Dan Mincher Sacramento Commercial Real Estate's Blog

Get Your Business Out of the House - Part 2

Dan Mincher Sacramento Commercial Real Estate (The Vollman Company, Inc.) — Thu, 05 Jul 2012 09:39:49 -0700

You’ve made the decision to ‘get out of the house’ and you’ve done your homework on what it will cost, and how it will change your operations and projected revenue and earnings… Almost. You won’t know your total fixed and variable costs until you know what it will cost to occupy any given space or building. we will look at these occupancy costs now.

When renting or owning your business location, the total ‘cost to occupy’ includes not only rent, but also utilities, insurance, maintenance, and operating expenses. The expenses above and beyond base rent can be substantial; in some cases as much as 50% more than your rent.

Rent can be one of your largest fixed costs and the amount of revenue it eats up can mean the difference between thriving, surviving, and disappearing. Every business can easily calculate their rent-to-revenue ratio (RR) by dividing their annual rent expense by annual revenue. Perhaps the critical consideration is that every industry has a standard RR derived from successful business practices within that industry. Why is this important? For example’s sake let’s say your industry RR is 9% and even though your RR is 12%, you’ve remained profitable. Will you still be able to compete if something happens in your market or industry that shrinks revenue or margins? Maybe; maybe not. It’s undeniable however that a 3% revenue savings would be a huge contribution toward earnings.

Rent-to=Revenue Ratio – Every industry has a different RR and they range from 1.5% to 14%. If you don’t know what the RR in your industry is, you may be giving the competition an edge simply by renting too much space or paying more than you should. If your industry RR is 6% and a competitor (also a million dollar business) is at 6% RR paying $5,000/mo rent ($1m x 6% /12 mo) and your RR is 7.5% it may be manageable but you’re giving up $15,000 a year in earnings. $15,000 in operating capital. $15,000 in pricing and margin latitude.

So how do you select the right location? There are many considerations; far too many to address here but I’ll hit the high points. Most importantly, hire a tenant representative to locate and vet spaces, arrange inspections, educate you on the process, and negotiate on your behalf. 99 times out of 100 it will cost you ZERO. They’ll be paid by the Landlord. At the very least, spend the time and effort to be informed about your leasing market.

There are different types of rate structures in commercial leasing depending on the property type and in some cases, Landlord preference. Triple Net leases, Net Leases, Gross, Industrial Gross, and Modified Gross leases, Full Service leases, and Percentage leases make up the majority of leases in use. Triple Net and Percentage leases are more common in retail space, Full Service or Gross leases in the office market, and modified or Industrial Gross leases in the Industrial market. Nearly all of these lease types has additional expenses that come with them. Triple Net leases only cover the building and the tenant is billed for their pro rata share of property taxes, property insurance, and operating expenses including management fees. This expense can be as much as $1.00/sf/mo in many markets. Full Service leases generally cover everything including utilities and janitorial service.

There may be a space with a Triple Net rate of $1.00/sf and a Modified Gross lease space offered at $1.10/sf. Until you know what the additional expense of each is, you have no way of comparing the costs to occupy. Have your broker calculate the total cost to occupy spaces that you are interested in to ensure you are making sound decisions.

Lastly, economic events of the past 4 years have brought the price of commercial property down quite a bit in some markets and product types. There is still an elevated level of commercial properties for sale and contrary to what you may be reading in the news, there is mortgage money available for the small business owner. One of the most attractive programs is the SBA 504 guaranteed loan program. Generally, a solid operator with 3 or more years of business performance can apply for a 90% LTV package (50% first, 40% second). It is not uncommon to be able to own a building at or below the cost to rent but again, you must calculate the TOTAL cost to occupy any space before making a decision.

Consult your broker (me) and make them do the professional tasks of securing you the best space, at the lowest cost, under the most favorable terms. Your time is better spent at YOUR business.

Get Your Business Out of the House!!

Dan Mincher Sacramento Commercial Real Estate (The Vollman Company, Inc.) — Mon, 02 Jul 2012 10:45:29 -0700

When You’ve Outgrown a Home-Based Business Arrangement

First of all, congratulations. Growing a business over the past several years has been no easy feat and you are now one of the survivors. If you are a service provider, the house may no longer be a good fit if you need to hire employees, especially since many cities and counties restrict or prohibit workers in a home business other than the owner. For those of you who sell goods on the internet, through delivery, drop ship, or pick-up, you may likely have more merchandise than room to store it.

