Month: November 2017
Shopping Centers – Retail Space For Lease – Retail Solutions Advisors #real #estate #agent #for #commercial #property
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Shopping Centers Retail Space For Lease
University Palms is a beautifully landscaped neighborhood shopping center anchored by Publix Supermarket and situated in an excellent location at the intersection of Alafaya Trail and McCulloch Rd with visibility to a combined 53,000 ± vehicles/day. The center is also located in close proximity to the main campus of the University of Central Florida, the largest university in Continue reading University Palms
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Retail Space for Lease Tampa Fl
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Retail Space for Lease Ft Lauderdale Fl
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Pros and Cons of Investing in Commercial Real Estate
Any type of property, whether it’s commercial or residential, can be a good investment opportunity. For your money, commercial properties typically offer more financial reward than residential properties, such as rental apartments or single-family homes, but there also can be more risks. Understand the full pros and cons of investing in commercial properties is important so that you make the investment decision that’s right for you.
What Is a “Commercial Property?”
Commercial properties may refer to:
- retail buildings
- office buildings
- industrial buildings
- apartment buildings
- “mixed use” buildings, where the property may have a mix, such as retail, office and apartments.
There are nuances to managing each of these types of properties. To paint a general picture of what it’s like investing in commercial property, let’s examine the pros and cons of investing in a single-story commercial retail building, such as a community “strip mall”.
Positive Reasons to Invest in Commercial Property
Here are some of the pros of buying commercial real estate over residential property.
Income potential. The best reason to invest in commercial over residential rentals is the earning potential. Commercial properties generally have an annual return off the purchase price between 6% and 12%, depending on the area, which is a much higher range than typically exists for single family home properties (1% to 4% at best).
Professional relationships. Small business owners generally take pride in their businesses and want to protect their livelihood. Owners of commercial properties are usually not individuals, but LLCs, and operate the property as a business. As such, the landlord and tenant have more of a business-to-business customer relationship, which helps keep interactions professional and courteous.
Public eye. Retail tenants have a vested interest in maintaining their store and storefront, because if they don’t, it will affect their business. As a result, commercial tenants and property owner interests are aligned, which helps the owner maintain and improve the quality of the property, and ultimately, the value of their investment.
Limited hours of operation. Businesses usually go home at night. In other words, you work when they work. Barring emergency calls at night for break-ins or fire alarms, you should be able to rest at night without having to worry about receiving a midnight call because a tenant wants repairs or has lost a key. For commercial properties it is also more likely you will have an alarm monitoring service so that if anything does happen at night, your alarm company will notify the proper authorities.
More objective price evaluations. It’s often easier to evaluate the property prices of commercial property because you can request the current owner’s income statement and determine what the price should be based on that. If the seller is using a knowledgeable broker, the asking price should be set at a price where an investor can earn the area’s prevailing cap rate for the commercial property type they are looking at (retail, office, industrial, etc.). Residential properties are often subject to more emotional pricing. See the Nolo article Is that Residential Real Estate Investment Property Worth It? for more on the subject, including an explanation of cap rates.
Triple net leases. There are variations to triple net leases, but the general concept is that you as the property owner do not have to pay any expenses on the property (as would be the case with residential real estate). The lessee handles all property expenses directly, including real estate taxes. The only expense you’ll have to pay is your mortgage. Companies like Walgreens, CVS, and Starbucks typically sign these types of leases, as they want to maintain a look and feel in keeping with their brand, so they manage those costs, and you as an investor get to have one of the lowest maintenance income producers for your money. Strip malls have a variety of net leases and triple nets are not usually done with smaller businesses, but these lease types are optimal and you can’t get them with residential properties. For more on common lease terms, such as net leases, see the Nolo article Commercial Leases: Negotiate the Best Term and related articles in the Business Space and Commercial Leases section of this site.
More flexibility in lease terms. Fewer consumer protection laws govern commercial leases, unlike the dozens of state laws, such as security deposit limits and termination rules, that cover residential real estate. For more on commercial leases, see the Nolo book Negotiate the Best Lease for Your Business, by Janet Portman and Fred Steingold.
The Downside of Investing in Commercial Property
While there are many positive reasons to invest in commercial real estate over residential, there are also negative issues to consider.
