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Commercial Real Estate Appraiser in Ohio

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					                            COMMERCIAL REAL ESTATE BASICS

                    MASSACHUSETTS ASSOCIATION of REALTORS
                             STATE CONVENTION




Presented By:                                                                              October 19, 2009

Mr. Robert J. Nahigian, FRICS, SIOR, CRE                                      MAR State Convention
Auburndale Realty Co.                                                   The DCU Center
P.O. Box 66125                                                                Worcester, Mass.
335 Auburn Street
Newton, Massachusetts 02466




Tele: 617-332-6900
Fax: 617-965-2570
E-Mail: Rob@siorcre.com
www.siorcre.com

Any reproduction or use of this material without the expressed written consent of Robert J. Nahigian or his legal
         2
         counsel is strictly prohibited.
                                           STATEMENT OF QUALIFICATIONS


ROBERT J. NAHIGIAN, FRICS, SIOR, CRE

Robert J. Nahigian, FRICS, SIOR, CRE has thirty-seven years of real estate experience with twenty-eight years exclusively
in commercial and industrial as a developer, advisor, expert witness and broker of approximately $4.7 billion of real estate
totaling 37 million square feet. He has served as a real estate mediator and arbitrator. Rob is the national recipient of the
“2009 James Felt Creative Counseling Award”; was awarded by Boston’s Commercial Brokers Association the “2005,
2004 and 2003 Advisory Assignment of the Year”; “2001 Industrial Deal of The Year” and “Distinguished
Achievements in Commercial Leasing”. He was nominated as “2003 Boston’s Commercial Broker of the Year” and was
honored by Banker & Tradesman as “Top 125 Business Leaders in Massachusetts”. He was featured by various
publications as “Movers and Shakers of Real Estate”; “People to Watch in New England Real Estate”; “Who’s Who in
New England Real Estate”; “Who’s Who in the East”; “Who’s Who in America” and “Who’s Who in Residential and
Commercial Real Estate”. He was appointed by the Governor to the Mass Highway Real Estate Review Board and was
elected to the Board of Advisors of an AMEX listed real estate investment firm (NERA).

Mr. Nahigian is currently, Principal of Auburndale Realty Co. He provides brokerage/advisory and expert witness services
to public agencies, investment portfolio groups and corporations in New England, Missouri, Ohio, California and Florida.
Formerly, Mr. Nahigian was Director, Office/Industrial Division of The Robbins Group in Cambridge, Massachusetts with
office/industrial responsibilities in New England. Previous he was Vice-President of The Norwood Group in Burlington,
Massachusetts specializing on build-to-suits/speculative developments. He was a City Planner in Bowie, Maryland; a planner
with Perkins & Will, New York City and a junior planner with the Bethlehem (Pa.) Redevelopment Authority.

He serves (d) on the faculty of Boston University/MAR/SIOR and CB Richard Ellis and has lectured at; Harvard, MIT,
Northeastern, Rutgers, Lehigh and DePaul Universities. Mr. Nahigian is an invited speaker in the United States, Canada,
Mexico, South America and Europe by Fiabci, Colliers, CoStar, NAI, ONCOR, CoreNet, CCIM, NAIOP, CRE, AMPI,
Latin American Real Estate Conference and other realtor associations. Mr. Nahigian has co-authored four real estate books,
over 300 professional articles and has developed over 100 realtor association courses.

With SIOR, Mr. Nahigian serves as the National VC, Training&Development and was National Faculty Chair; New
England Chapter President, National Co-Chair, 2001 Boston Convention; National Budget & Finance Committee;
Nominating Committee; National Committee VP; National Education/Instructor Committee Chair; NE Regional Vice-
President; Executive Committee; National Board of Directors; and EdFund (ex officio). He was awarded the
2004/2003/2002/1994 SIOR National Instructor of the Year.

