There is an expression that you get the good with the bad and the bad with the good. It is critical to have a complete and thorough understanding of what you’re getting before you purchase a property. These types of transactions can be compared to a marriage, particularly with the vows of in sickness and in health.
However, the following are some pleasant surprises that I have experienced:
- Land: In several deals, there was additional land which was not really counted on with the deal, but kept in the back of our minds as something of value. In two of the deals, this added $1 million in profits for each. Be on the lookout for extra land.
- Abstracting the leases: As crazy as it sounds, you would be amazed at how many times I have looked at residential and commercial leases, and the landlord or management agent was not getting the maximum value of what usually relates to what can be billed to the tenants. These can be hidden gold mines. Read every lease carefully.
- Unbilled or under billed CAM or expenses’ reimbursements: I have seen many deals where the owners were not billing for what the lease specified. Some common examples of what I have seen are water/sewer bills and escalations in real estate taxes. Pay close attention to how the CAM is calculated and what’s in it and what’s not.
- CAM adjustments at closing: Typical CAM is adjusted after the calendar year is over. Adjustments are made with the tenants in February or March for the previous calendar year. For example, if you close on a property in August, the shortage or excess for the following adjustment period is typically yours. However, keep in mind that this can work for or against you.
- CAM: If it’s an existing lease, check the exact wording, or if you do the leasing, use a good lease and modify it. Some common items you might be able to put in the CAM are a certain percentage on top of actual repairs and other expenses such as an administrative fee which is usually 10-15% on top of the cost. You can also include in the lease the amortization of some major capital items such as a roof, blacktop or HVAC work. Of course, some tenants will negotiate this or put limits on it. Of course, if your CAM is too high, you will frighten tenants away, or you will have to lower the base rent. As in anything else, be careful and do not be greedy.
- Size: In real estate, size does matter. I have seen leases in which the property is listed as a certain size, but in reality, it’s larger or smaller. Commercial rents are typically based on the square footage so as they say measure twice and cut one.
Of course, there are the not so hidden treasures, such as underpriced units where you can raise the rents, real estate tax appeals, and developing the property for more optimum income. Be on the lookout for the hidden treasures or ways to extract value from a deal for which you are not paying. It can turn a single into a home run very quickly.
Written on November 2011 by Jack Miller, no part of this may be copied or reproduced without the express written permission of the author. Jack Miller can be reached at JackMiller@GFCIB.com