Commercial Property Analysis - Case Study

Well, after all this is suppose to be a real estate blog.  So, for now, I thought I would step out of my arm chair economic advising / political role and throw some real estate at you.  

I recently was asked by a prospective client to analyze and list their property.  I thought I would present this as sort of a case study.   My analysis and recommendations follow:

Property and Market Analysis

In reviewing sales data, I was unable to find a single property like theirs which had sold in their area in the last 2 years.   Given the change in the financial climate, I do not trust any comps older than that.    I did find two units like theirs which were on the market for sale. 

Checking out the leasing market for the property, there were several possible options in the area with some 32 other similar options within a mile of the property.

Looking at the market stats, our commercial real estate information exchange (KCREA) showed 29  Industrial Sales, 86 Industrial Leases, 30 Office Sales and 94 Office Leases for our entire area YTD.    On the day of the analysis KCREA showed 219 Industrial Sales Listings, 337 Industrial Lease Listings, 254 Office Sales Listings and 771 Office Lease Listings.   Looking at the amount of inventory and the rates of sales and leasing, it would take more than 64 months to sell all of the sales inventory and it would take more than 49 months lease all of the lease inventory.

Property Recommendation

 
With this amount of inventory and competition, it is critical to position property in the top 5% or 10% of the properties on the market in price and condition in order to move it.   

I advised the prospective client to price the property below the offering price of the two similar properties in the area, which had not sold AND to be aggressive in pricing, terms and property condition in order to lease it.

Client Response

In spite of the analysis, the owners insisted on a listing price approximately $70,000 more than I recommended (and to put this in perspective - about 33% above the recommended price)   And while they were happy enough with the suggested lease rate, they insisted on not less than a 3 year lease and property to be taken "as-is."   Also, they insisted that any commission I earned in leasing the property should be refunded to them in the event someone decided to buy the property.

Result

When all was said and done, I passed on taking the listing.   In my opinion, the property would not sell at that price.   Accordingly from my perspective, the most I could reasonably expect to make would be a commission on a lease, which in this case would have been a small amount anyway.  Then on top of that, the owner wanted me to rebate that commission if I managed to sell it after all.

There have been times earlier in my career when I would take a listing and list it at a higher than recommended price thinking that I would satisfy the client and we could adjust it later.  My experience has been that this doesn't help anybody.   If the property is priced too high, you often cannot even get anyone to look at it.  And while I certainly want my clients to be happy, any project I take on has to make sense for me from a business perspective.  The bottom line is that if there is no way for me to earn any money off of the deal, it isn't something that I can afford to waste time on.  

Well, with that out of the way, I guess I want you to know that I am still taking listings.  If you have property that you would like me to take a look at, let me know.   I specialize in Commercial Real Estate and am a licensed real estate broker in Kentucky and Indiana.  I would love to help!

Thanks, all.   Have a great day!

David

David W. McCoy
Associate Broker
Commonwealth Commercial Real Estate
10444 Bluegrass Pkwy
Louisville, KY  40299

Social Security - A ponzi Scheme?

Governor Rick Perry has been taking some heat for claiming that Social Security is basically a Ponzi Scheme and following the financial crisis of 2008, many politicians that had been advocating for privatization of Social Security have been vilified.     Are these criticisms fair?

As a school administrator, my wife is essentially a Kentucky state employee and as such she is not part of the Social Security program.   She has a retirement account managed by the Kentucky State Teachers Retirement Fund.   She actually has to contribute a somewhat higher percentage of her pay toward this fund than those of us paying into Social Security.   The big difference however is that there is an actual retirement account that has her money in it.   And while the amount in that account fluctuates according to the way it is invested, it is hers and will always be there for her.

Contrast this with Social Security, where there are no accounts and no actual money being saved.   Payouts come from current taxes.   If the tax were to stop today, there would be no money to pay retirement.   The current payouts come entirely from the taxes collected from the currently employed. 

So, how is this any different from having Bernie Madoff manage your retirement accounts?   Bernie who perpetrated the largest Ponzi scheme in history was doing just this -  getting new investors to put money into the funds and paying those funds out to the original investors.   But ultimately, it was unsustainable.   Bottom line is this, if a private firm were managing your retirement money this way, somebody would be going to jail.

Looking back, I would say that those advocating the privization of Social Security win.   The accounts may have decreases in value with the decline in the stock market BUT in almost every case, there is still money there which will be available to those retirees.   Perhaps not as much as they had hoped but it is there.

The truth of the matter is, that the government does a terrible job of managing money.   And there is no reason to think that will ever change no matter who is in charge.

Just my opinion.

Speaking of which, if you would like an opinion on real estate, I would love to help.   I specialize in Commercial Real Estate and am licensed in Kentucky and Indiana.  I would love to help.

