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7 Real Estate Finance Myths Unveiled
Much of the real estate finance industry operates on dogma, most of which is grounded in sound theory about the factors that drive commercial real estate markets and risk pricing. During the past 15 years there have been significant advances in methods for assessing and quantifying risk, which contribute to more disciplined debt and equity investors.
However, many of the risk models and decisions taking place in commercial real estate today are based on assumptions that are questionable. Understanding the reality behind some of these myths is important when making commercial real estate financing decisions.
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Office Market Madness
Tulsa, Okla., does not rank high on most commercial real estate experts' lists of hot office investment markets. In fact, the 44th largest U.S. city has wrestled with high vacancy rates for years and historically has been dominated by private local owners. But in the past year a number of newcomers, including investment groups from California and Texas, have turned to Tulsa and other unexpected markets in search of potential office investments.
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Due Diligence: Digging Deeper
Lenders have overhauled their lending criteria and underwriting guidelines, so why shouldn't buyers do the same? During these challenging times, property investors must refocus on the fundamental aspects of investment analysis to properly substantiate value in the purchase price.
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Got Vacant Space? Think Inside the Box
The good news about tough economic times is that they breed ingenuity. Leasing specialists in retail and other property sectors need to think "inside the box" –- the vacant big box, the empty warehouse, or the small office building abandoned by the busted start-up firm. By thinking short-term instead of long-term lease, entertainment instead of shopping, farmers market instead of vacant lot, that space –- particularly in well located areas –- may be suited to new opportunities.
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Office Romance (This is not about employees)
At the national level, private equity investors are entering the office market at an unprecedented pace, escalating competition and pricing for premium assets in major and secondary cities. Other factors, such as interest rates, corporate relocations, and population shifts, are driving office activity in suburban and small markets.
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Rescuing Distressed Retail Real Estate
"The developer bit off more than he could chew," says Henry Englehardt, CCIM, senior vice president with Colliers International in Walnut Creek, Calif., explaining how Rocklin Crossroads, a mixed-use/retail property in Rocklin, Calif., fell into the hands of Umpqua Bank when the market turned. The property comprised one 18,000-square-foot multitenant building, an operating gas station, convenience store, and fast food restaurant, as well as four acres of development land restricted by reciprocal and utility easements.
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Running on Empty (Office Space is Ready to Take off)
The road is clear. Lenders have given the green light. Office investors sit in the driver's seat, poised to push the transaction pedal to the metal. But when they stomp on the accelerator, the car just creeps along. Its economic engine, fueled by job growth, only sputters.
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Splitting Profits
Today's developers and their equity partners often opt for progressive strategies that shift downside risk away from the equity investor and provide greater upside potential for the developer. The internal rate of return waterfall technique is an increasingly popular method that accomplishes these goals.
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What is a BPO?
BPO is an acronym for Broker's Price Opinion. In general, the term Broker's Price Opinion (BPO) is a method that a Real Estate Broker (or an agent acting on behalf of their employing broker) uses to estimate the probable selling price of a Real Estate property/house. The estimate of price is submitted in a BPO report (2-3 pages) that includes local and regional Real Estate market information, neighborhood analysis, and (comps) properties that compare to the (subject) house that is being priced. This method of estimating a price has similarities to a Comparative Market Analysis CMA and a residential Real Estate appraisal.
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