Let The Good Times Roll - Why The Sun Will Shine For At Least 2-3 Years

"Economics is a subject that does not greatly respect one's wishes"
-Nikita Khrushchev

For the last several months I have had the same conversation every day with my commercial real estate clients. It basically goes something like this:"Are things really as good as they look?" and "How long will the good times last?"

Anybody who was actively involved in brokering, lending, developing, investing or speculating in commercial real estate from 2008 onward knows how devastating the Great Recession was. In most markets nationally, and certainly here in Sioux Falls, SD, the fear is gone and business decision-making has resumed. My clients are making money again and 2008 - 2010 is a night terror partially forgotten in the daylight.

Despite the overall general good feeling, the specter of storm clouds threaten on the horizon. The stock market is volatile, Ebola dominates headlines, and Canada just got its first taste of domestic terrorism on its soil this week. Despite the echo chamber of the 24/7 media news cycle, things are good and they will stay good for another couple of years.

Here are some reasons why we have at least 2 to 3 years of sunshine to make hay in commercial real estate:

1) Lower Fuel Costs. Unless you are a gas station or a highly levered fracker (Forbes Article) in the Bakken Shale, paying less for gas means more money to spend on other things. The businesses that provide consumers with goods and services pay less too, allowing increased profits to be reinvested or distributed to investors/owners. According to a recent Wall Street Journal article, the US produced 8.5 million barrels of oil per day in July. It's no longer news (Bloomberg article) that American advances in crude and natural gas extraction have catapulted the United States past Saudi Arabia and Russia to the top slot in global production.

As the United States continues to produce more supply and provide downward pressure on global prices over the next several years, look for a sustained drop in energy costs. Less money spent on energy frees up discretionary spending for both consumers and businesses.

2) Low Interest Rates.  Inflationary readings remain low (International Business Times Article). This allows central banks to maintain low or easy money interest rates. Cheap money encourages growth and spending.

According to the Congressional Budget Office's August Update, the 10-Year Treasury Notes (key rate for commercial real estate debt) will slowly increase from 2.4% to 4.2% in 2017. That's three years of low interest rates. Nice.

3) Recovering Job Market. The September Jobs report included a 5.9% unemployment rate (New York Times Article). Wow. That's great. Do we have a wage growth problem? Yep. Is this percentage affected by a labor participation issue? I think so.

The good news is that people are going back to work. As more people go back to work and normalize their spending patterns the better off the general economy will be over the next two years.

If you would like to talk about your commercial real estate investing plans give me a call:

Nick Gustafson
605-201-2809
nick@benderco.com

Commercial Lease Hacks

"Most people will not put in the time to get a knowledge advantage." -Mark Cuban

10 years ago I was new to the commercial real estate business. After grabbing my college diploma, getting licensed, leasing a new car, and spending precious money on a new wardrobe to look halfway presentable I hit the streets looking for commercial real estate deals. While I pounded pavement, during off hours I would pour over commercial real estate books. It seemed as if every book I could get my hands on was written for a first time investor, property manager, or someone other than a green commercial real estate broker.

Then I stumbled across Negotiating Commercial Real Estate Leases by Martin I. Zankel. Check it out on Amazon here: http://amzn.to/1FmEWs6. This was a nugget of gold in a sea of dross. It was about 250 pages of commercial lease advice written by a broker turned lawyer. I stumbled across my copy today and it's well worn and beat up from rereads and reference. Lots of the material went over my head in those early years but I would repeat its wisdom in client meetings and conference calls with conviction. Enough people believed me as I started to broker increasing numbers of office leases.

Here are three takeaways that have helped my clients and might help you too:

1) Controlling the lease document.
Zankel's first gem of advice is to "GET CONTROL OF THE LEASE DOCUMENT. The party who controls the drafting of the lease document will win all the small battles."

Great piece of advice, especially in dealing with smaller landlords or business owners that begrudge every dime spent on attorney lease review. Simply offering to draft the lease or submit a copy during the initial offer gives a tenant or landlord tremendous advantages during lease negotiation and review.

