The real estate investment handbook

The Real Estate Investment Handbook THE FRANK J FABOZZI SERIES Fixed Income Securities, Second Edition by Frank J Fabozzi Focus on Value: A Corporate and Investor Guide to Wealth Creation by James L Grant and James A Abate Handbook of Global Fixed Income Calculations by Dragomir Krgin Managing a Corporate Bond Portfolio by Leland E Crabbe and Frank J Fabozzi Real Options and Option-Embedded Securities by William T Moore Capital Budgeting: Theory and Practice by Pamela P Peterson and Frank J Fabozzi The Exchange-Traded Funds Manual by Gary L Gastineau Professional Perspectives on Fixed Income Portfolio Management, Volume edited by Frank J Fabozzi Investing in Emerging Fixed Income Markets edited by Frank J Fabozzi and Efstathia Pilarinu Handbook of Alternative Assets by Mark J P Anson The Exchange-Traded Funds Manual by Gary L Gastineau The Global Money Markets by Frank J Fabozzi, Steven V Mann, and Moorad Choudhry The Handbook of Financial Instruments edited by Frank J Fabozzi Collateralized Debt Obligations: Structures and Analysis by Laurie S Goodman and Frank J Fabozzi Interest Rate, Term Structure, and Valuation Modeling edited by Frank J Fabozzi Investment Performance Measurement by Bruce J Feibel The Handbook of Equity Style Management edited by T Daniel Coggin and Frank J Fabozzi The Theory and Practice of Investment Management edited by Frank J Fabozzi and Harry M Markowitz Foundations of Economic Value Added: Second Edition by James L Grant Financial Management and Analysis: Second Edition by Frank J Fabozzi and Pamela P Peterson Measuring and Controlling Interest Rate and Credit Risk: Second Edition by Frank J Fabozzi, Steven V Mann, and Moorad Choudhry Professional Perspectives on Fixed Income Portfolio Management, Volume edited by Frank J Fabozzi The Handbook of European Fixed Income Securities edited by Frank J Fabozzi and Moorad Choudhry The Handbook of European Structured Financial Products edited by Frank J Fabozzi and Moorad Choudhry The Mathematics of Financial Modeling and Investment Management by Sergio M Focardi and Frank J Fabozzi Short Selling: Strategies, Risks, and Rewards edited by Frank J Fabozzi The Real Estate Investment Handbook G TIMOTHY HAIGHT DANIEL SINGER John Wiley & Sons, Inc Copyright © 2005 by John Wiley & Sons, Inc All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600, or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201748-6011, fax 201-748-6008 Limit of Liability/Disclaimer of Warranty: While the publisher and authors have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor authors shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993, or fax 317-572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley, visit our web site at www.wiley.com ISBN: 0-471-64922-8 Printed in the United States of America 10 G Timothy Haight This book is dedicated to my loving wife Ann, who has supported me both in my professional and personal development Daniel Singer This book is dedicated to my fellow investors, partners, and colleagues for their help, support, encouragement, and friendship over the years Contents Preface About the Authors ix xi CHAPTER A Portfolio Approach to Investing in Commercial Real Estate CHAPTER Interpreting Financial Statements for Successful Real Estate Investing 23 CHAPTER Depreciation 37 CHAPTER Business Organizational Forms 47 CHAPTER Buying versus Leasing 81 CHAPTER Residential Real Estate 97 CHAPTER Apartments 135 CHAPTER Condominiums 167 CHAPTER Timeshares 195 vii viii Contents CHAPTER 10 Undeveloped Land 213 CHAPTER 11 Self-Storage Facilities 231 CHAPTER 12 Restaurant Real Estate 255 CHAPTER 13 Shopping Centers 313 CHAPTER 14 Athletic Clubs, Physical Fitness Centers, and Family Entertainment Centers 347 CHAPTER 15 Office Buildings 379 CHAPTER 16 Industrial Properties 421 CHAPTER 17 Parking Lots 451 CHAPTER 18 Hotels and Motels as Commercial Real Estate Investments 479 INDEX 519 Preface The Real Estate Investment Handbook is designed to be a tool for current and aspiring commercial real estate investors in developing and evaluating commercial real estate properties In general, the commercial real estate market has been very “hot” since 2000 and gives every indication of remaining so throughout at least