Commercial Real Estate Construction

by

Commercial Real Estate Construction

A commercial real estate construction project is just like other projects. You will have a start date, benchmarks to hit, and an end date. The end date is the property being complete and a certificate of occupancy is issued. Commercial Real Estate Construction loans differ from other loans.  A draw schedule is set up to disburse funds which translates to the loan being funded. These loans are also called interim construction, temp construction to permanent  loans.

Draw Schedule 

Draw schedule defines as the dates funds distribute.  Let’s review a few key points on construction lending. Construction Loans do not fund at closing.  This way the lender can oversee the process while minimizing the amount if interest paid by the borrower.  To be more accurate, the construction loan is pre-fund an interest reserve account. Money from this account makes monthly interest payments. Funds deposited are figured by the lender using loan amount, interest rate and time of estimated construction.  The benchmarks that exist are the catalysts so money disburses. Larger deals have more benchmarks and are more complicated. This also allows the lender to monitor progress of the commercial real estate construction loan. An inspector will come and inspect the work making sure the borrower is using the funds for the construction specified. 

 

Budget Office Expenses

A lender will set up a budget that the borrower sends the lender for construction. These are limits set to each line item the borrower submits in a budget. When the inspection is complete, a report is submitted to the lender. The report is in review with a construction loan administration department. If approved, a draw request is processes.  Draw funds deduct from each line item which releases to the borrower. This way the budget will update in the computer systems to reflect a current balance of each line item.  This process will take 2-10 days. It is always important for borrowers to know when they need to pay the contractors.  You should submit a draw request ahead of the time.

 

Construction Schedule Changes

Typically a construction of commercial real estate does not occur on plan. Delays from municipalities, weather etc always effect construction completion.  A Loan’s interest rate is pre-determined on the estimated time to completion.  When delays happen, the builder will may their own interest payment.  Or, they can ask the lender to move funds from one line item to another.  A lender can deny a change request. Usually, denying a change request is not in the best interest of the lender.  A project must be complete before a borrower can covert to a permanent loan.

Business Valuation

by

Valuation of a Business

What is your business worth? How do you value  a business , in this bog we will discuss valuation. If you are selling your business, you need to be able to accurately forecast revenue. This blog deals with a percentage ownership in your business. If you want to sell it 100% , you can figure the math based on a total sell out.

Revenues and valuation 

Typically if you want to sell a portion of your business, an entrepreneur will ask for a dollar amount based on percentage of ownership. Let’s say you want $100,000 dollars for a 10% ownership stake in your company.  This means you would need to provide accurate documentation that your business is worth $1M.  The math works like this: 10%  $100,000/ .10 = $1M n revenue. You will provide the last years sales. If your sales were $250,000, it theoretically would take you 4 years to get to $1M. Revenues and valuations are based on past revenues or current deals you have working. 

Earnings and Profit Office Expenses

If your company has $100,000 in profit then your earnings multiple would be 10.  We get 10 by dividing $1M/100,000.  Then what will happen is the earnings multiple of a like business can be applied to your business.  This is done as a comparison to see if this is a good investment and to understand the valuation.  Let’s say the earnings multiple for a widget manufacturer is 12. Using the Multiple of 12 X $100,000 the valuation comes in at $1.2M.  In this example the valuation is higher than your number at $1M. This makes sense for a sounder investment. 

See Cap rates for commercial properties.

 

Commercial Office Space Austin

by

Commercial Office Space Austin | Summer 2019

Austin’s commercial office space market for the summer of 2019 equals 2 words, higher rates!  Current lease rates for commercial office space have hit all time highs in the Austin area.  Vacancy rates are down now below 10%.

Lower vacancies and positive occupancy have pushed lease rates up to a historic high, overall construction is up currently for office properties. The lease rate quoted above is for a full service rate which includes all expenses, electric and janitorial costs.  Although leasing rates have increased, they did not increase as much as they did the previous quarter.