Either of these scenarios or others can force your hand and cause you to seek new digs. You started the business at home with the plan to grow and become more profitable. You’ve worked hard to get to this point. Now what?

After working with clients in this stage of growth and transition, 4 primary questions need to be answered and accommodated:

1. What is the entire cost for changing from home to business address?

2. Have you revised your business plan to reflect the ‘new’ cost structure, vision, and goals?

3. What is the Rent-to-revenue ratio for your industry?

4. How do you assess locations, terms, property condition, and lease vs. own in selecting the best new ‘home’ for your business?

I’ll touch on the Business Operations items today and address the Location considerations in a follow-up post.

#1. - Entire Cost. There’s the obvious, like rent or mortgage, new stationary, business cards, and everything else with your address on it. Less obvious includes the deposit or down payment for space, cost of improvements to the new space (additional build-out, displays, counters, etc), business systems (internet, computers, copiers, POS, credit processing, etc), marketing, and the move itself.

Some businesses may suffer a drop in revenue when they move simply because theres only so many hours in a day. If you’re moving desks, cabinets, and product to the new store, you’re probably not on the phone selling. On the plus side, you’re a survivor and have been working your tail off to minimize customer impact. The more thorough the plan, the smoother the move, which results in the smallest impact on revenue.

#2. Revising your Business Plan – We’ve essentially identified the transition elements above that you need to consider when ‘planting your flag’ in the business landscape. The remaining and equally important parts of the plan include new growth projections, operating and reserve cash considerations, new fixed and variable cost structure, and future growth plans. These are essential considerations to make to ensure sustainability well into the future. If, for instance yours is a seasonal or cyclical business where revenues are predictably uneven throughout the year, events like when you purchase inventory, pre-sell orders, and perhaps the ideal location becoming available may heavily influence your timing and costs. There will also be new costs for additional insurance and all the payroll costs if you add employees. You may even be at a juncture where you want to offer benefits to you employees… and yourself!

Most likely, you are expanding because you have a bigger vision and greater goals for your business or company. Be sure that your plan reflects that vision and those goals and use them to drive you decisions on space, location, and cost.

That should be enough to get you thinking about the right set of details regarding your transition of business operations from your home. Next, we take on the challenges of a new physical location.

Have a Great Day with the Kids in Sacramento - May 26th

Dan Mincher Sacramento Commercial Real Estate (The Vollman Company, Inc.) — Tue, 15 May 2012 14:22:57 -0700

I haven't been to the previous 7 events... but only because I didn't know about them. Going to take niece and nephew this year. Look for me... I'll be the guy in the "Old Guys Rule" shirt with paper-white legs!

Great Kid's Outing for Memorial Day!!

Dan Mincher Sacramento Commercial Real Estate (The Vollman Company, Inc.) — Mon, 14 May 2012 08:46:13 -0700

Open Position: Commercial Broker/Agent

Dan Mincher Sacramento Commercial Real Estate (The Vollman Company, Inc.) — Wed, 29 Feb 2012 11:01:26 -0800

The Vollman Company Inc. (TVC) is a long-established local firm providing superior client service through a complete suite of commercial real estate expertise and products. In business for over 26 years and more than 75 years of collective experience, TVC has a depth of local knowledge and expertise necessary to advise and assist our clients in every CRE transaction. TVC currently has one (1) open position for a broker/agent with experience in commercial real estate sales, leasing, investment, or analysis. If interested in learning more about The Vollman Company and this position, contact the Principal and Managing Broker, Dennis Vollman or me to arrange an interview at 916-929-2000. DVollman@thevollmancompany.com Dmincher@thevollmancompany.com

This ain't so easy...

Dan Mincher Sacramento Commercial Real Estate (The Vollman Company, Inc.) — Thu, 16 Feb 2012 19:22:11 -0800

BET YOU CAN’T DO IT! Try to spend just 1 entire day with this singular primary function - Pay little to no attention to the things you can’t influence. BET YOU CAN’T DO IT! You won’t even come close.

