South Central Indiana Market Update!

The commercial real estate market in South Central Indiana has been picking up speed during especially the last quarter of this year.  There has been an announcement in Salem of a new retailer coming to town expanding into a 151,000 SF big box.  The announcement of a new upper scale apartment complex to be built in Seymour, the opening of the Cole apartments and retail center in Columbus.  There has been increased activity in Greensburg, and the new bypass in North Vernon has led to increased interest in the community.   A local auto dealer in Scottsburg is making plans to initiate building on the west side and with the new development in Salem will hopefully lead to new opportunities for Scottsburg.  Madison has held its course, and of course with Amazon coming to town, Jeffersonville economy has been bolstered.   There is great opportunity for expansion and growth.   Now is a great time to considering investing in South Central Indiana as it is the bright spot in the state’s economy.  For more details about available land, lease space and existing buildings or investment property, contact Rob Millman.

 

South Central Indiana Market Update

The South Central Indiana real estate market shows signs of great promise this spring and throughout the year.  In areas like Columbus and surrounding communities the employment numbers are high and unemployment rates hover around 7% which is below the state and national levels.   There is a strong demand for housing as inventory levels are well below their equilibrium points.  This factor continues to drive multi-family housing demand and developers are seeking opportunities while the dynamics of the market show favortism.  In regard to retail, the economic base multipliers all look positive for growth with many new job announcements.   This is evident as witnessed by the investigation of many developers seeking opportunities in many communities.  Wal-Mart moved into new stores this past year in North Vernon and Connersville.  This has spurred additional growth of shadow retail in Wal-Mart's wake.  There is very little excess inventory in most communities, towns like Greensburg, Seymour, and Franklin which are experiencing low vacancy levels.  On the flip side, other communities which have experienced the exodus of a major employer also suffer with vacancy as witnessed in Bedford and Connersville.   Overall, this is a great time to consider your options as we move from recovery to the expansion phase of the real estate cycle.  For specific details about opportunities, contact Rob Millman.

Why Commercial Real Estate?

If you have never considered commercial real as part of your wealth creation strategy, now is a great time to take advantage of the many opportunities available.  If you are first starting out, depending on your personal management skills, aversion to risk, and abilities there are several choices to consider.  For those only seeking to diversify their portfolio in the capital markets, you may choose to invest in a real estate investment trust (REIT).  The advantage of a REIT is you invest just as if you are purchasing stock in a company with the company of many collective investors.  You will find REIT’s normally purchase large investment grade properties e.g. (office buildings, industrial warehousing, large multi-family projects and a vast array of large scale projects).  The REIT handles day-to-day management, investment and yield strategies and provides dividends just as you would find with other funds in the capital markets.

Another investment alternative is to be a direct investor by purchasing a single tenant NNN property, e.g. Dollar Store, Auto-Parts Supplier Store, Drug Store, Medical Office Building or other retail or office opportunity.

The advantage of this type of lease is no landlord responsibilities in regard to paying property taxes, building and liability insurance and maintenance of the property.  Generally, these types of opportunities are available between $250,000 to below $5,000,000.  

If you are not quite ready to join the ranks of someone seeking a larger investment, a good starting point is to purchase a small multi-family property.  These may range from a (2) unit duplex to a (10) unit apartment building or maybe something greater.  The advantage of this type of investment is the ability to enter the world of commercial real estate investing without the investment of huge funds.  The biggest challenge is generally, you are also the property manager which obviously requires financial management and people skills.

Lenders are ready to lend money to qualified candidates, now is a great time to enter the market with amazingly low interest rates.  For more details about available investment opportunities, contact Rob Millman at (812) 528-3028.

Now is a great time to invest!

Now is a great time to get into the market and invest in commercial real estate.  The prevailing thought is interest rates will start to climb as the United States economy continues to improve.  There are still good opportunities to be had for seasoned real estate investors, and for those seeking less risk with greater returns than the capital markets, there are many good choices to consider.  In many parts of the country, the real estate cycle is on the final leg of the recovery phase and some markets are experiencing the initial effects of the expansion phase.  Understanding the cycle and where to find the best opportunities is critical to capitalizing on today's or for that matter any market.  For more details about opportunities and positioning your portfolio for success, please contact Rob Millman at (812) 528-3028.

