All Forum Posts by: Steve McGovern

Thomas Hickey in my opinion, answers will vary. Reason being, there are three traditional approaches to any appraisals. In terms of Fannie and Freddie, and what constitutes that “secondary level of real estate“, that usually starts at five families. The initial residential style mortgages for example are on 1 to 4 family properties. A quick review of most standard mortgages will show that threshold as a subtitle to the document. However, Let’s talk solely about a SFR for a moment. It’s in a moderate -to- low income area, but rents are proportionately higher than purchase values. The income shedding off this property is literally worth more than the property itself. If & when income trumps a comp, I’m going to jump to income (as a seller, which is the point of view you asked your question from) immediately, and I’m RIGHT To do so, for the above-mentioned reasons.. On the other hand, as a buyer, I would die on the hill of the comp in this situation, and I would also be right to do so. Usually the lender — whether it is or is not willing to lend to the higher amount –is the one to break the impasse here.

@Thomas Hickey The infuriating key to using and understanding Cap Rates is locked up in a combination of these threads.  

First, as many have mentioned, they fluctuate.   (HINT: So does the Market!) 

Second, as @Ola Dantis has mentioned, you actually use Cap Rates the opposite of the way that most people want to use them. You don't just have NOI, and divide by a rate-- how are you going to know what rate to use? You use known market values and divide by known NOI to get the rates, then apply those rates to your proposed purchase (or rehab, or development.) Yes, lots of Brokers and Analysts know the 'going rate' off the top of their heads, but that's only because they're embedded in the processes of all four activities: leasing, buying, selling, and financing in those particular markets.

I'll also draw your attention back to the key that @Russell Brazil mentioned with one quick edit: He said, however a completely vacant building has a zero cap rate...and that does not make it worthless.  This is very true, but easier to understand in the formula if one says 

...however a completely vacant building has a zero NOI...and that does not make it worthless. 

These are low, simple round numbers, just for show. Let's take a NOI of 10,000 and divide it by a cap rate of .1 ("a Ten-cap") ; we get a value of $100K.

Ok,  so if a 10 Cap reflects a reasonably stable market in Springfield, AnyState, USA, the property's worth 100K.   4 years later, Mom & Pop have the same tenants, haven't raised the rents, and the market goes out of control.  Now when we divide it by a Cap of .04, ("a 4-cap") we get $250K. Someone's going to be willing to pay $250K for this property and its $10K income (...or investment, or .."opportunity" as we all like to describe it, here.)  

Mom & Pop did nothing.  The Market did it all, and the market increased the "Value" of this property 150-fold.  But no one thinks about Cap Rates at this moment when they buy & sell...  a "son"  enters the picture and thinks "I'm going to get 300 for this place!" and puts it on the market at $300K.  When someone bites, they then reset the cap rates in that market to a 3.33 Cap (!)  

Bottom line: The NOI Describes the property's operating expedience; the CAP RATE Describes the market, and from that comes value. (Yes, there are tweaks for quality and obsolescence and deferred maintenance, and some for location, but generally location describes your market and its subsets... and yes, you need to understand a market's traditional Cap rate to know what's up and what's down... ) But for general purposes, I'll repeat it and suggest you file this somewhere in your matters: The NOI Describes the property; the Rate describes the market.  

In a super-heated market, if & when you're willing to consider paying the premium, you need to look carefully at that NOI, because small tweaks there, mean small adjustments to value in a stable market, whereas sometimes small tweaks to the Market (AKA the Going Cap Rate ) can make or break you. If you know you can double your NOI, then you're likely safe, but if you can only find upward rental increases of 10%, then look out.

When you buy the property under a 4 cap, and you you've improved operations significantly but you can't refinance in 2 years -- not because the economy's bad or because your tenants are losing their jobs, but just because the market then reflects a more-normal 8 cap and you lost 100K of value-- in market interest alone--  that's when lots of Owners go mad.  

Run the numbers in every scenario, improved, unimproved, refurbished, as-is, Low Income, Market rent, Section 8, run EVERYTHING. This is the moment in history when all the DD matters.  

Good luck.       

Sorry, @Melissa Haworth-- there's not much meat here to help you out... 

1) I assume you're the buyer here?  True or false?   

2) Describe "foundation issues"

3) Describe the contingencies in the doc(s) that you have negotiated and executed with the other party.

4) Describe your best option for this property, in a perfect world, and then your best alternative if that's not feasible.   

