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Healthcare Real Estate Transactions: A Few Considerations

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Healthcare is real estate heavy. Not until healthcare reform was formally introduced were the majority of private and public healthcare providers scrutinizing their swelling real estate portfolios with similar risk assessments and accountability measures as their employee-dense corporate industry peers.

Over the past decade, healthcare providers have increased outpatient care, both close to hospital campuses and, more recently, in retail settings. Inevitably, the growth will have to continue to accommodate the transfer of patients into more efficient care settings. Yet with statistics such as: 1/3 of all hospitals will need to find alternate use, healthcare costs and infections are at an all-time high, and technology rapidly reducing redundancies, any new or adaptive real estate use will certainly be scrutinized.

Given the tremendous task of analyzing a property or portfolio in today’s capital complacent, regulation rich healthcare real estate environment, it is important to note that the potential buyers and sellers of these transactions take note of the following:

Real estate, which may consume up to 50% of providers’ balance sheets, is valued at book value. So, determining the fair market value (FMV) of a portfolio may be difficult without true comparisons especially noting the separate and distinctive build-outs in the field. This lack of transparency typically favors the seller, especially in locations where a lack of supply and pent-up demand exists.

Currently, hospitals with whom we are speaking are more interested in monetization now, than possibly any time in the last decade. Determining what to keep and what to sell is commonplace. With regards to a future merger, the real estate assets are being used as a source of financing for the transaction. Thus, determining the hierarchical distribution of assets as they pertain to compensatory value is necessary. We are noticing that most providers typically sell their weakest ancillary units first. Some buyers may look past their first few purchases for future consideration of a larger portfolio.

Healthcare is very attractive as it holds a high barrier to entry. Large amounts of capital have been raised over the last few years all the while interest rates have been moving lower. This allows providers that are seeking to sell real estate the opportunity of selecting several long term capital partners or buyers at attractive prices, especially when given the credit of the provider is strong. EBITDA’s are certainly shrinking for all medical real estate deals.

To grasp what is moving and why -or- to request a proposal for a property or portfolio, please contact MREA for one of our experienced medical real estate advisors.

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Healthcare Facility Leasing FAQs

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We are commonly asked questions that pertain to concerns which are healthcare industry-specific, yet we can always find a way these issues relate back to the contractual obligations of real estate commitments.  As a courtesy to those that are seeking guidance explicitly for when the rubber meets the road (real estate meets healthcare), we have provided some fairly uncomplicated scenarios that will likely exist in a health facility lease transaction.

Landlord Vs. HIPAA
Commonly, a lease agreement will allow the landlord entry onto the premises for the purposes of inspections and repairs.  HIPAA provides guidelines to protect medical records and personal health information.  A lease within a medical facility will typically provide that the landlord may not enter an exam room with patients present.  Further, most leases will indicate that any location within the spatial premises leased by the tenant, if entered, will have the potential to breach privacy or confidentiality of patients or medical records.

Tenant Vs. Medical Waste
A medical lease agreement will typically include a provision that prohibits a tenant from using or storing any hazardous materials on the property without the consent of the landlord.  If the tenant will require the use of such materials, the lease will commonly indicate that the materials commonly used in concert with the permitted use of the leased premises will be allowed, as long as the materials are stored in compliance with strict regulatory commitments.

As for the disposal of hazardous waste, leases commonly provide that the landlord will be responsible for janitorial services, but will require the tenant to arrange for its own disposal of medical waste.

Stark Law Vs. Landlord/Tenant
It is important to consider if a relationship exists that has the ability to breach Stark laws, or potentially, Texas law.  The Anti-Kickback Statute deems it a felony to offer, tender or receive fee, or compensation, if the payment is determined to influence referrals for patients.  So, it is important for a lease to exist and to comply with the following:

  1. Be in Writing
  2. Identify the Premises
  3. Term of Lease at Least 1 Year
  4. If Interval (Time Share, etc), Lease to Specify Schedule and Rent for Interval
  5. Rent must be Fair Market Value

Permitted Use Vs. Technology
A lease agreement will include a permitted use provision that restricts the use of the space to certain business operations.  Yet, a tenant wants to maintain flexibility, especially with the newly minted technological changes that are required to adapt and compete within a specialty.  So, a tenant wants the provision to be as broad as possible, while a landlord seeks to restrict the use to improve tenant mix and provide other tenants with exclusive rights.  While a rare bone of contention today, technology will eventually force tenants to seek very general, or highly specific opportunities.

