3 Differences in Valuing Commercial Property from Residential Real Estate

Posted on March 24, 2020

Valuing commercial property, such as office buildings, retail centers and warehouses, is quite different from the way one would value residential real estate, which relies on comparable sales (comps) to determine a home or condo’s fair market value. With commercial property, buyers and sellers must understand terms such as cap rates, gross rent multipliers and cash-on-cash returns.

 Cap rates measure the potential return on investment investors can expect to receive from a commercial property over time, based on such factors as its location, quality, existing tenants, lease terms and rent payments. To calculate a property’s cap rate, divide its net operating income (NOI) by the asking price.

Cash-on-cash return measures the expected cash-flow of a property on a pre-tax/after-debt services basis relative to the owners’ invested equity. It can be used to gage investment performance and forecast projected earnings and expenses in the future.

Gross-rent multiplier (GRM) measures the potential income an investor can expect to receive from commercial real estate, based on the ratio of property’s sales price to gross rental income. It helps investors calculate how long it will take for their investment to pay for itself.

When evaluating commercial properties, be sure to work with experienced advisors to guide you through the due diligence process.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.

Strip Shopping Centers Still Shine for Investors, Retailers

Posted on March 18, 2020

Convenience has long been a driver of consumer-spending habits. Not only has it helped to create an online shopping phenomenon, but it is also giving a boost to everyday, neighborhood strip centers where consumers must go routinely to do things they cannot do online.

At a time when the consumers and investors are turning away from traditional malls with big box department stores, well-located strip centers with diverse tenant mixes are staying busy, attracting shoppers who going weekly to even daily to workout at the gym, treat themselves to a haircut or other salon service, pick up prescriptions and get a flu shot and grab a cup of coffee or meal with friends. Property owners are seeking out tenants that provide services or products that fulfill specific needs and are more likely to survive through a recession. Retailers are also recognizing the visibility and potential foot traffic offered by convenient strip center. For example, as part of its reorganization plan, Macy’s announced that it will shutter many of its big-box stores in underperforming malls in favor of smaller footprints in convenient neighborhood strip centers.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.

What is a Sale-Leaseback?

Posted on March 12, 2020

A sale-leaseback transaction occurs when a business sells the land or buildings it owns/operates but continues to occupy the space by leasing the property back from the new owner. In recent years, these flexible financing vehicles have increased in popularity as a growing number of businesses look for ways to free up capital and reinvest those dollars back into their operations. For example, venerable retailer Bed Bath & Beyond kicked off the New Year by executing a $250 million sale of approximately 2.1 million square feet of commercial space, which the company will lease back from the buyer under the provisions of long-term lease agreements. According to the retailer, the sale-leaseback will bring enhanced liquidity that it can use to revive its brand and “build a stronger, more efficient foundation to support revenue growth, financial stability and enhance shareholder value.”

By divesting themselves of their real estate holdings, retailers, restaurant operators and even physicians who own medical office can enhance liquidity without carrying debt on their balance sheets and reallocate those assets to their core business needs. By contrast, buyers and investors in these properties receive immediate return on their equity investments, thanks to loing0term leases already in place, and portfolio diversification and stability in asset class that is not susceptible to the swings of the public equity markets.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.

 

What is a Ground Lease?

Posted on March 03, 2020

A ground lease is a long-term agreement between a landowner and a tenant/lessee who pays to rent the land on which a tenant/lessee intends to construct a building. Essentially, a ground lease separates a physical building from the land on which it sits. In doing so, it helps prospective tenants, including banks, restaurant chains and similar franchises, develop stores in prime locations without significant up-front costs or carrying real estate debt on their balance sheets.

Because these arrangements involve very long lease terms of more than 50 years, often with built-in escalation clauses, property owners retaining title to the land receive the benefits of reliable cash flow and rent increases from typically creditworthy tenants. Landowners also receive the value of long-term property appreciation without exposure to income taxes that would be imposed on a property sale. As added savings to property owners/lessors, tenants/lessees bear the responsibility of paying all the expenses for managing, leasing, maintaining and repairing the buildings they construct, including real estate taxes and utilities.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.

