Understanding the Real Estate Development Process

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Before making any decisions to invest in a commercial real estate development project, it’s important to understand how the entire development process works. That will allow you to be able to track the progress of your investment. There are 7 major steps to commercial real estate development. Site Acquisition Due Diligence and Feasibility Entitlements Design Financing Construction Lease-Up Site Acquisition Site acquisition is where the development process really begins. There are several things to look at when selecting a site for development including: Demand Drivers – Understand the characteristics that make the asset you are wanting to develop successful. That…

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Understanding the Basics of a 1031 Exchange

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What is a 1031 Tax-Deferred Exchange? 1031 Tax-deferred Exchanges have been around since Congress passed the Revenue Act of 1921. The actual law is found in 26 U.S. Code Section 1031 of the Internal Revenue Code. Under Section 1031, the law specifically states that “a taxpayer may defer recognition of capital gains and related federal income tax liability on the exchange of certain types of property.” These transactions are known as a 1031 Tax-Deferred Exchanges. 1031 Exchanges are an excellent wealth-building strategy because it leaves you more money to invest in bigger and better properties. Note, however, that the tax…

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What is a Preferred Return?

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A preferred return is part of the real estate equity waterfall and is often referred to as a “pref”. A preferred return is often associated with limited partners in a commercial real estate project. Limited partners will usually receive a “pref” and will be the first to receive returns up to a certain percentage, generally between 6 and 10 percent. After this profit percentage is attained, the excess profits are then split among the rest of the investors (limited partners or LPs and general partners or GPs). The split is usually based on ownership percentages or an amount stated in…

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Commercial Real Estate Capital Stacks Explained

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Capital Stack Intro A real estate capital stack is the financial structure of real estate deal. The capital stack shows the amount and relationship of all the different types of capital used, or expected to be used, in a real estate deal. While that explanation may seem a little daunting to even the most seasoned investors, it’s actually pretty simple if you break the capital stack into its separate parts. Let’s start with an extremely simple example, your home. If you bought your home for $300,000 and were required to put 20% down, or $60,000, the capital stack on your…

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How to Invest in Self-Storage Real Estate

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What is Self-Storage? Self-storage rents out and leases space to individuals and businesses. Most people at one time rented a self-storage unit. A majority self-storage leases are on a month-to-month basis. Some of the largest companies in the industry are Extra Space Storage, Public Storage, and CubeSmart. Currently the self-storage industry has a market size of around $39 billion dollars with an estimated 60,000 facilities currently operating in the space. While those are large numbers, they are about 1/5 the size of the apartment industry which is around $176 billion with an estimated 564,000 facilities currently operating*. What that means,…

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Do Your Due Diligence

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When purchasing a real estate investment, it’s difficult to overstate the importance of doing your due diligence. The degree of due diligence depends on the complexity of the property under consideration. For example, purchasing raw land may require less rigorous due diligence than purchasing a commercial building. Due diligence begins well before you purchase the property. In the real estate purchase and sale agreement, allow yourself sufficient time to do a thorough analysis of the property. Life’s too short to get stuck with a problem property for 20 years. Don’t be lured by the promise of big potential profits on…

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Should Your Company Buy or Lease the Space it Occupies?

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As the owner of a company, one of the difficult decisions you will make is whether to lease or buy the space that your company needs. Ownership of the space your company occupies is always an important consideration, but sometimes owning is not always the wisest decision, especially if your business is experiencing change. Here’s some key points to consider when determining whether you should lease or buy the space your company occupies. Important considerations when purchasing commercial space:Does your company have the cash to meet the lender’s equity requirement? Most lenders require a minimum of 25% down to purchase…

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Capitalization Rates Can Be Tricky to Determine and to Apply

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All real estate appraisers use the Income Capitalization Approach when it comes to valuing commercial income-producing real estate. This approach determines the Net Operating Income (NOI) of an investment property and divides that number by the capitalization rate or “CAP Rate.” (NOI ÷ Rate = Value). That’s called the “IRV” formula where “I” means NOI, “R” means CAP Rate and “V” equals value. Think of the “CAP Rate” as the return an investor expects to achieve based on the risk they are willing to take. The higher the risk, the higher the CAP Rate. For example, Walgreens does not own…

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High Employment Drives Record Industrial Demand

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High employment and improved consumer spending continues to drive new supply and record demand for U.S. industrial space. According to CoStar managing directors and senior economists Christine Cooper and Abby Corbett, industrial space leasing hit an all-time high of 139 million square feet in the second quarter, outpacing the first quarter by 46%. In some markets, industrial and retail are merging, placing increased demand on distribution networks. The line between industrial and retail are blurring as companies like Amazon try to position its same day delivery service in closer proximity to the consumer. This demand has reshaped the eCommerce industry….

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Leverage Is the Key to Enhanced Investment Returns

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Leverage is using borrowed capital (other people’s money) to increase the potential return on an investment. Leverage, if done properly, will significantly enhance your return on investment. This is easy to do if you invest in income-producing real estate but much more difficult, if not impossible, if you’re investing in stocks or mutual funds. In the stock market, it is difficult to leverage your investment. One dollar buys you a dollar’s worth of stock. Whereas, in real estate, one dollar can buy you four dollars’ worth of real estate because the bank will lend you three of the four dollars…

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