Building Vs. Equipment
The medical industry has some of the most cumbersome and demanding equipment.  It requires specific attention when placing on the premises of a multi-story structure.  Thus, some buildings have special provisions for weight distribution or electrical capacity.  The location and installation of necessary landlord and tenant is commonly addressed in lease.

Improvements Vs Landlord/Tenant
The lease agreement will provide how each party will become responsible for design, materials and installation of the tenant’s improvements.  While a highly negotiable item within the lease, it should determine the control of implementation and ownership of improvements.

Lease Vs. Physician Practice
A greater number of leases are requiring personal guaranties from key members within a physician group for the purposes of adherence to contractual obligations.  With more physicians defecting to hospitals, merging practices, or even leaving certain jurisdictions, we are noticing considerations for physicians to be released from guaranty if the leave the practice, while including those that enter.  Other limits include guaranty amounts proportionate to ownership share of practice.

These are abbreviated responses to a few common inquiries pertaining to medical real estate, none of which constitute legal advice.  Please make sure to contact Robert S. “Bob” Lowery for guidance with your healthcare real estate decisions.

Bifurcating Commercial Real Estate…

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…could get worse (or better). This truly depends on which camp you associate with regarding the economic divide that is now a larger topic of debate in our country.  As for policy that is directed towards a remedy, both political parties could not be wider opposed to proposed solutions from the other, which is certainly indicative of our political and economic divorce.

The dichotomy is evident throughout the consumer world. For an example, high end retailers such as Nordstrom are recording excellent profit, and the low end, Dollar Stores, is doing great volume.  As for the middle, JCPenney is laying off.

Apple has the highest market capitalization for a technology company (or any company for that matter) with continued pricing power, yet products and inexpensive technological innovations from Google continue to see enormous, reliable volume.  Yahoo and Blackberry are getting slaughtered.

From a real estate perspective, multi-family is witnessing increasing occupancy levels from above normal rental activity and, on the opposite end, high end homes are picking back up once again as salaries, stock market and stable investments are paying greater tangible and mental dividends.

Farm and shale land are all the buzz, with prices quadrupling during a recessionary period, yet large tracts of land unloaded by lenders are dirt cheap.  Midsize land tract owners and developers have had no place to hide, with speculative plays now in another’s coffers.

This all said, there remains activity in the middle and it is improving, which is absolutely essential for commercial real estate to fully function as a healthy investment consideration.  When the headlines such as ‘commercial real estate is gradually improving’ echo throughout, it is the middle where analysts tend to concentrate.  As for the high end, which I consider to be strategically located, newly developed, and freshly tenanted, it is going up, while the low end is dissolving.  The middle (aka. the fence) is falling on one side or the other.

As for our firm, we are well positioned to guide and administer needs of the small (combining forces), middle (established, seeking to compete in other markets or adopt new identity) and large (strengthening and capitalizing on current position); we have solutions for all.

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8 Brain Benders (from easy to more difficult):

Property sales prices may be $600 per square-foot tenanted and will likely continue higher.  What could change this trend?  Stronger Dollar.

Property sale prices may be $6 per square foot vacant and will continue lower. What could stop this trend?  Lower Oil Prices.

Lease Rates will continue improving.  What will change this trend?  More Problem Banks.

Rental concessions will likely continue to increase.  What will change this trend?  Mortgage Rates Moving Higher.

Tenants will begin to purchase buildings.  It is going to happen.   As for cautions, several purchases on high end will eventually suffer due to current and future price speculation and a small percentage on the low end with sacrifice their business principles for a real estate play that will weaken their competitive position in the long run.

CPI will likely remain steady.  What will change this outcome?   Stock market decreases significantly.

Buildout costs will continue higher.  What will change this trend?  Fannie and Freddie are officially taken over.