Think about it. From foreign events, to gas prices, news, unscrupulous business people, rude adults, to the weather, and on and on, we personally can’t do a single thing about any of them, yet we spend a lot of time finding out about them and then analyzing or grousing or worrying about them. Think of all the time you would free up for doing the things you can influence – better and more productivity, improving your health, contributing in the community, spending time with kids, friends, and family, and enjoying sports, hobbies, and entertainment. The opportunities are nearly endless and very appealing.

That's why one of my goals this year is to spend less and less time on the things I can’t influence and more on the things I can. So, along with all the positives I mentioned above, I’m looking forward to the reaction I get when asked “what do you think about $4 gas?” and I answer with “I don’t really care”. Wish me luck!

Target Rich Environment for Small Business!

Dan Mincher Sacramento Commercial Real Estate (The Vollman Company, Inc.) — Wed, 16 Nov 2011 16:00:12 -0800

Successful business operators are being rewarded with historically low building prices, SUPER low interest rates, and up to 90% financing!! The target rich environment in Sacramento consists of an ennormous number of buildings for sale in all property types. SBA504 programs have gotten easier to navigate and complete, and Lenders are competing for these loans. There may be a slowdown with the CDCs as they deal with some short sales coming out the other end, although they'll be familiar with the property if they did the previous guarantee as well. Sacramento has plenty of discounted product in all property types, some good leased investment opportunities, and everything in between! Please don't hesitate to call for market data, ownership opportunities, consultation, and forecasting. By the way, my 2011 BPO accuracy on completed transactions is within +/-6% of actual sale prices!

Have a very prosperous 2012!

Appraisals vs. BPOs to set REO asking prices - Commercial Perspective

Dan Mincher Sacramento Commercial Real Estate (The Vollman Company, Inc.) — Mon, 22 Aug 2011 15:12:42 -0700

There has been a lot of conversation about Appraisals vs. BPOs. I don't know how it works for existing home sales and residential REOs, although the perspective of residential agents seems vastly different than the comparison I see for commercial REO properties. There are 2 primary drivers when valuing commercial property that do not appear to be as relevent for home sales. First, is the impact of an appraisal on a lender's reserves, and second is impact on price and salability. My experience suggests the proplems are reversed when an appraisal is used to determine sale price of an REOrather than confirm it. When a Lender orders an appraisal to value a commercial property and the valuation is markedly below the value when the loan was written, it may well trigger a requirement for the lender to set aside additional reserves. Add a bunch of those up in a portfolio and it can have serious implications for the Lender. Generally a BPO is quicker, cheaper, and will not trigger an increase in reserves while giving the Lender the info they need to make decisions. This brings us to the second impact; price and salability. Appraisals are a view of the past, adjusted to a point in time - Now. An appraisal must at the very least be adjusted in consideration of events since the date on the appraisal. In common practice however, a new appraisal is often used to set or adjust the value/sale price and remains unchanged for 6 to 12 months. An appraisal in a rising market tends to take advantage of favorable conditions. An appraisal done in a declining market often creates an inflated sense of value and causes the Seller to 'chase the market to the bottom'. BPOs on the other hand are largely a look into the future, done by brokers with knowledge of trends, vacancy, demand, and economics. If the only sales are occurring at all cash, fire sale prices, appraisals give false optimism. A BPO in a declining market is much more likely to indicate what the next sale price will be, rather than what the last sale price was. True REO scenario - Broker tells the Lender/Seller the BPO for a strip center is $3m. Lender hires the Broker to sell the property for $4.5m (nevermind that this is a whole other topic). In the ensuing 18 months the Lender/Seller declines an offer of $2.8m. In the end the Property sells for $1.8m. This appears to be the norm rather than the exception. What have you seen?

$20 per GALLON!?!?

Dan Mincher Sacramento Commercial Real Estate (The Vollman Company, Inc.) — Wed, 17 Aug 2011 15:32:07 -0700

This is a conversation with the author of a book I read about 2 years ago. I think this is a very clear example of how short-sighted people in general are, and government is in particular. Some things seem inevitable and yet, we continue merrily down the same path. I see this as opportunity. What do you think?

http://www.freakonomics.com/2009/07/30/it-wont-be-so-bad-a-qa-with-the-author-of-20-per-gallon/

It Won’t Be So Bad: A Q&A With the Author of $20 Per Gallon

Annika Mengisen
07/30/2009 | 10:46 am

It’s notoriously hard to predict gas prices. Who would have thought in 2006 that we’d be paying $4 a gallon in 2008? Or, as prices peaked last year, that we’d be filling up for $2.50 a gallon this summer?