BTW - Keeping my broker happy, you should know that this does not necessarily reflect the opinion of my company, my broker, or any of employees of Commonwealth Commercial Real Estate, other than me, of course.    AND if you have a different point of view, I am happy for you to present it in the comments.   

Thanks, so much all.   Have a great day!

David

David W. McCoy
Associate Broker
Commonwealth Commercial Real Estate
10444 Bluegrass Pkwy
Louisville, KY  40299

Spending our way to Prosperity - Aliens?

Paul Krugman, previous winner of the Nobel Prize for Economics, is no doubt a brilliant economist.  So knowing that he knows more about Economics than I could ever hope to, it is with some trepidation that I comment on his recent comments that all we need to get our economy running is a good Alien Invasion.   

Now lest you think that Paul Krugman is crazy, he reportedly made these comments when discussing what to do about the current economy.   Krugman's point was intended to call attention to the widely held belief that it was the spending of the World War II effort that pulled the US and the world out of the Great Depression.    As I understand it, his point was that if we had a threat serious enough that we would consider spending without limits that we could expect the same type of response in about 18 months.  

Yet, when we think about that does that make sense?  After all, if that were the case, wouldn't Greece have a booming economy right now instead of riots in the streets?   Something about that just doesn't ring true.

I think that what is missing here is a little more perspective.   During World War II, Germany was also spending without limits in order to win the war, but no one would claim that their economy was in terrific shape after the war.   What is different about the US is that the US won the war.   Obvious as that may seem, it is a crucial difference that I think explains why the US economy boomed while Germany's economy busted.    World War II was not only fought by armies, it was also fought by economies.   At the end of World War II, the economies of Europe as well as their infrastructure were destroyed.   That left the US as the only major economy left in the world, which then provided the money, and the goods and services necessary to rebuild the rest of the world.   

The world's experience with Communist economies would seem to support this idea.  After all in a true communist economy, 100% of the economy is basically government spending.  But the communist economies were notorious for not functioning well on several levels and I am not aware of anyone who would argue that they were successful.   None of them could have been considered prosperous.

Don't get me wrong, I think that there are areas where government spending is appropriate and helpful to an economy but I do not believe that government spending in and of itself can bring prosperity.

Just my opinion.   

AND using that segue way - if you want an opinion on your real estate matters, give me a call.   I am a licensed broker in Kentucky and Indiana and specialize in commercial real estate.

By the way, I am sure that my managing broker would appreciate it if I mentioned that the views in this article are my opinions only and do not necessarily reflect the opinions of Commonwealth Commercial Real Estate or any of those who work here (other than me, of course).    AND if you disagree or have an opinion you would like to share, please feel free to make a comment. 

Thanks, all.   Have a terrific day!

David

David W. McCoy
Associate Broker
Commonwealth Commercial Real Estate
10444 Bluegrass Pkwy
Louisville, KY  40299

The Tax Issue - How much should taxes be?

Today, I may well lose some friends I made in my last post but I suspect that I regain some friends I lost as well.  I waited a while before posting this because I was hoping to get some additional input.  As we enter a time where the nation will be debating our tax issues, I think that the appropriate questions should be, "what should our overall tax rate be?"

Over and over, as I read about taxes, it would seem that history has repeatedly demonstrated that, contrary to what one might expect, federal tax revenue has increased following tax cuts.    And so it would seem that prudent tax policy would dictate that any time you need more federal tax revenue, you should cut the tax rates.    I am sure that some would jump to embrace this strategy but if pressed, I think that even the most ardent  tax opponent would have to concede that this strategy could not work forever.   If it could, why would we even be concerned about having taxes at all or about the amount of our federal government's spending?    Logic would tell us that if the tax rate were zero, then we must be getting less tax revenue that if the tax rate were positive.

For both of these to be true, we have to assume that somewhere along the spectrum lies an optimal tax rate.    This rate would be the point where if you raise the rate, you actually decrease total tax revenue OR if you lower the rate, you would decrease total tax revenue.    It may well be that this rate is not constant and it may depend on several other factors.    In fact, if I had to guess, I would think that the optimal rate would be determined in part by what the public at large feels is reasonable and supportable.

In my mind, if our government is being responsible, this is the question that they have to address.  Once determined, all of the other questions can then begin to be addressed.   We would then know where to set our taxes and also where to set our spending.   While I suspect that in our current situation, this is not the case, it may well be that our Federal taxes should be increased.  It may also be true that our Federal taxes should be cut.  But it seems to me that the road to financial responsibility of  our nation should begin with this question.

Just my opinion.    Let me know what you think.  

Thanks, all and have a great day.

By the way, if you need an opinion about real estate, I would love to be of assistance.   Give me a call or shoot me an e-mail.  I am licensed in Kentucky and Indiana and specialize in commercial real estate.