Time commitment. If you own a commercial retail building with five tenants, or even just a few, you have more to manage than you do with a residential investment. You can’t be an absentee landlord and maximize the return on your investment. With commercial, you are likely dealing with multiple leases, annual CAM adjustments (Common Area Maintenance costs that tenants are responsible for), more maintenance issues, and public safety concerns. In a nutshell, you have more to manage; and just as your tenants have to worry about the public eye, you do as well.
Professional help required. If you are a do-it-yourselfer, you better be licensed if you are going to handle the maintenance issues at a commercial property. The likelihood is you will not be prepared to handle maintenance issues yourself and you will need to hire someone to help with emergencies and repairs. While this added cost isn’t ideal, you’ll need to add it on to your set of expenses in order to properly care for the property. Remember to factor in property management expenses when evaluating the price to pay for a commercial investment property. Property management companies can charge between 5-10% of rent revenues for their services, which include lease administration. Evaluate beforehand if you want to manage leasing and the relationships yourself, or if you want to outsource those responsibilities.
Bigger initial investment. Acquiring a commercial property typically requires more capital up front than acquiring a residential rental in the same area, so it’s often more difficult to get your foot in the door. Once you’ve acquired a commercial property, you can expect some large capital expenditures to follow. Your property might be humming along for a few months and wham, here comes a $10,000 bill to address roofing repairs or a new furnace. With more customers there are more facilities to maintain and therefore more costs. What you hope is that the gains in revenue outweigh the gains in costs, to support purchasing a commercial property over a residential one.
More risks. Properties intended for commercial use have more public visitors and therefore have more people on the property each day that can get hurt or do something to damage your property. Cars can hit patrons in parking lots, people can slip on ice during the winter, and vandals can spray paint the sides of the building. Incidents like these can occur anywhere, but chances of experiencing something like these events go up when investing in commercial properties. If you’re risk adverse, you may want to look more closely at putting your money in residential properties.
Commercial, Office and Retail Properties for sale or lease in Vermont – Hickok and Boardman Vermont Commercial Realty #mls #commercial #listings
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Leasing Commercial Property Frequently Asked Questions
A lease rate is stated as $10.00/SF. What does this mean?
This is the yearly lease cost per square foot. Example 1000Sf space quoted at $10.00/SF = yearly rental rate of $10,000 which is a monthly rate of $833.33.
What is Rentable square feet?
This is the total square feet used to calculate the rental rate and may include an apportionment of the lobby, hallways, and other areas in the building available to and used by all the building tenants. This is oftentimes expressed as a multiplying factor of the Useable SF. Example: Rentable SF = Useable SF x X.XX%. The multiplying factor is building specific with wide variations in actual numbers. Typical. multipliers would be 1.15 to 1.20.
What is Useable square feet?
This is the total square feet within the walls of the space being leased. The actual space available for the Tenants exclusive use.
What are CAM charges?
This stands for Common Area Maintenance charges and is the cost for items such as snowplowing, grass cutting, parking lot maintenance, common area lighting, etc. These charges are based on actual expenses and are apportioned among the Tenants. CAM charges are quoted as $X.XX/SF and are based on rentable square Footage. Typically these charges are paid monthly based on estimated costs for the year. At the end of the year, actual CAM charges are tallied and either a credit or debit is passed on to the Tenants.
What does NNN mean as quoted in a lease rate?
The NNN refers to additional actual expense items that are apportioned among all the Tenants. Typically included in NNN are CAM. building insurance, property taxes. This is referred to in most leases as Additional Rent. A cautionary note: ALWAYS ask what is included in the rental rate quoted and what additional items are you responsible for. NNN is defined differently by different landlords. Typically utility costs are NOT included in NNN expenses and are therefore a separate additional cost to the tenant.
What does Gross Rent include?
Typically a Gross Rent means the landlord is responsible for paying all the expenses outlined above as NNN expenses. The Tenant only pays the Gross Rental rate. The Tenant?s utilities may or may not be included in this gross rental rate. ALWAYS ASK!
Are Utility costs included in the rent? And how are they calculated?
In smaller spaces, the utility costs may not be separately metered and therefore are apportioned among the users. This may be a rent adder or included in the base rent. In larger spaces, the utilities are often separately metered and thus are paid by the Tenant in addition to any other rental amounts paid.
How short a lease can I get?
Typically, a landlord is looking for at least a year lease and many will have a 2 or 3 year minimum lease requirement. The longer the lease is, the more value it is to the landlord and thus the more receptive the landlord may be to negotiations of the lease.
What about changes needed to the space layout, new walls, special telephone lines, electrical, etc? Who pays for this?
