Commercial property ownership doesn’t have to come with the classic landlord obligations of taxes, maintenance and insurance. As some investors will tell you, success in property investment can be measured by net trips to the mailbox: if a property owner is writing more checks than she is receiving, there’s often a way to improve that situation by offloading costs onto tenants. In a nutshell, that’s what the triple-net lease does — assigns the costs of property taxes, insurance and maintenance to the tenant as enunciated in the lease agreement.
While the idea seems revolutionary to those who are first hearing it, it’s important to remember there’s no such thing as a free lunch. Triple net isn’t appropriate in every case. The fact is that the creditworthiness of tenants — related usually the degree to which they are backed with guarantees that come with national corporate presence — is the hinge point around which a triple net proposition revolves.
Another reason triple net might not work for the landlord is the fact that tenants who pay taxes, maintenance and insurance necessarily seek lower rent payments. What this does to an owners NOI (net operating income) on the property is of course lower it, which means putting pressure on downstream cash flow requirements that may have been put in place as a result of some portfolio management technique.
Looking for more perspectives on net lease agreements? Check out these short videos from experts, agents and brokers around the US on the subject. It’s useful to hear the different angles on net, double-net and triple-net leasing structures all in one handy spot.
Wherein Chris Mirabella, a financier of triple-net properties based out of Carlsbad, CA gets into his company’s history with triple net and what the leas structure means at various stages of the deal.
Here we find Michael Bull of the Commercial Real Estate Show delivering intel on the net tenant lease sector interviewing CE Hutton of the Hutton Company.
Giving a shorter, more street-level perspective is Edina, MN’s Scott Miller of Keller Williams.
At NAR Expo 2014, commercial membership got a reminder that one of the industry’s most cutting-edge software tools doesn’t cost REALTORS® a dime. A fact made all the more impressive when Realtors Property Resource (RPR) is shown to deliver a depth of trade area data, customer analysis and population trends reliably and intuitively, enabling the commercial REALTOR® as a pathfinder for clients.
Emily Line, RPR’s Director of Commercial Services took the podium at the Expo to update the membership on the importance of partnerships and member feedback in the ongoing development of RPR and its utility to the commercial sector.
In short, it’s partnerships that feed the listings data into RPR – from CIEs and CIXs, CMLSs and other data vendors. Market, demographics, trends and population data come from other vendors
However, data alone does not a useful tool make. She spoke of another kind of partnership with RPR user-members, one critical to the continuous improvement of RPR, its core functions and enhancements. As it turns out, unlike most other commercial property database products, the experiences of RPR users are constantly, actively fed back into the software development process. This produces a software product that constantly evolves to be more valuable to the users that provide the feedback. It’s Emily’s job to facilitate that feedback, and to guide it into technical improvements.
“Our job is never done as far as building out the enhancements [which are] thanks largely to REALTOR® feedback. This is why it’s imperative to us that you not only get into the system and try it out, but that you don’t get discouraged. If something isn’t working for your business needs, call us, tell us.”
Not that features are usually missing — while RPR’s features are deep and sometimes it’s just a call to the team that’s needed to get used to something new to the user, the fact is that RPR being situated as a member benefit gives it a uniquely close and two-way relationship with its users. If you’re not taking advantage of RPR Commercial, you’re missing out on a whole range of business consulting capabilities that your clients could use at deal time.
Developers and commercial property managers and owners faced with improvement and expansion projects rely upon general contractors to take on the project. But how do you separate the heroes from the zeroes in the construction arena? Ask Kia Ricci.
Ricci is a licensed general contractor, consultant and author of Avoiding The Con In Construction. She’s also an engaging speaker with a mastery of the material and many years of hard-won experience. At Ricci’s address to NAR Expo 2014, she walked attendees through the ins and outs of identifying bad actors in construction contracting and subcontracting, from spotting problems in insurance, exploring state-registered complaints about work, to a catalog of scams and ripoffs in the construction trade.
Florida-based Ricci started her career as a Disney World employee in its Central Shops, Disney’s in-house fabrication division responsible for modeling, structuring and building props and structures for the Florida theme park as well as California’s. She spoke of falling in love with construction when working on the Disney Swan and Dolphin resorts, with their 60-foot art adornments. Her making the leap from fantasy-driven projects to more ground-level undertakings was informed by years of working alongside craftspeople in all construction and structural disciplines.