the middle of the decade As a result of Federal government tax and monetary policies, commercial real investment provides excellent risk-return opportunities that enable many individuals to build a secure foundation for their wealth In addition, most high income individuals are overinvested in the stock market The portfolio of these individuals would benefit from diversification into commercial real estate Unlike equity securities, commercial real estate often generates a substantial and predictable cash flow over time The compounding effect of this cash flow can significantly enhance the performance of most investment portfolios Investing in commercial real estate is not for those whose mindset is to “get rich quick.” Investing in commercial real estate involves a deliberate trade-off between up-front investment costs and a stream of cash returns over a five-to-ten-year time horizon This cash flow is normally augmented by a favorable tax treatment that can yield substantial benefits to the high income investor The fact that such benefits are received over time lends a compounding effect to real estate returns that may lack the “flash” of a quick kill in the stock market, but more than compensates for this by a predictable income stream The market for commercial real estate is differentiated by both size and type Investing in a condo, second residence, or even a small office building is well within the reach of middle income investors Opportunities also exist for much larger investments The point is that commercial real estate provides opportunities for both the small and large investor Different types of real estate investment also abound, ranging from single-family rental properties to industrial parks These investments vary by the function they serve, the required skill and experience of the potential investor, and the characteristics of their cash flow A given investor might not have the proclivity and experience to invest in a self- ix 530 Inflation (Cont.) debt, advantage, 12–13 hedge See Undeveloped land impact See Real estate value macroeconomic trend, 218 protection, 127 resistance, 10–11 Initial rent, appreciation, 191 Inner-city neighborhood shopping center, 334 Insurance companies, 383 Inter-city shopping centers, 317 Interest charges, 190 Interest expenses, 84 Interest payments, 190 Interest rates, 100 receiving, 110 reduction, 424 Interest-only balloon note, 372 Interest-only bridge loan, 83 Interest-only construction loan, 389 Interest-only loan, 25 Interests, transfer/assignment, 66–69 Internal exchange system See Private internal exchange system Internal rate of return (IRR), 30, 130 difference, 102 increase, 251 Internal Revenue Code (IRC), Code Section 179, 42 Internal Revenue Code (IRC), Section 179 Deduction, 38, 42–43 Special Bonus, 43–45 Special Depreciation Allowance, 42–43 Internal Revenue Service (IRS), 106 dispute, 39 information return, filing, 53 tax-oriented lease requirement, 327 written appraisals, requirement, 203 Interstate Land Sales Division (ISLD), 217 Index Interval International (II), 198, 201, 202 Inventory control, 259 Investments See Commercial real estate investment; Real estate investment evaluation, 30–34 optimum, 357 performance, 102 impact, 330 portfolio, 86 potential See Timeshares return/risk, 114 yields, 13 IRBs See Industrial revenue bonds IRC See Internal Revenue Code IRR See Internal rate of return ISLD See Interstate Land Sales Division Jacksonville Ventures LLC (JV), 442 bridge loan, securing, 444 interaction See Mississippi Industrial Development Corporation IRBs, usage, 445 mortgage loan, securing, 444 tax shield, importance, 445 Jobs and Growth Tax Relief Reconciliation Act of 2003, 4, 37 impact See Special depreciation allowance rules, suspension, 42 Johnny-on-the-Spot, 102 Johnson Building acquisition phase, 400–401 BEP, 413, 418 break-even analysis, 410–418 capital, cost, 402 conclusion, 418 disposal phase, 402–410 holding period increase, impact, 410 Index Johnson Building (Cont.) phase, 401–402 IRR, 406, 410 lump-sum gain, 406 mortgage payment, 413 NPV generation, 406 yield, 410 office building example, 400–418 opportunity cost, 402 performance, 402 proposal, 401 ROE, 402 tax shield, 401, 418 Thompson (Bill), call (exercising), 410 total cost, 413 