The space layouts vary from business to business and rarely does an existing space work for a new Tenant. Therefore the landlord is reluctant to invest dollars for a tenant specific requirement. Usually some painting, carpet cleaning, etc. are done by the Landlord. The length of the lease and terms also are a factor in what contributions the landlord is willing to make to the changes needed by the Tenant. In some instances, while the Tenant is responsible for the fitup costs, the Landlord will agree to amortize the fitup costs over the term of the lease.
Negotiate from Strength: 7 Tips for Leasing Commercial and Retail Space #commercial #property #foreclosures
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Negotiate from Strength: 7 Tips for Leasing Commercial and Retail Space
A great franchise in a poor location will become a poor business. When it comes to site selection, one difference between an independent tenant and a franchisee is that, presumably, the franchisee will be getting real estate help and support from the franchisor. Whichever side of the coin you’re on, here are some site selection tips for leasing commercial and retail space:
- Allow enough time so you’re not making decisions under pressure. Typically, new franchisees should start the site selection process at least six months in advance of when they wish to open. If you find a great site right away, usually the landlord will hold it for you for a few months. If the process takes longer, you may need several months to finalize the Offer to Lease, have the formal lease documents reviewed, and build out your store.
- Don’t let a Realtor (who represents landlords) show you space all over town. This will effectively create commission splitting between the property’s listing agent and the outside agent. It will also undermine your negotiating power, as the agent will know how you feel about every location. Realtors may be helpful in pointing out a good location–but will they negotiate aggressively on your behalf if it means jeopardizing their landlord-paid commission? (The higher the rent, the higher the agent’s commission.) Even the most altruistic agent will struggle trying to serve two masters.
- Make your leasing inquiry by calling the “For Lease” number on the property or listing agent’s sign. Do this after you have finished driving around doing site selection. This way, you will meet and negotiate with or through the listing agent directly. Begin by viewing prospective sites, from worst to best. You will become better at handling yourself, and when you find the property you like most you will ask better questions and remain more in control of the leasing process.
- Don’t telegraph your intentions. Have the leasing representative send you some preliminary information before you agree to view any space. During the viewing, stifle the urge to think out loud. Subtle comments overheard by the leasing representative or property manager can work against you. If asked how much you have budgeted for rent, be vague. Not every question deserves an answer–not just yet anyway.
- Resist making the first Offer to Lease. The landlord’s leasing representative, upon your request, will prepare a lease proposal or an Offer to Lease containing suggested Terms and Conditions for your tenancy. While this is not a site selection tip per se, it is an integral part of the site selection process. Franchise tenants who receive an Offer to Lease first will be nicely positioned to counter-offer or negotiate. To get the best lease deal possible, you want the landlord to pursue your tenancy–not vice versa.
- Don’t negotiate on only one location at a time. As a franchise tenant, you can–and should–create competition for your tenancy by getting lease proposals on several different properties simultaneously. Negotiating on numerous locations may be the single most effective tool you have for creating the best deal. If one landlord is offering you three months of free rent, perhaps the next one will increase that to four, and the next may top this to five. Play one landlord’s lease proposal against another’s and you will negotiate from a position of strength.
- Do your homework before you start. Pull out a map and mark the boundaries of where you are willing to site your business. Use the Internet to pinpoint locations of competitors and complementary businesses that might help your franchise become more successful. Also, talk with existing tenants at prospective sites. Good preparation is an excellent substitute for novice negotiating skills.
When doing site selection, remember that landlords prefer to lease their worst space first, saving the best for last. Usually, the individual unit or location within a shopping center or strip mall is more important than the mall itself (or at least equally important). Lease rates can vary two to three times within the same building, depending on desirability and demand for a particular premise, time of year, visibility, walk-by or drive-by traffic, accessibility, the shape of the space, the quality of the neighboring tenants, anchor tenants, and the strength of your franchisor’s name.
Don’t rule out great properties just because there are no vacancies. By contacting the property manager or leasing representative, you may discover that a tenant’s lease is about to expire. Perhaps a tenant is leasing on a month-to-month basis and the landlord hopes to find a more permanent, secure tenant like you. Every building has tenant turnover at some time or another. Considering that you will be leasing the location for a very long time, I always recommend that it is best to wait.
Finally, if you already have a franchise business and are considering relocating when your lease expires, start your site selection process 9 to 12 months or more in advance. The theory here is that if you cannot get a decent lease renewal, you need ample time to select alternative sites and negotiate a new lease elsewhere.
