Points to Consider Before Remaking Your Workspace

SmartBusinessNAIDaus_Cle_1015Architects can play a key role in helping your company create a workspace that matches your vision of how you want the company to operate.

“An architect can sit down and interview your key people and gain an understanding of how everyone works in your business,” says Alec Pacella, managing partner and senior vice president at NAI Daus Property Management.

“He or she can understand the critical components of your business and see what parts of the office need to be more collaborative and where you need to have more privacy.”

Collaboration and open space are more popular than ever in the working world, but Pacella says too much of anything is often not a good thing.

“You need to be able to draw a line between having open space and having a total free-for-all,” Pacella says.

Smart Business spoke with Pacella about how to develop a workspace that fits the needs of your business.

What is the biggest change in today’s typical workspace?
Companies are much more efficient in the way that they use space and that amounts to less square footage.

Some of the factors pushing this trend are the increase in shared working spaces and the rise in the number of people working from home, as well as the diminished reliance on paper files.

The raised floors that would cover up all the cables and wires don’t exist anymore. Younger employees want to be more collaborative and companies are adapting to create workspaces that facilitate that kind of working environment with the goal of boosting productivity. Click here to continue.

 

Different Applications of the Real Estate Spread

PropertiesSept2015-1On the eve of yet another youth soccer season, I recently took my son to the sporting goods store to buy a new pair of soccer shoes. We narrowed the choice to three – a relatively inexpensive pair, a moderately priced pair and an expensive pair. And to my surprise (or shock), my son didn’t immediately focus on the most expensive pair. Instead, he began to ask questions about why there was such a difference in price. And this led to a whole discussion about cost versus benefit and choosing the appropriate tool – in this case, a shoe – to fit the need.

Most investors will secure a mortgage when purchasing real estate. While there are many reasons why the use of debt is commonplace in the world of real estate, the concept of positive leverage is at the top of the list. This concept, commonly known as “the spread,” compares the unleveraged or free and clear yield of the real estate to the interest rate of a mortgage that would be used to purchase the investment. The spread is the difference between the two rates and the greater it is, the better it is for the investor. So it should be no surprise that one of the most popular forms of analysis focuses on determining the spread. But, similar to my son’s shoe decision, there are several levels of this analysis – good, better and best. And, similar to the shoes, there is certainly a cost versus benefit decision that needs to be made when choosing which specific analysis to use.

Good
Spread between the CAP rate and the loan constant The mechanics of this particular analysis are actually pretty simple. By now, you should understand that CAP rate is determined by dividing the purchase price by the net operating income. And while the concept of a loan constant may not be familiar, it is just as simple – divide the original loan amount by the monthly payment. I will use an example for each analysis to better illustrate the process. Suppose we are looking at a property that has a purchase price of $1.4 million and an NOI of $123,404 (for details on this calculation, see the Financial Strategies column in the November 2013 issue of Properties, available at (www.propertiesmag.com). The resulting CAP rate would be 8.81%. On the debt side, we can get a loan with a 75% loan to value, 8% interest rate and a 25-year amortization. The resulting loan constant would be 9.26%. And the difference between the two, or the spread, would be 0.45%.  Click here to read the rest of the article.

Knowledge is Power

PropertiesAugust2015-1A wise real estate Yoda once told me that all a real estate agent has to offer are two things – time and knowledge. And sales comparables are certainly at the front of the line when it comes to knowledge. Commonly known as ‘comps,’ individually, they can provide guidance when attempting to value a similar property. And collectively, comps can provide insight into pricing trends, sales velocity and buyer characteristics.

Back in the ‘old days,’ there were not many sources for this type of information. The most common method to collect them was trekking down to the county courthouse and searching through stacks of microfiche. How times have changed. The information superhighway has resulted in a staggering variety of sources for this same information. Some are free while others have a cost, either in terms of money or ‘goodwill capital.’ This month, we are going to discuss some of the most common sources for this vital but sometimes elusive information.

County auditor web sites The good news regarding county auditor web sites is that all 88 counties in Ohio offer the ability to view information down to the parcel level online. And the better news is that these systems are typically free. The bad news is that the individual county sites can vary widely in terms of searching functionality. For example, Perry County has a very robust system that allows users to perform broad-based searches based on a variety of characteristics, such as land use, transfer date and city. However, Cuyahoga County’s site is much more basic, allowing searches only based on specific name, address or permanent parcel number. And, although Cuyahoga County also offers a robust GIS system, if you are strictly searching for comps, this system is not the best tool. Click here to download the entire article.

Will property upgrades yield higher rental rates? Part 2

PropertiesJune2015-1Last month, we began a discussion regarding an analysis to compare a challenging decision that often faces a real estate investor – maintain the property as-is or upgrade the property with the expectations of achieving a higher rent.

If you missed last month’s column (and shame on you if you did), we set up the following scenario: an investor owns a single-tenant office building and the tenant’s lease is expiring. The tenant is interested in renewing their lease. But the building is located in a growing and attractive area, so the investor thinks a higher rental rate can be achieved if the building were to be upgraded and con-verted to a multi-tenant property. Last month’s column went on to detail the economics associated with each scenario and distilled the annual cash flows into T-bars, a tool that illustrates performance over a time horizon, for each.

