KUOW Seeking Stories from Commercial Real Estate Investors

I received the following request from a KUOW reporter that I thought was worth forwarding on to the general reading audience:

Another of our reporters is working on a story on commercial real estate investment. I recognize that your blog follows residential real estate more closely, but I know many of the people reading it are doing so for investment purposes.

I would be thrilled if you would once again publish our question form.

I do have something to offer as some sort of a way to square things: our reporter Phyllis Fletcher did a 10-minute feature piece the other day on the fallout when people are evicted in order to make way for new development that never happens.

For those that do not remember, back in June I posted a similar request, which resulted in an interesting story about downtown office space.

This month’s questionnaire concerns commercial real estate investment decisions.

Just a few years ago an investment in commercial real estate looked like a sure thing. Now it’s a different story. What decisions are you making now because of the market downturn?

If you’ve got any recent experience in commercial real estate investment, head over to the KUOW question form and drop them a line. When the story is posted (presumably in a few weeks), I’ll be sure to post an update.

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

12 comments:

  1. 1
    David Losh says:

    Commercial Real Estate means an investment with an expected return.

    The unfortunate down side to the uptick in residential prices and the exuberance of the stock market is that owners of commercial spaces have a false sense of hope.

    An associate of mine signed a lease on a property that was vacant for a year. The owner can afford to do that but still, what a waste.

    I called about a space yesterday and the agent flip flopped around about what the owner would or could take as terms. We’re going to wait until after the first of the year.

    In my opinion many of the owners of commercial spaces are amateurs who thought that commercial Real Estate meant a more professional set of renters. Instead, these will be the next round of defaults.

  2. 2
    Ray Pepper says:

    Our LLC’s own 5 commercial buildings. 2 Coffee Shops, 1 Church, and two 2500+ sq foot retail. They were bought in the GEM status of prices, 59k,65k,113k,118k, and 200k. One is long term rented as a Church and One Coffee Shop is under new tenancy. The other 3 are vacant. They are being used as a write-off for tax purposes in 2009. Even Gems can drag on a portfolio when vacant but I must stress the combined payment of all 5 is just 3514.00. The church brings in 1600 thereby causing about a 1500 neg. However, we have noticed an uptick in commercial insurance rates as well. Remember they don’t like vacant buildings.

    All are being marketed for sale (however we always do this in between tenancy) while we also hit it hard for tenants. We have reduced the properties prices nearly 40% (which would still yield a 27% gain) and we are now getting nibbles.

    I personally like them all because they are income producing, owner operators can live in them/ run their own business, and are turn key.. I’m racking my brain to see if I want to invest in something to put in these places but I don’t want additional headaches and I don’t want to initiate a payroll and monitor employees.

    In sum…KUOW..Commercial is very bad now, actively depreciating, and many proposed tenants have no cash to get a small business going so we reject tenants. We already know with no financial backing/little cash to operate they will not make it 6 months even with the best of intentions.

  3. 3
    AMS says:

    RE: David Losh @ 1 – Any idea on how to value all of the commercial real estate in a market, such as the Seattle? What is the foundation of the valuation?

    What is a proper way to value the rent of a single building?

  4. 4
    AMS says:

    RE: Ray Pepper @ 2 – Which building is the church?

    I’ll assume the $200k:

    Purchase Price to annual rent multiple = 200k/19.2k ~ 10 (it’s slightly over 10)

    The others offer a better ratio for investment purposes.

    On the other hand, I suspect that the market value is now over the $200k, even if values have declined recently.

  5. 5
    Ray Pepper says:

    RE: AMS @ 4

    yes the 200k is the church rents for 1600. It can be yours for 269k..Plus you will get a Free 500 Realty T Shirt! Can’t put a price on that.

    We had one deal go dead on this one with a 10k non refundable deposit on the option. The option expired and so did the Buyers 10k. We pay 7% on the note at 933.33 plus Tax/Ins. We make a few hundred a month on it. Not worth the time for us.

    MLS # 29118693

  6. 6
    AMS says:

    RE: Ray Pepper @ 5 – Options are only exercised when the market value increases, or shall I more correctly state, options are exercised when the strike price is below market value.

    What’s amazing is that a property with a purchase price to annual rent multiple of about 10 isn’t worth your time, yet so many residential properties have a very unfavorable multiple of 20 or more. Even if we use the $269k, the multiple is about 14.

  7. 7
    Ray Pepper says:

    It was just a 120 day option to perform. They placed the money down and were perfectly willing to lose it as it turned out.

    Yes, we believe commercial will remain flat with a downward bias for at least 5 years. With the risk of vacancy in this environment we’d rather walk with 50k and grind it out at the auctions.

    We had this property listed at over 350k last year.