Real Estate Investing Fundamentals



Making the right choices is the key to success!

Growing up in Southern Indiana causes everyone to know Bob Knight, Gene Keady, Denny Crum and Rick Pitino.  Of course all these individuals were college basketball coaches of the Indiana Hoosiers, Purdue Boilermakers, Louisville Cardinals and University of Kentucky Wildcats.  Every week on Sunday morning, you could listen to these coaches purport: we didn’t focus on the fundamentals, we have got to work on the fundamentals, if we just focus on the fundamentals we will win more.  So, keeping this in mind and knowing even Michael Jordan used to always show up for practice before playing basketball practicing the fundamentals;  today, I want to focus upon helping you the reader understand the fundamentals of real estate investment. 

Real Estate provides opportunity for investors to really grow their dollars through careful and strategic management.  Real Estate allows an investor to own a direct investment versus stock providing independent control of their choices.  Many individuals enjoy the autonomy of decision making versus being dependent upon the management decisions of others.  There are a few things to consider when investing, and I wanted to outline those factors today for first-time investors or those working to streamline their portfolio.

 The first step is deciding what property type are you most comfortable owning based on your management skills, ability and time availability.  Most investors normally have a full-time career and time availability to oversee a real estate project may be very limited making a NNN investment a more common sense decision.  However, there are other investors who rather make their real estate investments a part of their daily career choice purchasing multi-family projects which require more hands-on management dealing with tenants and overseeing the property.  As part of the first step, I would include first choosing markets of which you are familiar rather than buying out-of-state.  It is good to have a real grasp of the local demographics, consumer behavior, market knowledge, traffic patterns, physical features, site knowledge and physical characteristics of the trade area.

The second step before investing is to totally grasp cash flow is the lubricant of your real estate machine.  This is why calculations like cash on cash return are so critical so you may realize the return of your dollars into your pocket to re-invest into another investment and continue to watch your dollars grow like children.  It is important to have a full financial analysis prepared so you understand analytics of the project.  It is good to always approach investment opportunities with eyes wide open and use a common sense approach to analyzing a purchase.

Make sure you are working with a real estate broker who can provide you with the financial details.  You need to make sure you have enough cash flow to handle your mortgage payments, it is always good to figure cash flow before and after taxes.

Another point I would like to make, sometimes first-time investors take too much advice from those who really do not know a whole lot about real estate.  Novice investors many times rely on their attorney, accountant, family members and friends who are not actively involved with real estate investment.  This can cause them to be overly cautious not understanding the dynamics of commercial real estate financing which is much different than buying a single family home.  These days fixed rate financing is a rarity and the finance term is more likely to be 5 or 10 years.  It is important to be cautious, but also to grasp a realistic understanding of the marketplace before approaching investments in this arena.  Also looking at the performance of the S & P 500 versus real estate, I would put my betting money on real estate.   

Another factor to consider is “The Giant Engine” of real estate, and that is appreciation.  Nowadays after suffering such a terrific recession over the past few years, appreciation seems of little consequence to some.  However, economists are predicting in 2014, appreciation will be back on track.  Appreciation is what has made real estate such a great investment as a long term hold investment.  Each year the value continues to increase because of market factors, inflation, and cost of living increases.

The next factor to consider is income tax ramifications.  There are many tax advantages to owning real estate including depreciation, and if you decide to sell an investment and purchase another, you may capitalize on a 1031 exchange to defer any immediate tax consequences. 

The third step is to choose a great team to work with you to become more prosperous.  This team will compromise a competent commercial real estate broker who understands the marketplace, financing options and has a grasp on preparing a financial analysis for you.  It also includes a relationship with a attorney who really know real estate law, not every attorney has the everyday working knowledge to understand what are the mechanics of Letters of Intent and purchase agreements, reciprocal easement agreements and the like.  Another partner should be your accountant to help you take advantage of favorable tax consequences.  And finally, to choose lenders with specific knowledge of your property type and has intimate knowledge of the financing programs available through sources like Fannie Mae, private sources, hedge funds and insurance companies. 