total return, 413 vacancy rate, 401–402 Johnstone’s Pharmacy analysis, 83–90 example, 82–90 JV See Jacksonville Ventures LLC Kai mansion, residential real estate example, 112–115 Kennedy, Diane, 105 Kim’s Family Entertainment Center BEP, 371 net cash gain, 367 NPV, generation, 367 revenue, attendance (relationship), 371 take-out, 367 total cost, 371 total revenue, 371 variable cost, 371 Kim’s Family Entertainment Center (FEC) acquisition period, 366 break-even analysis, 371 disposal stage, 367–370 effective season, 366 531 example, 365–371 go-cart track, 365 demand, 366 holding period, 366–367 labor expense, 366 Paintball Arena, 365 Soda Shack, 365 success, 366 Kiyosaki, Robert T., 105 Knights Inn, affiliation See Starlight Motel Labor, variable costs, 247 Land See Developing land; Raw land; Undeveloped land costs, 290 exclusion, 370 development, 262 improvements, 38, 311 lease, support, 291 market value, 248 purchase, 247, 252 Land use ethnicity, impact, 214 homogeneity, 215 shift, appreciation, 214 Law of Large Numbers, 453 Leasehold, usage, 328 Leases See Gross leases; Net leases evaluation, 81 expense, 263 extension, impact See New Hope Shopping Center holding, 259 length, 82 negotiations, 291 play, 282 proposal, 301–302 purchase, decision, 84 renegotiation, 331–334 rent, level, 315 requirements See Tax-oriented lease rollover, 186 532 Leases (Cont.) support See Land terms, negotiations, 316 Leasing characteristics See Shopping centers contrast See Buying costs, 276 timing, 81 Legal costs, 176, 182 Legal fees, 179 Leisure time availability, 350 Lessors/lessees debt cost, 81 risk, 91 tax differential, importance, 95–96 tax situations, 81 Leverage See Financial leverage; Operating leverage; Undeveloped land degree, 115, 125 level, 187 optimization, 9, 18 reason, 10 ratio, 32 Lifestyles attributes, 349–350, 355 impact, 354 marketing, 354 Limited liability company (LLC), 58, 149, 313 forms, 54 proposal, 155 Limited liability limited partnership (LLLP), forms, 53 Limited liability partnership (LLP), 151 forms, 53 See also Registered limited liability partnership Limited partnership (LP), forms, 53 Liquidated damages, 482 Liquidation price, 228 Index Liquidity See Commercial real estate investment absence, 14 loss, 326 ratios, 32–33 Listed property, 39 LLC See Limited liability company LLLP See Limited liability limited partnership LLP See Limited liability partnership Loan balance, 175 Loan-to-value ratio, 216 maximum, 387 Location absolute, knowledge, impact See Restaurant success importance, 4–5 Long-term commercial investors, 26 Long-term horizon, 13 Long-term mortgage loans, usage, 387 Loopholes, closing, 37 LP See Limited partnership LTUVs, increase, 455 Macomb Self-Store, 233–240 MACRS See Modified Accelerated Cost Recovery System Mad Cow disease, 255 Madison Athletic Club (MAC) acquisition phase, 356–360 BEP, 364 break-even analysis, 364 construction costs, 358 disposal stage, 360–363 example, 356–364 holding stage, 360 NOPAT, acceleration, 360 revenues, 364 sale, 360 success, 360 total cost, 364 total revenue, 364 Index Magnolia Industrial Park, 444 Maintenance expenses, 203 Management expertise, requirement, 18 fee, 328 See also Big Sky Shopping Center; Property inclusion See Variable costs Manekin LLC, Mansion, example See Kai mansion Manufacturing activities, conversion, 422–423 Manufacturing employment, decrease See Post-World War II Marco Building acquisition phase, 388–390, 394– 395 after-tax gain, 393 BEP, 399, 400 break-even analysis, 399–400 construction process, 390 contribution, amortized value, 399 costs, coverage, 399 disposal phase, 395–399 disposal stage, 390–394 escalation clause, 394 excess supply, example, 394–400 holding period, 399 phase, 390, 395 income level, 395 maintenance costs/taxes, 394 negative cash flow, 395 net equity, contribution, 390 net outflow, 389–390 NOPAT, decrease, 395 NPV, 393 office building example, 388–394 small office building conversion, 388 total cost, 399, 400 total revenue, 399, 400 Margin financing, Market analysis, quality See Restaurant real estate 533 area, defining See Athletic facilities demographics, 348 efficiency, 103 feasibility study, 348 niche, 350 research, 241 served, definition See Hotels; Motels value determination, 107 estimate, 388 Marketing