@Alfred Edmonds interesting quandary.   First, when you say she had no title I'm already confused.   Here's the issue you need to clarify (or if you already know, then clarify it to us!) 

Usually, when you buy a house, there's a Structure and LAND.  These two things are inseverable from each other.  The house is a fixture on the land, and the Deed you get starts with the words "THE LAND AND THE BUILDINGS THEREON..."   

However, a mobile home is just that-- MOBILE.   Depending on the jurisdiction-- and I don't know VT Law-- It is often NOT considered a fixture,  it is considered personalty-- personal property, no different than your dresser or your car.  

So, the first thing you need to figure out is (1) WHO OWNS THE LAND?   This you'll find at the Town level in Vermont, because Title is run municipally in VT (not in the County.)  Go to the town Clerk.  

The Second thing you need to figure out is (2) WHO OWNS THE TRAILER?  This is where a Bill of Sale comes in.  It sounds like this is where the issue lies.  She's unable to convey anything to you that she doesn't already own, so if the paper never passed properly, then yeah, the Town has the right to hold her (and you) up.  

Definitely get a 50 year title search done by an attorney or abstractor, and buy that title insurance at closing.  Additionally, you may find in the Deed that it ALSO Describes rights to own the (trailer in question.)  In areas that sever these from the land, this will need to be very specific.  If that language is there, and was properly drafted then you should be good.  

The next problem, however, is If she doesn't own the trailer... and YOU can't own it 'cause she can't legally convey it to you, then how the heck will you remove the thing?  Theoretically, you'd need to contact the prior owners or his/her heirs to either convey it to you or release it.  

This is confusing, but it's nothing a decent attorney with knowledge of the jurisdiction shouldn't be able to handle for you.  

@J Scott  I no longer work with Jared, but he always has practiced-- and I'm sure he's still practicing-- on a national basis.  Read his bio completely to the end.  I highly recommend him and respect him greatly. I would be happy to virtually-introduce you. 

http://www.dfllp.com/partners/jaredjeigerman/

PS-- I recently heard great things in another thread I participated in about your Negotiation book, if you're offering...  (Enter sheepish blinking here.) :-)  I'll forward you the thread if you'd like.

My best.   

Wow.  Very interesting topic.  I do not know about this type of investment at all (ALERT!  Disclaimer! Complete ignorance here, and happy to admit it!) :-)   

However, since a bunch of the work that I do involves solar farms & cell towers, I've been in the situation of having to coach a landowner in & out of state regulations for tax abatements based on conservancy, agriculture, and forestry when they want to accept a Ground Lease from me.   I've worked on these in Mass, NH, NY, and PA.  

So, That's why your post caught my attention, @Ralph C.,  and I looked up your term via the "scientific google method."  

 This is about the first thing I saw:  https://www.forbes.com/sites/peterjreilly/2017/07/...

This article from Forbes in July not only outlines the process, but also seems to absolutely skewer the concept.  

In the name of fair & unbalanced posting,  (and without politics, please, to the greatest possible extent!) is anyone able to offer a counterpoint to the article? Is there something other than a faulty tax-shelter and/or scam to consider here?  

I'm quite interested in the replies you may get.  

Good luck! 

@Erin Wicomb great post.  I supported a little work in this matter when at one of the larger law firms. Your synopsis is good, but I'm going to take it back one step to simple Real Estate Law (not a lawyer, so I'd welcome elaboration/correction from any Counselors out there.)  

My understanding is that generally when you purchase a property, you purchase rights that extend from the mantle of the earth to the stratus of the sky.  Of course, these matters at/near the mantel or stratus aren't usually used or taken advantage of,  but you often see limitations in Zoning for vertical surfaces (e.g., you may OWN it, but you can't build it that high.) And as @Chet Mazur noted, concerns about FAA and resultant matters are also out there and can limit your rights from a public safety perspective.  You will also find very explicit limitations and exclusions in your Deed, depending on your locale, for Oil, gas, and mineral rights that had been previously disposed by prior owners.  Whether or not you can add a well for water, for example, may be determined by your interest in those subterranean matters.   

The Air Rights matter that I was involved in was a case of air rights disposed-of by the DOT for development over a highway in suburban Boston. It was a hell of a transaction, first considering that the entity in question was a public entity and as a result, RFPs (etc.) were required, and then after all that, consider the engineering challenges of developing and constructing a structure over one of the busiest highways in the Commonwealth. I wouldn't recommend just anyone try to do this, but like @Jay Hinrichs, I am always interested in these most challenging, highly complex areas of real estate.  

