The Northwood Group

Building Partner Investors

Utah Real Estate


Utah Commercial Real Estate – Seller Financing Discussion

April 18, 2012

 

Over the past several years as financing has been more difficult we have seen many deals reach completion with the help of seller financing in the Utah commercial real estate market.  It has taken on many forms from the basic 1st position seller financed purchase, to a 2nd position to bridge the loan to value gap, to even more creative scenarios such as all inclusive trust deeds whereby existing financing is wrapped into the seller financed note.  We have seen some of these strategies used by large private investors and smaller 1031 exchange buyers alike.  With the lack of good 1031 exchange properties on the market, we have also seen sellers in some cases willing to sell only under a seller financed structure so that they can spread out their tax liability and make a better return than they perceive that they can make in other investments.  I am going to address the potential benefits of seller financing from both the perspective of the investor and the seller in a transaction:

Benefits to a Seller:

  • Opens the door to a wider pool of potential investors
  • Often times leads to a higher pricing structure
  • Potential tax savings due to timing of payments
  • Accelerated closings whereas you are not waiting on a 3rd party lender

Benefits to an Investor:

  • Usually less transaction costs (loan fees, legal fees, etc)
  • Potentially higher loan to values than traditional financing
  • Ability to close quickly in the case of 1031 exchange
  • Less annual reporting as compared to a traditional lender

With those points in mind, prior to proceeding with this type of a structure an investor and seller should consult with their tax advisor and legal counsel to make sure that the deal is right for them.  The biggest hurdle to many seller financed deals is the credit-worthiness of the investor.  A seller needs to complete a careful due diligence of the investor to determine its credit worthiness.  In many cases, a personal guarantee is warranted and sometimes even collateral on other assets is taken.

Oftentimes we see sellers rule out this potential structure too quickly. However, in many cases (but not all) it can make the deal more profitable for both parties.  It is a strategy that should be given due consideration as an acquisition or disposition is being considered.

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Utah Investment Snapshot – Q1 2012

April 16, 2012

Investment Properties Utah

We have just completed our analysis for the 1st quarter of 2012.  Please click the link below to see the Q1 Investment Snapshot for the Utah market:

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

  • Compared to Q1 2011, the total number of transactions is down but transaction volume is up.
  • Cap rates have remained relatively flat compared to 2011.

Please feel free to contact me for the full report or for information on Real Estate Investment.

Thanks, Brandon.

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JUST SOLD – CENTERVILLE POST OFFICE

April 2, 2012

Post Office Closed, Building Sold

  • Asking Price: $2,840,000
  • CAP Rate 7.50%
  • 11,860 SF
  • 100% Occupied

I am pleased to announce the closing of the Centerville, Utah, United States Postal Service, the building sold. The Post Office has been at this location since 1997 and is one of the highest producing Post Offices in the State of Utah. The annual was $213,000 and the initial 20 year lease comes up for renewal in June of 2017.  The Post Office has 2, 5 year options to renew their current lease term with the annual rent bumping to $300,000 for the first option and $310,000 for the second option.  Asking price on the property was $2,840,000 at a 7.5% cap rate.  Please contact for comparable details.

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Buying on Pro Forma Rent

March 27, 2012

 

Back in the peak of the commercial real estate market many investors bought properties with values underwritten by “pro forma” rents.  By “pro forma” rents I mean that properties were underwrittten based on projected lease rates, occupancy rates, and future increases as opposed to actual operating history of a property.  The obvious risk with this approach is that inaccurate assumptions can lead to dramatic swings in actual property performance.  To complicate matters, many lenders also underwrote deals based on these assumptions.  Many of these puffed assumptions added to the crash that we’ve experienced in recent years.

With the downturn in the commercial real estate investment market, investors and lenders alike were forced to “get real” with the way that they valued properties.  Properties values were derived based on actual operating history which was a tough pill to swallow for those properties experiencing high vacancies.  Essentially no value was being given to that square footage that was not leased.

It is amazing how short our memories are in this industry.  I have seen a resurgence in the last 12 months of properties being offered based on a “pro forma” basis.  The most typical scenario I see is that of a property with higher than market vacancy (say 20%) include rent for the vacant space as part of the net operating income and then taking out a less than market vacancy factor (say 5%) of that net operating income.

There are several factors that need to be addressed when analyzing properties presented by this approach.  Please keep in mind that I am addressing this from the standpoint of an investor looking for stabilized returns and not speculative upside deals.

  • Market vacancy – What is real market vacancy for the property?  How has this property performed relative to the market historically? It is important to understand what stabilized occupancy really is.
  • Costs to Obtain Pro Forma Occupancy – If pro forma occupancy is realistic, there will usually be a cost in the form of downtime, leasing commissions, and tenant improvements to reach pro forma occupancy that must be considered in the analysis.
  • Lease rate risk – Make sure that projected lease rates are reflective of current market conditions for comparable properties. It is too easy to say that lease rates “should” be higher when historically they have not been.  It is also important to underwrite in-place leases to determine where those leases will renew at.

Despite the uptick in the market in recent months I remain hesitant to recommend properties to clients that rely too heavily on future assumptions.  For the most part, I want to make sure that a property can perform to expectations based on actual operating history.  In those cases where pro forma analysis is relevant, it is necessary to fully understand the assumptions being made to avoid those equity losses that so many investors experienced in recent years.