That said, civil engineer and Forbes reporter Chris Steiner argues that prices will rise precipitously over the next few decades. (It would probably make as much sense to argue that electric cars will take over and gas prices will fall, but that’s another argument for another day.) In his book $20 Per Gallon Steiner talks about how super-expensive gas would change everything — from the cars we drive to the price of sushi (if you can still buy it at all); whether Wal-Mart stays in business, and how often the average family can afford Disney World (if it still exists).

On balance, Steiner argues that dramatically high gas prices would actually be good for society. He predicts what would happen if gas prices rise drastically, and explains why he thinks that could actually be good for society. (Related: see this quorum on suburbs.) We asked him to give us his predictions for what our lives might look like with gas at $8 and $18 per gallon, respectively.

$8 per gallon (predicted year: 2019):

If I go out to eat, what sorts of restaurants will I most likely be able to choose from? Where will most of the food on the menu come from?

Our restaurant world won’t be terribly different from what we’re used to now. We’ll always have Chinese food — or at least the Americanized version of it (batter it, fry it, smother it in sweet and tangy sauce).

The tricky part of the question concerns foods like sushi. When gas is $8 per gallon, sushi will still be hanging around. Things get interesting, however, at $18 per gallon.

If I have kids, how will they get to school?

How you live largely depends on where you live. For people who live in walkable communities, life at $8-per-gallon gas will be far easier. Their kids will just hoof it.

What most kids won’t be doing, though, is riding a school bus every morning. Just last year, when gas was $4, school districts across the country made huge cuts to busing programs. Maryland’s Montgomery County, outside Washington, buses 96,000 children to school every day, burning 3.3 million gallons of diesel fuel a year. When the price of gas goes up a penny, the county is out another $33,000. So the price of that program would increase nearly $20 million in a world of $8 gas. School board officials last year authorized Montgomery’s superintendent to increase the maximum walking distances for high school students, which were set at two miles. Generally, students who live within the limits are expected to find their own way to school.

In a future of $8 gas, those limits will go up across the country. In fact, it’s possible that places such as Montgomery County would cut busing almost completely. Capistrano School District in California’s Orange County dumped 44 of its 62 bus routes when gasoline spiked, saving the district $3.5 million.

America’s schools face tough choices in the future: do they cut sorely needed teachers and programs, or do they cut busing — something whose price is capricious and likely to keep increasing?

How much will I have to save up for a round-trip flight from New York to France? What airline would I most likely fly on? How about from New York to Disney World?

At $8, a trip from JFK to Paris will cost around $2,000. When gas prices reached $4 last year, jet fuel comprised 40 percent of most big airlines’ operating expenses. When gas goes to $8, they’ll set aside 60 percent of their operating costs for aviation kerosene, an untenable model. These companies built their networks paying 10 percent of costs toward fuel. We will lose at least half of our domestic airline capacity at $8, as the legacy carriers (United, America, Delta/Northwest, US Air) surrender America’s skies to JetBlue and Southwest. Continental, the best-run of the legacies, may hold on and become the lone carrier of international consequence. So, as a result, you’ll either fly Continental or Air France for your trip.

At $8, traveling from New York to Disney World will be on a JetBlue flight. The cost: $800. The only problem is that, when you arrive, you may find the gates to Disney World locked up. Disney World is a mammoth operation — more than 50,000 employees across 47 square miles — utterly dependent on people making the pilgrimage to it from across the country and world. When just getting the family to Orlando takes $4,000, Disney World’s visitor count will crash. Day-tripping Orlando folk can’t keep the place open. The good news is that Disney, its movies, and its characters will persevere, so the children of the future will still understand who Cinderella and Mickey are.

What’s the likelihood I’ll have a car in the driveway?