Finally, the places you'll see these rights most commonly alluded to are right outside the front door-- for most of us, at least: above-ground utility easements-- e.g., those on transmission towers or telephone poles-- usually carry explicit statements of air rights within the docs both for the utility companies and adverse to your future development. 

The Trump Tower comments were also interesting-- I've seen matters like this come into play in Texas, when someone sells their Impervious Surface Rights to a neighbor. Point is, as you've said, rights are rights, even if they're not developed, and unless they're squashed by a particular police power, they likely have value to someone. 

@Patrick Philip Never "flipped" commercial, myself, but I have lots of experience in various capacities as a Commercial Consultant including Legal, Brokerage, Due Diligence, and Development. Your first problem with "flipping" Commercial (and the reason that I guess I find myself riling at the concept at first blush) is that commercial property values are determined by NOI, and without tenants, you have no NOI.

What I mean is this: Unlike, a residential property which is expected to be improved to a certain level of finish and then sold vacant, a commercial property is expected to be above that level of finish and sold occupied. This means a "Flipper" has three difficult jobs: (1) Finding the property undervalued, (2) (Usually) improving the property to get the best possible tenant in there, and (3) actually finding the tenants and getting them under contract prior to selling it, again, based on that NOI.

Exceptions are out there-- long-held mom & pop neighborhood strip malls or small office assets,  properties in areas that are quickly improving or where all of a sudden a major employer happens to be entering the vicinity, and you are the first one with the info, etc.  but generally speaking it's that brokerage & occupancy piece that can trip up someone who treats a commercial revitalization as though it were a 'simple flip.'  

My own thoughts when all else is equal, (e.g., no historic property issues, zoning is reasonable or favorable, and there aren't a ton of depreciating assets abound,)  I'd rather raze the existing structure, perform a highest & best use analysis, and build anew than try to 'flip' a property within the same asset class.  Generally speaking, it's been underperforming for a reason that's above the level of "ugly" or not-maintained.  

Hope that helps in some way.  If you have specific questions, I'd be happy to respond. 

@Mike Dymski this chart is one I follow for some of my smaller, arm's length investments... like REIT ETFs. However, I assume you're aware of this, but I think it should be stated outright that the Green Street index, for those who are unfamiliar, is based on assets of typically "high-performing" assets. These are nationally-oriented class A properties. This gives a great benchmark and/or can describe the overall health of the commercial market, but it doesn't break the valuations down by asset classes. They also call out the alarming *(but typical, today) drop of the larger-oriented Retail sector. Office sector is also flat or down, generally speaking and depending on your market, based on the "gig economy" and an increase in telecommuters either all or part-time. I'm more concerned with these charts when certain asset classes are pulled out and/or isolated, and when they refer to specific urban environs and MSAs.

Furthermore, these REIT-quality properties are not assets that most of the viewers on BP would concern themselves with.   Generally, our colleagues here are interested in finding distressed or underperforming, standalone properties and creating value, as opposed to following macroeconomic. trends in commercial.

In all things, context.    

@Tara Gupta, if this is an interest of yours, and you're not yet familiar with the USGBC and/or LEED, then you should start there.  First, keep in mind that much of green building starts with green design--  the Contractors simply do the bidding of the design team (which in this case, may or may not be you.)  I'm sure that a local chapter of the USGBC can refer you to a reputable GC/Design team in the area.   

That said, I agree completely with his words, but  I might disagree with the underlying sentiment of @Anthony Dooley.  Caveat that most of my work is in commercial real estate, and therefore the activities of a full overhaul of a new school to be certified LEED Silver or better are certainly not applicable to you--- that would certainly be overkill and would not help your property.  Anthony's also correct that "double the money doesn't mean double the savings." (Cost or energy).   I think that most people in the industry understand this. It's a standard to try to achieve, but we're not there yet by any metric.
    However, I have also been involved in creating studies where LEED Certification and/or building under green standards, generally can been found to be minimally more money on the front end (Construction) with all  the savings/value on the back end (Consumption, maintenance cost, and resale values) that we would hope to achieve by undertaking a project of this scope.  

Anthony's final words are dead on-- avoid the scamster at all costs.  I'll repeat my own warning as well-- don't allow yourself to be over sold.  Start with the USGBC.  

Finally, I note that you're in VA, but the project is in Providence? as in, RI? I may be able to introduce you to a few people in the Boston area, if that'd help. Feel free to reach out.

Good luck!