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JUST SOLD – SKULL DEVELOPMENT INDUSTRIAL PARK

March 13, 2012
  • Multi-Tenant Industrial Park
  • 37,100 square feet
  • 13 tenants in 5 buildings
  • 3.28 acres
  • Sold – February 2012

The Skull Development Industrial Park was recently sold to a 1031 exchange investor from Michigan.  The project, located just off of I-15 in Centerville, Utah has maintained high occupancy for the past several years despite the downturn in the economy.  The park was 100% leased at the time of sale and sold near the asking price.

Additional comparable information available upon request.

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The Multi-Tenant Property Alternative

March 13, 2012

 

Over the past several years, the single-tenant property market has gained a lot of momentum.  It has for good reason.  There are many advantages such as ease of accounting, management, underwriting, and predictability of cash flow.   Many investors perceive that the risk is much lower with the typical long-term leases associated with the single-tenant market.

However, many investors who follow the single-tenant trend might be missing an opportunity that actually fits their investment objectives a little better.  Multi-tenant properties often times can provide higher returns and in many cases less risk than their single-tenant competitors.  Some of those advantages include:

  1. Lower Risk – The risk is spread out over many tenants rather than having it all concentrated in one.  For example, let’s consider an all-cash, 10% cap rate property.  If that property hits a rough patch and vacany increases to 20%, the investor is still making 8%.  On the other hand, on a single-tenant property, if the tenant has an issue or doesn’t renew at the end of its lease term the return evaporates completely.  This is exacerbated if the building is a unique building requiring extensive tenant improvements.
  2. Higher Returns – Because the trend right now is towards single-tenant properties, there is less competition in the multi-tenant market and often higher returns.  There are also few institutional buyers set up to acquire multi-tenant properties reducing the competition in this arena.
  3. Upside Potential – Lease terms are typically shorter on a multi-tenant property which allows for an opportunity to capture upside as lease rates increase.  Depending upon your opinion on the market and inflation in the coming years, this might be something to consider.  With a single-tenant property, lease rates are most often fixed.

With those advantages being stated, an investor also must mitigate those disadvantages associated with this type of investment which create those opportunities.  Those include more intensive management with more leases to administer, more responsibility for physical property maintenance, and tenant rollover.  These can typically be mitigated through competant 3rd party management but they are concerns nonetheless.

I am of the opinion that no one property type is best for all investors.  There are advantages to both single-tenant and multi-tenant properties considered here.  I do believe however, that there is wisdom in considering the alternative when the majority seems to be going one direction or the other.

 

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JUST SOLD – ROCK RUN MEDICAL

March 12, 2012

Real Estate Office Buildling

  • 12,192 SF – Medical Office Building
  • 100% Occupied
  • Closed in February of 2012

 

The Rock Run Medical Office Building was recently sold by our team to a family investment group out of Utah.  The real estate office building was a 100% leased medical office building in Roy, Utah. The property included strong Tenants, such as Wee Care Pediatrics, IASIS, Rock Run Physical Therapy and Price Orthodontics.  Comparable information available upon request

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Capital Market Review – March 1, 2012

March 5, 2012

With the volatility in the capital markets, I will be posting a monthly update on the current state of those markets.  The reports are provided by Metro Commercial Finance.  The link below contains a link to the Capital Market Report for the month of March.

A few of the highlights are as follows:

  • Lenders are slowly considering higher loans to value
  • Rates for quality projects remain in the low 5% range
  • We are starting to see availability of funds for development

The underlying theme is that capital is available for good projects and even for some more challenging projects depending upon buyer strength.  Underwriting remains stringent but deals are getting done and they are getting done at very attractive terms.

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Investors Seek Secondary & Tertiary Markets

February 27, 2012

 

As the commerical real estate market begins to recover, we are seeing an increase in acquistion activity among investors both institutional and private.  While the majority of investment activity in recent years has been in primary markets, many investors of late have been seeking better returns in secondary & tertiary markets.

It is hard to believe that there is already significant cap rate compression in many markets.  However there remain opportunities for smart money willing to consider markets that maybe haven’t been considered in the past.  Secondary markets typically have higher upside, less competition, and better returns.

There are a few factors that investors want to consider when looking at secondary markets.   Those include population growth, employment growth, financing availability and potential risk related to a local economy’s reliance on any one particular industry.

Utah is recognized as one of the strongest secondary markets in the country.  It maintains very strong historical population growth and employment growth.  Many companies look to the state as a place to do business because of its highly educated workforce as well as its relatively low cost of labor.  Because of these factors institutional investors, strong private investors as well as the smaller 1031 exchange buyers, have found strong rates of return relative to risk.

It is interesting to note that nearly half of the deals that I have been involved in have been with out-of-state buyers.   Utah definitely should be on investors radar as they are looking to place money.

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Notable Utah Transaction – Hobby Lobby – Logan

February 22, 2012

Investors in Utah, each month I provide some information on a notable transaction that occurred in the State of Utah.  This month I am highlighting the Hobby Lobby in Logan Utah.  A few of the highlights of this deal were:

  • Single Tenant
  • 9 years remaining on lease
  • 8.21% Cap Rate
  • 55,137 square feet
  • 3.86 acres

 

Please let me know if you would like additional information regarding this sale.

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