The Downtown Boise Association put on the annual State of the Downtown today, and they did a great job.  Our downtown is healthy and more people continually want to be here.  What can we all do to help that grow?

Peter wrote a book called For the Love of Cities, and is a "city guy" as described by Mayor Dave Bieter.

In a world that seems to be moving away from the personal touch and attention to detail, I am predicting a "swing to real" where people interact with people, bigger doesn't always mean better, and quality over quantity will have meaning again.   I have been working with Rizen Creative, and I knew they had figured out Story Commercial when they came up with this ad for me.  Cheers to small time!

5 Good Reasons You Need Representation

1.  Your Landlord wants you to pay more rent.
If you are negotiating directly with your Landlord or their representative, remember that they look after the Landlords’ best interest…not yours.  They will use any information they have at their disposal to negotiate the best deal for the Landlord, which often means higher rent and more restrictive lease terms for you.  Protect yourself and a professional to look after your best interest.

2.  Use market conditions to your advantage.
A commercial real estate professional can help you look at all the options and give you market knowledge.  Most likely there are multiple properties that will suit your needs, why not put multiple offers out there and take the best one?  Even if you intend on staying in your current location, when your landlord finds out you have other options available and an agent working for you, they will be more likely to cut you a better deal.

3.  Negotiate favorable lease terms.
Landlords are not going to offer you the best lease terms, but if you hire a professional to help you, these terms can be negotiated directly into your lease.  Items like renewal options with predetermined rents, right of first refusal, free rent clauses, money for tenant improvements, or buyout clauses are some terms that could be negotiated on your behalf.

4.  Save your time.
Driving around and calling on signs is not the most efficient way to find space.  From a sign, it is hard to tell the size of the space, the price, the landlord motivation, or any other item that a professional may know about the property before calling.   Hiring a professional to assist you will save you time when they do the upfront leg work and present you with the properties that suit your needs, and help you through the contract negotiations. 

5. Peace of mind.
When the deal is inked, it is nice to know your best interests have been protected throughout the real estate negotiation process.  Knowing you are paying a fair rent and have a fair lease, gives you one less thing to worry about.

PS.  When you're looking for someone, you might as well hire the best and get a CCIM to work for you.

As I approach my 11 year anniversary in the commercial real estate business, I am grateful to have survived one the largest real estate downturns we have ever seen.  How did Story Commercial survive while some did not?  I like to think we survived because at Story Commercial we look after our clients’ needs first – not ours!

This may sound a little ridiculous because aren’t all agents required to protect their clients’ best interest?  One thing we do at Story Commercial that is different than most real estate agencies is offering only “single agency.”  This means there is a clear line as to who we are representing, and we are working to get our client the best deal.  We are NOT representing both sides.

If my client is the Seller, rest assured I am using every tool in my toolbox to get them the highest price and best deal, and that includes marketing to ANY potential buyer.  Now, if my client is the Buyer, rest assured I am using every tool in my toolbox to get them their best deal. 

Another agent was recently telling me how he received an offer on one of his listings from a buyer who happens to be a licensed real estate agent and wanted to partake in sharing the commission.  This listing agent then told me he was going to stop sending this buyer/agent their marketing material because he had to share the commission with him.  Whose interest is being protected in this situation?

So when a prospective listing client asks me, “Do you have a buyer for my property,” I reply, “I probably do not have the best buyer for your property, and my job is to make sure we find you the best buyer.” 

At Story Commercial, we draw a clear line on agency (everyone knows which party we represent), we love sharing the commission, and most of all, we thrive by making our clients’ best interest, our best interest.

Why writing off questionable commercial property expenses may hurt you in the long run…

As tax season draws to a close, some people may have given their accountants information to make their investment property look as bad on paper as possible.  By this I mean, some people write off all kinds of questionable expenses against a property to reduce the taxable income on the property, thus reducing the tax liability. 

As I go over the income and expenses of properties for clients getting ready to sell, I generally see some expenses that are not directly related to the property but are still written off as an expense.  I then inevitably have to describe that when buyers, including them, are buying a property, the most reliable source of income and expense data is the tax return.  Obviously, if the property has a higher net operating income it will be worth more. 

Let’s break it down with some real numbers.  Let’s say a property has a rental income of $50,000 per year and $15,000 of expenses written off on the tax return.  This leaves us with $35,000 of net operating income (NOI) – the most important number!  Let’s say investors are requiring approximately a 9% return, and this property sells at a 9% capitalization rate (cap rate = NOI / sale price).  The property would sell for $388,889.  Now let’s imagine the client had $2500 of questionable write-offs in those tax returns.  If we don’t include those expenses on the tax return, so the NOI is actually $37,500, and the property sells at the same cap rate.  The investor would get $416,667 for the same property.  This is an increase in the property value of $27,778 from that $2500 worth of questionable expenses you did not write off!