See Niche marketing Marriott International, 201 Maximum daily rate (MDR), 452– 454 amount, 457 discount, 453 fee, charging, 453 multiple, 457 McDonald’s franchises, 262 proximity See Burger King restaurant real estate example See Route 66 McDonald’s McDonald’s franchisee approach, 263 break-even level, 276 operation, 276 risk, 269 McMansions, 307 MDR See Maximum daily rate Membership fees, 359, 373 interests, 60–62 voting/management, 60–62 Midscale full-service dining, 255 Miller, Sr., J William, Missawak Indians, 150 Mississippi Industrial Development Corporation (IDC), 444 JV, interaction, 445 Modified Accelerated Cost Recovery System (MACRS), 39, 422 534 Monthly contract (parking) users See Parking lots Month-to-month lease, 110 Mortgages equity payments, 88 insurance, 111 loans, usage See Long-term mortgage loans payment See Johnson Building payoff, 183 Motels apartment conversion, 481 BEP, 491–495 commercial real estate investments, 479 contract negotiability, 483 daily rates, 483 EBIT, growth, 490 examples, 483, 495, 508, 513 exit windows, 482 franchise arrangement, entering, 482 opportunities, 481–483 IRR, decrease, 490 liquidated damages, 482 lump-sum cash penalties, 482 maintenance, 485 market served, definition, 482 nonroom revenue, 480 NOPAT generation, 485–486 occupancy levels, 483 profitability considerations, 483 protection area, 483 purchase, 184 risk-return opportunities, 479 room sales, percent, 482 summary, 513–517 technical support, 483 total cost, 491–495 total return, 491–495 Mulberry Street, residential real estate example, 120–125 Multiple business forms, usage, 57 Index Multiple-purpose family entertainment centers, 347 Multistoried buildings, SSF usage, 232 Municipal services, 143 Mutual funds appreciation, 132 portfolio, sale, 127 Myers, Kevin C., 105 NAI KLNB, National Park Service, 106 National Restaurant Association, 255 Near-money, 214–215 Negative cash flow, 132, 225 Negative net income, 126 Neighborhood shopping centers, 317 See also Inner-city neighborhood shopping center Net cash flow, treatment, 141 Net income, 15 determination, 109 development, 263 increase, 235, 275 negative level, 123, 242, 248, 269 positive level, 144 present value, 330 relevance, 321 trends, impact, 29 Net leases, 316 See also Doublenet leases; Triple-net leases Net operating profits after taxes (NOPAT), 15 comparison See Big Sky Shopping Center consideration, 25–26 development, 263 flow, 190–191 generation, 242 growth, 161 impact, 248 increase, 235, 275, 291 negative level, 158, 269 Index Net operating profits after taxes (Cont.) positive level, 123, 130, 144 relevance, 321 spreadsheet analysis, 58 strength, 100, 111 sufficiency, 151 trends, impact, 29 weakness, 115 Net present value (NPV), 27, 30 See Real NPV attractiveness, 115 calculations, 42 coverage, 84 definition, 82 generation, 91, 290–291 increase See Nominal NPV level, 83–84 negative level, 151 New Hope Shopping Center, 334–345 acquisition phase, 335–336 BEP, 341 break-even analysis, 340–345 disposal stage, 340 failure, 337 holding phase, 336–339 lease extension, impact, 342 negative NOPAT, 337 NOPAT reduction, 342 positive NOPAT, 337 positive NPV, generation, 340 revenue enhancement, 341 SBA-funded leasehold, 335 total cost, 341 total revenue, 340–341 Niche marketing, 348–350 Nominal NPV, increase, 222–223 Noncash expense, 40 NOPAT See Net operating profits after taxes Nordstroms, 349 NPV See Net present value Occupational affinity, 350 535 Ocean side properties, 183 Office buildings, 379 See also Class A office buildings; Class B office buildings; Class C office buildings; C-type office building access/circulation, 381 appraisals, 388 boom/bust, 387 classes, 386 construction, 383 costs, 379 phase, 387 design, issues, 380–381 development process, 387 success, 380 disability accommodations, 381 disposal, 381–382 environmental considerations, 381 examples, 388, 394, 400 financing, 387–388 geographical location, changes, 384–385 industrial structure, change, 385 life cycle, 382 business life cycle, interaction, 382–384 market cyclicality, 379 predictability, 382 parking, issues, 381 sewer/water, availability, 381 traffic generation, 381 types, 386 use intensity, 381 vacancy rates, 382 work mode, change, 385 zoning ordinances, impact, 380 Office