Eyesore buildings will continue to worsen.  What could change this trend?  REIT prices continue higher.

Social Media VS. Commercial Real Estate

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I remember the day in early 2010 like it was yesterday.   After a horrible year for our industry, the company called in all of the associates to mention that the firm’s corporate marketing platform was shifting to adopt very unique selling strategies incorporated within social media. For the firm, social media would be the horse to pull the cart for the indefinite future.

As an avid participant of social media marketing techniques for several years prior, whereby utilizing it as a defined percentage of my overall personal branding strategy, my reaction was not one of rejoice.  It was not that we were implementing 21st century technology to benefit our organization and its associates; we were.  My discontent was that we would dilute ourselves and our profession by largely incorporating social media’s bold, yet sloppy entrance into the internet as our preferred method of corporate branding and potential client interaction.

Why?  In my mind, social media is, and will always be, in whatever form, utilized as a simpler, more cost-effective alternative to professional corporate public relations and marketing.  Therefore, if I am in the majority on this, which I certainly believe I am, using social media suggests to an educated, informed public, especially within the ranks of healthcare and commercial real estate, that our message, any message, is important.  It is not.

Utilizing a “free” media campaign as a large percentage of the company’s brand and product distribution is simply recipe for disaster.  In business, through education it is realized that just because someone else is, or is not doing it, does not make it a sound business decision (or even profitable). By exclusively implementing social media, simply because it is the easiest way to promote your product or service, or worse, to gather fiduciary relationships, suggests that not everyone should actually be in business. Remember the expression — Talk is cheap, well, social media is essentially cheapening our words with each egregious talking point or reference.  The thought that forwarding material by clicking buttons just because someone else’s story line looks appealing is a good idea, it is not.

So, how can social media work for you?

A few suggestions:  Build a profitable brand prior to implementing social media.  This takes years of effort, but when your brand is ready for mainstream, implement it wisely.  Because, in the end, it truly depends on the time spent utilizing it (or abusing it) and what you are delivering that separates you from the noise. So, if you are in the widget business, you should advertise your widgets or help people understand how your widgets work, or how your widget is worth something over your competitors widgets.  Be realistic though, no one wants to hear your message again and again.  If so, the “any message” just gets lost in a verbal chaos known as social media and time could be wisely spent in more productive, profitable ways for yourself, your company and, especially, your clients.

See, social media is free because it has no direction, no purpose, no unique selling points to deliver to its customers; large or small.  It resembles an enormous disfigured mass of molten hot lava that swallows each unsatisfied marketing campaign or underfunded budget and dilutes it through over absorption.  Using this analogy, the heat eventually cools and turns into a hardened object called igneous rock.  The rock signifies time lost chasing a passing fad.

So, is your time better served Twittering or working?  We think working.  Remember the days when companies told their employees not to use the internet in lieu of working.  Still true today.

By the way, I just missed a potential client’s call writing this post.

This is an educated opinion written by Robert S. “Bob” Lowery.

How Pocket Listings Are Utilized

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We realize that everyone is ‘looking for a deal’ in today’s marketplace.  For an example, we have access to a list of investors, developers and JV’s that are searching for opportunities in the market.  This list has been updated quarterly and has changed only slightly over a 5 year period.  So, some qualified investors have remained on the sidelines for 5 years; some longer.  While a few purchase opportunities have presented themselves, to which our clients have been rewarded, as you might imagine most deals have not materialized because of a multitude of regulatory issues.

Over the stretch of 2011, the majority of property transactions that have been sold through our Houston office have been issued directly from the bank.  The secondary source for transactions have been generated via listings/contracts kept off the open market, otherwise known as pocket listings.

Pocket listings happen to be one of the most highly scrutinized, yet secretive avenues for obtaining deals in the commercial real estate industry.  In order to understand pocket listings and how they allow commercial real estate professionals, and their clients, to have the upper hand in the industry, it is important to know what a pocket listing is when compared to a marketed listing.

