The Northwood Group

Building Partner Investors

Commercial Real Estate

Capital Market Review – August 13, 2012

August 20, 2012

It is interesting to look at how interest rates have moved over the last couple of months.  Across the board rates have continued to drop since May.  Additional lenders have continued to come back into the market.  Underwriting remains strict but there are more sources of financing re-entering the market weekly.

One note in the report that caught my attention was the Fitch Ratings which project that $24 billion of US CMBS loans are set to mature over the next 12 months and of these loans 41% would be unable to refinance (without additional cash) based on Fitch’s defined stressed refinance parameter (DSCR of 1.25, rate of 8%  amortized over 30 years).

It will be important to watch over the coming year how many of these loans default and how many are able to be refinanced.

Please see the following link for the Capital Market Review for the month of August 2012:

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NAI West Mid-Year Market Report

July 31, 2012

NAI West recently completed its Mid-Year Market report detailing the state of the economy in Utah, and more specifically the state of Utah property investment.  A few of the highlights are below:

A few of the highlights of the market report are as follows:

  • Utah has the 3rd lowest unemployment rate in the US at 6%.
  • Just under $1 MM square feet of industrial spec space has been completed and most of it has been absorbed.
  • Overall office vacancy is down to 13.98% with Class A office space at 9.43%.
  • Positive retail absorption for the 3rd straight quarter.
  • Property investment market remains strong with volumes very similar to the first half of 2011.
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Utah Business Magazine Article – Northern Utah Regional Report

June 27, 2012

In March I participated in a round-table discussion related to the business and economic climate of Northern Utah.  Particpating along with me were government, education, & business leaders throughout the area.  The state of the commercial real estate market played a big part of the conversastion.  Please click the button below to see the article in it’s entirety.

The information provided in the article is very pertinent to investors considering acquiring properties in the area.

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NNN Leases versus Absolute Net Leases

June 25, 2012

Structuring commercial real estate investment sales I have found that there is a wide range of disagreement regarding how sellers of property refer to the leases on the properties that they are selling.  I have also found that many investors expectations regarding how leases are identified are varied.  There are many types of leases including gross leases, full-service leases, modified-gross lease, net leases, NN leases NNN leases, absolute net leases, etc and many of these leases mean different things to different people.  Most often I see confusion in relation to NNN leases and absolute net leases.  I thought that it may be helpful to discuss these two types of leases in detail.  First let me start with the definitions:

  • NNN Lease – This is a lease where the base rent is net to the Landlord.  The tenant is responsible for property taxes, insurance and maintenance, hence the   N-N-N.  What is typically not included in a NNN lease is roof and structure and that is why you will often see a “reserve” being taken out of net income prior to calculating value to account for roof and structure.
  • Absolute Net Lease – This type of lease is often referred to as a bond-able lease or a hell or high-water lease meaning that the tenant is responsible for all of the expenses and repairs relating to the building including the roof and structure.

The confusion comes when a property is advertised as one type of lease such as a NNN Lease and upon review of the lease it is discovered that it is different or actually an absolute net lease.  The most common frustration that I see is when an investment property is being advertised as a NNN lease rather than an absolute net lease and an investor assumes that means that the roof and the structure are the tenant’s responsibility.  I often hear the comment, “The seller told me this was a NNN lease and now I find out that I am responsible for the roof and structure”.  Definitionally, a NNN lease typically does not include the roof and structure but some investors interpret a NNN lease as meaning something different.  Parking lot replacement often comes into this discussion as well.

With that being said, regardless of how a commercial real estate investment property is being advertised, it is important to ask specific questions about the lease prior to submitting offers to avoid any surprises when expectations are different from reality.  This will help you determine if it is a NNN Lease or an Absolute Net Lease. A little bit of additional due diligence and underwriting up front can save a lot of time and money on the back end.  I hope that is helpful.

The text of this website is available for modification and reuse under the terms of the Creative Commons Attribution-Sharealike 3.0 Unported License and the GNU Free Documentation License (unversioned, with no invariant sections, front-cover texts, or back-cover texts).

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Commercial Real Estate Investing – Top 5 Due Diligence Items

May 21, 2012

Commercial real estate investing is full of opportunity but as with all opportunity comes risk.  One question I am often asked, especially by new investors is, “Other than the market risks, what are the other potential risks in buying commercial real estate?”  Most of these are first time investors  or 1031 exchange buyers coming out of family land or other family assets.  I thought that it might be helpful to create a list of the top 5 due diligence items need to be addressed to detour some easily avoidably but potentially costly pitfalls.

  1. Confirm the Square Footage –

    The majority of investors rely on the square footages included in the tenant’s leases assuming that the tenants did their due diligence.  However, that is not often the case.  It is important to either do a quick measurement yourself or hire an architect or an engineer to verify.  You want to make sure that you’re getting what you’re buying.

  2. Tenant Estoppel Certificates –

    A tenant estoppel certificate is a document signed by the tenant stating that the lease is still in effect, there are no material defects in the property that they are aware of, there are no side agreements with the landlord not shown in the written lease, and neither the landlord or tenant are in default along with several other items.  If you are financing the property, it is likely that your lender will require this anyway.  If not, this can be a lifesaver.  It is not unusual for a landlord to verbally give a tenant a break on rent during difficult times that is not reflected in the lease or maybe the landlord has not made a repair requested by the tenant.  The estoppel will flush these items out so that you know what you are buying.

  3. Environmental Assessments-This is an essential due diligence item in my mind.  The potential risk outweighs the minimal cost by too great of an amount.  For example, we were recently selling a piece of farm ground that had never been developed.  All assumed that the property was clean.  However, the environmental assessment showed that the farmer had buried a fuel tank on the property years before and it had leaked.  This would not have been uncovered without the report.  Later this year, I will be dedicating a full post to this topic.
  4. Careful Review of Property Operating Statements –

    A careful review of the property’s operating statements can uncover items not readily seen on a property’s surface.  For example, a historical review of the annual income can uncover periods of vacancy or tenant’s failure to pay rent.  There may be an explainable reason for this but it might be that the actual historical occupancy for the property is lower than the market.  On the expense side, it is not unusual for a property owner to understate actual expenses and write them off as unusual or particular to the way that he manages the property, especially in the repairs and maintenance category.  Are those expenses unusual or are these on-going repairs going to continue into the future and need to be built into your financial model.  Comparing those expenses to expenses of similar buildings in the market is also helpful to understand the full picture.

  5. Title Review –

    I cannot overstate the importance of a good title company.  Many investors glaze over when it comes to reading and understanding the title report.  However there should be an ample amount of time spent here reading through the easements, development agreements, etc that affect the property.  Many items are easily fixed prior to the acquisition that are very difficult once closing has occurred.  A good title company can help through this process.

There are obviously many other items that need to be addressed when buying a property but I hope that this list is helpful especially to new first time investors or 1031 exchange investors that are entering the commercial real estate arena for the first time.

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