Mr. Nahigian received his BA from Lehigh University and a Masters in Urban Planning from Columbia University. He has
earned the FRICS, SIOR and CRE accreditations and elected to LAI. Rob serves as the CRE New England/NY Chapter
President; served as the CRE National Chair, Public Relations Committee and on the National Board of Directors. He
serves (d) on MAR/GBREB Committees; Govt. Affairs and Education Curriculum.
                                                                                                     Page 3


 COMMERCIAL REAL ESTATE BASICS COURSE OUTLINE


This module qualifies towards two points for Massachusetts real estate agent license renewal with a
Massachusetts real estate approved school and instructor. Do not rely on the accuracies of any of the
information provided. The author, the sponsor and the instructor cannot be responsible for errors in the
preparation of the materials, nor the presentation of the same. The program is for educational purposes
only and neither the author, the sponsor nor the instructor are providing advice, legal or otherwise which
would be dependent on the facts and circumstances of any particular situation. The student should contact
professionals, legal counsel or experts on updates, corrections or revisions on any information provided
herein.

As a further disclaimer, any names or information should not be relied upon for professional or legal
purposes or to aid in a business decision in real estate or any other field. The material presented may be
inaccurate or may be improper for any business decision. Some examples in this presentation are good
examples of practices that would be better to avoid.

Two-Hour Module

01. Defining Commercial Real Estate

02. Needs of the Commercial Real Estate

03. Criteria and Concerns in making Commercial Real Estate Decisions



  Course Objective


The course is directed to the beginning residential and/or commercial real estate broker to help
understand the differences between residential and commercial real estate leasing and sales.
This course is an overview to the real estate broker that exposes him/her to various types of
commercial properties, explore how tenants evaluate real estate and to identify valuation methods.
                                                                      Page 4




    COMMERCIAL REAL ESTATE ORGANIZATIONS, JOURNALS and
    PUBLICATIONS

1. “SIOR Professional Report”
   “Strategies in Tenant Representation”
   “Mastering Office Leasing”
   “Comparative Statistics”
   Society of Industrial and Office Realtors
   1201 NY Avenue, NW, Suite 350
   Washington, DC 20005
   (202) 449-8200
   www.sior.com

2. “Directory of Corporate Real Estate Managers”
   “Crittenden Directory Retail Space Users”
   “Crittenden Directory of Investors”
   “Crittenden Retail Space News”
   Crittenden Publishing Co.
   P.O. Box 1150
   Novato, CA 94948
   (800) 421-3483
   www.crittendenonline.com

3. “Massachusetts Commercial Real Estate Resource Guide”
   New England Real Estate Journal
   P.O. Box 55
   Accord, Mass. 02018
   (781) 878- 4540
   www.rejournal.com

4. “Marketing Office and Industrial Parks”
   National Association of Office and Industrial Properties (NAIOP)
   Woodlands Park, 2201 Cooperative Way, 3rd Floor
   Hernon, VA 20171-3034
   (703) 904-7100
   www.naiop.com

5. The Warren Group
   Bankers & Tradesman
                                                       Page 5
   280 Summer Street
   Boston, Mass. 02210-1131
   (617) 428–5100
   www.bankertradesman.com




6. Commercial Property News
   770 Broadway, 4th Floor
   NYC, NY 10003
   (646) 654-5380
   www.cpnonline.com

7. NAR Commercial
   National Association of Realtors
   430 North Michigan Avenue
   Chicago, IL 60611-4087
   (800) 874-6500
   www.realtor.org/RCA

8. Building Owners and Managers Association (BOMA)
   Commercial Brokers Association (CBA)
   Greater Boston Real Estate Board
   11 Beacon Street, 1st Floor
   Boston, Mass. 02110
   (617) 432-8700
   www.gbreb.com

9. Certified Commercial Investment Member (CCIM)
   430 North Michigan Avenue
   Suite 800
   Chicago, Illinois 60611-4092
   (312) 321-4460
   www.ccim.com

10. International Council of Shopping Centers (ICSC)
    P.O. Box 26958
    NYC, NY 10087-6958
    (646) 728-3800
    www.icsc.org
                                                                                                   Page 6




I.   GETTING STARTED IN THE BUSINESS


     Learning The Terminology and Techniques

     A.       It’s a New Language. Learning the “Lingo”

             What is a Square Foot? In England, Square Meter
             West Coast tends to quote on a monthly basis
             Many countries have different methods and rules on commercial leasing
             CAF, CAM, PSF, triple net, etc.