2)  Including caps on expenses.
The idea of limiting expenses on tenant or landlord responsibilities was a new concept to me years back and occasionally I will introduce caps during certain situations depending on the situation.

3) Landlord Clauses
Appendix II contains an impressive list of landlord clauses to review and potentially draw from. A simple read is a must, a through understanding makes you sound like you know what you are talking about.

This was and is a great book for tenants, landlords and broker's to read and absorb valuable takeaways from.

If you need help negotiating your next lease, you can reach me at:

Nick Gustafson
605-201-2809
nick@benderco.com

Listing Price - Why it Matters

The biggest mistake commercial and investment sellers during the selling process is listing their property too high. Here are reasons why sellers make this mistake:

1. Greed
2. Need the excess capital to fix another problem
3. Ignorance of market
4. Want to "test" the market

 I've been in front of hundreds of high pricing prone sellers as they review my pricing recommendations and I find it amazing how the conversations are so similar. Phrases like "You start high" or "My property is worth more than..." and "These are not good comps" and "Actually, I didn't report all my income" and "It's your job to bring good offers"".

Here is what happens when sellers list too high:

1. Investors pass during the important 1-6 month initial window due to over listing the property 
2. The property is regarded as "stagnant" or "has something wrong"
3. The seller gets angry at their broker due to lack of activity
4. Seller fires broker
5. Seller has damaged the market value of their asset
6. Seller eventually sells asset at price recommended by broker or lower, but takes much longer

The best way to sell an investment property is to price the asset close to market price with a little extra wiggle room for buyers to feel as if they have "won" the negotiation. I prefer to present my analysis on market value (Broker's Price Opinion) along with the marketing material to buyers with sellers permission.

If you would like to discuss the market value of your property give me a call.

Nick Gustafson

605-201-2809

nick@benderco.com   

Why I still make Cold Calls

When I got into the commercial real estate brokerage business back in 2004, I was 22 years old. I looked like I was 12. Pictures from this time show a thin, eager looking young man with all of his hair ready to make his first million in commercial real estate brokerage.

I joined a family run real estate services firm well known for three generations of  brokerage, management and development. The family had just transitioned to the next generation of leadership and was looking to build back the commercial real estate brokerage division.

Shortly after college graduation I passed my real estate exam and continued to work in the same cubicle that I had labored in as an intern. My new sales manager (great guy) had been hired days before I got my license and while having an impressive sales background did not have commercial real estate experience. Nonetheless he laid some of the most basic sales principles in front of me possible:

1) The more times you pick up the phone or pitch qualified tenants/buyers in person, the more properties you will lease/sell. 2) Get the first part right and we can hone your presentation skills through experience and coaching 3) Track this activity and we will see patterns to effort and results, tweaking efficiency all the while.

While there is clearly complexity involved, he was right. He is still right. The more times I pick up the phone to call qualified buyers to pitch them market priced investment properties the happier my clients (sellers) are.

It takes massive amounts of time and effort coupled with years of diligent data base work to cultivate the proper call lists. But it works. Call me if you have commercial/investment properties and would like to learn how we can help you.

605-201-2809
nick@benderco.com

Real Estate Crowdfunding Cliff Notes

Crowdfunding is a major buzzword in today's startup and tech scene. Simply defined, crowdfunding is the practice of funding a venture or a project by raising money from a large number of people via the internet or a specific website/application platform.

Kickstarter is the most visible crowdfunding site, launching in 2009 and raising over $700 Million dollars as of mid year 2014. Successful recent fund raises include 1) The Coolest Cooler ($13.28 Million) 2) The Veronica Mars Movie ($5.7 Million) and 3) Reading Rainbow Reboot ($5.5 Million).

The 2012 Jobs Act contained provisions that prompted similar real estate platforms to raise equity and acquire their first buildings in 2013 and 2014. This trend will likely grow exponentially when the rule making is completed for the Jobs Act and may lower the bar for non accredited investors to participate.