First, let’s review marketed listings and the internet marketplace.   Dot.coms, such as Loopnet and Costar, offer huge databases of all of the properties that are for sale, as well as information regarding these properties.  Once the property has been made available for sale, it most often is made public on these various internet channels, available for all commercial real estate professionals to participate in and view information.  Once the property has been sold, or disposed, the listing is removed from these networks.

Pocket listings differ in that the commercial real estate broker holds a signed contract or a listing with narrow price negotiation range off of the market.  Most of the time, these agreements limit the amount of advertising that can be done on the listing or the type of access that others are given to the listing.  This listing type is often utilized by the large brokerage investment firms that control their certain investor market, essentially creating their own in-house auction for the strongest, most qualified buyers to bid.

On the flip side, marketed listings are such that the commercial real estate broker makes the listing available to any and all prospective buyers, per the agreement that they signed with the seller in the first place.  Any commercial real estate professional that is interested in showing or buying the property is able to so and is therefore entitled to any commissions that are made off of the final sale of the property.

How did we enter this closed market?

Being in command of our sector type is the best way to get in, as far as pocket listings go.  For example, our group will attend networking, trade, bank and large conventions to access individuals who control information.  Not only does this allow us to build solid, positive relationships with medical and business professionals, it also put us allows us to be in the know of such opportunities.  Prior to the property coming to market, we offer to eliminate the marketing process, whereby providing a ‘qualified buyer’ directly.  In addition, we have determined that physician functions, economic planning committees or zoning and planning committees are a great way to obtain information for land / medical development, selling, planning and other things related.  By attending these meetings, we put ourselves at the forefront of any marketing process.

Pocket listings have their naysayers, though.  Many listing brokers and brokerage houses have labeled them as detrimental to an efficient marketplace.  Their reason, as legitimate as it sounds, has serious holes.  Their rebuttal is that if every investor was given the opportunity to bid on a property listing, the highest bidder wins.  This is far from realistic.  For one, they are assuming that their personal marketing campaign will provide the most optimal coverage possible for the property.  The response from the pocket listing broker tends to always be that the strongest bidder wins.

Unfortunately, brokers and investors became accustomed to internet solicitations as their main source for information, especially during the mid 2000′s when anyone could qualify for a commercial real estate loan.  During this time, investors became more apathetic, never setting foot on the the real estate that they ultimately purchased.  Brokers sat idly by their computers for a property, price or deal to flash onto their screen or sought listings to place them on the these vehicles.  Those days are long gone and so is the internet marketplace as a source of trustworthy information.

For those that utilize pockets listings, we encourage direct communication with the owner, as this strategy must be disclosed properly.  If the owner wants to risk taking his/her property to market in order to obtain multiple offers, qualified or unqualified, or advertise a listing on several marketing channels, then they might want to consider slipping into an exclusive, marketed broker listing format.  In essence, it is not the best practice for commercial real estate practitioners to request that listings be pocketed to them.

It takes experience, know-how and above all, HARD WORK!

What is Wrong With Commercial Real Estate?

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It has been well documented that commercial real estate prices have dropped significantly since 2007 and continue to suffer today, albeit a push forward in 2010.  As a practitioner in the ‘middle market’ then, and today, the disruption to the commercial real estate flow and communication has been nothing but extraordinary.

The decline is the result of three very simple causes that most of us have a tendency to forget.  The first reason for reduced prices is the downward pressure on rents and increasing vacancy rates.  The second is increasing capitalization rates and third factor can be considered a result of the first two results – rising capital requirements.

The easiest way to obtain a value for commercial real estate, especially when comparables (recent sales) are so few, is by dividing the net operating income of a property by the capitalization rate. The capitalization rate is the market’s way of quantifying the risk for the collection of an income stream in the future. Capitalization rates are affected by macroeconomic factors such as liquidity and taxing, and microeconomic factors such as local unemployment rates and supply and demand of the certain type of asset. A lower capitalization rate will result in a higher property value and a higher capitalization rate will result in a lower property value. Capitalization rates are problematic when a market is in flux, as ours continues to be, where there is limited liquidity and decreased demand.