Good luck with your franchise site selection!
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Common Commercial Lease Terms
Once you’ve found suitable commercial real estate and you and the landlord have agreed on the key features of the lease, such as how much rent you’ll pay and how long the lease will run, it’s time to formally spell out your deal in a binding, written lease. Most important? Head into the lease negotiations understanding the meaning of the landlord’s lease clauses. A thorough understanding of common commercial lease clauses will help you avoid hidden, onerous traps. It will also help you bargain for modifications in your favor.
The list below introduces you to the most common lease clauses.
Leases generally begin by naming the landlord and the tenant, in a clause entitled “Parties.” Or, the clause may be entitled “Landlord and Tenant,” or “Lessor and Lessee” (the landlord is the lessor and the tenant is the lessee). Although you might not think so at first, it’s important to look at these names carefully. For example, if you are a corporation or an LLC. you’ll want to make sure that your name on the lease is your legal name, such as “Able Investments, LLC,” or “Macro Industries, Inc.” An error in the way you or the landlord is identified can have serious repercussions. If you are an LLC or corporation and you list your personal, not corporate name, you may become personally responsible under the lease (avoiding personal liability is probably one of the reasons you incorporated your business or became an LLC).
Somewhere near the beginning of your lease, often right after the Parties clause, you’ll see a clause that identifies the space that you’ll be occupying. This clause is often titled “Premises.” If you’re leasing an entire building, the clause should simply give the street address (and should describe any outbuildings or lots that come with it). If you’re leasing less than an entire building, you and the landlord need to describe the space more precisely. In particular, if you will have access to storage rooms, conference rooms, parking, kitchen facilities, and the like, you should spell this out.
The Use Clause and Exclusive Clause
A use clause limits how you’ll use the rented space. The limitations can be as broad as what business you’ll conduct there, as narrow as what specific services or products you’ll offer, or as nebulous as the quality level of your operation. Landlords can impose use restrictions for any of these reasons:
- The landlord has promised other tenants that no one will compete with them.
- The landlord is worried about liability if you conduct certain kinds of businesses.
- The landlord has a personal aversion to certain kinds of business activities.
In general, you’ll want to avoid strict restrictions on your use of the rented space. Most of the time, you’ll count yourself lucky if the lease handed to you by the landlord does not include a use clause.
An exclusive clause is a promise by the landlord that only you and no one else in the mall or building may engage in a particular type of business or carry a certain type of merchandise. (Naturally, other tenants will have use clauses that prevent them from conducting business activities that would violate your “exclusive.”) Typically, only powerful “anchor” tenants get exclusives.
(For more detailed information, see Nolo’s article, The Pros and Cons of “Use” and “Exclusive” Commercial Lease Clauses .)
Near the beginning of the lease, you’ll see a clause entitled “Term.” This clause describes the length of your lease and specifies the starting and ending dates. You may be tempted to cruise right through it — after all, if you want a five-year lease and the Term clause gives you five years, where’s the complication? Alas, there’s more than one tricky wrinkle, and they’re apt to be hidden and dangerous. For example, some leases start as of the date the lease is signed, even though you haven’t conducted business for even a day. Though you might not be responsible for rent right away, you will be responsible for other obligations in the lease, such as the requirement that you carry insurance. Done properly, leases should have many “start” dates, corresponding to when you can enter to set up, when your rent is due, when you become responsible for securing insurance, when you can open for business, and so on.
For most small businesses, the amount of the monthly rent obligation is a very important issue. It’s important to look carefully at the landlord’s lease clauses to see whether your rent estimates will pan out and to determine any new costs or savings, such as:
- expenses that you didn’t anticipate — make sure you understand which parts of the landlord’s operating costs will be passed-on to you
- savings that may make it possible to shoulder other expenses — for example, the landlord may offer a “tenant improvement allowance,” which you will use to get the space ready for your operations, or
- issues that you want to renegotiate, such as the landlord’s expectation that the rent will increase by a certain amount on a stated date.
Your landlord may ask for a security deposit to assure that cash will be available if you fail to pay the rent or don’t make other payments required under the lease. Unlike residential landlords, who in many states may not ask for more than two months’ rent as a deposit, commercial landlords may demand whatever amount they think they need as a cushion to cover rent and other tenant financial obligations.