Dotting I’s, Crossing T’s
Of construction contracting, Ricci said “Before any job begins, 50% of it has been done – in contracting, the business of construction. If you don’t get this right, you’e going to probably have problems as construction gets underway.” She listed the various aspects of contracting: project feasibility, scope of work, contractor qualifications, proposals, contracts, estimates, schedules, permits, inspections, contract obtaining and liens.
The talk focused mainly on the two critical areas of licensing and insurance, with Ricci exploring signs of insurance fraud and how to obtain lists of complaints against licensed contractors.
“[License complaints listings] are a gold mine,” said Ricci, while showing a screenshot of Florida’s website dedicated to publishing the complaints against contractors. “If you click in and find out that they have problems with their government licensing agency, you want to know.” She was also careful to point out that not every complaint represents legal action taken – meaning contractor research on state complaint lists produces a different picture than a search in court records for the same contractor’s appearances on paperwork such as lawsuits.
For the second-straight quarter, CCIMs reported the most transaction activity in the industrial sector, according to the CCIM Institute’s 3Q14 Quarterly Market Trends report. Seventy-one percent of members who responded to an August/September 2014 market intelligence survey experienced greater industrial deal flow year over year, and 79 percent of CCIM respondents said they received more inquiries from buyers over the same period last year.
Industrial asset prices were higher for 46 percent of respondents and remained flat for 42 percent of members. Capitalization rates for industrial properties held steady for 46 percent of member respondents; 42 percent said cap rates declined in their markets YOY. Industrial investments also registered highest on the investment value vs. price scale, coming in at 3.2 percent on a scale of 1 to 5 (with 1 being lowest and 5 being highest).
Multifamily Continues to Rank as Top Investment Sector
The multifamily sector’s investment conditions continue to rank highest among the five major property types, according to responding members. On a scale of 1 to 5 (with 1 being lowest and 5 being highest), multifamily investments ranked 4.0, followed by industrial (3.6), retail (3.2), hospitality (3.2), and office (2.8), respectively.
Other highlights include economic activity in the South and East regions, where 31.1 percent and 23.5 percent of respondents respectively said their regional economic climate is booming, according to the report. In addition, 54 percent of CCIM member respondents said they expect credit conditions to continue to improve, while 40 percent said the current financing climate is the new normal in their region.
To get an appreciation of the evolving national situation regarding marijuana decriminalization, all one needs is to take a look at the state-by-state recaps of statutes. The National Conference of State Legislatures has compiled such a list of the 24 states and the 24 very different legal approaches to this national decriminalization trend.
Which means that multifamily property owners and managers in those states have delicate times ahead, legally speaking. The questions come much faster than the answers: what is a landlord’s liability? Do no-smoking provisions in leases prevail? Could a landlord be charged with discrimination if seeking to keep property marijuana-free?
Staying on top of this budding issue (sorry) is NAR’s Megan Booth, Senior Policy Representative, liaison to IREM and CCIM. Her presentation to NAR Expo 2014 kicked off with her introduction as “marijuana (policy) guru” for NAR.
“NAR does not have a position on marijuana legalization or decriminalization. We have no intention of taking a position on it. Instead, what we’re trying to do is make sure our members informed about the laws and about the implications to properties,” said Booth.
The implications lie mainly in the area of leasing and management, said Booth. It impacts apartments, office buildings, industrial, retail and leased or managed single family homes. Additionally, managers of community organizations or homeowners associations face the issues associated with the changes to state marijuana laws.
Red Tape In Full Force
Booth continued, “If you do any federally assisted housing, take vouchers, Section 8, 202, [there are] huge implications. The guidance that has come out from HUD [...] is frankly schizophrenic. They tell you that all HUD housing is drug-free, then they did a memo about a year and half ago saying ‘well, if it’s a new tenant and they want a medical accommodation, maybe’. Its’ very wishy-washy,” said Booth.
