Are you ready to buy a commercial property?

By purchasing commercial property, you build equity in an appreciable asset that also offers multiple tax advantages and income-sheltering opportunities not available with leasing. But is it right for everyone?

Here is a list of factors to consider when evaluating the purchase of a commercial property, particularly an office or building, vs. leasing or continuing to lease.

FACTORS TO CONSIDER IN MAKING COMMERCIAL PROPERTY PURCHASE DECISION

Location/Site Considerations

• Is it in a thriving neighborhood?
• Is it in a commercial district that's popular and full of tenants, or half empty?
• Are prices trending up or down?
• Has the building been well-maintained?
• What business image equity does the building offer?
• How long you plan to stay in the space; will it be long enough for the property to appreciate in value? If not, could you easily rent it out to a tenant if you move?

Property Management

• Will you hire out property management or do it yourself?

Opportunity Cost

• What is opportunity cost of money used as deposit to purchase a building?
• What return would you expect to receive on that money compared to the return you would expect to receive if you invested the money back into your business or other investments?

BUY Vs LEASE CONSIDERATIONS

• Cash Outlay - Down payment of approximately 25% of the purchase price, depending on the lender and buyer’s credit, vs. lease space with good credit, typical outlay is the security deposit and first month’s rent

• Fixed vs. Variable Cost – With purchasing, costs more stable over long run, especially with long-term, fixed-rate mortgage. With leasing, the market dictates rent costs over the long term.

• Growth Considerations – Leasing allows more flexibility and fewer growth constraints for newer companies or those in high growth mode. If company is mature and stable, or buys bigger building and rents out additional space, buying can not only meet future space needs, but offers another source of income.

• Appreciation – In purchase, generate long-term increase in value through market appreciation.

• Tax Factors - Lease payments are usually fully deductible, but many expenses of owning office space must be written off over longer periods of time of up to 39 years. Depreciation on the improvement portion of the property and can usually deduct all interest payments. When considering the tax factors it is essential to consult an attorney and tax professional about the legal and financial considerations of owning office space.

Everyone Wants a Pool Table Until They Have to Cart it Away

Around 1992, shortly after we had the basement of our home finished, my husband and I went out and bought a pool table. It was one of the reasons we'd finished the basement! With three school-age kids at the time, we thought it a great addition to family fun and a draw for our kids to invite friends over. We purchased a functional-looking but high quality slate-top table.

The pool table fulfilled our wishes. I have fond memories of my father, now 87, playing pool with the kids when he visited. Although our oldest daughter, as she entered her teens, tended to go more to her friends' homes than bring them to ours, our middle daughter spent many nights and weekends during her high school years in the basement playing pool with friends. Our son did likewise, and continued through his college years to enjoy many games of pool when he came home with groups of friends.

The kids are all in their twenties now and have moved out of the house. My husband and I have basically ignored the pool table for a few years, as well as the basement with its horribly dated and worn blue rug, and white walls in desperate need of a paint job. So we decided beginning of this year to recarpet and paint. What to do about the pool table?

The carpet guy assured me his installers could move it and put it back, despite its weight. Since we weren't using the table, my husband and I were leaning toward selling it or giving it away. Not wanting to go through the whole craigslist thing, filtering calls and emails for a serious prospect, we opted for the latter--we'd give it away.

The title of this post says all. We discovered everyone wanted a pool table until they had to cart it away (and figure out where to put it). Took a while to find someone, as we say in real estate, who was ready, willing & able, but my painter's brother-in-law finally came and got it last month (actually 5 guys came and carried it off).

Why do I tell this story in a blog devoted to real estate topics? Last week I wrote about the office market heating up, and it continues to do so. I conducted several more office tours again this past week, had one lease proposal accepted by the prospective tenants, with another one requested I will send out Monday. So that's one office space leased and potentially a second.

These two parties plus several more who toured space last week were all exploring lease vs. purchase options. I know at least two were checking with lenders. There are buyers who want to purchase commercial property until they come up against the realities of lender requirements. Money is tight right now but hopefully it loosens up soon.

There are some qualified buyers out there, however. One closed on one of our office listings in Cascades Office Park in Sterling (below) last week.

