All Forum Posts by: Russ Kitzberger

You likely need a general business attorney to review the ownership or partnership agreement and explain the terms and how decisions will be made per the operating agreement, buyout clauses, etc. Explaining this would be best handled by an attorney.

If the cap (or IRR) rate the investor is using is what other investors are paying (Market rate), it will already include tax risk. You are correct, if you set a cap or IRR that is outside of market rates for your investment matrix, then that is your purview and you may pass deals at Fair Market Value.

If the market no longer supports the rents, then the investor will request a tax reduction or the assessor should already adjust this and the taxes will be based on market cap rates and market rents. The cost of adjusting taxes (legal related expenses) to the market may be high for some investors. The of adjusting to market for an attorney and an appraiser, and some time value of money isn't that significant to others. Keep in mind an owner will particularly benefit until a full reassessment is completed (or a legal challenge to change to FMV) from the discounted tax amount in an increasing market and you as the investor can control tax expense relative to market value in a declining market.

 Tax risk should be accounted for in cap rate by market participants. If you are using market caps, then all participants in the market should have accounted for tax risk in their rates.

Under the current rent increases and inflationary environment, the tax expense increase could be reasonably passed through to tenants in the future.  Property taxes affect all properties in a market, so unless your competition is eating the increases, everyone should be increasing rents, particularly on properties with 12 month lease terms. 

If you are in a 10 or 20-year commercial or industrial lease with different expense exposure, that is a different situation.

Always recommend an attorney draft any commercial lease. I can say that I have gotten some awesome terms for tenants from landlords who drafted their own leases.

A reasonable increase is going to depend on the area and asset class; retail might be oversupplied in one area and undersupplied in another. Inflation at 9.1%, what are your operating costs going to be in the future, is it is NNN,NN,MG or gross lease, should that be included in the increase?

A proposal could mean different things to different people.  It could mean anything from a letter of intent to a contract.  No commercial deals are not similar, unless you are taking the property as is. Commercial deals take alot longer, require different due diligence, and more frequently can stall or fail, particularly when novices are involved.

With commercial deals you usually have a period that you can do your due diligence, then a deposit that is non-refundable, then time for closing.  The type of adaptive reuse project you are describing might take months or years to plan depending on how busy your engineers, planners, zoning attorneys,  and general contractors are in your market. So, yes I would anticipate, under current circumstances, the owner might want some assurances before locking the property up in a contract.

"Should I also wait for that analysis before I approach investors about potentially investing with me on this deal?"

Many people, would want the investors in place before spending time on the project.  This seems like an owner-occupied project that would best be suited for SBA or similar financing.

I work with alot of small businesses and startups, this would be a big project for most startups without experience.  Not impossible, but you will have $10k-40k into soft costs before a hammer is swung.

This is common, particularly for industrial properties in which the tenant may install heavy manufacturing equipment that is expensive or impossible to move.

Bill is correct in saying it is a function of what you want as a return.

Without knowing what the user (tenant) will install or what goodwill they may have from the location and what leverage you may have at the end of the lease term; you can only work with your desired Rate of Return and the data you have.

Income capitalization is a good method for investment value analysis in lieu of good sales comparison and appreciation data:

You start with the current market value of the property that can be capitalized by NOI/Cap Rate, depreciated cost analysis, etc. From there you can project forward with a Discounted Cash Flow analysis using your desired IRR. If you are not able to do that level of analysis you can do a basic exit cap analysis.

It is part real estate and part business (going concern) purchase.

Typical due diligence for real estate (legal, environmental, title, etc), plus a valuation/investigation into the business operations/sales/expenses/franchise/royalty. 

Of the 3 major markets in Ohio, Cleveland (and Akron, Youngstown) have some of the least landlord-friendly courts, tax, and related governmental systems. You will receive a higher rate of return as compared to Columbus and Cincinnati due to the higher risk environment of all the factors: economics, employment, government, supply/demand, repair costs, and ease of leveraging. You will find cap rates reflect the perceived risks.

If you can setup systems to navigate the risks, it can be highly lucrative.

As an analyst/appraiser; I spent a lot of time assembling data. Usually starting with a subscription database, like the MLS, realist, auditor database query and supplemented with internet research and personal interviews.

Now, if there are truly no sales, then you need to have the valuation skills to use outside data for sales analysis, income analysis, and/or depreciated cost analysis.