Significant Financing Obstacles
Given that the use of marijuana remains illegal at the federal level, the capital markets for development of retail dispensaries face unique snarls. Federal regulations imposed on banks who underwrite such developments include onerous reporting and compliance regulations, so many and so severe that the American Bankers Association today gives guidance to its members to not lend at all to such developments, owing to the great risk of falling out of regulatory compliance. Booth said the ABA is calling for a change in the law at the federal level before it will reconsider its position.
This information-packed session on this critical legal area for commercial real estate covered far more than the above, and you can get a full recording of the NAR Expo 2014 Ssession Medical Marijuana Laws Impact All Real Estate Transactions: An Overview at PlaybackNAR.com.
Bringing an objective, research-oriented approach to issues in commercial and residential real estate is Counselors Of Real Estate (CRE), a group whose advisors deliver unbiased and trusted advice to clients and employers. Sporting a CRE designation before the NAR Expo 2014 this morning was David Lynn, CEO of Everest High Income Property who sought to sum up the entire coming year in a list of ten issues affecting the real estate marketplace for commercial as well as residential.
Issue #10: Agriculture
Lynn noted that even though agriculture historically goes through cyclical changes and volatile demand, the past two decades in farming have by contrast produced little in the way of complaint from the sector. Efficiencies in farming equipment and processes have steadily goosed output while rising world populations have and will continue to drive demand from the world’s #1 food producer, the United States. One major impact Lynn sees coming in tertiary and smaller real estate markets is rising demand for location in these places. This idea made me think of yesterday’s session with Craig Lindvahl and his efforts to educate small-town youth in the opportunity present in their own back yard. There’s a lot of synergy between these two outlooks.
Issue #9: Manufacturing
The US decline in manufacturing is over, and domestic output is on the rise, foretelling a robust market for industrial property. That said, Lynn pointed out that manufacturing in the early 21st century, similar to farming, is greatly automated and geared toward customization, which will tend to not drive job growth.
Issue #8: Housing
The housing market bottom came in 2012 and Lynn sees growth in housing commensurate with that event.
Issue #7: Capital Markets
A much-feared wave of maturity of commercial mortgage-backed securities has come and gone, said Lynn, resulting in a non-event. The majority of CMBS maturities simply extended their terms “kicking the can down the road” and cleared the way through the market fear to allow a resurgence in CMBS financing. Lynn sees $360 billion in CMBS financing maturing by 2017 and touted improved underwriting of the instruments.
Issue #6: Water
There is a shortage of fresh water in the world and millions die each year due to lack of access to clean water. This reality along with that of climate change adds up, according to Lynn, to a decline in suburban development.
Issue #5: Globalization
With more and more of US GDP tied up with imports and global transactions, a development Lynn sees as by and large positive, real estate values in cities best connected to global flows of goods are in the main expected to rise. Additionally, the US has become the world’s leading exporter of oil and natural gas, which speaks to rising land values in producing areas.
Issue #4: Health Care
The Affordable Care Act served to add 40 million people to the health care system, which in turn has produced a wider range of health care delivery formats and locations convenient to general populations. Lynn sees this trend, along with the prolonged life spans of the US population as a driver for retail and office property.
Issue #3: Millennials
The youngest generation of adults prefers urban living and mass transit, and Lynn pointed out this age cohort numbers the same size as baby boomers. While it’s not clear if the behavioral trends of millennials will hold out, Lynn sees improved values for urban space and declining demand for housing in suburban enclaves.
Issue #2: Jobs
The great recession cost millions and millions of jobs, recovering to 2008 levels only this year. But persistent trends in underemployment make the unofficial unemployment rate closer to 9% according to Lynn. He spelled out that a decline in office space per employee has halved on average to 150 sq. ft. per worker. Retail and office property values aligning with millennial lifestyle preferences for more collaborative and nontraditional working arrangements will tend to produce downward pressure on demand.
Issue #1: Energy
Lynn referenced a sea change in energy markets over the past five years. Driven by fracking technology, the “whole equation has been changed” were the US produces the cheapest energy of any country in the world. California, Dakotas, Montana, Pennsylvania and other energy-producing areas have added up to rising values for commercial and residential real estate close by, making former “flyover” areas far more generally desirable.
