In this blog series, we explore commercial real estate questions that are often asked by tenants, landlords, and investors. Have a question that’s not on the list? Feel free to reach out to Peter Andrews, Executive VP of Brokerage at pandrews@melvinmark.com.
What is a Broker Opinion of Value?
Also referred to as a Broker Price Opinion, a Broker Opinion of Value (BOV) presents the estimated value of a property based on a broker’s research and analysis. It tends to include zoning and tax information, income and expense analyses, property highlights, comparable property listings, and market data.
A BOV might be requested by a property owner looking to sell or refinance their property, by an investor looking to buy a property, or by a lender looking to assess a property prior to a refinance or foreclosure.
What does the term “due diligence” mean?
Due diligence refers to the process of obtaining all necessary information before a property is bought or sold. It can include zoning laws, inspections, property valuation, building codes, history of lease payments, environmental assessment, building easements, and more. While the length of a due diligence list varies depending on the type of deal, it’s a highly beneficial process for a commercial real estate investor or seller.
What is a “value-add” property?
A value-add property is an investment property that has the potential to increase cash flow through upgrades that can include interior or exterior renovations, rebranding, better property management, added security, or management restructuring. Once upgrades are made, investors usually seek to sell the property for a profit. This can be done by a single investor or by an experienced investment group, such as Melvin Mark Investors.
How does a 1031 Exchange work?
A 1031 exchange gets its name from the Internal Revenue Code (IRC) 1031, which allows a commercial property owner or business to defer federal taxes during an exchange of real estate. The properties must be considered like-kind and if so, you may exchange one investment for another without the need to pay the capital gains tax that would normally be paid during a property sale. This allows you to continue growing your investment tax deferred.
What is positive leverage?
Positive leverage occurs during an investment in income-producing real estate, when the interest rate on the loan is lower than the cap rate. For example, if you are buying a property at a 6% cap rate and getting a loan at 4.50% interest rate, then you have positive leverage. The positive difference increases your return on the cash equity you have invested.
What is buying on “pro forma” versus “in place”?
Buying a property based on “pro forma” means that you are paying for a property based on some amount of future expectation. Typically, this has to do with the opportunity to decrease expenses or increase rents because they are below market. Usually buying on “pro forma” requires a certain amount of work to get the property stabilized, therefore, the pro forma cap rate is usually higher than what you would pay for already-stabilized property.
Buying on “in place” refers to taking the current net operating income (NOI) and applying a cap rate to determine a purchase price. A buyer may pay a lower cap rate based on “in place” if there is more upside based on “pro forma.”
What is the difference between a permanent loan and bridge loan?
A permanent loan refers to a longer term fixed-rate loan. These loans are typically granted to properties that have consistent operating histories and are stabilized. Permanent loans are usually fixed for 10 years, but could be up to 30 years.
Bridge loans are normally considered “floating rate” (not fixed), meaning the rate changes every month based on a spread over an index. These loans are typically granted for up to 36 months and utilized for properties in transition. For example, if a buyer were to purchase a property based on pro forma upside, they might want a bridge loan while they increase rents and reduce expenses. When the property is stabilized, they would then place a permanent loan on the property.
Is it better to work with a local or national commercial real estate company?
While you may be more familiar with the names of national commercial real estate companies, smaller, local companies like Melvin Mark present a variety of advantages. At Melvin Mark, we believe relationships are the most important part of our success and we work to help our clients achieve their goals on a personalized level. Because we have been part of the Portland community since 1945, our local expertise is extensive and each of our employees is based at our Downtown headquarters. This means we make all of our decisions right here in Portland and can address situations efficiently.
With local experience and attention, we can help you buy, sell, lease, or finance your investment. Contact us today to get started.
Click here to read part 1 (tenants) of our blog series and click here to read part 2 (landlords).