1. Commercial and Investment Real Estate Opportunities Types of Properties Diversity of Clients ® Dearborn Real Estate Education, 2002

2. Primary Classifications of Commercial Properties Office Retail Industrial Apartments Other Commercial Properties ® Dearborn Real Estate Education, 2002

3. Commercial Property As an Investment Almost every type of commercial property can be an investment! ® Dearborn Real Estate Education, 2002

4. Investment Customers Users Space Driven Developers Build-to-Suit Pure Investors Profit Driven ® Dearborn Real Estate Education, 2002

5. Commercial and Investment Real Estate Opportunities Residential Real Estate – One Client – One House – One Time ® Dearborn Real Estate Education, 2002 Commercial and Investment Real Estate – Many Types of Properties –Several Kinds of Customers –Unlimited Opportunities –Redundant BusinessToo!

6. “Taxpayer” Small Multiuse Buildings Typically, a store or office on the ground floor with two to six apartments above. ® Dearborn Real Estate Education, 2002

7. Advantages of Purchasing a Small Multiuse Building Which type of customer would buy a small multiuse building? ® Dearborn Real Estate Education, 2002

8. Net Operating Income (NOI) Gross Operating Income Less Owner’s Operating Expenses Equals Net Operating Income ® Dearborn Real Estate Education, 2002

9. Case Study: Main Street Multiuse Building ® Dearborn Real Estate Education, 2002

10. The Advantages of Purchase Often the cost to buy is equal to or less than the cost to rent. Purchase price is affordable. Tax benefits of ownership, i.e., depreciation ® Dearborn Real Estate Education, 2002

11. Often the Cost to Buy Is Equal to or Less Than the Cost to Rent. Store rent (from problem) $15 PSF X 1,000 SF = $15,000 annual rent Rental income (apartments)$12,000 Owner’s Operating Expenses 10,000 “Profit”$ 2,000 Effective new rent$13,000 ® Dearborn Real Estate Education, 2002

12. Affordable Purchase Price Financing the Main Street Building Building Price$160,000 Down Payment – 32,000 Mortgage$128,000 15-Year Term, 7.5% Interest Rate Annual Debt Service$ 14,239 ® Dearborn Real Estate Education, 2002

13. Cost to “Carry” the Main Street Building Debt Service (per year)$14,239 Operating Expenses 10,000 Total Expenses$24,239 ® Dearborn Real Estate Education, 2002

14. New Store Rent ® Dearborn Real Estate Education, 2002 Cost to “carry” the building$24,239 Less income from apartments–12,000 Effective New Store Rent$12,239 A savings of $2,761 over the original rent ($15,000) due as a tenant.

15. Tax Advantages of Ownership ® Dearborn Real Estate Education, 2002 Depreciation or Cost Recovery Required by IRS Code Buildings depreciate, but land does not Depreciation Time Commercial Buildings over 39 years Apartment Buildings over 27.5 years

16. Tax Advantage of Ownership ® Dearborn Real Estate Education, 2002 Purchase Price$160,000 Less Land Value – 20,000 Depreciable Building Value $140,000 Building value divided by 39 years equals the annual tax depreciation. $140,000 divided by 39 = 3,590 Tax Benefit

17. Buy vs. Rent User-investor saves $2,761 in rent Gains tax advantage of $3,590 ® Dearborn Real Estate Education, 2002 Real estate agents should discuss the advantages of purchasing with their clients.

18. The Concept of Vacancy Vacancy is defined as a portion of, or entire space without, tenancy, measured for a period of time. ® Dearborn Real Estate Education, 2002

19. Neighborhood Strip Center ® Dearborn Real Estate Education, 2002

20. Considerations of a User Customer The cost to buy may be equal to or less than the cost to rent. Tax advantages of ownership. However, “Purchase price is affordable” may no longer be true. ® Dearborn Real Estate Education, 2002

21. Considerations of an Investor Client ® Dearborn Real Estate Education, 2002 Quality of Tenants Turnover Concerns Rate of Return on the Investment

22. Case Study: Neighborhood Strip Center ® Dearborn Real Estate Education, 2002

23. Step 2: Adjusting for Vacancy ® Dearborn Real Estate Education, 2002 Adjusting for vacancy requires a reality examination. Vacancy is usually calculated as a percentage of the Potential Rental Income (PRI).