Or, instead of a security deposit, your landlord may ask for a “Letter of Credit ” from your bank, in which the bank puts aside an agreed-upon amount of your funds for use by the landlord should you not carry-out your financial obligations.
Improvements and Alterations
If your new space will have to be customized to fit your needs, a big chunk of your lease should address this issue. You and the landlord will have to reach an agreement about who does the design, who does the work, when it gets done, and who pays for it. And if you’re going to occupy space in a building not yet completed, you’ll want to be sure that you pay for as little of the finish-up work as possible.
Maintenance, Utilities, and Code Compliance
The landlord’s lease will undoubtedly contain a Maintenance clause that concerns your duties to care for your own rented space (or for the entire building, if you are the sole tenant). If you’re a tenant in a multi-tenant building, you and the landlord will also have to settle on how the utilities will be billed and paid for, so you’ll often see a Utilities clause near the Maintenance clause in the lease. Finally, the landlord may expect you to keep the building “up to code” — whatever that means (it often isn’t clear), in a lease clause sometimes titled “Compliance” or “Compliance with Laws.”
Parking, Signs, Landlord’s Entry, and Security
You’re likely to find several clauses in the lease that concern practical understandings you have with your landlord, about such things as parking and business signs. As you negotiate these clauses, you and the landlord will be trying to smoothly integrate your needs to run your businesses wisely. Although these clauses may not pack the punch of a Rent or Maintenance clause, they can be very important to a successful and convenient tenancy.
Several kinds of insurance are available to cover the risks of leasing commercial space, including property and liability insurance, rental interruption insurance (this covers you if your business is unexpectedly interrupted, as would happen after a natural disaster), and leasehold insurance (this coverage protects you if your lease is canceled due to circumstances beyond your control and you have to rent elsewhere at a higher rent). You’ll need to evaluate each type of insurance coverage in the context of your lease and your landlord’s requirements, your business needs, and the property — and negotiate accordingly. An insurance broker can help too, especially when it comes to choosing adequate levels of coverage.
Other common and important clauses in business leases include Option to Renew or Sublet (and other Flexibility Clauses), Breaking the Lease, Disputes, Attorney Fees, Foreclosures, Condemnations, and Guarantors. Nolo’s Negotiate the Best Lease for Your Business, by attorneys Janet Portman and Fred S. Steingold, explains these clauses in detail.
#commercial property for lease by owner
Practical Advice on Profiting from Commercial Real Estate in the United States
Many entrepreneurs have proven that owning the real estate used by their closely held businesses can provide them the advantages of stable rents for their businesses and appreciation for themselves. Many other benefits accrue to the owner of single-tenant commercial real estate, including the ability to employ advantageous tax strategies, an income stream in perpetuity, asset diversification, and control of the property s tenancy.
This article provides an overview of how business owners can benefit from owner-occupied, single-tenant commercial real estate, and offers practical advice on how to enter this potentially lucrative investment.
Case Study: M G Consulting
M G Consulting is an engineering firm located in Southern California. They have rented space in a business park for many years and each year they have observed that their rent has increased by at least the rate of inflation. Although their business is successful, they have come to realize that their landlord has made just as much profit in the form of rents and appreciation on the building as they have in their business. They vowed to take control of their situation and began the search for their own building.
Identifying the Building
First, M G identified the building size and amenities that suited their needs. They planned for the growth they expected over the next 10 years. In addition, they planned for future technology needs in terms of communications facilities, the image they wished to portray to clients, the proximity and ease of access to transportation hubs, and not least importantly, the geographic area. Their specifications were shared with trusted employees, and modifications were made based on ideas generated in group discussions. The owners then began their search and quickly settled on a building in a business park about 10 miles from their current site.
Negotiating the Terms
M G negotiated with the owner of the identified building regarding his price, terms, willingness to carry back secondary financing, and willingness to complete necessary repairs and tenant improvements. The owner was flexible because he had held the building unsold for some time. The buyer and seller settled on a set of mutually acceptable terms and signed a contract.
Structuring the Entity to Hold the Building
M G soon discovered that they could hold title to the building in a variety of ways, each of which had its own advantages and downfalls in terms of liability and tax treatment. M G discussed the legal implications with their attorney and the tax implications with their CPA of the following methods:
Limited Liability Company (LLC)
M G s attorney advised them that they could structure building ownership as an LLC, the major advantage being that it would be a legal entity separate from either M or G, and therefore limit personal liability from claims arising from the property. However, M G s accountant pointed out four disadvantages of an LLC holding the property:
- The cost of establishing an LLC, largely attorney fees, is significantly greater than for some other forms of ownership.