     B.       Commercial Real Estate Publications and Organizations

               2007: Approximately 3.4 million total real estate licensees in US
               2008: NAR has approximately 1.3 million members
               2006: Massachusetts has 83,294 real estate licensees
               2002: Approximately 750,000 US people employed in commercial real estate of which 120,000
                are commercial brokers.
               SIOR, CCIM, CRE, ULI, NAIOP, ICSC, CoreNet
               NEREJ, Banker & Tradesman, Boston Business Journal, etc.
               NAR Commercial




     C.       National Realtors Library, Chicago, IL

                 www.realtor.org
                 Great research available on any real estate topic

     D.       Marketing Sessions
                                                                                                  Page 7
                   “Haves and Wants” of brokers in your market
                   Monthly Commercial-Investment Division meetings
                   Chamber of Commerce




        E.            Defining Commercial Real Estate




                                   COMMERCIAL REAL ESTATE




RESIDENTIAL                                 INDUSTRIAL
                                               DUSTRIAL                             COMMERCIALL

   Rental Houses                   * Heavy & Light Manufacturing * Office Buildings
   Rental Condos                   * Warehouse                           * Shopping Centers
   Duplexes                                                              * Single Purpose
                                                                            Buildings
                                                                          * Hotels/Motels
                                                                          * Rest Homes
                                                                          * Net Leased
                                                                            Buildings
                                                                          * Government Occupied
                                                                          * Parking Lots




              LAND                                                    USER-PROPERTIES


       Farms & Ranches                                     * Manufacturing
       Recreation Land                                     * Restaurants
       Subdivision Land                                    * Home or District Office Buildings
                                                                                      Page 8
        Development Land                                    * Banks
        Raw Acreage                                         * Car Dealers
                                                             * Theatres
                                                             * Real Estate Office
                                                             * Office Condominiums




F.       Having a Property Contact Listing Sheet or Site Selection Criteria

General Information

    Type of Property: Ind, Com, Office, Other      * Ceiling Height
    Location; Street, City, State                          * Office Area______
                                                            * Toilet Facilities
    Asking Price for Sale
    Quoted Lease Rate PSF, annually                Taxes
    Gross $____ Net $ _____                        * Total Annual Taxes_____
                                                    * Taxes PSF
    Lot Size                                       * Land Assessment
    Zoning                                         * Building Assessment
    Gas Service                                    * Total Assessment
    Rail Service                                   * Town Tax Rate
    Water Service
    Sewer or Septic Service                        Other Information

    Parking Spaces: cars/1,000sf                   * CAM (common area maintenance)
    Street Frontage                                * Age of Building
    Traffic Count                                  * Former Use
                                                    * Existing Tenant
    Roofing Type                                   * Former Tenant
    Flooring Type                                  * Carpet
    Elec. Power: Volts, Amps, Phase                * Tenant Improvement Allowance
                                                    * Name of Owner
Structure Information                              * Minimum Size/Unit
                                                    * Name of Property Manager
    Total SF                                       * Date of First Contact
    Available Space                                * Name of Representing Broker
    # of Floors
    # of Buildings                                 Signage
    Plant Dimensions
    Loading Docks                                  * Size
                                                                                      Page 9
     Drive-In Ramps                                     * By rights or permit
     Column Spacing                                     * Height restrictions
     Elevator Capacity                                  * Number allowed and where
     Type of Heat                                       * Illuminated?
     Type of AC and Capacity
     Type of Lighting
     Type of Sprinklers




II.
         NEXT…ANTICIPATING & MATCHING THE NEEDS OF THE USER AND LESSOR


         A.     Know Your Geographical Market

         B.     Research is focused on Lessee’s Site Selection Criteria Needs:

                1.       Planning

                        Traffic Patterns
                        Street Flow
                        Pending Road Changes/Construction

                2.       Water, Sewer, Septic, Utilities, Rail Service Availability

                        Moratoriums
                        Utilities, Building Permits, Etc.
                        Gas Service
                        Electric Service
                        Rail Service
                        Public sewer vs. private septic
                        T1 line/DSL/Verizon connection
                        T5, T8 Lighting




                3.       Employee Work Base

                            Availability and Cost of Labor
                            Tight Labor market in Massachusetts

                4.       Housing Availability
                                                                                        Page 10
                   Is there an adequate supply for new workers?
                   Vacancy Rates and Cost
                   Are housing costs affordable?
                   Rental v. Purchase