One of my clients closed on an office condo in Springfield two weeks ago and an investor closed on another of our office listings (pictured below) last month, where I still have one more office condo for sale, btw.

This post wouldn't be complete without a picture of the newly finished basement (without the pool table!), with thanks to my awesome painter, Manuel Colcas of JMC Painting , who also installed the French door, and Mike Rokni of Chase Gallery Carpet and Flooring who did the carpet and tile work.

The Office Market is Heating Up

The office market is getting hot, hot, hot!

Since I work in many areas of commercial real estate, including office, industrial, retail and restaurant properties, I see firsthand the market waves in sales and leasing activity. Some weeks, all calls are for warehouse spaces; others retail. By far, the least amount of responses to our marketing since the beginning of the year has been for our office listings.

Until this past week. My phone has been ringing (as usual!) and most those inquiries have been about office space. On Wednesday I received two calls about Colonels Ridge from two different business owners who had toured the office park about six months ago. Each had put the acquiring-new-office decision on hold and are now ready to reevaluate making those moves. These two business owners were looking to lease space. I also showed office property to two other prospects looking to purchase. That's four office tours in two days!

Metro-Washington DC is largely driven by the government; since their fiscal year ends September 30, I have been told that money is becoming available to companies who derive their business from that sector.

John Stewart, an economist and Managing Director of Vantage Economics, a consulting firm, believes economically we have entered into a period of stabilization. Although unemployment will continue to be high for a while, the recession may be over. The Wall Street Journal reported this week that based on its latest quarterly survey of housing data, home sales were up compared to last year in Washington DC and Northern Virginia. Another report I read indicated a 3.7% price increase from April to May in the Washington DC metropolitan area, suggesting a recovery in the housing market here.

From my perspective, consumer confidence is back, reflected in business owners feeling positive about making long-term monetary decisions (i.e., signing leases, purchasing properties). I hope this trend continues.

REALTOR® Magazine-Daily News-Best Cities for Finding Opportunity

REALTOR® Magazine just posted the following question:
Where are the best cities to live in the US if you want to work hard and get ahead?

I was happy to see that metro-Washington DC made the list. The study, conducted by Forbes magazine, chose the top ten cities based on the number of Forbes' 400 best big companies and 200 best small companies headquartered in each. The study lists locations with high rates of small business successes, identifying what it considered places with the most opportunity.

I work with a lot of small business owners and have noticed the past month an increase in activity, i.e., number of listings I have leased or sold.

I had a 1,500 SF office listed for about half a year in Cascades Office Center, which leased two weeks ago.
And the charming 1,000 SF retail storefront on Battle Street in Old Town Manassas leased last week to the soon-to-opened Oh So Sweet Treats Bakery.

The retail tanning salon space I had listed for lease in Manassas Park Plaza leased in a week!

To me, this indicates consumer confidence is returning and underscores what I believe: Northern Virginia is a great place to live and work.

Best Cities to live to work hard and get ahead:
1. Houston
2. Dallas
3. Minneapolis
4. Pittsburgh
5. Boston
6. Washington, D.C.
7. Austin
8. St. Louis
9. Kansas City, Mo.
10. New York

Source: Forbes, Lauren Sherman (06/19/2009)
Article link:
REALTOR® Magazine-Daily News-Best Cities for Finding Opportunity

What it takes to succeed

Like many independent business people, I get together on a regular basis with other professionals to exchange ideas and contacts, in other words to network. Some of these meetings have a structured format, such as BNI; others are governed more by the members of the group. One of these networking groups I attend was started by my broker and business partner, Gayle Bailey. We meet twice a month for breakfast, with a guest speaker joining us for one of those monthly meetings to share an inspiring business success story.

Last week, Gayle challenged each of us in the group to share what we felt was the single most important quality that had contributed to our own success stories.

The business broker in our group, Jeff Neuburg, owner of Piedmont Capital Group, cited perseverance, his ability to overcome life's curves and to stay the path.

Our commercial lender, Byron Schulze with Virginia Commerce Bank , ranked honesty high on his list. If you always tell the truth to your customers, no matter how hard, you will earn their trust and retain their business.