24. Determine Gross Operating Income ® Dearborn Real Estate Education, 2002

25. Step 3: Calculating the Total Operating Expenses ® Dearborn Real Estate Education, 2002

26. Step 4: Calculating NOI Net Operating Income Gross Operating Income minus Operating Expenses equals Net Operating Income ® Dearborn Real Estate Education, 2002

27. Repair and Maintenance Contingency Expenses Contingency expenses are best thought of as irregular, unexpected or emergency events. There is an important distinction between normal regular expenses and contingency repair and maintenance expenses. ® Dearborn Real Estate Education, 2002

28. Repair and Maintenance ® Dearborn Real Estate Education, 2002 Guidelines Age of the building Condition of the property Under the lease terms, what are the landlord’s responsibilities? Calculation Percentage of PRI or Percentage of GOI or Fixed Dollar Figure

29. Repair and Maintenance Problem ® Dearborn Real Estate Education, 2002

30. Effect of Repair and Maintenance on Expenses ® Dearborn Real Estate Education, 2002 Operating Expenses Taxes$20,000 Insurance 2,500 Repair & 3,750 Maintenance Total$26,250 Revised NOI Income$67,500 Expenses–26,250 NOI$41,250

31. Market Value © Dearborn Real Estate Education, 2002

32. Market Conditions Affecting Price Supply and Demand Location, location, location! Available Financing Insurance Value © Dearborn Real Estate Education, 2002

33. Commercial Values Retail – Location – Traffic Industrial – Cost of Labor – Transportation Investment – Upside Potential © Dearborn Real Estate Education, 2002

34. Highest and Best Use The best use of a property will create the highest financial return on the investment. © Dearborn Real Estate Education, 2002

35. Triple Net Lease (NNN) Tenant pays all © Dearborn Real Estate Education, 2002

36. Floor Area Ratio (FAR) a.k.a Land Coverage Ratio The ratio of the bulk area of a building to the land on which it is situated. © Dearborn Real Estate Education, 2002

37. Highest and Best Use Problem A © Dearborn Real Estate Education, 2002

38. Conversion Costs Variance–Legal Costs Construction Costs Down Time © Dearborn Real Estate Education, 2002

39. Highest and Best Use Problem B © Dearborn Real Estate Education, 2002

40. Comparing NOI Current Tenant GOI$75,000 TOE 15,000 NOI $60,000 Proposed Tenant GOI $60,000 TOE (NNN) 0 NOI $60,000 © Dearborn Real Estate Education, 2002

41. Good Deal for Owner? Rent Increases No Conversion Expenses No Down Time Bigger Building Sale versus Land Lease © Dearborn Real Estate Education, 2002

42. Capitalization Rate (CAP Rate) The CAP rate can be looked at as a desired “profit percentage” for an investor. © Dearborn Real Estate Education, 2002

43. CAP Rate Formulas Solve for Market Value NOI$50,000 CAP Rate 10% Market Value? Solve for CAP Rate NOI $60,000 Offer$500,000 CAP Rate? © Dearborn Real Estate Education, 2002

44. CAP Rate Problems A property is priced at $750,000 and has a NOI of $67,000. What is the CAP rate being offered? An investor wants to sell her building. She advises you that she has an NOI of $48,000 and will offer the property at an 11% CAP. At what price do you market the building? © Dearborn Real Estate Education, 2002

45. Retail Terms © Dearborn Real Estate Education, 2002

46. Anchor Tenants Do not sell anchors! Large department stores or supermarkets Do their own advertising © Dearborn Real Estate Education, 2002

47. CAM Charges Common Area Maintenance © Dearborn Real Estate Education, 2002

48. GLA Gross Leasable Area © Dearborn Real Estate Education, 2002

49. Tax Escalation Clause a.k.a Real Estate Taxes over Base a.k.a Tax Stops © Dearborn Real Estate Education, 2002

50. Annual Property Operating Data (APOD) © Dearborn Real Estate Education, 2002

51. Case Study: Mountain View Mini Mall © Dearborn Real Estate Education, 2002

52. Base Rent Roll Calculation $167,000Total $32,000$162,000Real estate $36,000$182,000Stationery $54,000$183,000Video store $22,500$151,500Dry cleaner $22,500$151,500Restaurant Annual Rent Base RentSquare FeetStore © Dearborn Real Estate Education, 2002

53. Step 2 Analyze all other income and adjustments to income. Solve for Gross Operating Income. © Dearborn Real Estate Education, 2002

54. Vacancy and Credit Losses In this problem, 5% is used for vacancy contingency. Potential Rental Income$177,000 Multiplied by 5%X.05 Vacancy & Credit Losses $8,850 © Dearborn Real Estate Education, 2002

55. Step 3 Expenses Only the Owner’s Operating Expenses Reminder: All figures are annual. © Dearborn Real Estate Education, 2002