      5.        Transportation

                   Highway Access
                   Proximity to Market Place and Suppliers
                   Traffic Counts

      6.        Town/Public Attitude Toward Commercial Growth

                   Snob or desirable Attitude?
                   Town Economic Development Office
                   Town Hall Web site/Town Cable
                   MassDevelopment Financing
                   SBA Financing
                   Local Chamber of Commerce
                   State and/or local tax incentives for job creation: TIF


      7.        Signage Availability and Size


      8.        Demographics, Population Trends


      9.        Developments Planned in the Area




      10.       Inventory All Commercial Listings in Your Market Area by Type,
                Size and Location: Broker Due Diligence

               Print Media: NEREJ, Boston Sunday Globe, etc.
               Broker Open Receptions
               Signage
               CoStar
               LoopNet, DealMaker, Craigslist, OfficeSeeker, MyNextDeal.com; NAR.com
               Read, attend seminars, talk with competitors


C. Lessee/Lessor Mutual Needs
                                                                                   Page 11

I.          How Needs Differ for Owners v. Tenants

     First Recognize that Real Estate Is:

a.          A Physical Asset
b.          A Financial Asset
c.          Therefore everyone’s needs for real estate is conceptually different




II.         Real Estate Investor/Landlord Goals:


               Rate of Return
               Appreciation
               “Entrance” Strategy
               “Exit” Strategy
               Holding Period
               Real estate is an investment


A.          Therefore Landlords Want:

            a. “Bricks & Mortar”?
            b. Legal Contract
            c. Seeks Stability
            d. Estate Planning Issues


B.          Landlords Need to Know:

            a. Tenant Building Requirements
            b. Tenant Credit History
            c. How does one define “a good credit” tenant?
            d. 3 Year Corporate Tax Returns


C.          Purpose of Investor Ownership

                 Create Wealth
                                                                                                     Page 12
                     Need “Entrance” and “Exit” Strategies

                     Exit Strategy issues: Hold, Sell or Exchange?


       D.        Tax-Deferrred Exchange: IRS Code 1031

             Tax Deferred Exchange 1031 IRS Code: Goes back to The Revenue Act of 1919
             IRS sanctioned over 80 years ago.
             Benefits seller/buyer of investment real estate
             Same Day or Forward Exchange




       III.      Both Parties Focus On:

There is no universal industry agreement between all real estate professionals on the definitions.
This lack of continuity adds confusion for tenants and brokers.

1.     Three Categories of Space:

       A.        Defining Space Calculations: Consumer Protection 93A Issue
                  The space you pay rent on, may not be the space you occupy!
                  Surprise!

       B.        Tenant Wants Information on:

                 a.       Space and Methods of Measuring

                         Define: Length x Width
                         Gross Square Feet (GSF)
                         Rentable Square Feet (RSF)
                         Usable Square Feet (USF)




                  OFFICE SUITE




                                      HALLWAY/COMMON AREA


                  USABLE
                                                                            Page 13




                                 OUTSIDE DIMENSIONS / GSF




        b.      Building Services

        c.      Minimal Economic Effects/Liabilities
                    Type of Lease
                    Term of Lease
                    Occupancy Costs
                    No Escalators

C. Lease Rate: (See APOD sheet)

a. “Quoted Rent”
 Asking price for first year’s lease

b. “Full Service Lease” v. “Gross Lease”

   Not standard for an industrial lease; used more in office real estate
   A rent that includes most or all operating expenses in the lease rate
   In Massachusetts market, often does not include electrical expense


c. “Triple Net” Lease or a better term “Absolute Net” or “All Net” lease

   More typical for industrial lease

   Rent Includes “Nothing”
                                                                                                      Page 14
         Tenant charged pro rata share of: Insurance, common area maintenance (CAM), real estate taxes,
          repairs and maintenance, snow plowing, landscaping and sometimes property management.