John Richter, the attorney who owns and operates Provident Title and Escrow with his wife, talked about ethics, stating that your name is everything. If you lose that, it is difficult if not impossible to get it back, so you must always do the right thing to retain your good name.

Troy Toureau with First Potomac Mortgage , credited passion for his success in the mortgage industry. He elaborated, adding that he loves what he does and could not see himself doing anything else.

Gayle Bailey, Principal Broker and owner of The Bailey Team Real Estate , has earned his living for the past 35 years on close to a 100% commission basis. He said his ability to seize opportunity and always have options has been the #1 factor in his success.

I recognized my ability to multi-task, or as Gayle would say, have many "irons on the fire" as playing a large part in my success. It's all about juggling multiple transactions and simultaneously keeping track of numerous clients in various stages of their respective deals.

It was interesting to me that while each person identified a different trait, each of us in the room, successful in our own businesses, all share these same qualities. Integrity and hard work certainly come into play. But when you think about it, distilling the concept of success, passion may be the single most important ingredient. You cannot work hard and do your best for people when you are not fueled by passion.

Real Estate Investment for 2009

Investment sales in the commercial market are down. Banks have money to lend, but are looking for good cash flow and a solid down payment from the buyer, as I wrote about the last month. The National Association of Realtors® recently reported that some sectors of the investment market will come out better than others in 2009, quoting Ken Riggs, CRE, president and CEO of Real Estate Research Corp.

His Predictions:

Student housing. The combination of two factors—universities facing a financial squeeze and the surge of college-bound Generation Y members, the second largest demographic in the United States—creates strong demand for student housing.

Medical offices. Aging boomers and their readiness to spend on health care make this a solid investment, especially if located near hospitals and nursing homes.

Tax-credit housing. An unmet need for affordable housing, combined with the federal government’s willingness to provide funding via low-income housing grants and tax-exempt housing bonds, may make this an attractive niche for conventional multifamily developers.

Residential building lots. Smart developers are compiling parcels now so that approvals can be in place.

Neighborhood centers. Retail is risky at best, but people will always need staples, even in the tough times. That’s why neighborhood retail centers are a winner, especially in mature trade areas with a strong grocery or drug store anchor.

My Experience:

In 2004, when my son first went to Virginia Tech, my husband and I purchased a townhouse in Blacksburg which we rented out to 3 additional students (our son was the 4th tenant). The rents from the 3 students covered all our costs. Three-and-a-half years later we sold it for a decent profit. Had we decided to hold it, there is an excellent property management company in Blacksburg that does a great job. In fact, the party who purchased the townhouse was an investment buyer (former Tech student) who lives in California.

Health care industry continues to fare well. My clients who are in health-related industries, such as medical, dental, and all wellness type businesses (such as exercise including gyms, yoga studios & tanning salons) are prospering. Many report their earnings are up from last year, which shows that people do take care of themselves even when they don't eat out as often or cut back on non-essential purchases.

Builders are always looking for residential building lots especially in highly developed areas of Northern Virginia where such lots are hard to find, closer to to Washington DC.

Retail strip centers with long-term leases and solid tenants are a good buy. I also know of several with approved site plans ready for development, the land available for purchase.

There are some good buys out there!

Some Things Beautiful

I have been remiss in updating this blog, but I have also been very busy. This week alone I have been and am still in the midst of preparing and negotiating two sales contracts, both of which I represent the sellers, one letter of intent to purchase (I represent the buyer) and three letters of intent for leases (once again, tenant reps). There is a lot going on in my head!

My husband and I did take time out to visit Florida the week before last for a five day trip. I'd never been to Florida when it wasn't summer, i.e., humid and steamy. So it was a pleasant surprise to find South Beach (Miami) and Florida Keys to be 80 degrees, sunny, breezy and dry every day; 70 degrees, dry and breezy every night. We were extremely fortunate when it came to the weather.


We were also fortunate to stay at the Tranquility Bay Beach House Resort where you could see the sun set over the Coast Guard lighthouse every evening. These pictures remind me that no matter how busy you are, it's good to slow down a little and appreciate the truly beautiful things in life.