To Buy or Not to Buy, revisited

Back in October, I took some time to write about the pros and cons of buying your office space.  Just this week, I had the opportunity to reflect on my own opinions, after a friend referred a new client who is actively seeking a small office space to own.  As I mentioned in the post, there are definitely valid reasons for buying versus leasing and my client has several.  Interestingly, the one that I hadn’t considered in the past is the fact that they are an international firm.

Being based in another country, the American dollar and dollar-denominated assets, including real estate, still look pretty cheap by comparison.  Overseas firms that meet other office condo acquisition guidelines would do well to consider relocating to an office condo and parking some of their capital in American real estate.  Whether analysts are bullish or bearish on real estate prices, the strength of the American dollar can be an attractive hedge for the international business or investor.

Are You Being Served… More Expenses Than You Deserve?

On Monday morning, my colleague Bill in our Audit and Recovery practice presented to all of us on the expense and fee clauses that he frequently sees when he is brought in to audit a client’s lease.  Since he is compensated on a contingency basis, he is very good at finding discrepancies between what the lease obligates and what the landlord actually charges.  However, the gems that he shared with us had less to do with comparing rent bills to leases and more to do with how to reduce the likelihood of these improper charges ever being an issue for our clients.
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And winner for “Shortest Article on Commercial Real Estate” goes to…

Wall Street Journal’s “Real Estate Journal”, with this tiny gem Capitalization Rates for Offices Sink to Low.  Weighing at at a whopping 4 lines, it’s almost hard to believe there is any useful data contained within.  Actually, there isn’t.

Although the explanation of capitalization rate – or “cap rate” – is handy for the beginning real estate professional, the quoted cap rate for central business district (CBD) office properties tells the reader absolutely nothing about which property types were considered, if it includes mixed-use buildings or only pure office towers, what they define as the CBD for the value quoted, or what the rate dropped from (historic values for the last month, quarter or year).  I’m sure that there are other things missing, but these immediately struck me as odd.  Seems like they were struggling to provide anything newsworthy, but the real estate analyst was out sick today.  It’s almost like if I commented on a short article about commercial real estate, simply to have provided my readers with a post for the day, without actually providing any insight or value to them.  Oh, wait…

When the Worst Happens in your Business – Managing the Real Estate for a Closure

Karen Klein, of BusinessWeek, recently responded to a letter in her Smart Answers column asking for advice on how to close a division of a business.  Knowing that real estate holdings (owned or leased) often must be disposed as part of a closure, I scanned the column for the advice that Klein provided to her faithful reader.  I was not disappointed, nor was I impressed.  Since I appreciate that Klein is not a real estate professional, I applaud her for including a short paragraph in the Tie Up Loose Ends section; however, the advice that she and her forensic accountant interviewee provide stops a bit short.  What follows is my elaboration of their advice.
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National Real Estate Investor needs to hire a proofreader

Amidst National Real Estate Investor’s article about Chicago office trends, which always has me curious, I found a number of typos that made this a less than stellar read.  In my analysis, I’m going to begin by picking out a couple of errors that need to be fixed, because I’m particular like that, and then I will continue with a content analysis.
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The Property Taxman Cometh

I was doing a bit of research to improve my understanding of the financials involved with tenant representation and came upon this older article on CFO.com about corporate property taxes, entitled Poor Move.  Here are the key points from the article:

  • As of the date of the article (02/01/04), property taxes were the single largest non-federal tax obligation for companies, weighing in at 38.3 percent.  Given the significant increase in $/sf prices paid for commercial buildings in the last 18 months, I suspect that this still holds true today, since property taxes are assessed based on FMV.
  • Corporations should seek reductions in property taxes at the time they are considering a relocation.
  • You’ll be paying property tax whether you own your building or rent your commercial space.
  • If you are a major tenant in a building, ensure that your lease obligates the landlord to “go to bat” to reduce property taxes should they change substantially.  If your lease doesn’t have that, bear this wisdom in mind when your lease is up for renegotiation or you relocate.

My hope is that CFO Magazine revisits this article in the 2007/2008 time frame.  My theory is that the only change will be higher rates today.

Would you like a slice of office or a scoop of retail?

CoStar’s Mark Heschmeyer just published an intriguing interview with Ray Wirta, former CEO of CB Richard Ellis.  Apparently, Wirta has created a company called Nexregen that will allow smaller investors to acquire stakes in commercial properties for as little as $2,500.  This reminds me of the stock brokerage where you can buy fractional shares of stock, for when you want a piece of Google but can’t justify dropping $600/share from your portfolio capital.  I can’t think of the name of the brokerage – anyone, anyone? – but that got me wondering, “What can’t you buy a fraction of these days?”  iGo and ZipCar allow you to own a fraction of a car, fractional jets have been available to executives and corporations for years and, after a little Googling, I found the fractional ownership website FractionalLife.com, which seems to fill any remaining fractional desires you might have, including art, liquor and handbags of all things.

Of course, a stake in a commercial property is arguably an asset, whereas all of these other fractions are fractional liabilities.  In the article, Wirta discusses the terms of the first deal they have put together and where he sees continued opportunity with this model.  Personally, I think it’s intriguing as a concept, especially if you want to own property in a self-directed retirement account like an IRA.  If they buy any properties up in Chicago, I may consider ordering a slice, but just one to start.