of Consumer and Regulatory Affairs, 217 Office space additions See Post-World War II excess, 383 536 One-time killing, Open outcry method, 107 Operating agreement See Delaware LLC Operating expense ratios, 142 Operating income, 321 Operating leverage, 10 usage, 345 OPM See Black-Scholes Option Pricing Model Opportunity cost, 138, 141, 269 See also Johnson Building; Rent Option costs, 182 Organization, forms, 59–60 Out-of-pocket closing costs, 119 Ownership, pride, 198 PA See Professional associations Parking See Time-and-destinationspecific parking bay module, 454 demand, 452 issues See Office buildings patrons, cost (front loading), 453 Parking facility See Ground-level parking facility; Structured parking facilities rates, 454 revenue, 453 service, 453 Parking lots, 314, 451 cost See Surface parking lots cost/design estimates, 454–456 early bird users, 453 financial feasibility study, 452–456 holiday users, 454 leasehold example See Small surface parking lot market data, usage, 474 monthly contract users, 454 revenue estimation, 452–454 Saturday/Sunday users, 454 short-term/transient users, 453 Index special event users, 453 users, types, 453–454 weekend users, 454 Partnership, 319 forms See General partnership; Limited liability limited partnership; Limited liability partnership; Limited partnership tax-paying entity, 53 Passive activity, 11 PCB contamination, impact, 223 Peaceful Valley Resort acquisition phase, 508–511 ADR, increase, 511 after-tax profit, 512 common area, remodeling, 510–511 disposal phase, 512–513 holding phase, 511–512 hotel/motel example, 508–513 IRR, generation, 512 NOPAT, level, 511 NPV, generation, 512 purchase, 510 revenue, generation, 511 Performance, usage, 32–34 Personal liability, limitation, 149 Personal property, definition, 232 Physical attributes, Physical fitness centers, 347 P&I, existence, 142, 413 P&I payments, 179, 181, 472 PIP See Property improvement plan PITI See Principal interest taxes insurance Pizza Hut, 233 Planning commission, impact See First Order Pleasure World, condominium example, 185–189 Population data, 256 estimate See U.S Bureau of the Census Index Population (Cont.) growth, 356 impact See Restaurant real estate Portfolios, approach See Commercial real estate investment Positive cash flow, existence, 216 Positive externalities, 313–314 Post-World War II manufacturing employment, decrease, 421 office space additions, 382 Preconstruction basis, 176 sale, 185 sales, 175, 181 Preconstruction condominiums flipping, 172 purchase, 177 Preforeclosures, 104 Present value, 42 See also Net present value examination See Cash flows Price earnings approach, 137–138 Price sensitivity, 137 Price-earnings ratio (P/E) approach See Apartments Principal interest taxes insurance (PITI), 99, 100 result, 112 Principal payment, 320 Principals definition, 49 fidelity, 49–50 Private internal exchange system, 201 Pro forma income statements, 27–29 losses, elimination, 302 meaning, 27 Probate properties, 104 Process systems, 57–58 Professional associations (PA), forms, 56 537 Professional corporations (PC), forms, 55–56 Profitability, 34–35 considerations See Hotels; Motels level, 263 ratio, 32 Profits criteria, 40 inclusion See Deeds Prohibited properties See Self-storage facilities Project market value, 246, 251 Property assumed value, 268, 274, 290, 296, 301 depreciation, 326 leasing/selling, decision, 81 limited use, 327 management fee, 191 firm, hiring, 381 marketability, 47 owner, risk, 326 rents, increase, 130 taxes incentives, 159 payment, failure, 312 terminal value, 91 value determination, difficulty, 15– 18 Property improvement plan (PIP), 482 Publicly traded stocks, liquidity, 14 Punch list, 482 Purchase and sale agreement, 47 Purchase contract assignments, 173 Queensbury Manor acquisition phase, 143–149 apartment example, 143–149 Qui facet per alium, facet per se, 49 Quick ratio, 32–33 Quiet enjoyment, meaning, 48 Quit-claim deed, 48 538 Ratio analysis, 32 Raw land, 213, 216–220 acquisition phases, 220 break-even analysis, 223 disposal phase, 220–223 example, 220–223 purchases, leveraging, 219 RCI See Resort Condominiums International Real estate See Residential real estate; Restaurant real estate auctions, 104 comparable (sales), 119 approach, 108 cost approach, 