You’ll drive a hybrid at $8. Consider this: driving will cost about three times as much as it does now at $8. That’s a giant difference. A family who now drives two cars 15,000 miles per year currently pays $325 a month for gasoline (assuming $2.60 and 20 m.p.g.). In a world of $8 gas, their monthly gas bill would be $1,000. That’s like a second mortgage. Costs like that will drive hybrids to be wildly popular — and so, too, will be the practice of cutting down on miles driven. The easiest way to do that, of course, is to get rid of your car, assuming you live in a place that will allow it (a lot of places don’t, obviously).

What industry will everyone want a job in?

Remember when everybody fell all over themselves trying to land a gig at an internet company during the late 1990′s? Those jobs were instant tickets to riches, or so we thought. When gasoline reaches $8 per gallon, energy-related startups will form the new craze. That’s where the hot jobs will be. IPO’s, wild sums of venture money, 23-year-old C.E.O.s — all of it will be resurrected from that movie called 1999. Or perhaps the market will recall the mistakes we made in the past and dial back its reaction … or perhaps not.

Either way, the energy revolutions that begin at $8 will change our lives indelibly. And just as many of the companies to emerge from the dot.com craze turned out to be legitimate, brilliant, and successful (Google, eBay, Yahoo!, etc.), so too will some of the companies that find their genesis in $8 gasoline.

$18 per gallon (predicted year range: 2029-2039):

What will have happened to my sushi options now?

One of two things will have happened at this point: either we’ll have fished out most of the wild tuna and other fish stocks we depend on for sushi or, if those stocks still exist, it won’t be affordable to chase them around the world’s oceans on a large scale (this exercise requires convoys of boats gulping copious amounts of fuel; and transporting the fish in a fresh manner means air freight, something whose price will have increased four- to five-fold by then).

The ocean’s fish stocks have shrunk more than 50 percent during the last 40 years while global demand for seafood has doubled during the last 25 years. Basically, what we have is a race pitting the price of gas against dwindling fish populations. If gas stays cheap long enough — under $10 per gallon or so — we may drive fish stocks to utter collapse. But if the price of gas increases quickly enough, the world’s fish will finally, for once, catch a break.

Regardless of who wins (loses) the race, the $25 plate of sashimi cuts will be lost to history when gas costs $18 per gallon, which is perhaps two to three decades away, which really isn’t that far off. Some contemporary idea of sushi, I think, will always be around, but it will morph to forms more like the California roll than maguro sashimi. Local fish from farms may take the place of those buttery cuts of ocean-going salmon and yellowtail. Catfish sushi? I haven’t tried it. Not yet.

How will kids get to school now?

By the time gas has reached $18, most people will live in places where density dictates that schools be grouped closer together, putting them within an easy walk or a brief bike ride.

How much for that round-trip flight from New York to France and on what airline?

You’ll either fly Continental or Air France for your trip. At $18, this flight will be $4,000 to $5,000. The dearth of capacity will allow the existing airlines to charge large premiums and, unlike now, make a steady profit.

What car’s in my driveway now?

At $18, you won’t have a driveway. There will be a whole generation of Americans growing up without cars at this point. They’ll live close to schools, close to new train lines, and close to places like restaurants and grocery stores. Electric cars will make an impact, but they won’t come in with the pricing power nor the volume to prevent massive changes in where we live and how we live.

What’ll be the new hot job field?

At $18 per gallon, a new way of efficient living will have settled in across much of the developed world. What we’ll still need, however, is what we always need, in fact: civil engineers. As our world transforms from one built around the car to one again built around the person and forms of mass transit, civil engineers will reshape society and the way we move and the way we live.

Additional questions:

Life will change drastically for Americans if the price of gas rises as you predict. What are some things you suggest people enjoy now before they’re gone?

Eat sushi. Drive the trans-Canadian highway (in summer). Go to Australia. Go see Tokyo and take notes — life will be more like that and less like, say, Omaha, in the future.

Will rising gas prices affect the impact of climate change?

It’s likely we’ll burn most of the easy-to-get oil no matter what. Expensive or cheap, we’ll burn it. There’s probably no saving the atmosphere from the carbon locked in the oil of places such as Saudi Arabia and Russia; it will get burned. What high gas prices can lead us toward, however, is a more efficient world where coal (climate enemy No. 1) plays a smaller role in our energy needs. For this to be possible, we’ll need more cogeneration (combined heat and electricity projects), solar, wind, and nuclear.