- If an LLC has two or more owners, they must file partnership federal and state tax returns,  which require most taxpayers to seek professional (i.e. costly) tax preparation assistance.
- In some states (e.g. California), an LLC, including a single-member LLC, is required to file a tax return and pay an annual fee based on gross revenue the fee, which is $800 if the building makes no net income, can go as high as $11,790. 
- Not only is the owner taxed on his or her portion of the net profits of the LLC, losses may have limited deductibility depending on the cash the owner has invested in the LLC.
Sole or Joint Ownership
M G s attorney advised them that the property could also be held under sole ownership (one owner), or as a tenancy in common or as joint tenants with right of survivorship (multiple owners). Under any of these structures, the attorney opined, unlimited liability falls on the owner of the building for any potential claims against the property. 
M G s accountant told them that the attractiveness of sole ownership or joint ownership versus an LLC is that it requires only one additional form on a personal tax return. Net rental income or loss on the property is taxed at ordinary income tax rates on the owner s tax return. He also pointed out that these entrepreneurs can mitigate personal liability risks through the establishment of a comprehensive insurance policy. That said, the decision of which way to structure the entity holding the property should be based on the LLC fees and costs versus the cost of any extra insurance required because the property is held in the owner s name.
Formal General Partnership
Essentially, a formal general partnership is a tenancy in common that is required to file a partnership tax return (usually form 1065), which is usually prepared by the partnership s accountant. Very often, establishing the partnership also requires an attorney to prepare the partnership agreement. M G s accountant strongly urged them to have a formal partnership agreement if they chose to enter into any form of partnership; in his experience, many problems are avoided if they are anticipated, which is what the partnership agreement formalizes.
The partnership is not required to pay income taxes and each partner s share of net rental income or loss on the property is taxed at ordinary income tax rates on his or her tax return. The general partners have unlimited liability for the partnership s acts, and they will often opt to insure against loss from those activities.
Formal Limited Partnership
A formal limited partnership is another type of tenancy in common required to file a form 1065 partnership tax return. However, while the limited partners liability is generally restricted to the amount they contributed to the partnership, the general partner s liability is unlimited. There must be at least one general partner and most often it will be a corporate entity established for that sole purpose. If so, that corporate owner must file a form 1120 tax return to report its share of the income from the property.
Again, establishing the partnership often requires the services of an attorney to prepare the partnership agreement. The partnership is not required to pay income taxes. Each partner s share of net rental income or loss is taxed at ordinary income tax rates on his or her tax return.
C-Corporation (Regular Corporation)
It is rare that a property is owned by a corporation and leased out to others; doing so usually means losing tax advantages such as favorable capital gains treatment on the property at sale, the ability to deduct operating losses from the property, and the ability to take tax-sheltered cash from the property. In addition, any cash taken from the corporation would be double taxed (if taken as dividends) and subject to payroll taxes (if taken as management fees) neither scenario is tax efficient.
The only advantage of corporate ownership is the limitation of liability; however, this can also be achieved by holding the property in an LLC or a limited partnership.
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Small business owners have a lot to digest when it comes to the subject of commercial real estate especially these days. That goes double for the notion of obtaining an appraisal on a piece of commercial real estate, a process that can differ quite a bit from appraisals done for residential properties. “Commercial is very different from residential in the fact that appraisals are much more subjective in nature,” says Scott Everett, founder and president of Supreme Lending, a mortgage lender in Dallas. “Much of the value derived from a commercial building is based on the rental rates received relative to the expenses paid out. The underlying asset is important, but not even close to the same way that a residential properties value assets.”
In other words, if you’re looking to get an appraisal done on a piece of commercial property perhaps because you want to buy or sell it or even because you want to establish a value of a lease or lodge a property tax appeal there could be a bit of a learning curve in knowing what you’re about to embark on. Inc. contributor Darren Dahl asked Douglas McKnight, a 22-year veteran commercial real estate appraiser and managing director at CapStruc Valuation in Malvern, Pennsylvania, for some insight into his profession. What follows is a list of the top 10 things McKnight says you need to know about commercial real estate appraisals:
1. The Inspection Is Only a Small Part of the Appraisal Process
Depending on the size and complexity of the property to be appraised, it might take less than an hour to several hours to inspect the property. Some clients perceive this as the entire process but the truth is that it is just the beginning. Appraisers research public ownership and zoning records, investigate demographic and lifestyle information, and compile comparable sales, replacement costs, and rentals. They then analyze this information as it relates to the value of the property. Finally, they write a report on their findings. The inspection is just the beginning of an appraisal process that may take several days or even weeks.