108 disadvantages, 14–18 discounted cash flow (income) approach, 109 properties, 16 impact See Tax savings purchase, 225 timing, 81 rental, 11 stocks, historical performance (contrast), 2–3 transactions, 47 Real estate investment advantages, 9–14 business ownership, comparison, 12 opportunities, demand (impact), 347 portfolio approach See Commercial real estate tax advantages, 11 Real Estate Investment Trusts (REITs), 3, 141, 143, 313 cash flow, financing, 144 competition, 383 discovery, 321 property sale, 226 Real estate owned (REO), 104 Real estate ownership encouragement, 11 Index hybrid form, 168 tax advantages, 11 Real Estate Research Corporation, 213 Real estate value determination, 107–109 disagreements, 17 increase, inflation (impact), 10 Real NPV, 221, 223 Records/reporting See Delaware LLC Recovery period, 43 See also Commercial buildings Regina property, residential real estate example, 125–130 Regional shopping centers, 318 See also Super-regional shopping centers Registered limited liability partnership (RLLP), forms, 54 REITs See Real Estate Investment Trusts Rent appreciation See Initial rent charge, 359 increase, 137 level See Leases opportunity cost, 126 Rental income, 111, 328 absence, 125 Rental property, 124 See also Residential rental property business conversion, 203 REO See Real estate owned Residential condominiums, 168–170 investment attributes, 169–170 Residential development, zoning, 223 Residential property leases, business leases (contrast), 48 Residential real estate, 97 buying at market, 98–106 buying below market, 103–106 implementation, difficulties, 104– 105 Index Residential real estate (Cont.) examples, 109, 112, 115, 120, 125 investment, 135 success, formula, 98–103 summary, 130–133 Residential rental property, 39 Resort Condominiums International (RCI), 198, 201, 202 Resort property, appreciation, 129 Restaurant real estate, 255 See also Fast food restaurants; Full-service restaurants business trade, 258 competition, 258 cost control, 260 excess, 261 demographics, impact, 257 examples, 262, 285, 302 failures, 258–262 causes, 259–262 financial planning, impact, 261 financial resources, absence, 260 GNP portion See Gross national product highway traffic, impact, 257 location, impact, 256–258 management, quality, 259–260 managers, impact, 260 market analysis, quality, 261–262 population, impact, 256 seasonal demand, impact, 257–258 service, quality, 260, 261 Restaurant success, location (impact), 256–258 Retail activity, 342 Retail shopping districts, 454 Return on equity (ROE), 34 Return on investment (ROI), 33–34 Revenue bonds See Industrial revenue bonds estimation, 452 See also Parking lots 539 generation, 219 increase, 242 structure, uncertainty, 345 Revised Uniform Limited Partnership Act (RULPA), 54 Ridgely, Thad/Jenny (SSF example), 233–240 Risk assessment, 30–31 danger, comparison, 7–8 factor, 141 increase, 18 mitigation See Industrial properties Risk-free investments, 441 Risk/return, trade-off, 10, 26 Risk-return outcomes See Apartments RLLP See Registered limited liability partnership Road access, 217 ROE See Return on equity ROI See Return on investment Route 66 McDonald’s build-to-suit, 282 restaurant real estate example, 262– 284 Route 30 Motel and Cottages, 510 Rule of thumb approach, 141–142 RULPA See Revised Uniform Limited Partnership Act Rust Belt, 255 Sale lease-back arrangement, 18 Sales approach See Real estate costs, 176 182 projections, 302 Saturday/Sunday (parking) users See Parking lots; Small surface parking lot SBA See Small Business Association Second mortgage See Condominium interest, 124 540 Secondary market, selling practices, 171–172 Section 179 See Internal Revenue Code Security services, 314 Sedgewick Arms acquisition stage, 174–177 condo examples, 173–179 preconstruction investment, 177– 179 Self-storage facilities (SSFs), 231 acquisition period, 233–234 acquisition stage, 241–242 approach, alternative, 246–252 BEP, 247 break-even analysis, 240, 246, 251– 252 construction, 233–234 disposal stage, 235–239, 245– 246 examples, 233, 240, 248 holding period, 234–235 holding stage, 242–245 impact See Financial leverage popularity, 232–233, 240 prohibited property, 232 scaled-back version, 251 security, 232 soft costs, 248 usage See Multistoried