investment, but due diligence greater than traditional economic analysis is in order.

OPPORTUNITY: Is it out there?

September 18, 2009

My parents came of age during the Great Depression so as I grew up I heard stories from them, at school, in movies and everywhere else about how bad it was. In fact, my parents had to keep their marriage a secret because my dad was a coal miner and my mother worked in the company store. Back then there was a rule of just one job to a family. Had it been known they were married my mother would have had to quit her job.

Things were tough-to-worse everywhere. So imagine my shock when one day while driving my car and listening to an interview, the guest said, “Many people made fortunes during the depression.”

My head snapped to the radio so fast my neck got a crick in it. I said out loud, “What?”

The guest went on to discuss how many people with money amassed fortunes by acquiring good properties at bargain prices. Assets were up for grabs due to the owners bad planning, bad management, bad luck, or a combination of all of the above.

I don’t suggest opportunism in the sense of preying on people; in the past I have rejected offers from people who wished to partner with me in buying tax-sale property. I personally will not benefit from the bad fortune of others. However, there are many opportunities that offer win/win scenarios.

In my own commercial real estate business, as an example, I have listed a farm strategically located within a hundred yards or so of an I-94 exit. It once had a $6 million sales contract on it, but when the downturn came the national builder terminated the contract. Today, because of cash needs of the seller the farm can be bought for the list price of $2.6 million – with terms.

Sometime in the not too distant future that farm will be developed into a successful residential subdivision.

When I listed the farm I called the vice president of the developer/builder that had walked away from the contract to see if they would like to pick it up again at the new price. His answer was “No.” He went on to tell me they were still disposing of land – that he had just sold a completely developed 203-lot subdivision in which they had invested about $68,000 per lot…for $3,000 per lot!

The message is there are many opportunities in today’s market. The old adage of “buy low and sell high” holds true now more than ever. And, it’s not just in land where the opportunities lie; it is in every classification of property that exists. People find themselves in need of cash and must dispose of assets.

The time to buy low is now.

9/11

September 11, 2009

We will never forget – and we thank those who protect us; our military, police, firefighters, EMS, and all of the rest. Be safe.

IT’S JUST A LEASE? Get expert advice

September 9, 2009

Legal:

There is (almost) no such thing as a pro-tenant lease; there are pro-landlord leases and fair leases, but rarely a pro-tenant lease.

Tenants should try to negotiate a gross lease; and they must understand what their responsibilities will be over and above the rent.

If the tenant reimburses the landlord for taxes, what happens if the building is sold and taxes double – or worse?  That can cause even a long-established business to fail; especially during a recession.

If the tenant pays for maintenance, are the words “capital improvements” in their. That could include a new furnace or roof.  With a 5 year lease and no options to renew that is probably not equitable.

Are there charges for common area maintenance, such as snow plowing?  What about management fees?  Ask to look at historical charges (or projections if there is no history), and negotiate a “not to exceed” amount.

The tenant wants the right to assign the lease and/or change the use, so that they can sell their business and/or find their own substitute tenant if the business does not do well.  Try to negotiate in advance the right to terminate a lease early by paying a lease termination fee, perhaps equal to 4 to 6 months rent.

Tenants should also ask for options to extend the lease term at a predetermined rate and conditions. Otherwise the landlord or new owner may try to extort exorbitant rent or conditions when the time comes to renew (just this morning a friend told me of such a case with his son). Pay the new rate or move your business.  If you move, the Landlord may open a competing business or lease to a competitor at a premium; taking advantage of the good will created by the tenant.

Is their a first right of refusal in the event the landlord decides to sell?

If the tenant is a business entity try to avoid personal responsibility, or to limit personal responsibility if a personal guaranty is required.

The opposite of the above may be the goal of the landlord; except the landlord should not ordinarily want to drive the tenant out of business. The landlord’s goal should be to keep a responsible tenant financially healthy so cash flow continues.

Insurance:

These are things to discuss with your insurance agent:

A LANDLORD should include an Indemnification agreement from the tenant, and a certificate of insurance naming landlord as additional insured; in limits that are reasonable and prudent to exposures unique to the risk. In other words, are you insuring a retail store in downtown Manhattan, or a in small strip mall in Washekaw, Minnesota? Reasonable and prudent dollar amounts will change dramatically in those examples.

Require renter’s insurance and liability on a blanket basis. Essentially you may have problems with tenants who are not covered by their own insurance. If a renter does not have tenant’s insurance it may affect your own insurance rates.

What limitations are in your own policy for a vacant building or unit? Are you covered if it is vacant for one week, one month, three months? You may need a rider to cover vacancies, but not just vacancies – talk to your insurance agent.

TENANTS: As a renter in an office building, what is your coverage if you or even another tenant accidentally damages or destroys the building? Are you covered for interruption of business (loss of income), cost of recreating your records, or expediting expenses allowing you to get back in business as soon as possible? Even residential tenants with home offices may need additional coverage.

New construction? That’s a whole different issue.

A book could be written on the subject of insurance coverage and language in a lease, but what it boils down to is be sure your insurance agent is in the loop prior to signing that lease.

The most important point to remember about a lease is they are not generic. As a long-term broker I know that leases seem to vary in correlation to how many landlords and how many tenants there are out there.

KNOW YOUR ASSETS: Why should I lease your building?

September 2, 2009

There is a lot of competition to attract tenants – especially in the business climate we are in. I don’t need to tell you that vacancy rates are high and tenants are taking advantage of that in their negotiations.

So how do you make your building/space/unit stand out? Be it industrial, office, retail, or residential, there is something unique about your real estate, but don’t look for the obvious – it may not always be physical.

About five years ago I listed a 215,000 square foot industrial building in Marlette, Michigan, which is in an area known as “The Thumb” (yes, Michiganians will always hold up their hand and point to the spot where they live – at least those in the Lower Peninsula).

Marlette is midway between Detroit, Flint and Saginaw; three cities that have been badly affected by the loss of jobs in the auto industry. As a result there are many 200,000 square foot vacant plants available. Not only that, but the owner insisted on a lease rate nearly double the market rate.

Marlette is surrounded by Amish farmers and they and their families made up most of the plant work force. While being given a tour of the plant by the manager of the vacating occupant, he continually bemoaned the fact that his loyal, hard working, reliable employees would lose their jobs. He told anecdote upon story of what a blessing they were and how profitable the plant was because of them.

I asked him if he would give me a letter of recommendation for his employees, which he immediately agreed to and threw in the entire community. That letter was posted on my web site presentation of the plant and became the centerpiece of my marketing. I did not promote the building – there were many to choose from – I promoted the work force.

After just a few months I had received four offers to lease the building and it went for slightly over the already high list price. The new tenant was a Spanish Tier 1 auto supplier that was actually headed to Mexico.

Step back and take a fresh look – what makes your building superior? It may not be the building or even its physical location.