David

David W. McCoy
Associate Broker
Commonwealth Commercial Real Estate
10444 Bluegrass Parkway
Louisville, KY

PS - I am sure that my managing broker would appreciate me stating that these opinions are my own and not necessarily those of Commonwealth Commercial Real Estate of any of the others who work here.   

The Tax Issue - Promoting Class conflict

It would appear that the next great issue in Washington will be about raising taxes.   Our President and his supporters want to raise taxes.  The President wants to garner support for this position by promoting class conflict.  He claims that he has no intention of raising taxes on the ordinary citizens, he will only raise taxes on the wealthy.   He goes so far as to define the wealthy as those making $250,000 per year or more, which includes 2% of the US population.   To further this agenda, claims are made to indicate that the wealthy do not pay enough taxes and certainly there are at least undertones that the wealthy somehow have been cheating ordinary Americans, or at least that ordinary Americans have been having to carry the load on behalf of the wealthy.

Is that a fair claim?    One of the claims is that all of the tax cuts have cut taxes for the wealthy but not for the ordinary Americans.    I suppose this is true but of course, if you are already paying no income tax, you cannot expect your taxes to go lower.  It only makes sense that a tax cut would only affect the 53% of Americans who are paying federal income taxes.   So, if it has no effect on us, why should we be be angry that the wealthy are getting a break.   It seems a little like being mad that someone who bought your dinner, used a coupon at the restaurant.

I am not necessarily against taxes per se.   It may be that we need to review our tax system but I am opposed to vilifying law abiding citizens and promoting class conflict in order to promote this agenda.

Just my opinion.  

By the way, if you need an opinion about real estate, give me a call.  I am a commercial real estate broker and would love to help you if I can.   Have a great day, all.

David

David W. McCoy
Associate Broker
Commonwealth Commercial Real Estate
10444 Bluegrass Pkwy
Louisville, KY  40299

Debt Ceiling Debate

Perhaps I shouldn't wade into political waters, but the state of the economy affects real estate and especially commercial real estate.   Accordingly, these issues are very important for my profession. 

Listening to the coverage of the US Debt Ceiling Debate, it seems to me that the media coverage as well as the President of the US want to assign the blame for the impasse at the feet of the Republicans for not caving to the President's demands.   The President has repeatedly stated how desperately important it is to raise this Debt Ceiling and indicated that it is irresponsible not to do so.   He even threatened not to pay Social Security and our troops if the Debt Ceiling is not raised and then tried to assign the blame for this on the Republicans. 

Media coverage aside, logic tells me that if there is no agreement, it must also mean that the President has also not been willing to agree to the terms of the opposing side.   We are told that the issues at hand are the level of the Debt Ceiling, the reduction of spending, and tax increases.    The President tells us that he thinks raising the Debt Ceiling is imperative, so they are in agreement there.   The President also tells us that he believes that getting spending under control is imperative, so they seem to be in agreement there.   The one remaining issue then is tax increases.

Taking this all together, it sounds to me like the President is saying that he is willing to let the US government default and allow social security recipients and soldiers to not be paid in order to demand tax increases.    If that is the case, I feel like I must be missing something.   The President indicated that the consequences were so dire that it would be completely irresponsible not to simply agree to something to allow the Debt Ceiling to be raised and yet he is not agreeing.  

The President seems to be saying that the state of the budget is so bad that only the tax increases will allow it to be under control.  And yet, all of the information available indicates that the increases desired cannot possibly balance the budget.

I cannot claim to know the President's mind and perhaps he is getting different information from the rest of us, but given that the tax increase is the issue preventing a deal and given that the tax increases could not begin to balance the budget, the President's motives for this demand become suspect.  This leads me to wonder if the President is holding the country hostage to try to make political gains at the opposing party's expense.   Hopefully, I am wrong, but in my humble opinion, the promotion of class conflict to attain political advantage is not a courageous or helpful policy.

(stepping off my soap box)

Have a great day!

David

David W. McCoy
Associate Broker
Commonwealth Commercial Real Estate
10444 Bluegrass Pkwy
Louisville, KY  40299

PS - I am sure that my principal broker would appreciate me noting that these are my opinions only and do not necessarily reflect the opinions of this firm or its other agents and employees.

8116 Blue Lick Road Sold

My C-Store listing on 8116 Blue Lick Road, which earlier in the year was my busiest listing has sold and closed on Tuesday.     That one was a challenging listing but the more challenging they are, the more satisfying when they sell.    I believe the new owner intends to update it a little and lease it out.   

With that one sold, I have more time available for other listings.   Let me know if you need any help. 

Have a great day and stay cool!

David

David W. McCoy
Associate Broker
Commonwealth Commercial Real Estate
10444 Bluegrass Pkwy
Louisville, KY  40299