buildings Seller financing, 219 Selling rule, Sensory attributes See Athletic facilities Service infrastructure, 356 quality See Restaurant real estate Service corporations (SC), forms, 56 Sewer availability See Office buildings Shopping centers, 313 anchors, 314 examples, 318, 326, 334 Index lease arrangements, 316–317 leasing characteristics, 315–317 marketing, 336 overdevelopment, problem, 315 risk/return combination, 318 threats/opportunities, 313–315 types, 317–318 Short-term (parking) users See Parking lots; Small surface parking lot Single-family homes, 97, 112 investment, 127 ownership, 185 Single-family housing, price comparison, 180 Single-family residential developments, 143 Single-purpose facilities, 347 Small Business Association (SBA), 106 assistance, 335–336 loan, 336 SBA-funded leasehold See New Hope Shopping Center Small office building, conversion See Marco Building Small surface parking lot acquisition phase, 456–457 BEP, 458, 465 break-even analysis, 458–460, 465– 466 cash flows, calculation, 461 construction costs, 456 contract users, 457 conventional financing, example, 460–466 disposal phase, 461–465 disposal stage, 460 early bird users, 457 EBIT, 460 financial leverage, 461 fixed costs, 458 gross revenues, generation, 460–461 Index Small surface parking lot (Cont.) holding phase, 458, 460–461 holiday users, 457 IRR, 460 lease payment, 458 leasehold example, 456–460 NOPAT, generation, 461 NOPAT/net income (comparison), 458 purchase price, 465 revenue analysis, 457 projection, 465–466 Saturday/Sunday users, 457 short-term/transient users, 457 special events users, 457 total cost, 458 users, types, 457 variable costs, 458 Socialization, desired form, 350 Socioeconomic attributes, impact, 354 Socioeconomic characteristics, 348–349 Socioeconomic data, 256 Socioeconomic lifestyles See Athletic facilities Socioeconomic segments, serving, 357 Soft costs, 359 See Self-storage facilities Sole proprietorship, 111 forms, 50 Spacebanking, 202 Special Bonus See Internal Revenue Code Special depreciation allowance See Internal Revenue Code creation, Jobs and Growth Act (impact), 43 Special event (parking) users See Parking lots; Small surface parking lot SSFs See Self-storage facilities St John, Ed, Staffing, excess, 259 541 Standard & Poor’s (S&P500), 2, Starlight Motel AOR/ADR increase, 505 levels, 496 Econo Lodge, affiliation, 500–502 financial performance, 505–508 franchise example, 495–508 holding period, 496 Howard Johnson Express, affiliation, 503–508 IRR decrease, 503 increase, 500 Knights Inn, affiliation, 503 NOPAT, 500 increase, 503 NPV, increase, 503 purchase, interest-only loan, 495 revenue, increase, 500 Stocks, historical performance (stocks) See Real estate Straight-line depreciation, 39–40 Strip shopping centers, 143, 317 conversion, 240 development, 318 Structured parking facilities, 455 design layout, 455–456 Subchapter S corporation, 26, 58, 313 formation, 335 forms, 55 Subjective perception, impact, Subsidized mortgage, 124 Sucker ads, 102 Suitability index, 22 Summey, Mike, 105 Sunset dates, 424 Super Motel acquisition phase, 483–485 break-even analysis, 491–495 conversion example, 483–495 holding phase, 485–491 542 Superfund law See Comprehensive Environmental Response Compensation and Liability Act Super-regional shopping centers, 318 Surface parking lots See Small surface parking lot cost, 455 Surroundings, attractiveness See Athletic facilities Sutton, Garrett, 105 SUVs, increase, 455 Sweat equity, 105 Swiss Alps, condominium example, 179–182 Taj Mahal (Paisley Brothers), SSF example, 240–245 alternative, 246–252 scaled-back version, 251 total costs, 251–252 Tax advantages See Real estate ownership Tax assessments, 217 Tax delinquent properties, 103 Tax depreciation, reduction, 90 Tax implications See Timeshares Tax law changes See Depreciation Tax liability, reduction, 328 Tax rates variation, example, 95–96 Tax Reform Act of 1986, 39 Tax savings amount, 42 real estate property, impact, 21 Tax shield, 313 See also Johnson Building benefits, 330 importance See Jacksonville Ventures LLC shift, 326 Taxable gain, calculation, 246, 251 Tax-deductible expenses, 15, 84 Tax-exempt financed property, 39 Tax-exempt property, 39 Index Tax-oriented lease, requirements, 327 Taxpaying