  • Operational costs have increased as well up $0.10 from the first quarter of 2019.

Commercial Office Space Terms Austin Office market

Commercial office space terms are typically 3-5 years. As far as costs go most multi-tenant buildings have a “FSG” full service gross lease quoted. Outside of that tenants may be looking at a NNN lease which has a base lease rate plus operating expenses added onto the lease rate and it does not cover electric or janitorial costs.

Expect TI finish out concessions to go in line with longer lease terms , short lease terms less than 3 yrs typically do not have leverage to negotiate finish out in the tenant’s favor. Your credit should be good to excellent if you want to lease a Class A or B Building in Austin.  Because we track lower lease rate deals, you can find these on our website page under “Office Deals“. We do not project much change near term for the next quarter of 2019.

 

Capital Reserves

by

New Accounting Rules- Shorter Term Leases?

Banking institutions, financial service firms and other enterprises may have to take on new leasing negotiations. New rules regarding capital reserves against liabilities are going to be in place.  A Landlord -Owner can expect some of these types of organizations to negotiate leases with shorter terms and maybe fewer renewal options. This can provide some uncertainty for owners as to how they are going to manage assets with shorter lease terms for tenants.

Capital reserves must increase by 5% on a balance sheet. If a firms lease obligations total 50 million annually, then their  capital reserves would increase by 5 percent, or $2.5 million, to cover the liability. To minimize tenant turnover, the landlord will need to think more strategically regarding improvements and amenities to the property to retain tenancy.

 Example: Capital reserves to be required

A financial institution that has a 3 yr term lease in place with $1M in rent and $3M of liabilities, they would be required to have at 2X the liabilities $6M in capital reserves.

Negotiations on Office Lease OptionsAustin office expenses

Building owners will experience accounting changes regarding lease extension options.  This will require the existing tenant to review those options more carefully. If a lease offers  a tenant a better deal or discounted lease rate with a  lease extension at the end of the term, the “economic incentive” could impact how the lease is classified beginning on Day One.

If a tenant signs a 10-year lease with two five-year renewal options that carry an incentive, such as a 95 percent of market rental rate during the extension period. Even though the lease is technically a 10-year lease, it could be viewed as a 20-year lease for businesses’ accounting purposes if it there is a “good chance ” that the options will be exercised.

Within the new regulations, corporate real estate users will have to determine whether their office leases qualify for the finance or operating lease accounting treatment. This will require their assets and liabilities to appear on their balance sheets. Tenants may need additional time for lease negotiations because they have to bring additional people into the process.  An owner can expect possible delays so are advised to start the lease negotiation process as early as possible.

Net Lease Investments

by
Read more

Valuing Commercial Property

by

Cap rates for commercial propertyValuing Commercial Property

There are 3 ways when it comes to valuing commercial property that you should be aware of and by no means are they absolutes. Why? Because market conditions can have direct affects on valuation principles such as comparables. Here are the 3 approaches to value:

1. Cost Approach to valuation

Using the cost approach, investors or buyers will calculate how much it would cost to build the subject property at the current market’s prices. Remember , we said the market can affect and influence this approach?  After that is done, they would subtract the depreciation for commercial property and add to that figure the current rent value of the site.

2. Comparable Sales Approach

In Texas, a brokerage firm or Realtor does not have to reveal sales of a commercial property. This is probably the most popular request among Buyers and Investors. However, sometimes it is not easy valuing commercial property because the data is not there. Using the comparable sales approach, a Buyer or Investor will compare the subject property with other similar (comp) properties that have recently sold.  You can adjust prices for the positive and negative features of each of the comps as compared to the subject commercial property. This allows you to make a knowledge based guess on valuing the commercial property.

 

3. Income Value approach

Using the income approach , investors can estimate the lease rents a property can be expected to produce. By estimating rents, we then convert those rents into an expected income stream.

This can be used in valuing the commercial property using net operating income calculations and cap rate formulas. See blog on cap rates.