RE95C15: Commercial Real Estate Basics: Geographic and Financial Analysis

Approved April 6, 2015

I. Introduction:

1. This course focuses on commercial real estate basics to further understand the real estate decision-making tools of a commercial tenant or buyer
2. Decision-making variables will be reviewed targeting location site selection variables, physical variables, housing availability, transportation networking, etc.
3. Valuation methods that may be employed for the purchase of investment real estate, end-user occupied building and business asset sales.

II. Business Owner to be a Buyer or Tenant:

1. Purpose/Goal of Business Owner and the Business
   1. What is the long-term plan of the owner?
   2. Will the business be sold in a few years, merged or acquire other firms?
   3. Understanding the reasons to own vs. to lease?
2. Ownership Versus Leasing:
   1. Comparison of all Costs
   2. Cost to purchase vs. annual debt service vs. rental payments
   3. Financing Alternatives (Include Owner Financing and Documentation Required) - Value of Equity
   4. Formal Illustration
3. What is the 1-3 year business plan (Including Growth and Cash Flow Analysis) to support any new location or to decide if to lease versus to own?
   1. Evaluating the company’s business plan and financials, as would a landlord, to assess leasing risk and establishing negotiating leverage
4. What are the required building characteristics and other external variables? For example, minimally a broker should understand the end-user’s need for: 
   1. Space and the amount, office, warehouse, retail, lab, medical, R&D, industrial, etc.
   2. Number of required parking spaces
   3. Signage capabilities for company exposure
   4. Amount of power/type of lighting/Internet access and type
   5. Company’s number of employees and living locations
   6. Location of the company’s competition
   7. Utilities: public vs. private water, sewer, septic, electric, gas, etc.
   8. Identifying any service moratoriums
   9. Identifying safety issues of the property
   10. If the company is a “Start Up” then identifying location of company’s market & suppliers for the company’s products
   11. Other examples

III. Location:

1. Site and Building Cost and Availability
2. Visibility/Exposure Required - Traffic Counts. What type of commercial end-user is this information relevant?
3. Access to company’s suppliers and customer market to conduct a site search
4. Supplier availability as it relates to a target site search
5. Location of Competition and when this information is relevant
6. Quality of All City/Town and Local Services and Utilities 

IV. Labor Supply:

1. Proximity to Labor Market and Needed Services
2. Labor Type Needed vs. Type available
3. Wage Levels and costs; Union vs. Non-union
4. Seasonal vs. Year-Round labor availability

V. Transportation:

1. Proximity to Major and Secondary Roads
2. Access to airports, harbors and mass transit
3. Road Maintenance/road construction, pending road change issues, street flow
4. Rail service e. Trucking vs. passenger vehicle access

VI. Housing Availability:

1. Single family and rental housing quantity, type available and cost
2. Affordability for company workers
3. The use of resources such as residential agents
4. Broker conducted apartment market survey/Vacancy rate/Rental rates/general market study

VII. Financing Opportunities for a Business buying real estate

1. Commercial lender will want a 3 Year History Including Income Taxes. There will be a check list of other loan application requests.
2. If a public company, then real estate agent can research financial history on website of the Security and Exchange Commissions (SEC) or company’s annual report
3. Financing options that broker can assist include: traditional commercial lender, Small Business Administration (SBA), State and Local Economic Development Agencies, Commercial Mortgage Originators and other examples.
4. Chamber of Commerce Assistance 
5. SCORE: a non-profit association that partners with SBA

VIII. Real Estate and Business Valuation:

1. Real Estate/Business valuation employ different methods
   1. Real Estate Valuation Methods
      1. Full Discussion and Example of Income Approach (Capitalization Rates, Gross Income Multiplier (GIM)
      2. Identifying possible income sources in a commercial building
      3. Identifying possible operating expenses in a commercial building
      4. Understanding the difference between an operating expense and capital expense
      5. Review of the Band of Investment Approach: NOI/Capitalization Rate = Value

IX. Business Valuation Methods:

1. Broker should recommend the need to use accountants and business valuation experts as required through this process
2. Broker may find a commercial real estate firm that has both business brokers and commercial real estate brokers that could be a time management benefit
3. Identifying the business valuation revenues: Sales of Goods, Cost of Goods, Other income = Total Income
4. Expenses can include: Cost of goods sold, selling, general and administrative expenses, rent, building occupancy costs, operating interest, discontinued operations, TI depreciation and equipment, etc.
5. Gross Revenues-Cost of Goods = Gross Profit; Gross Profit –Total Operating Expenses = Net Profit from Operations; Net Profit from Operations – Non-Operating Expense = Pre-Tax Income
6. Considering other variables that can affect business value: revenue growth over the last 3-5 years, future book of business, new patents, expansion of customer base or product base; reduction of competition or increase of competition, market share, goodwill value, etc.
7. Financial Ratios can include Price to Earnings, Asset to Liability ratio and others
8. Give Detailed Example of a Business Valuation

Resources:

1. Introduction to Commercial Real Estate Sales, by Bill W. McCoy III, Dearborn Real Estate Education
2. Commercial Real Estate, Listing Properties, by Edward S. Smith, Jr., RECS, Dearborn Real Estate Education
3. Commercial Real Estate, Understanding Investments, by Edward S. Smith, Jr., RECS, Dearborn Real Estate Education d. Real Estate Investing for Dummies, by Eric Tyson and Robert S. Griswold