Real estate crowding platforms raise equity or debt to invest in specific buildings or developments. These platforms can choose debt or equity raises (ownership in shares verses lending on project). The range of minimum investment needed ranges from $100 - $250,000. Note that this investing method is limited to accredited investors.

Why is this important?

To understand the potential here, it is important to understand how things have worked in commercial real estate investing for the last 100 years. A developer or investor would use her personal balance sheet and capital to invest and borrow in a property. Historic returns typically outpace retail investment opportunities (stocks, bonds) with cash flow and asset appreciation. As this model worked very well, it usually limits the total number of projects one individual could be involved in at a given time. Thus, this developer or investor would leverage her network and raise equity from friends, family and local investors in exchange for ownership. Good developers/investors (General Partner) would build a strong networth and would reward her limited partners with strong cashflows during ownership and proceeds upon sale of assets. Institutional investors, hedge funds, and high net worth individuals have access to these partnerships the average investor does not. Private and Public REITS have gotten closer to making commercial real estate investment returns available to the general public, but typically hold large numbers of properties which diversifies risk, but takes away the opportunity to own part of a single property.

What does the future hold?

Potentially this new approach to commercial real estate investing will allow investors to diversify their investments among several large properties in smaller amounts while still taking advantage of strong returns associated with larger, successful projects. Non accredited investors may have access to this platform depending on final ruling making on the Jobs Act.

The risk this approach contains mirrors the risk current investors face while investing in commercial properties 1) The general market 2) Dependence on the General Partner's hundreds of decisions involved in acquiring and operating a commercial asset.

Tons of promise here, the devil will be in the details.

Nick Gustafson
nick@benderco.com
605-201-2809
 

I just got fired...

I got fired from a listing last month. The property was a real challenge. The building was in tough shape and the curb appeal didn't light anybody's fire. Interior mechanical systems, roof and just about everything was decades past replacement. I took the listing as I had a good relationship with a now deceased family member. But my listing relationship was terminated and another broker whom I consider a friend got the listing. I consider my former client to be a classy individual and I harbor no hard feelings.

With a long track record and plenty of experience gaining and losing market share, losing one listing isn't going to throw me into a depression or force my family to skip dinner tonight. However it is the equivalent of a check engine light coming on my business dashboard. I worked hard on the listing, I cold called on the listing, I showed it. But I didn't spend enough time with the client this spring and summer as I was busy selling a lot of real estate. So in a sense practically and figuratively I dropped the ball. I should have been more creative. I could have controlled this outcome.

Your car usually doesn't break down without warning. Usually there is a warning sign or a missed scheduled maintenance item. Tires, timing belts, water pumps get old and need replacement. Oil needs changing.

Health usually doesn't disappear overnight. One typically stops exercising, eating well, and loses discipline long before weight gain and issues become apparent.

Who cares? What does this have to do with real estate investing?

Your properties do not suddenly lose value overnight. Tenants do not leave without reason. Here are some practical warning or check engine lights that will flash on your properties below. If you pay attention and fix problems before they eat you alive, you will be free to look for new opportunities.

-Tenants start leaving
-Dips in revenue
-Repair costs increase
-You stop showing off the property to out of town relatives
-Building vacancy rates are higher than market vacancy
-Capital improvement are skipped in good years
-Roof starts leaking
-HVAC stops working
-Vacancies get fewer showing than the past
-Rents have to be dropped to do deals
-Property managers/brokers pass on the opportunity to work with you
-Current tenants complain of a drop of business

Negotiation and Need

During the last 10 years I've seen a couple of negotiations. I've negotiated bill boards easements, coffee kiosks, office leases, retail leases, industrial leases, call center leases, and sales of multi- million dollar investment properties.

I've negotiated for and against a wide range of personalities; straightforward, devious, open and guarded, rich, poor, careless and desperate.

Books, classes, experience have all taught me a variety things that ensure successful transactions and help my client reach their goals.