In this moment of history for most of our lives, this is the greatest opportunity to take advantage of the real estate market and position oneself financially for the future.  I hope you find this information helpful as we all practice the fundamentals to propel our success.

Book Overview: "A Field Guide to Commercial Real Estate Evaluation"

Location, Location, Location!!!  We all have heard this old adage for decades upon decades, however in today’s complex retail environment there are many more factors to consider than only location.  In this article, I would like to share with you some information found in Dr. Richard M. Fenker’s book, The Site Book also known as “A Field Guide to Commercial Real Estate Evaluation”.  Dr. Fenker contends the following factors are critical when considering a site: site features, demographics, customer knowledge, competition, market knowledge and physical characteristics of the trade area.  

He purports when considering the basic principles, site evaluation is a science not an art suggesting analysis must be objective and measured using scientific tools to make intelligent estimates of future potential.  He describes in-depth in his book eight key principles.  The first is the notion site evaluation is science, secondly, you must know the behavior of your customers to determine traffic patterns and demographic attributes. The third denominator is “predicting sales is not the same as evaluating site quality.” His fourth principle is understanding that “evaluating risk and estimating site quality are different problems.”  He continues, “You can have a site of average quality with very high risk because of a few specific factors such as very high (or no) competition, poor visibility, or poor strategic position.”  His fifth principle is “objectivity in real estate depends on context.”  In a nutshell, parties have differing opinions for liking or disliking a site.  Dr. Fenker writes, “Objective knowledge about the features that determine the success of a retail location is the heart of an effective evaluation strategy regardless of the perspective.  Strategic decisions are strengthened when complemented by a comprehensive understanding of the factors that determine site quality.”  Principle Six: “Site quality is an enduring, not momentary concept.”  He believes good locations or site quality possess enduring features that will stand the test of time and most likely will not change.  Principle Seven is very simply to invest your money wisely upfront with an intelligent site analysis process as dog sites are very expensive mistakes.  And finally, principle eight is “develop a good process and good results will follow.”  His contention is short term sales are rarely a trustworthy indicator of location quality adding there are many factors other than real estate quality that determines sales and factors vary greatly from market to market.

Dr. Fenker’s book is published by Mesa House publishing and provided a good in-depth discussion of major areas affecting site evaluation, including customer sources, usage patterns, demographics, drop-in features, image, trade area, growth strategies, competition and cannibalism.  I recommend it as a good read for investors to better grasp factors beyond yield and capitalization rates to consider when purchasing retail properties.

Creating a Due Diligence Checklist...

One of the best methods to become a sharper investor is to make your checklists your best friends.  The focus of this post are topics to include in your due diligence checklist.

The first list to consider is the Financial Due Diligence Checklist.  

Income and Expense Statements

These statements document the seller’s income from tenants and expenses to operate the property.  Based on this information and the quality of the information, as a prospective buyer you should be able to determine if the performance of the property matches your yield requirements.

Rent Rolls

The rent roll has been described in some investment books as the attendance sheet for the tenants, when analyzing multi-tenant properties whether strip center or multi-family project, this should provide you with some essential information.  Ask for move-in dates, expiration dates, current rents received, security deposits and then compare to the income statement to determine if the cash flow matches.

Lease Agreements

It is always good to review the lease documents, and important to have qualified professionals to review them.  Estoppel Certificates are usually issued prior to closing and confirms the lease is accurate and the only one made between the tenant and the current owner.

Utility Bills

Obtain the past two year’s utility bills including water, sewer, electric, gas, phone, cable, internet and compare to the P&L for accuracy.  By re-evaluating, you can determine if the deal is still worth pursuing.

