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!