For all of the commercial real estate (excluding multi-family), capitalization rates have increased significantly since 2007, which has in turn tormented appraisal values for commercial real estate. As a result, many borrowers, those who have paid their making monthly mortgage payments on time, have found themselves in technical default because of low appraisal values that do not satisfy loan-to-value requirements.

This is a significant problem and poses the greatest risk of continued pressure on prices.  That borrowers of performing assets are finding themselves in maturity defaults, unable to refinance expiring debt is commercial real estate’s largest issue. Unlike residential loans, which can fully amortize over a 30-year term, permanent commercial loans normally partially amortize over a 5, 7, or 10-year term. As a result, the borrower must refinance a balloon payment at these intervals.

As stewards of the industry, we hope to allow the free market determine the income stream, or risk, that is required for investor demand to re-enter the market and price stability to occur.  Until we are able to obtain a clearer picture of what the future may look like, capitalization rates will continue to rise as the industry is deemed ‘too risky’ to enter.

Investing in Medical Real Estate

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Most serious commercial property investors are well aware that multifamily apartment buildings are leading the commercial sector recovery.

Right now, multifamily transactions are well on pace to eclipse the 2009 and 2010 by the first half of 2011.  Remember though, medical offices are the best commercial investment for the future.  Hedge funds, insurance companies, pension funds, and other highly capitalized investment groups have been moving into large medical centers for several years.  Smaller investors, have made similar moves into single office practices and small medical complexes.

There are several reasons that medical real estate is on the short list of commercial investments to be closely analyzed. It’s difficult to single out an individual reason, as there are many.  However, the fact that a growing number of baby boomers will be entering their 60′s cannot be denied.  The medical needs of baby boomers are about to explode.

On average, 7,000 new beneficiaries will be added to Medicare every day during 2011. That adds up to 2.5 million in a single year.  Over the next 20 years, the Medicare program will expand to cover approximately 70 million people, compared to 42.5 million in 2008 (source: AARP).  As baby boomers continue to age, the senior care market will also expand into assisted living and nursing home care until 2030 and beyond.

Another reason that medical facilities would make a solid addition to your commercial property portfolio is the Obama administration’s Health Care Reform package.  Whether you agree with it or not, when fully implemented, the program is expected to provide medical coverage to an additional 32 million people as well as improve coverage for those with limited coverage or those that have reached their life term limit, which has been abolished.  The 32 million becoming eligible for health insurance will no longer have to be treated at hospital emergency rooms for non-emergency conditions.  They will receive preventive medical services and other treatments from private practitioners operating out of private medical offices.

Finally, I would like to the caliber of tenants that lease medical facilities.  These are not a couple of high school hot rod enthusiasts partnering up to start an automotive performance parts store without any business background. The kind of tenants that go out of business as soon as their SBA loans run dry.  Instead, doctors are highly trained and educated individuals.  These motivated tenants attend university and intern programs for between 11 and 16 years before beginning their medical practice.  That shows serious tenacity and dedication towards their profession.  Once they start their medical practice, they lease or buy hundreds of thousands of dollars of expensive and specialized equipment.  These are not people that are going to give up their practice on a whim and leave you with a difficult to fill vacancy.

The bottom line is that if you don’t want to be a landlord of a multifamily apartment building and you don’t want to deal with overflowing toilets or a noisy neighbors in the middle of the night, there are quite attractive investment opportunities in medical real estate.  I would encourage you to understand how health care functions and make medical facilities part of your ongoing investment interest.

Analyzing the Leases of a Commercial Real Estate Investment

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As the market climbs out of the doldrums and lease activity picks up, it may be time to wipe the dust from the broker’s offering memorandum and take a closer look at that commercial real estate investment.   While, in this environment, we defer to the buyer to make that determination based on associated need and risk,  but currently some buildings and pockets of Houston are attracting attention from the pent-up commercial real estate investor class.

Because we understand that the market has changed so quickly, in such a brief period of time, new investment capital is no longer looking for land appreciation as the sole driver to the investment decision.  They will now be focused on what makes the property truly worth its weight: strong leases.