         Utilities Separately Metered (gas, electric and sometimes water/sewer)

         Owner Responsible for Roof, Structural Repairs and Floor/Foundation

         What about the HVAC (heating, ventilation, air conditioning)?


     d.       Tenant has immediate focus in a lease on “Exit Clause Strategies”

             Assignment & Sublet
             Termination Language
             Fire & Casualty
             Bankruptcy
             Landlord Default
             Death Clause




D.            Physical Characteristic Issues to User

             How does the real estate asset fit the business plan?
             Location
             Budget
             Square Footage Required
             Parking Requirements
             Electrical Power; amps, volts, phase
             # of Employee and Future Growth
             Labor Supply and Wages


E. Financial Asset

         Should the Tenant Own or Lease?
         Should the President of the firm own the building and lease back to his own company?
         If the company is growing, is there room to expand or add to the building size?
         Perhaps leasing space is less capital intensive and allows for movement flexibility


F. Other Variables in Real Estate Decisions for Landlord/User
                                                                                                              Page 15
      a.       Location Analysis
      b.       Inventory Market Studies
      c.       Absorption Rate Studies
      d.       Financing
      e.       Depreciation Schedule
      f.       Environmental Issues

              Hazardous Waste: 21E
              In-ground contamination
              Building contamination
              Title V
              Wetland Issues




IV.            Investor’s Valuation (Could be Tenant or 3rd Party Investor)

                  The Band Of Investment Approach: It’s History
                  (MacRossie then refined by McLaughlin: 1959)

      A. Capitalization Rates

                  Capitalization rate is an investor’s subjective overall rate of return demanded from one specific
                   property

                  Investors impose a capitalization rate to value investment property

                  Users may focus on replacement cost or price per square foot


      B.       Definition and Formula of Band of Investment Approach (BOI)

                          History of BOI
                          Using BOI for valuation and negotiating tool
                          Subjective Rates of Returns
                          Debt vs. Equity Financing
                                                                    Page 16


C.       APOD Sheet

          NOI/Cap Rate = Value

        Net Operating Income/Capitalization Rate = Value

        NOI is not legally standardized

        Gross Income – Operating Expenses = Net Operating Income

     How does one define “Operating Expenses”?


        See APOD Sheet
        Accounting & Legal
        Advertising, Licenses and Permits
        Property Insurance
        Property Management
        Payroll-Resident Management
        Personal Property Taxes
        Real Estate Taxes
        Repairs and Maintenance
        Elevator Service
        Snowplowing
        Janitorial
        Landscaping
        Pool
        Rubbish
        Supplies
        Electric
        Gas or Oil
        Water and Sewer
        Telephone
        Other
        Miscellaneous
Page 17
Page 18
                                                                                                              Page 19




                                            SEE BOI MODEL BELOW


                                     BAND OF INVESTMENT APPROACH

                                            INCOME/VALUE RATIO

FORMULA:

1.           % of Mortgage to Value of Property                % Rate of Return to the
                            X                                =  Loan Portion of the
             Loan Constant for Mortgage                          Investment

                                                                                +
             % of Equity Raised
                     X                                        =     % Return on Equity
             % Cash on Cash Return Desired By
             the Investor                                           _________________

             OVERALL RATE OF RETURN                           =     % Amount




2.           Net Operating Income
             --------------------------                       =     Total Value of Property
             % Overall Rate of Return


Example:

    Assume you borrow 75% of the value of a property at 10.5% for 25 years

    Your investor requires a 12% return on his equity invested.

    If the net operating income of the property is $ 180,000 then what could the investor pay for this property?

Mortgage Constant Formula:

Annual Debt Service           = Mortgage Constant
Total Loan Amount
                                                                                                             Page 20




 D.            Own vs. Lease

      1. Financing v. Equity Contribution
      2. Could the cash be used for operating growth instead?
      3. Cost to Purchase
               Annual Debt Service (ADS)
               Convert ADS to Lease

      4. What length of time does tenant expect to stay?
      5. Need exit strategy
      6. Real estate is perceived as a liability rather than a separate asset class


 E.            APPRECIATION

              Definition: An increase in the value of the property over and above the investor’s initial investment.
              Gain is not realized until ultimate disposition.
              The Key: Increase the NOI or sell in a low cap rate/interest rate environment.
              Inflation vs. Deflation
              Decrease in Value of the Money


  F.       Use Professionals For Tax Consequences and Valuation

              Accountant
              Tax Attorney
              Appraiser
              CFP
              Real Estate Counselor




CONCLUSION
              Page 21

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