You predict that gas will hit $6 by 2010. This will probably be a life/lifestyle changing event for a lot of people, so why doesn’t it look like anyone is preparing now? Is it apathy, denial, or something else?

If the current economic malaise the world finds itself in continues much longer, we probably won’t see gas prices that high so soon. But the important thing to realize is that higher gas prices will come and it won’t be a pure function of inflation, it will be one of supply and demand.

People typically don’t change, especially on this kind of scale, until they’re forced to change. Cheap gas has been a function of abundance. It’s not an entitlement. I think people sometimes forget that. What I’ve tried to do is forecast how those changes will unfold as we’re forced to make them at different price points of gasoline.

That said, it’s hard to plan for something so transformative when we have so much in our lives to worry about already. Just like some people would rather ignore their credit card bill than pay it, some people would rather ignore this problem until it’s taken them by the collar and thrown them against the wall. Six-dollar gas will be that moment for a lot of people. They may not like it — and why would they? — but they’ll accept the fact that higher gas prices are real and they’ll adapt. And most them, I think, will be surprised at how well they adapt.

I'm Firing Clients and Prospects This Week!

Dan Mincher Sacramento Commercial Real Estate (The Vollman Company, Inc.) — Wed, 13 Jul 2011 12:18:34 -0700

OK, firing probably isn't the best way to characterize it since there isn't any likely compensation at stake, but the end result will be the same, none the less. My reputation in Commercial real estate sales and leasing needs to be one of service and results. I need to be working for the right people. This week I am prioritizing the assignments I've agreed to take on and dropping the 'bad apples' based on the following criteria:

Do they value my service? - Am I going to work for 6 months finding them the right location or buyer to have them go around me in hopes of cutting a better deal? I'm going back to the practice of getting representation agreements with ALL new clients. As a wise friend reminded me recently, 'If you're not going to get paid, you want to know now!'

Have they used our market data and expertise wisely? - eg: market price range $800,000 - $850,000 and I'm asked to list it at $1,200,000. In this market, I've said only half-jokingly 'I want to be the 3rd listing agent on a commercial building sale. The first agent doesn't stand a chance selling it at the overpriced expectations of the in-denial seller, the second agent drives home the reality of decreased values, and the 3rd gets to sell the building...

Are the prospects financially ready and professionally competent? Landlords are often so anxious to place tenants just to get some cash flow that they give the best deals to the weakest tenants. My reputation can't afford to put a tenant in a space and have them default in 6 months.

99.9% of the prospects and clients I drop under this criteria weren't going to make me any money or enhance my reputation anyway. Perhaps I'll prevent someone from from getting in over their head or provide the 'reality check' that spurs them to make a long overdue decision. Perhaps I'm performing a public service.

What criteria do you use? Is it different between commercial real estate and residential?

They took, what? From, where? How?

Dan Mincher Sacramento Commercial Real Estate (The Vollman Company, Inc.) — Thu, 30 Jun 2011 23:52:51 -0700

I don't know how it is in your market, but the metal thieves in my town are quick, ruthless, and many. At a recently closed Fitness Club building, they stopped operating on a Tuesday and on Wednesday morning all the sellable metal was stripped from the rooftop A/C units. Same scenario with a vacant church. These people must be desperate.

Now we have evidence that they aren't satisfied just taking what they can get easily.

LockBox users beware. I just heard of a recent event that has us reconsidering their use at certain locations. A flex office space was undergoing tenant improvement work for a tech company with some significant investment in tech and power infrastructure. A lock Box was put on the suite to allow various contractors access without having a lot of keys floating around.

Well, it's not what you might think. No one left the door unlocked and no one failed to "spin the dials" on the lockbox. The metal thieves destroyed the lockbox, liberated the keys, and helped themselves to all the copper and other valuables inside the suite.

Oh, I know what you're thinking. I understand the alarm was working just fine. Quick in, quick out. Perhaps these thieves would have defeated the door lock without the lockbox. Who knows. I just know these guys have gotten way out of control.

How is your community dealing with this sort of crime?

What Is Your Commercial Building Worth?

Dan Mincher Sacramento Commercial Real Estate (The Vollman Company, Inc.) — Thu, 23 Jun 2011 20:42:04 -0700

I've been asking this question of clients and prospects lately and here are some of the answers I've gotten.