2. Don’t Try to Misrepresent the Facts
Appraisers are professional skeptics. They will seek to verify anything that you tell them from other sources. McKnight says he often ask questions that he already knows the answer to just to test the credibility of the people showing him the property. Appraisers are always thinking about how they will defend their opinions if they are ever brought to court, even in assignments in which litigation appears unlikely. If you misrepresent anything, the appraiser will discount the credibility of anything else that you say.
3. Don’t Withhold Information
You will probably be asked if you can provide a property tax bill, a set of drawings of the property, income statements, and other things. You might not know why an appraiser is asking you for something but it is best to provide whatever you can. Appraisers have no interest in unduly expanding their work files but they do need certain information and the more you provide, the more quickly they can complete the assignment. If you subsequently dispute the appraisers value opinions and produce additional information that wasn’t provided from the onset, you have wasted valuable time.
4. Appraisers Must Adhere to a Strict Code of Ethics
Appraisers must follow the Uniform Standards of Professional Appraisal Practice, which, among other things, requires them to provide an unbiased opinion. Failure to follow this might result in disciplinary action from the state, including revocation of an appraiser’s certification. If an appraiser refuses to do something that you ask for, it is probably because of the obligation to adhere to these ethics.
5. The Client Is the Party That Orders the Appraisal
If the appraisal is for financing, the lender is the client. Appraisers are obligated to maintain client confidentiality, so if you are the borrower or any other party, the appraiser cannot release the appraisal report or any other confidential information to you. If you order an appraisal as part of a property tax appeal and are afraid that the appraised value might be higher than the assessed value, you can rest assured that the appraiser won’t release the results to the property tax board without your permission.
6. Identify the Intended Users
Make sure the appraiser knows who you want to use the report. If you are looking to buy a property, that might mean you intend to share the appraisal with the seller, your lender (though they will likely obtain their own appraisal) and possibly your local property tax appeal board. These people or parties will be identified in the appraisal report and are the only ones who are authorized to use the report.
Dig Deeper:The Truth About Real Estate
7. There Are Three Types of Preports
A “restricted use report” is the shortest and least expensive type but can only be used by the client. Fees can vary based on the size of the property as well as the scope of the appraisal, but a good starting point for a restricted report might be $2000 to $2,500. A “summary report” summarizes the data and analysis and can be used by any intended user and can cost upwards of $3,000. A “self-contained report” contains all of the details of the data and analysis, but is rarely requested. If you tell the appraiser how you intend to use the report, he or she can guide you as to what type of report you will need.
8. The Type of Report Is Separate From the Scope of Work
The amount of work involved in reaching conclusions does not depend on the type of appraisal. With a restricted use or summary appraisal, the appraiser will compile large amounts of information that are retained in a work file but are not included in the report. For this reason, the differences in fees between the various types of reports are less than the amount of information contained in the reports might indicate.
Dig Deeper:How to Get a Good Deal on a Lease
9. Consider the Date of Valuation
Several years ago, McKnight appraised a nightclub. The weekend after he inspected the property, someone was shot in the club. This introduced stigma that reduced the value of the property. This indicates the importance of establishing the date of valuation. Appraisers can appraise property as of the date of inspection, as of a past date (a “retrospective appraisal”) or as of a future date (a “prospective appraisal”). It is important that you establish the correct date of valuation for your needs.
10. Consider the “Property Interest” Appraised
Last but far from least, it’s important to tell the appraiser what your interest in the property is. For example, if you want to know what a property is worth free and clear such as a warehouse you want to move your business into you are interested in what’s called the “fee simple interest.” In other words, you simply want to know the value of the building and its property. On the other hand, if you want to know what a property is worth to a landlord when occupied by a particular tenant or tenants, you want a “leased fee interest.” Finally, if you want to know what a lease is worth to a tenant, you want a “leasehold interest.” This is a common request when people look to buy businesses, as they need to know what the value of the lease is to that business. “Be sure to identify which property interest you want appraised,” says McKnight.
Dig Deeper:How to Purchase Commercial Real Estate