entity, separation, 54 Tenant mix, 318 Ten-year holding period, 100, 130 example, 82–90 Terminal value, 138 calculation See Big Sky Shopping Center Termite damage, 120 Thomas, Suzanne P., 105 Time-and-destination-specific parking, 453 Times interest-earned ratio (TIE), 26 Timeshares, 171, 195 See also Deeded timeshare alternative, 196 business ownership, 203 concept, 196–198 desirability, 197–198 examples, 204, 209 exchange controls, 198 process, 201–202 expenses, tax deductibility, 202– 203 industry, growth, 195 investment potential, 200 market attractiveness, 201 timing, 200–201 ownership, attractiveness, 197 personal ownership, 203 positive NPV/IRR, 207 primary market, 199 properties, listings, 199 quality, 209 sales presentation, 204–206 secondary market, 199 supply, 200 tax implications, 202–204 Title characteristics, 217 Titled real property, conversion procedures, 183 Index Torts, definition, 49 Total capital, 290, 301, 307, 311 Total costs, 34–35 See also Big Sky Shopping Center; Madison Athletic Club; New Hope Shopping Center; Taj Mahal Total revenue (TR), 34–35 See also Madison Athletic Club; New Hope Shopping Center Townhouses, definition, 169 Toxic Substance and Control Act (1976), 423 TR See Total revenue Trade agreements, 421 Traffic counts, 314 generation See Office buildings patterns, 356 Transient (parking) users See Parking lots; Small surface parking lot Triple-net leases, 316, 319 See also Ajax Armor Manufacturing Company; Barry’s Bastille offering, 83 partnership usage, 320 percentage, inclusion, 316 ups, inclusion, 317 usage, 326 Triplexes, 97 Trophy buildings, 386 Turtledove Drive, residential real estate example, 115–120 Twenty percent rule, 137–138 See also Apartments Twenty-year holding period, 220 example, 90–95 Two-entity structure, usage, 56 U-Haul dealer, joint effort, 235 Undeveloped land, 213 carrying costs, 215–216 inflation hedge, 214–215 investment characteristics, 214–216 543 leverage, 216 speculation, 215 taxes, 216 types, 213 Upscale full-service dining, 256 Urban area, gentrification, 335 U.S Bureau of the Census, 255, 347 data, 256 population estimate, 347 U.S Corps of Engineers, 218, 224 U.S Customs, 106 U.S Department of Agriculture (USDA), 106 U.S Department of Housing and Urban Development (HUD), 106, 217, 335 U.S Environmental Protection Agency (EPA), 158, 218, 225, 435 mandated cleanup See Bates Publishing Co U.S Geological Service (USGS), 218 U.S Marshals Service, 106 USDA See U.S Department of Agriculture Utilities availability, 217 variable costs, 246 Utilization rates, 242 Vacancy rate See Apartments; Office bulidings Vacant lots, 224 Vacation ownership, 195 Vail Christmas, timeshare example, 209–211 Value engineering, concept, 352 Variable costs, 34–35 See also Labor; Utilities existence, 240 management fee, inclusion, 334 relationship See Fixed costs Vision Partners Condo OPM evaluation See Bates Publishing Co 544 Vision Par tners LLC formation, 434 mortgage, obtaining, 435 NPV, doubling, 439 opportunity cost, 441 return, expectation, 441 strike price, 441 Volatility risk, reduction, WACC, 441 Wal-Mart, 314, 349 efficiency ratio, 33 Water availability See Office buildings Wealth accumulation, starting point, 13–14 creation/preservation, dynamics, 6–7 Weekend (parking) users See Parking lots Wetlands, characteristics, 218 Wish book, 202 Index Work mode, change See Office buildings Working capital, 425 Yamashita, T., Yield capitalization, 109 Zoning issues, resolution, 389 laws, 384 change, 214 consistency, 380 ordinances, impact, 380 problems, clearance, 226 regulations, 471 requirements, 455–456 restrictions, 217 variance, 365 acquisition, 241 Zoning Board, variance, 144 ... all their individual investments Rather, it is the risk inherent in their entire portfolio The risk of individual investments is not the same thing as the risk in the portfolio This is because the. .. real estate investors All these factors point to the fact that this is the time to buy This is a situation that will continue through the end of the decade Understanding the commercial real estate. .. Motels as Commercial Real Estate Investments 479 INDEX 519 Preface The Real Estate Investment Handbook is designed to be a tool for current and aspiring commercial real estate investors in developing