Business phone systems are expensive, physical and made to support one thing that fewer and fewer professionals rely upon every day: a fixed desk. The image of a real estate professional shackled to a cubicle is increasingly outdated as mobile and internet technology allows users ever-increasing power and range. It’s only natural that commercial real estate professionals would take advantage of any tools that allow them to meet clients, tenants, landlords and managers at key locations to make the face to face arrangements, showings and negotiations that all portfolios demand.
That said, smartphones alone don’t have the features that office phone systems do: auto-attendant, call transfer, and hunt, just to name a few. Agents and brokers work on teams, after all, and too often smart phones alone don’t support teams as well as fixed business phone systems do.
Send In SendHub
In the 2014 class of REachⓇ companies who show best in breed technology solutions for the real estate industry, one company stood out as an ideal solution in this problem space: SendHub. It’s a virtual business phone system that requires no hardware, can be configured in mere minutes, and brings business phone system features to the Android and iPhone in your pocket.
Addressing the NAR Expo 2014 with this offering was SendHub co-founder John Fallone .
“Traditional phone systems don’t work in real estate,” began Fallone. “94% of agents end up using their mobile phone. 65% of calls to agents go to voice mail and 70% of clients are unhappy with the way their agent communicates with them. ”
The reason: traditional phone systems are built for a desk and don’t give the tools and features that agents need to do business.
“We bring a business phone to your cellphone,” explained Fallone. SendHub works as an app installed onto your smartphone. Fallone illustrated a customer story where an agent had three phone lines that go to one phone: his personal line, his business line and a marketing line.
“When a call comes in on his business line, his SendHub app pops up so he knows he has a business call coming in. But on his third line, he uses it to create text message marketing campaigns that he can manage straight from his phone or from the computer.” In this way, one phone serves three purposes elegantly.
SendHub also sports collaboration features that keep track of constantly flowing information – updates to contracts, floor plans and the like, for example. File transfer is supported, as is threading of conversations/calls so that who got what when is clearly viewable on the phone itself or on a web browser. The features of SendHub are too many to get into here, but a look at the company website will be a rewarding exercise.
In another life, I was what they call a “phone phreak” — I built, repaired and installed telephone systems for small business. Knowing what I know about those hardware products and about voice over internet (VOIP) applications, I have for years wondered when someone would develop a VOIP application that brought PBX (business phone) services to smart phones. After my visit to NAR Expo 2014, I’m not wondering any longer: SendHub is here.
NAR Chief Economist Lawrence Yun addressed the NAR Expo 2014 with a talk on the specific of commercial real estate. Before a crowd of attendees and international translators sending the talk around the world, Lawrence spelled out his projections for 2015 and a bit beyond in areas of indication for the commercial property market.
2.5 Million Jobs Predicted
With unemployment dipping below 6%, Yun did announce that “jobs are coming around,” which would be news to most of the US electorate, having handed a shellacking to in-power Democrats over the matter of the economy earlier in the week. Nonetheless, on the matter of job growth, Yun predicted 2.5 million new jobs to appear in 2015.
“More jobs means more demand for office spaces, more demand for warehouse spaces, more demand for rental housing and retail spaces. With the economy expanding, commercial activity should be rising.”
Household Net Worth
The chart Dr. Yun put up showing record high household net worth was explained as being sourced “from the stock market.” Because “there’s no other place to put your money,” he explained, comparing poor or zero returns as compared to bank deposits or other places to stash cash. Driving the stock market according to Yun is the past six years of zero interest rate policy at the Federal Reserve, which led to another prediction for 2015 that wasn’t as rosy.
Raising Fed Funds Rates In 2015? Spring, Says Yun
“The federal Reserve has indicated that they will be raising the [interest] rate, and this is a big deal for commercial practitioners. Why? Cap rates are dependent upon interest rates and if the Federal Reserve raises the Fed funds rate, the only wa to get a higher cap rate is to raise the rents or the price of the property needs to come down.”
Property owners should be “not overly concerned” said Yun, but should be monitoring what will happen to prices [as] a chain reaction to rising interest rates.”
To obtain a full recording of Dr. Yun’s session at NAR Expo 2014, click here to PlaybackNAR.
(Above: Author and trainer Craig Lindvahl)
One of the more storied traditions at the NAR Expo is the Commercial Caffeinated Breakfast, a bright and early gathering of NAR Commercial members to meet, network and learn while the coffee and carbs flow freely. This morning was no exception as commercial folks from around the country closed in on the Rivergate Room at the Morial Convention Center to hear the good news.
