All Forum Posts by: Nick L.

@Bryan Gay

 Did you get any estimate of what the rehab costs would be to bring the building up to date and the units to rentable standards?

@Jason James

 How would you characterize the neighborhood? B/C/D? How is local employment and crime?

@Nick Stango

There's really no value in a 15 year mortgage if you have a choice.

If your goal is to pay the place off as quickly as possible, you might as well take a longer amortization and make extra payments. The small bump in the interest rate on a 30yr is your "insurance" for being able to reduce payments in a financial crisis.

But most investors will stretch out their payments as long as possible to maximize leverage and cashflow.

I'm building the pro forma for a mixed-use urban infill development. In speaking with potential retail tenants, a couple have expressed the desire to own rather than lease their space. That works for me because I can use the difference between construction cost and sale price as equity in financing the development.

Where I'm stuck is how to price the commercial condo. I am currently working on two models:

1. Simple cost-plus approach. Figure out all my hard costs, soft costs and financing costs for that portion of the development, then add a markup for my developer profit.

2. Calculate the NPV of a commercial lease. For example a 15yr term with initial rent set at comps, 3% annual increases and a terminal sale for the FV of construction cost - all discounted back to NPV at a 6-8% discount rate.

These methods provide quite different prices, especially because the NPV is so sensitive to changes in assumptions.

Has anyone done this before and how did you calculate the price?

@Vida Novak

 If it's a minor encroachment there's a better solution than having to buy the second lot. Just negotiate with the seller for an easement over the affected part of the other lot. He will get money from you for the easement and still be able to sell the lot.

If it's just a setback violation of zoning, your property should be grandfathered in.

@Andrew S.

Sounds like rubbish to me. This NC Fair Housing guide specifically mentions "Common screening criteria such as credit and criminal record check policies". And Fair Housing NC lists protected classes as "race, color, religion, national origin, sex, familial status, and disability".

I think the person you spoke to at the PM company misunderstood the law or miscommunicated it.

@Ramon Jenkins

Thanks for sharing. 

This is the first I've heard of this statute and I'm no lawyer. But it seems to be a result of heavy lobbying by the Wis. REALTORS' Association, which has a major political influence arm.

There's an interesting article on the subject from the WRA last October in this archive. And a little googling showed that Grafton has enacted such an ordinance. It seems the WRA is concerned about the effect on property sales and REALTOR liability.

It's now a standard play in WI politics to overrule local authority legislation at the state level. That's why this got shoved in as a budget provision.

@Roy N.

I totally agree with your point. There's no value in making an investment with an IRR that doesn't compensate you for the work. (The risk should already be built into the IRR, of course.)

I'm just not sure how your point relates to the original question about positive and negative leveraging. What am I missing?

@Roy N.

 Good point, but that's quite a complex way to look at it. 

I think a simpler way to look at it is:

- Interest rate < unleveraged return = positive leverage (good)

- Interest rate > unleveraged return = negative leverage (bad)

@Joel Owens & @Christopher Telles 

This listing near me illustrates just what you're talking about. Non-corporate KFC in a specialized building with a 6.5% cap, 12 years on the lease at 1.5% increases starting 2017 and some options. 

Just out of curiosity I fired up Excel and used some assumptions that (1) the land value will gain 1.5% per year in line with the lease, and (2) the lease will terminate with unexercised options and no improvements value. The unleveraged IRR at the asking price is just 2.36%!

The only way you could see any reasonable return is if the tenant exercises at least one option. Then you finally break a 7.01% IRR over a 22 year period.

But it says right in the listing that the tenant already renegotiated during the last downturn. So when re-up time comes and they know they've got you over a barrel, you can bet they'll do the exact same thing. And even your paltry 7% flies out the window...

@Jeff L.

 You are asking two separate questions.

1. Re that specific property, yes the assessor's page you referenced will give the latest tax bill and amount outstanding.

2. For properties in general, the easiest way to estimate taxes is to multiply the assessed (or anticipted reassessed) value by the net mill rate, currently 2.997%. 

By the way, for people looking up City of Milwaukee properties you may also want to check them out on the Department of Neighborhood Services site. You can get additional useful information there.

Also tagging @Brie Schmidt in case this is of interest.