1. "about ½ of what I paid for it."

2. "less than I owe."

3. "Well, I paid $1.5 million for it so I have to get at least that much."

4. "At a 6% cap rate it's worth $2 million."

The first 2 are probably pretty accurate in our market, and suggest a sense of helplessness and resignation. The third response is almost certainly rooted in denial, and the 4^th may or may not be anywhere close to accurate.

It is my observation that the valuation methods of replacement cost and comparable sales have become less relevant and far more difficult to quantify over the past 2 years. Replacement cost becomes totally irrelevant when there is an adequate supply of listings well below replacement cost. (I remember thinking it was pretty obvious advice when a legendary local investor admonished a room full of investors and brokers in 2006, ..."never pay more than replacement cost"... but that's another story.)

In the case of comp sales, there is little opportunity for fair market sales when the inventory of distressed properties is sufficient to satisfy buyers. We have market segments with 30 to 40% vacancy where most if not all the sales in the past 6 months have been distressed, short sale, and foreclosure sales. Many owners hope or even believe that there is one market value for distressed sales, and another for stable property. That is only true if your definition of stable property includes an in-place income stream, AND the income is from a financially healthy tenant. Otherwise, it may as well be vacant. I say this because there are really only 3 buyers out there.

Buyers of Credit Tenant investments

Owner/User Buyers of heavily discounted distressed property

Investors in vacant, heavily discounted distressed property

The investment buyer and the owner/user buyer are straight-forward and expected. It is the investor in vacant distressed properties who take advantage of the discounted purchase price, captures the scarce tenants with market-leading rents, and essentially resets Lease rates across that micro market. Buying at a discount provides them with an acceptable profit, even at the new reduced rate. The real upside for these investors will be realized when vacancy decreases and rents increase with demand. When that happens, their Cap rates will be 10 - 20%

Sellers in today's market have few options and tepid prospects for near-term improvement. The individuals and small businesses that invested their own ‘real' capital to buy and operate property between 2002 and 2008 stand to suffer the most severe ‘real' losses as a result of value declines. This is especially significant as 5, 7, and 10 year loan maturities approach. It's not a promising prospect for some of our most entrepreneurial and hard working property owners. It's an even bigger shame that so many of these people who DIDN'T game the mortgage system are taking far more than their share of the consequences.

...I think my next topic should be, "Where did all the money go?"

Would You Like Fries With That?

Dan Mincher Sacramento Commercial Real Estate (The Vollman Company, Inc.) — Wed, 01 Jun 2011 15:43:33 -0700

Would You Like Fries With That?

It's among the most basic of all the up-sell tools in fast food training programs. Too bad real estate agents often don't get the same quality of training as a 17 year old fast food worker. Whether commercial, residential, mortgage, or any other sales call for that matter, it really translates to "How else may I help you?" I'm a commercial agent and that's where my perspective is anchored.

Before I call a prospect, I need to know something about them; even if it's simply what their business is or the size and location of their building. That helps me get the conversation going. Some folks can take a list of phone numbers and dial away. That's just not my thing. A little bit of familiarity helps me organize my call list based on geography, business type, or property use and helps grow my knowledge from one call to the next.

My first contact with prospects is to establish myself as a resource. I want to be their ‘real estate guy'. "If you'd help me gather some market data, I'll be happy to share my results with you. This info will be helpful in assessing your current location and making important decisions about your future success." I want to get them talking. The more I know about the market, the more I can help my clients. I can call 50 prospects and get useful data from 40 of them, or do I want to suffer 48 ‘nos' for 1 or 2 who will actually have a current or near-future need. It's a lot easier to stay motivated with 40 good calls instead of 48 rejections if you're only asking for business, today... Much more useful in the long run too.

I wrap it up by confirming their email for sending the survey results. I now know more about the property, the owner or tenant, and market conditions, and I've made a commitment to deliver results. The fries? "Is there any other information or service that I can provide that we didn't talk about?" It'll be different for each prospect, but you've gotta ask.

I hate being right sometimes

Dan Mincher Sacramento Commercial Real Estate (The Vollman Company, Inc.) — Wed, 11 May 2011 17:11:17 -0700

This is the lead-in for a client newsletter item I wrote in November 2008. Reading it now, I remember how disappointed I was with my conclusions. Commercial roperty values and investment opportunities certainly have changed. I wish I had been less right in my forecast...