Investors Find More Opportunities in Tenant Vacancies

Posted on February 27, 2020

Neighborhood shopping centers in secondary markets where consumers live, work and play are continuing to do well at a time when many national brands are downsizing or closing stores.  In fact, when a staid, time-worn tenant vacates a property with strong fundamentals, landlords have an opportunity to revitalize the property and bring in stronger-performing brands and new concepts that create a more vibrant tenant mix and improve foot traffic.

One of the keys to attracting new tenants, however, is having on your side a team of real estate professionals who have deep relationships with potential tenants across a broad range of categories, including restaurants; health, wellness and fitness service providers; grocers; and specialty brands. Moreover, these professionals must keep their fingers on the pulse of consumer trends and continue to build new relationships with brands that can bring new value to their assets, even though they may not fit traditional strategies.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.

Why Real Estate Investors Should Avoid Gross Leases

Posted on February 19, 2020

In a full-service lease, also referred to as a gross lease, a tenant’s only financial responsibility is to pay rent for the space it leases. This leaves landlords with the responsibilities of paying all the costs to operate and maintain a property, including insurance and taxes, which can become a significant financial burden. Although landlords may attempt to account for these operating costs from the onset by building them into the rent they charge tenants, they cannot guarantee that their estimations of future expenses will turn out to be correct. After all, commercial leases typically extend over a long period of time, when repairs will be required for not only normal wear-and-tear but also more serious damages that can occur to unforeseeable events, including weather events, fire and flooding.

Instead, investors should look for commercial properties with net leases, for which tenants are responsible for all or a portion of the property’s operating expenses in addition to their rental payments. This will ensure landlords receive the benefits of cash flow from their investments without the risk of exposure to unpredictable future operating costs.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.

More Risks with REIT Investing

Posted on February 11, 2020

Real Estate Investment Trusts (REITs) can provide average investors with an affordable option for gaining entry to the high yields and steady cash flow that can come with investments in commercial real estate. However, because equity REITs are publicly traded securities governed by the SEC, some of their potential benefits can also prove detrimental and counter to investors’ unique need and goals.

For example, the SEC requires REITs to pay 90 percent of their taxable income as dividends to investors. While these payouts translate to positive cash flow for investors, the REITs themselves must continuously buy and sell properties to fund their growth, often taking on significant debt to expand their real estate holdings. When property acquisitions and dispositions are based on these rules and constraints rather than sound investing principles, buyers/investors are more likely to overspend for a property, and sellers/investors run the risk of missing out on property appreciation. In addition, in today’s extremely low interest rate environment, REIT investors must consider how rising rates will negatively affect REIT profitability and investor returns.

Investors looking to diversify their portfolios and improve returns with commercial real estate should think twice before applying a REIT’s shotgun approach to real property investing. Instead, consideration should be given to working with experienced, private real estate investment firms with local market knowledge and deep tenant relationships who can take a much more strategic and methodical long-term approach to property purchases and sales.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.

How CRE Investments Can Hedge Against Recessionary Risks

Posted on February 06, 2020

While economic and political uncertainty in the election year will likely produce short-term volatility in the equity markets and slow the country’s record period of economic expansion, long-held commercial property with sound fundamentals is well positioned to survive and even thrive through a market downturn.

Three interest rate cuts in 2019 have kept the federal funds rate extremely low, helping to fuel consumer confidence and spending, including a significant amount of capital chasing real estate deals. In the event the economy slows more rapidly than expected, real estate values for properties in the right locations with good credit quality tenants can continue to appreciate while investors can continue to rely on tenant rent for cash flow. Moreover, if history is any indication of the future, commercial real estate has proven its resiliency as a market class through the most recent recession beginning in 2008, providing investors with buying opportunities that have appreciated significantly over the past 10 years.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.

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