The buildings that have the strongest leases and are located favorably, per their specific asset type, will be the most marketable and sellable over the next few years. For the others, and there are many, the asset values will continue to decline on a similar path with land values.  And, if maintenance for the property becomes deferred and tenants not properly managed, the outcome will be much worse.

Regarding those buildings that are truly sellable, we have provided you, the user/investor, with some expertise regarding the examination of leases when purchasing commercial investment property.  Here are seven important lease items to analyze prior to, and during, the due diligence period:

  1. Bank and Personal Guarantees: An investment property comprises leases and other documents which support tenant occupancy. A normal leasing process would involve and create some form of guarantee to be provided by the tenant to the landlord for the duration of the lease. It is important that this guarantee has both strength and substance to reimburse the landlord in situations where the tenant defaults under the terms of the lease. At the time of property sale, these guarantee documents should have some form of ability to be transferred or re-issued to the incoming purchaser. This process is called an assignment of the guarantees. You should consult with the landlord’s agent to identify the types of guarantees involved and the ease in which this can be achieved at time of sale.
  2. Income and Rent Analysis: The income for the property is a reflection of the leases and occupancy licenses therein. It is essential to understand that the rent has been collected in accordance with the leases or licenses and that all rental matters are up to date. Part of this process will also involve the checking of the rent review profile and the expiry profile of all leases. A property with a volatile leases or leases that are soon to expire is likely to impact the price or the buyer interest. When reviewing tenant occupancy against leases, you should review the original documents and cross reference this to the tenancy schedule and any discussions or information provided by the landlord.
  3. Lease disputes: Rarely is there a property that does not have an existing lease dispute or has been impacted by a previous lease dispute. For this reason it pays to question the matters of lease dispute and resolution. If in doubt, seek a copy of correspondence and any subsequent agreement between the appropriate parties. Unresolved lease disputes can jeopardize or slow the process of property sale.
  4. Rent reviews: A significant concern in the sale of a property is the size and stability of future rent reviews. It is the rent reviews which will underpin the cash flow and hence the attractiveness of the property to purchasers. It is essential that the real estate broker or agent read all of the leases, before any assessment of price or method of sale is given. It is quite possible that the rent reviews projected and detailed in the leases can either hinder or attract purchasers to the property.
  5. Rent arrears: Existing rent arrears should be identified with the owner of a property. Any matters of associated legal pursuit should also be identified. It is possible that the property has had a history of rent arrears and instability. Look for these matters and question the cash flow stability. A history of financial performance from the property over the last few years is the best way to achieve this.
  6. Short term leases: Many properties have short term leases or casual occupancy active at any point in time. It is vital to know the mechanism under which this occupancy occurs and how it will be terminated. You do not want a short-term occupancy to jeopardize the stability and processes of the sale.
  7. Undocumented lease occupancy: Some may call this a casual lease; however a casual lease can create concern and uncertainty in the process of sale. Some tenants may claim a long-term occupancy from the existence of a previous casual lease arrangement with the landlord. Claims of this type must naturally satisfy the requirements of law to be sustained or upheld by the courts; however you should be cautious in such circumstances given that it can slow down or hinder the sale process.

This article was republished from Robert S. “Bob” Lowery’s original article, “Lease Issues That Arise When Purchasing Commercial Property”

Real Estate Investing: Residential or Commercial?

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Most commercial real estate investors begin their investment careers by purchasing residential or multi-family homes.  A number of influential figures of Houston’s commercial landscape dabbled for a period of time.

Here’s how it begins…

The strategy: Residential investors typically lease their homes to stabilize the asset in the hopes of making their riches on the back end or via long-term investment.  While most residential investors usually go in with the best attitude, they quickly realize that leasing the home is a “necessary evil” for its long-term benefit:  price appreciation.  In some cases, residential investors have been willing to accept negative cash flow for this ultimate prize.  They do the “toilets, tenants, trash”, or other variation of this commonly used phrase, with the belief that tenant demand & supply of dollars will remain constant and home prices will go up.  This is the typical story of the residential investor of the past.