Negotiation is a real art with winners and losers. There truly is a difference between an experienced negotiator and an inexperienced person running around with family money (daddy's checkbook).

However what is understood by seasoned brokers but is rarely discussed is that most negotiations boil down to one thing. And that is need. Who needs the deal more? Who needs what? Who is facing bankruptcy? Who needs the adjacent parcel to expand and thus avoiding bottle necking revenue?

While the better negotiator will "win" in an evenly matched deal, all the negotiating in the world will not overcome overwhelming (or crippling) need. Imagine the worlds best 13 year old judo champion facing off against a 300 pound NFL linebacker. Not pretty right?

What's the takeaway?

Sometimes the best negotiating is simply reaching out to the other party and explaining your position and intent in a human, straightforward way. You might not squeezed every drop of blood out of the deal, but sometimes that's for the best.

American Idol Real Estate Investing

For the last 12 years or 14 seasons American Idol has captivated millions of viewers around the world and jump started genuine music careers. The concept is simple: throw a nationwide singing audition, tens of thousands of people show up, producers and judges hold progressive cuts to discover the newest American Idol. Drama ensues.

Something interesting occurs every season. The show actually finds talent.Carrie Underwood, Kelly Clarkson talent. Since Carrie Underwood's 2005 win on the show she has sold 16 million albums, 30 million singles and made $100 million in tour revenue. Before her American Idol audition, Carrie was attending Northeastern State University in Oklahoma, waiting tables, working at a zoo and vet clinic.

Good for Carrie Underwood. What does this have to do with Real Estate Investing?

The Show American Idol is a numbers game. Every wannabe singer with a dream and the inclination to show up to audition displays talent. Producers get to pick and choose.

Here are some American Idol lessons that can make you money in Commercial Real Estate investing:

1)  Define Your Criteria.

• American Idol producers don't let just anybody audition. They restrict their auditions to contestants ages 15 - 28, and have general rules regarding representation, and criminal backgrounds. This ensures that the show is focusing on the most marketable talent.
• If an investor focuses on single tenant retail investments ranging from $1,000,000 to $1,500,000 with at least 7 years of lease term and investment grade credit, suddenly patterns emerge and genuine deals stand out. 

2)  Look at a Lot of Deals.

• Tens of thousands of people audition for American Idol. The best talent rises to the top. 
• Warren Buffet once said that "The stock market is a no called strike game. You don't have to swing at everything--you can wait for the right pitch." Wait for the right pitch. If you look at a lot a pitches you will know when to swing.
  

Don't Forget About the SBA 504 Program: A Buyer's Reminder

Last month I had a meeting with a successful Sioux Falls business owner. Business is booming, he's hiring and in danger of outgrowing his space before his lease ends in the near future. 

We had the classic lease vs. purchase conversation and discussed the merits and drawbacks of each approach. As we were discussing down payment percentages for purchasing, he was using 25% to 30% in his calculations. I applauded his conservative approach as its harder to get foreclosed on with a smaller principal and interest payment to make every month. 

I reminded my client about the SBA 504 program that is available to small business owners in some situations as they purchase real estate for their business to occupy. His eyes lit up and we made some changes to his assumptions. 

Why did my client not know about this program? He was too busy focusing on his clients and growing his own business to search out advantageous financing programs. If he would have lunch with his commercial banker, I'm sure this would have come up. However he was making assumptions based on traditional financing and this limited his options. One dollar invested in his business returns much more than a traditional commercial real estate investment. However in 30 years if he continues to rent, he will be missing out on a variety of opportunities ranging from tax advantages, equity build up, and asset appreciation. 