    A simple rule of Auction Investing in a depreciating asset environment:

    **Don’t buy anything unless you can sell it for a profit tomorrow**There should be a GIANT BANNER on display at all the County Auctions because so many “investors” just way over pay in hopes of a quick flip. Make a mistake and you become a “bagholder” with a rental..The nightmare for an auction investor. End up holding too many bags your investment career is over/put on hold for a period of time.

  8. 8
    AMS says:

    By Ray Pepper @ 7:

    It was just a 120 day option to perform. They placed the money down and were perfectly willing to lose it as it turned out.

    Oh, $10k for 120 day option on a $250k asset. That’s ~16% per year for the option alone–the rental income only makes the situation better. If the strike price was right, then the you were not going to lose much, even if you wanted to sell. In other words, if the strike price were high, and thus you really want to sell, then you earn the 16% rate for the 4 months. If the strike price were low, then the deal would have been done.

    By the way, I will cover this issue down below once again.

    Yes, we believe commercial will remain flat with a downward bias for at least 5 years. With the risk of vacancy in this environment we’d rather walk with 50k and grind it out at the auctions.

    $50k today is better than $50k five years from now.

    We had this property listed at over 350k last year.

    Listing prices are only interesting if there is a sale.

    **Don’t buy anything unless you can sell it for a profit tomorrow**There should be a GIANT BANNER on display at all the County Auctions because so many “investors” just way over pay in hopes of a quick flip. Make a mistake and you become a “bagholder” with a rental..The nightmare for an auction investor. End up holding too many bags your investment career is over/put on hold for a period of time.

    This is where I will cover that option idea again. There are too many accidental landlords, also known as stuck flippers, who are clueless about how options work. For some reason they think that an option contract is essentially a purchase contract. The deal will happen. In part I think it is about love, or possibly laziness, but I am not really sure where the mentality comes from.

    The basic idea is that when you write a lease with “option to purchase,” the purchase will happen. Unfortunately for these guys, I have been known to help buyers. What I tell the buyer is to offer the “full selling price” on an option to purchase deal. The seller then, for some reason, counts his unhatched chickens. Of course when the day to buy comes, if the value of the property is significantly more than the strike price, then the buyer wins. If the days comes to buy, and the value has gone down, if the buyer still wants to buy, I suggest negotiating a lower price. This is something that many sellers didn’t consider: The option not being exercised by the buyer in favor of a lower purchase price. Simply put the seller cannot suggest that an option adds value to the property, as the buyer will not exercise the option, and then the deal is dead. Once dead the only thing left is the current market value, which is lower than what the seller wanted.

    Anyone who agrees to a “lease with option” should understand how options and purchase contracts work.

  9. 9
    Ray Pepper says:

    RE: AMS @ 8

    Agreed. We view the option as tangible and always non-refundable for our transactions. Meaning there is a price to purchase the option. If the option does not get exercised, per the agreement parameters, the option expires and is deemed void. The Buyer can repurchase another option on the same property ,at an agreed upon price, if the seller wants to offer one.

    This obviously was not exercised in the above transactions. The Buyers walked and left us 10k on the table. I could never again reach them after numerous attempts.

  10. 10
    AMS says:

    RE: Ray Pepper @ 9 – At an annualized rate of ~16% per year I bet you would have renewed that option for quite some time, especially with your outlook on the market values. $10k/quarter => 25 quarters to full payback. Better yet, rule of 72 => 72/16 = 4.5 years. It’s no surprise you couldn’t reach them.

    I know buyers of options who have obtained options for nearly free. Take a 12 month option to purchase that is nearly free, and the seller obviously didn’t make a good deal. Option holders are much easier to reach when a seller seeks to renew an essentially free option.

  11. 11

    Tim, You Might Want to Subscribe to the Puget Sound Business Journal

    Then you can get a list of a dozen comercial real estate properties the courts just released for foreclosure this month. Aritcle in part:

    “…In such cases, where the amount owed a secured creditor exceeds the value of the property, the creditor can ask the bankruptcy court to release the property so it can foreclose it. So far, the bankruptcy court has released about a dozen properties to creditor banks. (Subscribers to the Puget Sound Business Journal can see the list by clicking here.)…”

    The rest of the 10/16/09 PSBJ article that most Mastro Properties worth less than borrowed [upside down loans]:

    http://seattle.bizjournals.com/seattle/stories/2009/10/12/daily53.html?s=industry&i=commercial_real_estate

    I also hear that hotels are experiencing high vacancy rates across the nation; with their parent owners bailing them out so far from bankruptcy. I assume Seattle hotels are in the same economic mess. I can tell you from experience that the University of Washington’s Deca Hotel has a suddenly empty parking lot the last few months [they now charge for parking this month, it was free last Spring].

  12. 12

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