As I described this phenomenon of questionable write-offs to a client of mine, his response puts it best:

“You may save a couple dollars today, but you more than pay for it when you go to sell.”

In various industries we use acronyms, nicknames, or abbreviations that don’t make sense to someone not in the business.  I decided to give you a cheat sheet of sorts for various commercial lease types common in the commercial real estate world.  It is important to read the lease and ask questions, because these lease types can mean different things to different people.  Not asking the questions, can be very expensive to you (landlord or tenant!).

Various Lease Types

Absolute Net (True NNN)
Tenant pays a base rent plus ALL expenses associated with the property…even capital improvements!  The NNN stands for net-net-net (taxes, insurance, & maintenance). Found most commonly in corporate retail leases and sale-leaseback transactions.

Triple-net (NNN)
Tenant pays base rent plus all operating expenses associated with the property. Typically excludes capital improvements. This means the tenant will be paying property taxes, insurance, and maintenance.  Found in many retail property leases (i.e. Walgreens, O’Reilly’s, etc.), newer industrial properties, and single tenant buildings.

Double Net (NN)
Tenant pays a base rent plus their share of taxes and insurance. This can also be the tenant paying taxes and maintenance or tenant paying insurance and maintenance.  Found occasionally throughout various property types.

Modified Gross (Mod Gross)
This is the most variable type of lease. Tenant typically pays a set rent plus some of the operating expenses.  I see this most often as tenant paying rent plus utilities.  This is a common lease structure for many, mostly smaller, properties from industrial, to office, to apartments.

Full Service Excluding Janitorial (FLSVEJ)
Tenant pays a set base rent plus any janitorial they may desire.  Landlord pays all operating expenses of the property excluding janitorial. Found commonly in smaller office properties.

Gross (Full Service, FLSV)
Tenant pays a base rent which includes all expenses.  Landlord is paying for all building operating expenses including janitorial service.  Most common in larger, newer office buildings.

A couple weeks ago, I was at a Urban Land Institute conference on housing trends in the Treasure Valley.  While there, it was interesting to listen to a group, Local Construct, who has recently purchased two deals in downtown Boise (the city block at 15th & Bannock, and the Owyhee Plaza in partnership with longtime Boise downtown owner Clay Carley) with plans to do residential.  They had a great presentation full of statistics on why there is an unmet demand for housing in our downtown.  

In this presentation it discusses several different aspects on why there is an unmet demand, and my favorite is on page 8 where it shows the employee to resident population.  Let's just say Boise has lots of employees downtown compared to residents when compared to other cities around the nation!  I pulled out my calculator and began running some numbers to see how many units may be needed in downtown to bring our employee/resident ratio to the average of the 7 other cities on the slide (3.7 employees for every 1 resident).  I was quickly surprised to see an unmet demand of housing units in excess of 2500 units for downtown Boise!!!


Later in the presentation it shows 5 studies that have been performed in the past on this very same topic, and they show an average unmet demand of 940 units.  Right now in the works, there are approximately 100-200 units in the planning stage for downtown Boise...I think there is room for lots more!

Some things in the real estate world will dramatically shape (or reshape) your view on investments.  I recently went through one of these, when I sold an investment property I purchased 6 years ago.  I used to believe investment properties with a return of 6% should only get the delete button, but now a 6% return may not be so bad!  The particular investment property I sold was a good learning lesson in several ways:

• Do not be too motivated to buy a property using a 1031 exchange.  Many times, it is better to just pay the taxes and find a better deal without time constraints.
  
• Falling “in love” with an investment property never ends well.  As they say, “breaking up is hard to do.”  My suggestion is to never start the relationship.
  
• NEVER count on appreciation to make your investment a good one.  ALWAYS use cash flow as your gauge.
  

This particular investment was not too expensive that I could not handle it, but yes, it would have been much nicer to just put the 1031 money under my mattress, paid the taxes, and waited for a better investment to come along...as they often do.  For those that like calculators as much as me,  I have included my yearly cash flows below along with my initial investment indicated as Year 0.   If you calculate the IRR for this investment, what do you get?

     Year                    Total Cash Flow
       0                           ($70,012)
       1                              $577
       2                            ($2432)
       3                            ($4759)
       4                            ($7395)
       5                            ($3543)
       6                            $12934

On this deal, assume the cash flows occur at the end of the year and that there is only 1 payment per year.  Sometimes the best learning experiences come long after college is over!