Here are some great links to check out if the SBA 504 Program is right for you.  

http://www.sba.gov/category/navigation-structure/loans-grants/small-business-loans/sba-loan-programs/real-estate-and-eq

http://en.wikipedia.org/wiki/SBA_504_Loan

http://www.entrepreneur.com/article/52736

Why hasn't my space leased? A Landlord's Guide

Why isn't my commercial space leasing? A Landlord’s Guide

I have been leasing commercial space for the last 10 years. In fact the first couple of years in the commercial real estate business, that’s all I did. I have sat on the tenant rep and the landlord rep side of the table hundreds of times while negotiating on 500 square foot suites to 160,000 square foot call centers.  During the last 10 years I've picked up a couple of things along the way. Here are some reasons landlords struggle to lease space:

1)      Price is too high. This sounds pretty self-explanatory, but is quite common. In today’s digital world potential tenants can figure out over the lunch hour on their smart phone what the market is in a given parameter. Spaces that are simply overpriced often do not get the attention they deserve and take much longer to lease.

2)      The space shows poorly. I see it all too often; good location, good building, vacant suite is in bad condition. Dated carpet, wet and moldy ceiling tiles, scuffed walls, weeds in the parking lot, uncared for landscaping can all contribute to limited market activity.

3)      Location. As buildings age and neighborhoods change, sometimes what was a good location morphs into an average location or worse. Sometimes developers get ahead of the market and wait a year or so longer than they expected to fill space.

If you are struggling with any of these issues give me a call.

3 Common Mistakes Small Business Owners Make Buying Their First Building

1)   Not checking with the city regarding planned street improvements.

Most cities will resurface, improve, or significantly change busy thoroughfares at some point. These changes will clearly affect retail or personal service providers more than heavy industrial users, but keep in mind that a new median in a light industrial area can significantly change the way trucks and semis access even an industrial property.

Road construction can easily last a full spring or summer. A small retail business can easily get crushed during the 3 or 4 month period access is restricted to their customers.

The solution to this is spending the time to check with the city’s engineering office about upcoming traffic disruptions. The hour spent at the City prior to making an offer is well worth the thousands of dollars of potential business disruptions.

2)    Not buying a building that allows for growth

A result of a successful business is often the need to grow floor space, storage, production area, etc. Buying a building that does not have enough dirt or ability to expand in some way can be a bottle neck for continued growth. Commercial property usually takes some time to sell for full market price, so keep in mind that any building purchased may stick around for awhile.

To avoid this trap, be sure to buy a property that has less than a 1 to 5 building/land ratio for expansion. Another solution is to buy a property that has or could have an additional tenant sharing the building. The additional rent will support the building payments while you grow. As lease(s) expire, expansion is an option.

3)    Not putting enough equity into the deal.

This mistake is harder to do today with the recent recession fresh in lenders’ minds. However I encourage owner occupants to put as much equity into the deal as possible to provide a good margin of error. While the general economy probably will not blow up in the next several years (we hope!), remember that certain industries are dealing (or will deal) with paradigm shifts and new competitors. Sometimes having strong balance sheet is the best way to buy time for adaption or addition of new products or services to maintain profitability. Crushing principle and interest payments don’t help a business in transition. 

Why You Should Never Leave a Nasty Voicemail

There was a time when people could leave a nasty voice mail on a home or work phone and it would stay there. Those times are over. I am not just talking about if you are a Hollywood star leaving a drunken tirade on your daughter's voice mail.I had two situations occur in the last few months that I will share with you as a reminder that voice mail is no longer tethered to the recipient's voice mail box for their ear only. 

1) The E-Mailed Voice Mail Last month I was finishing up a routine transaction that had few, if any problems. The buyer called the seller in this late stage of the transaction and left a voice mail regarding move out. Within 5 minutes my client e-mailed me an audio file of said voice mail with a "FYI" subject title. He is a pretty savvy guy, but not a tech guy by any means. In that format I could have sent that e-mail to anybody and everybody in the world. I could have put in on YouTube. Thankfully for everyone involved it was simply a polite update from a classy buyer. 