Fast forward to today.  The challenge of leasing and managing a home is much greater, while home prices are falling.  The old formula for residential investment no longer computes. At best, residential investors are hoping to break even. Different from a couple years ago when everything was going up!  As a result, our representation group has welcomed a new group of investors; those that are shifting their investment strategy closer to the core of business and money creation – commercial real estate.  Leaving residential investment for it’s older cousin.

These investors are looking into commercial property, such as single-tenant retail and office, shopping centers, small medical office buildings, and industrial are searching for more stability, less management, and more potential upside due to current depressed prices.  Let’s explore this paradigm shift…

  • Income: Commercial real estate generates far greater income when compared to residential properties in the Greater Houston area.  For an example: Rental income on a commercial property can range, but we are locating properties with $300,000 of net operating income (income – expenses) for a $2 Million Property.  To equate to residential, the owner would have to rent out at that 15,000 SF home for around $35,000 a month.  We say, if you can achieve this on a long-term basis, stay in residential.
  • NNN Leases: NNN-leased commercial properties remove a host of issues that are typically provided by a landlord in residential investment.  The worst fear for any tenant is deferred maintenance.  Your tenant pays good rent to receive poor, inadequate, or no service whatsoever.  Furthermore, deferred maintenance will have a negative impact on the property appeal and value.  In NNN-leased commercial properties, the tenant has control over the condition of the property.  In this type of lease, a landlord and tenant agree on a price and terms, as standard.  The difference is in a  provision that states that a tenant will pay their pro-rata share of the expenses for the upkeep of the property, among other things.  While that means lower base rent to the landlord when compared to a “no expenses to tenant” clause, it includes that the tenant is responsible for the building’s appearance.
  • Reliable Tenants: Tenants of commercial buildings are stronger – financially.  If you don’t believe that, ask them.  As commercial brokers, that is exactly what we do.  Unlike residential, financial statements and tax documents are requested to view a company’s past, present and potential future.  The greater the company’s history, the greater the lease longevity, the greater the stability and appeal of the property.  And, based on commercial real estate’s long-term lease arrangements, if a tenant leaves a  property, they will continue to pay rent.  If the tenant cannot pay,  they will need to replace themselves (via the use of a brokerage house or in-house leasing) with another tenant.  This is called subleasing.  So, no sweat to the landlord, as they are not responsible for re-tenanting, unlike residential.
  • Long-term Leases: On average, businesses usually settle into one location for 7 years.  Tenants, such as Walgreens, stay for 20.   Residential agreements last around 1 year.
  • Management: Much simpler in commercial real estate.  For an easy example, which would your choose?  10-tenant shopping center or 10 homes spread throughout the city? Management intensive investment is a waste of your time and your money.

Others….

  • Tax Ease
  • Credit Impact
  • Pride of Ownership

This article was republished from Robert S. “Bob” Lowery’s original post, “8 Reasons to Leave Residential for Commercial…Now!”

CRExtract: 11.23.2010

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Price Rise is a Record – Commercial real-estate prices rose in September, as measured by the Moody’s/REAL All Property Type Aggregate Index, which posted a 4.3% increase. It was the first increase in the index since May and the largest gain in the history of the index. Not all sectors logged improvements in September. Moody’s said two property types, apartments and retail, had price increases, while the other two property types, industrial and office, measured declines. WSJ

Real Estate Investors Look to the Future, and Signs to Buy Apartment Towers – Competition is strong for the few properties that reach the market. Many owners are loath to sell unless they can reap a large profit. Class A properties, or properties in good locations, selling for more than $20 million in cities with little development and strong demand are the most wanted. “It’s highly competitive today because we only have 10 percent of the inventory we had in 2006,” said Mark T. Alfieri, an executive vice president at Behringer Harvard, a private commercial real estate firm. NY Times

Report: Banks Selling Off More Assets - But in the last few months, banks sold more than $6 billion in so-called nonperforming assets, according to the report, published by the investment bank KBW. Banks have sold more than $16 billion in such assets so far this year, twice what they sold last year, said the report, which was based on regulatory filings from a diverse set of more than 200 banks. The banks are selling the troubled assets, the report said, now that they have enough capital to withstand some losses. It also helps that the institutions have given up on the hope of turning a profit. NY Times (DealBook)