The preliminaries included a shout-out to Jean Maday, NAR’s Director of Commercial Real Estate Development & Services on her recent RCE certification. Always a fixture at the Breakfast along with NAR Commercial VP Jan Hope, Jean took a well-deserved bow for this key milestone in her service to NAR and its commercial membership.
Craig Lindvahl: Things You Wish You Knew Yesterday
Breakfast speaker Craig Lindvahl is an educator, author, filmmaker and passionate advocate for the development of local communities. In his talk to the commercial membership, he laid out the classic problem of talent drain from small towns as younger people (we’ll call them millennials here) look around their communities and conclude that no opportunity for them exists, that any chance to grow lies elsewhere.
In Lindvahl’s view, this isn’t because no local opportunity exists. It’s because it’s hidden to kids.
“Kids aren’t stupid. They’re ignorant,” quipped Lindvahl to a laugh in the room. Clarifying, he pointed out that being ignorant is just not knowing, where being stupid is being ignorant on purpose. And kids, he said, tend to be ignorant about business and economic development going on locally, and about the people that work and build these businesses.
This is to be expected, he said, because schools don’t teach about local business at all, let alone provide any hands-on experience in those businesses that leads to real understanding about the responsibilities that go with entrepreneurship. So Lindvahl stepped up to do just that. He created CEO, for Creating Entrepreneurial Opportunities, a program of the Midland Institute for Entrepreneurship, at which Craig serves as Executive Director.
In a fascinating run-down of the CEO program, Lindvahl described the process of working with high school juniors and seniors on and in real businesses. Meeting for 90 minutes each day on the site of a real operating business, kids do real work, and make real connections with real business mentors. They develop their own business plans — each write two to three plans a year, says Lindvahl — and all for one reason:
“[The kids] come to see their local town as a place of opportunity, not a dead end.”
At the close of the session, NAR Commercial handed out free copies of Craig’s book “Things You Wish You Knew Yesterday” and left the assembled with a lot to think about concerning the role of education, opportunity and business in home-town settings.
When Constance Freeman of NAR’s strategic investment arm Second Century Ventures convened this morning’s session showcasing the hottest technology companies in the real estate sector, she had a game plan. First was to talk about the REachⓇ program, and next to talk about innovation more generally. The panel, made up of major players in the market space, was glad to oblige, bringing unique perspectives on the present and future of technology in the property business. They were:
- Alex Perriello, CEO of Realology Franchise Group
- Steve Berkowitz of Move, Inc, operator of Realtor.Com
- Gino Blefari, CEO of Berkshire Hathaway Home Services
- Mike Ryan, EVP Global Communications And Branding, RE/MAX
- Elie Feingold, SVP Global Innovation & Business Intelligence, CBRE
Because technology is transforming the business of real estate, the goal of REach and Second Century Ventures is to ensure that REALTORSⓇ stay in the center of the transaction. And each of the showcased companies hit that mark with a variety of offerings and tools that worked to make the practice of real estate more convenient and give professionals greater reach.
The Commercial Entries: Desktime and FundWell
While a large grouping of real estate technologies were shown off (and will be covered in later posts here at The Source,) here are the two enterprises that squarely face the commercial market space: Desktime and FundWell.
Desktime is another in a series of “matchmaker” plays in the technology space where a marketplace is created by finding sellers and buyers and connecting them with a web application. In the case of Desktime, the buyers and sellers are the small leads in the commercial real estate space – 500 square feet or smaller.
Desktime cofounder and partner Sam Rosen presented the business and its plan, targeting the 30 million (very) small businesses and 40 million freelancers who he shaped his company to serve — small operators, typically computer-based, who are in need of modest desk space. The listings for these aren’t found in CoStar or Loopnet – while the inventory is huge, the lead is too small to monetize and manage.
Desktime works by turning empty space into cash as a commercial coworking space – even residential. This idea grew from Sam’s own background building a digital agency in his own Chicago home. When the time came to expand, Sam created unused short-term space, which effectively left that space off the market due to its being too small to handle. Desktime makes that match and allows formal commercial brokers to stay close to leads that are too small to handle otherwise.