November 22, 2008

Dear ;

In the next few years, it is likely that more property owners will go broke and more will get wealthy than in any similar period in recent history. The challenge is to make the right decisions to stay out of the former group, and squarely in the latter.

Commercial property values continue to reset downward. From unimproved land to Class A office space and every property type in between, values have fallen and can be expected to continue. This trend is a function of the economic considerations of income production vs income potential, debt coverage vs projected appreciation, and replacement cost vs inflated market rates. These realities will have very different yet interdependent meanings for tenants, owner/users, and investors.

TENANTS will seek to reduce expense in the face of reduced earnings. Increased vacancies are creating greater opportunities to right-size their businesses into aggressively priced space. Shopping for the best deal in an inventory rich market is already the norm.

OWNER/USERS may experience one or both of 2 financial crisis; debt greater than value, and inability to obtain financing. Many will require proactive measures by owners and lenders to work-out modified loan terms while others will go back to the first note holder.

INVESTORS should be juggling the cash flow, expense, and future values of their properties to ensure financial stability. Retaining tenants and filling vacancies will become more critical and also more difficult as today's cash flows strive to satisfy yesterday's debt obligations.

4 Things I know to A Certainty

Dan Mincher Sacramento Commercial Real Estate (The Vollman Company, Inc.) — Mon, 09 May 2011 21:20:34 -0700

Here are the 4 reasons why I know, TO A CERTAINTY, that now is the time to buy commercial property. As with all investments, you must be cautious, judicious, and well informed but without a doubt, NOW IS THE TIME TO BUY!! Certainty #1—There are properties for sale right now that can be bought for well under replacement cost. This alone would be a compelling reason to consider buying your own building but it is not the only reason. Well run companies are surviving and competition is falling by the wayside. Businesses that have survived the recession have shown their ability to operate and the Small Business Administration (SBA) stands ready to reward you. With assistance and loan guarantees that make financing of up to 90% of an owner/user building purchase possible. Now is the time to buy your own building! Certainty #2 – Quality investment property holds value better than the broader market. Through the past 24 months of economic contraction and declining values, investment property and their value have gravitated largely toward 2 categories: one characterized by stabilized occupancy with well managed tenant businesses, and the other made up of declining occupancy compounded by declining rents. Perhaps surprisingly, BOTH can provide exceptional returns and future value. The first, often described as the “flight to quality” should be more obvious as a more secure investment. Solid tenants have propped up values and these investments have not suffered as much as the broader market. Not a lot of hidden value here; just quality income. The second category involves investment property with upside earnings potential. Higher vacancy and lower rents at these properties can be converted to income opportunity. Don’t be mistaken; not all vacancy represents upside potential. Some properties will always under-earn. On the other hand, choosing the right under-performing investment property in a depressed market can represent a significant additional discount and value opportunity. Now is the time to buy the right investment property! Certainty #3 – When the economy gets better, values will go up. Sooner or later, the economy is going to improve and with it, property values. There isn’t a lot of room for values to decline much further unless the economy collapses, and no one thinks that’s going to happen. Why? Well, to over simplify, the USA is too big to fail. Our creditors can’t afford US to go bankrupt. The short story is that values are going to go up and now is the time to buy! Certainty #4 – If the economy doesn’t improve quickly enough, inflation will set in and real estate values will go up. A lot can happen as a result of all the recent global economic challenges, and I certainly don’t have a better crystal ball than anyone else. By the same token, it doesn’t take a rocket scientist to connect the dots either. What’s most likely to happen before the economy improves? Inflation. It’s not a question of ‘if’’ inflation is coming, it’s a question of ‘when’. Now, what happens with inflation? Real estate is a proven hedge against inflation where values go up, making NOW the time to buy! To put this all in a nice tight package, there are value opportunities for owner/users and investors on the market right now and every indication that values are going to go up, not down. Don’t miss this unique opportunity to buy while property is at a discount. Many properties are on sale for a limited time only! Now is the time to buy commercial property! Call me to schedule an appointment where we will assess your business needs and investment requirements. Matching your profile with the right opportunity is the ‘upside’ I add to the equation for you. Now is the time to buy the right property. Dan Mincher, March 2011