Property Tax Bills

Verify the past two years of property tax bills and compare to the P&L and review for discrepancies.  Also, contact the tax assessor’s office and find out if you become the new owner if a property tax reassessment may affect you.  If an increase is anticipated then make adjustment to your calculations in your pro-forma.

The next list to consider is the Physical Due Diligence Checklist…

It may not always be possible or probable, but ask the seller for the following.

Site Plans and Specifications

This group of documents includes the building plans, schematics, floor plans, and land use documents when the building was first built and may prove helpful in better understanding the original purpose of the property and how modifications can fit your purpose.

Photos of the Property

Photos of the exterior, interior and all the surrounding land and structures should be taken.  Also aerials are quite helpful to understand the placement of the property in proximity to area retail districts, competitors, residential neighborhoods and the entire vicinity.  This may aide in assisting you in determining what obstacles you may be facing now or in the future.

Interior Systems Inspection

Inspection the interior of the property for wear and tear, inquire about the age of the roof, and building code violations and governmental compliance issues.

Mechanical and Electrical Inspection

Make sure every mechanical and electric system is inspected including the HVAC, plumbing, electrical power and gas equipment and systems.

Obtain a list of Capital Improvements

Any confirmation of improvements completed in the past five years to be provided from the seller would be helpful to assess the condition of the property.  Also this documentation would serve as a guide for future maintenance or replacement costs to be incurred.

Pest Inspection

This may not be necessary for all structures, however may be a lender requirement, most multi-family properties would have records on hand, and if termites or other pests are found, then it is appropriate to have the property treated.

A final due diligence checklist to consider is your Legal Due Diligence Checklist.  As a commercial investor, it is worthwhile to employ the services of a qualified attorney who has experience with real estate transactions.  

An Environmental Inspection

In today’s lending environment, most lenders will require a Phase I Environmental Assessment and it is important to employ the services of a reputable environmental consultant, as well as having an attorney versed in understanding the basics of the issues related environmental issues and law.  Although these reports are sometimes quite cumbersome, make sure you read through the report thoroughly, if you do not understand everything, make sure you find someone who can help you, usually your consultant is the best bet.  You want to make sure the property is free of potential problems, find out now or pay later.

Survey and Title Inspection

Again, most lenders will require an up-to-date survey to be completed on the property.  The title company will verify the legal description matches the survey, also they will check for liens, judgments, easements, encroachments on the property which could adversely affect the use or value of the property.

Check Building Code Violations

This is a matter of traveling to the city’s planning department and verifying with the local officials there are no issues of concern.

Zoning Code

Every property has a specific use permitted, you need to review the city’s zoning ordinances to make sure it complies with what it is legally zoned for.  Most lenders will not extend a loan on a property unless they know it is properly zoned for the intended use.

Insurance Policy

Ask to have a current copy of the property insurance and investigate the claim history.  The property’s claim history serves as a report for prior issues, e.g. roof leaks, fires, flooding, lapse of coverage or policy cancellations.

Licenses, permits and certificates

Some of these items are necessary to operate a business, so make sure you get them from the seller.  If not, check with the city officials and make sure you are in compliance with all local codes to avoid future fines.

Service and Vendor Contracts

Review all service and vendor contracts to make sure you have the right to choose, discontinue services if desired and review charges.

Personal Property Inventory

Obtain a list of all personal property such as tools, equipment, computers, furniture, supplies and appliances to remain, document all of them to ensure they stay.  In most transactions, a bill of sale form is prepared to document the personal property transferred to the new owner.  This should be addressed in the purchase agreement.

Police Reports

Finally, you want to check with the local authorities to determine if the property you are seeking to acquire has a quiet or active record.  This is definitely something you want to know before you purchase.  This is quite common when especially when evaluating multi-family projects.

I hope this list provides you a summary of what to consider when making your purchase.  It is always good to work with a professional Realtor familiar with this process to assist you to make your transaction smooth and hassle free.  The assistance of a professional will help guide you through the bumps and curves in the road to hopefully achieve a successful close and the beginning of a new venture. If you have questions or comments, please call me at (812) 528-3028.