2) The Smart Phone Speaker Phone Share I was working with a buyer on several potential investment opportunities in the Bender Conference Room last month. Our conversation was interrupted by her cell phone ringing. She let it go to voice mail, listened to it, then plopped her phone on the table and played it on speaker. The message was from a visible member of the Sioux Falls Community. It was a voice mail with a raised voice, a profanity, then a command to call him back. My jaw dropped open.I will always remember that voice mail. I don’t know all the details and this guy could have well been in the right, but all I remember is that I thought (still think) he was a jerk.

Conclusion: Expect your voice mails to be shared with people out of context all the time.

Flood Plain Calculus

Flood Plain Calculus

Let’s get one thing straight right off the bat. I’m not a flood plain expert. One of my partners (whose name rhymes with doghouse – which is usually where I am in his book) knows more about flood insurance than anybody I’ve met. Here are the highlights he has drilled into me, and things I have picked up along the way.

·         FEMA drew its first Flood Insurance Rate Maps (FIRM) in Sioux Falls in 1979. Then redrew in 1982, 2009 and then again in 2011.

·         Fact: More than a few investment/commercial buildings in Sioux Falls are now in the flood plain. When these buildings were built they were not.

·         Section 42 of U.S.C 4012a sets the responsibility to place flood insurance on the applicable lender. In reality this means insurance agents must get a flood insurance policy pre-approved before a lender will close a transaction. (Really this means your commercial real estate broker will frantically make calls to any insurance agent who returns calls to get bids to ball park this number (Yes, it really flows downhill).

·         Basically if a commercial property is in the flood plain and it has debt the federal government requires the lender to force the buyer to buy a flood insurance policy.

Who Cares?

If you are buying a commercial or investment property in Sioux Falls you need to determine if the property is in the flood plain early in due diligence. Properties that currently do not have debt on them, are in the flood plain and currently do not have insurance can be difficult to insure, and perhaps quite costly.

True Story

I sold a half million dollar office building this summer that was in the flood plain. It did not have debt or flood insurance on the property. Quotes ranged from $1,700 to $30,000 a year from various agents in town. We got the deal closed after a diligent agent from Howalt-McDowell took the time to work on the project (Thanks Karen!) and finally got a reasonable quote.

This delayed our transaction and almost killed the deal.

Take Away

You don’t have to be a flood insurance expert while buying your next property, but here are the basics.

• 1.       Determine through your insurance agent if your property is in the flood plain.
• 2.       Get a couple of quotes very early in due diligence.
• 3.       Factor this into your expenses much like property taxes. You can’t avoid it and the annual cost will most likely keep going up.

Time to Make Hay

Leaving the title company yesterday after a closing, I thought about how much the Sioux Falls Commercial Real Estate Market has changed in the last two years. After dropping a happy (I hope!) client back off at his office, I thought I should say something about this a tweet or a blog post. On a whim I looked up this old blog and realized it had been nearly two years since I had blogged about South Dakota Commercial Real Estate and decided it was time to change that. 

If you are involved in Commercial Real Estate in anyway, it's clear that things are up on the upswing. Some asset classes are doing better than others, but generally its a good time to lease, buy or sell commercial/investment real estate. Interest rates are low, vacancies are down, the fear is gone. Developers are optimistic (for real now), and are testing speculative waters. Buyers and sellers seem to be on equal footing with sellers starting to command a premium, and it some cases getting it. 

So what's next?

Current Investment Property Owners:

• Call me to review income and expenses. Make sure your ratios and rents are in line with the market. Now is the time increase rents as leases expire. Its hard for tenants to find deals in today's market and moving is a pain. If business is going well and your rental increase is inline with the market, chances are they will not move.  2 and 3% increases go a long way in ensuring your asset appreciation continues and your Net Operating Income supports your target rate of return.

Investment Property Buyers: 

• Quality investment property is getting harder to find. When opportunities present themselves they will not last for long. Talk to your banker and make sure you are ready to swing at a fast ball thrown down the middle of the plate. Give me a call, talk to your CPA, attorney, golfing buddies, etc. This is still a small town, deals will find you. 

Nobody knows the future, but is clear that the sun is shining right now. Let's make some hay!