The performances of the “as-is” scenario and the “renovate” scenario are illustrated in Figure 1. But before we discuss the actual analysis, a few items need to be highlighted regarding each scenario. First, both scenarios assume that the property is owned free and clear at the beginning of the analysis and the investor plans to re-finance in either instance, based on the anticipated stabilized income. For the “as-is” scenario, the refinancing proceeds are realized as pure income while for the “renovate” scenario, part of the refinancing proceeds will fund the necessary upgrades. Second, the “as-is” scenario will result in positive cash flow in year one, as any improvements associated with the tenant renewing will be borne by the tenant. But the “renovate” scenario will take 24 months to reach a stabilized occupancy as a result of the conversion to a multi-tenant build-ing. And third, the holding period for both scenarios is assumed to be 10 years. The cash flows illustrated in that final year for each scenario consolidate the year 10 income plus the anticipated sale proceeds (which are based on year 11 NOI) less the loan payoff. Again, all of the background information associated with each scenario was detailed in last month’s column and the first two T-bars in Figure 1 reflect the resultant cash flows on an annual basis.

There are two primary ways to analyze this type of decision – the easy but limited way and the hard but complete way. Let’s tackle the easy way first. Click here to download the full article. 

Survival Tactics for the Real Estate Investor – During the Good Times!

PropertiesApril2015-1Several years ago, April 2010 to be exact, I wrote a column titled ‘Suvivorman’. At the time, we were a couple years into the economic downturn and there was no quick end in sight. That column drew several parallels between a couple popular survivalist type reality TV series and the then-current real estate market. Half a decade later and the real estate market is significantly better. However, these shows didn’t just focus on getting through the bad times but also taking advantage of the good times.

This month, we are going to revisit this genre and focus on applying some of the tips to the current market.

Get healthy.
Survivalists always first seek to stabilize their situation and then take inventory and make necessary repairs. Most real estate investors have been able to stabilize their situation over the last couple years. Now it’s time to assess their situation and make improvements. Maybe you have been putting off some large-scale repairs, such as rough spots in a parking lot or that HVAC unit that has been held together with bubble gum and band-aids. Or perhaps it’s time to address a less-than-ideal balance sheet. Whatever the need is, if you have the capital, the time is now.

Save something for lean times.
Water is a critical element for survivalists and whenever it is discovered, they are quick to stash some for the future. For the real estate investor, cash is king so the obvious comparison here is to save some for the future. However, we can also apply this concept to various other aspects. For example, if you are involved in a lease renewal, it may be more prudent to accept a lower rental rate but longer lease term as opposed to maximizing the rental rate with a correspondingly shorter term. Or if you are involved in a re-financing, think about taking less proceeds in exchange for a longer loan term (i.e., balloon payment).

Keep a survival edge.
Survivalists are careful to not get too comfortable – after all, the name of the game is survival. Real estate investors would be well served by this same advice. Just because times are good doesn’t mean that you should forget all of the things that allowed you to get through the downturn. Chief amongst this is an eye toward opportunity. While real estate bargains are much harder to come by, they are still out there. The key is being able to identify them earlier in the process.

Learn from the past.
Survivalists continually make adjustments based on past experiences and never make the same mistake twice. The entire real estate industry learned several painfully difficult lessons several years ago and would certainly be well served to not repeat some fundamental errors. But it is absolutely critical for individual investors to adapt their behavior as well. For example, an investor may have had to stretch their pricing in order to win a deal during the go-go 2000s and then face the consequences when the pendulum swung hard the other way a few years later. Or maybe a landlord had to contribute a higher level of build-out in order to lure a tenant, only to learn the ugly side of bankruptcy protection a few years later.

Keep one eye on the horizon.
Weather is one of the critical and constantly changing elements (no pun intended) for survivalists so they are keenly aware of details such as wind direction, cloud formations and the atmosphere at sunrise and sunset. The real estate industry is also susceptible to quick changes but savvy real estate investors know to watch the tealeaves that affect our industry. There is no single magic bullet but rather a variety of measures and indices that, when collectively considered, can certainly point to the anticipated direction of the real estate industry. These can include real estate fundamentals, such as vacancy rate, net absorption, gross leasing activity, sales volume and new construction volume, as well as broader indicators like the 10-year treasury rate, loan delinquency indexes and economic statistics including the unemployment rate. It’s important to not only recognize the signs associated with a pending downturn, but also to react to these signs in a timely fashion.

Take some time to enjoy yourself.
While the name of the game is survival, the hosts of these shows never fail to take some time to ‘smell the roses’. 
From making hot tea out of pine needles to catching some rays while taking in a spectacular view from a sunny vista, they realize the importance of taking some time to enjoy life’s gifts. Very few of us in the real estate biz were having fun during the last downturn. And while the environment is certainly much better now, we shouldn’t forget how we got here. Consider throwing a tenant appreciation party for your tenants or use some downtime to invest in yourself by taking a relevant training class.

One of the more ironic things about these particular survival shows is that neither is still around. But real estate investors are in this for the long haul. Approaching the good times with a solid plan can not only help take some of the sting out of the bad times but also ensure that we all continue to survive in the real estate jungle. Click here to download article. 

Alec Pacella, CCIM, Managing Partner
NAI Daus
apacella@naidaus.com.