56. Step 4: Solve for NOI Net Operating Income (NOI) Gross Operating Income$168,150 Less: Operating Expenses– 81,000 Net Operating Income $87,150 © Dearborn Real Estate Education, 2002

57. What Is My Building Worth? Step 5: Calculating Market Value NOI ÷ CAP Rate = Value $87,150 ÷.12 (12%) = $726,250 © Dearborn Real Estate Education, 2002

58. The Value of Investments © Dearborn Real Estate Education, 2002

59. Key Investment Terms Rate of Return Leverage Initial Investment Cash Flow Before Taxes (CFBT) Equity Cash on Cash Return Internal Rate of Return (IRR) © Dearborn Real Estate Education, 2002

60. Leveraged Purchase Cash on Cash Return CFBT = NOI – Annual Debt Service Cash on Cash = CFBT ÷ Initial Investment © Dearborn Real Estate Education, 2002

61. Investment Strategies Stability Potential Flipping Upside Potential Holder © Dearborn Real Estate Education, 2002

62. What Is the Property Worth? © Dearborn Real Estate Education, 2002

63. Components of Value Current year analysis Five-year forecast Owner’s perspective Buyer’s perspective © Dearborn Real Estate Education, 2002

64. Case Study Office Building © Dearborn Real Estate Education, 2002

66. Determine Current Rent Roll and Potential Rental Income © Dearborn Real Estate Education, 2002

67. Complete the Income portion of the APOD. © Dearborn Real Estate Education, 2002

69. Operating Expenses © Dearborn Real Estate Education, 2002

71. Net Operating Income © Dearborn Real Estate Education, 2002

72. Cash Flow Before Taxes (CFBT) © Dearborn Real Estate Education, 2002

73. Cash on Cash Return Cash on Cash = CFBT ÷ Initial Investment $15,294 (CFBT) ÷ $125,000 (II) =.1224 12.24% is the Cash on Cash Return © Dearborn Real Estate Education, 2002

74. All Cash Purchase Capitalization Rate Formula: NOI ÷ Value (Purchase Price) = CAP Rate $60,936 ÷ $500,000 =.1219 12.19% CAP Rate © Dearborn Real Estate Education, 2002

75. Spreadsheets Cash Flow Forecasts © Dearborn Real Estate Education, 2002

76. The Upside 44,84441,64233,52428,02215,294CFBT 90,48687,28479,16673,64460,936NOI Year 5Year 4Year 3Year 2Current Year © Dearborn Real Estate Education, 2002

77. Cash on Cash Returns.1224 (12%)$125,000$15,2941.3588 (36%)$125,000$44,8445.3331 (33%)$125,000$41,6424.2682 (27%)$125,000$33,5243.2242 (22%)$125,000$28,0222 Cash on Cash Return Initial Investment CFBTYear © Dearborn Real Estate Education, 2002

78. Market Value Does the potential buyer care about the present owner’s return on his/her investment? © Dearborn Real Estate Education, 2002

79. Potential Market Value 12% CAP 10% CAP 90,48687,28479,16673,66460,936NOI Year 5Year 4Year 3Year 2Current Year © Dearborn Real Estate Education, 2002

80. Potential Market Value 754,050727,367659,717613,867507,800 12% CAP 904,860872,840791,660736,640609,360 10% CAP 90,48687,28479,16673,66460,936 NOI Year 5Year 4Year 3Year 2Current Year © Dearborn Real Estate Education, 2002

81. What Is My Property Worth? © Dearborn Real Estate Education, 2002

82. Considerations Regarding Value What the current owner paid is irrelevant. Test the assumptions used in the forecast. How much upside potential will a buyer pay for? © Dearborn Real Estate Education, 2002

83. Methods of Valuation Income Approach Comparable Sales Method Cost Approach © Dearborn Real Estate Education, 2002

84. The Buyer’s Perspective Challenges Incorrectly Stated Facts Questionable Assumptions Business Style © Dearborn Real Estate Education, 2002

85. Applied to the last problem Basement Rent? Vacancy Rate 7%? Repairs and Maintenance 5%? Off Site Management 5% © Dearborn Real Estate Education, 2002

86. Compare the Market Values None of the “facts” changed. What did change were the assumptions. © Dearborn Real Estate Education, 2002

87. Commercial Agents Validate the facts and evaluate the assumptions. © Dearborn Real Estate Education, 2002

88. To make a deal Negotiate the assumptions first Then the price © Dearborn Real Estate Education, 2002

89. Future Business Develop relationships with commercial and investment customers for life. © Dearborn Real Estate Education, 2002