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Due Diligence for Acquiring Commercial Property

As a buyer of commercial properties, you should accomplish two types of due diligence before moving forward with the acquisition. These types of due diligence will protect you against incurring liabilities, and you will be made aware of precisely what you are purchasing. It also gives you a more straightforward overview of what you can negotiate and the terms you could offer. The two types are physical due diligence and financial and operational due diligence. Physical Due Diligence Start with a PCA report or property condition assessment, which physically checks the property's construction. It will also tell you about the capital needs you need to address and the property's future. Next, you will need environmental testing to rule out any hazardous contaminants present on the property. There will be physical surveys done to measure the property, determining the property's legal boundaries.  For older properties built more than 40 years ago, there are two kinds of asbestos surveys you may need. These surveys ensure that the property does not contain the material that, once disturbed, the fibers can be inhaled, risking the development of fatal asbestos diseases. Make sure that the roofs are in good condition, ask when they were last repaired or replaced. These include checking on the elevators, air conditioning, and ventilation that can cost hundreds of dollars in repairs.   Inspect the properties of fire escapes and areas that could be fire hazards. You can also check the property's historical capital expenditure analysis to check what the previous owners spent......
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Barriers to Entry

Barriers to entry are restrictions that prevent new competitors from quickly entering an area of business or industry. These include regulatory clearances, securing licenses, tax benefits, and customer loyalty. Startup companies need to contend with these different barriers, depending on their industry. Some may be caused by government intervention or even other firms that deem the new businesses a threat. These firms may be protecting the integrity of the industry, attempting to avoid products that they believe are inferior to the market, and at the same time, watching the market shares. New business ventures have a lot to contend with before entering the market. Without sufficient research, they will have difficulty penetrating a market that already has strong and established barriers to entry. These barriers have already equipped them with years of experience and mastery of the technology. They have already selected the dominant control over the supplies and have the upper hand to the industry's advantages in that area, including the consumers' trust.  Kinds of Barrier to Entry There are two kinds of the barrier to entry 1. Structural or Natural Barriers to Entry These include the ownership of the primary resources such as sugar plantations for soft drink companies or bee farms that produce beeswax, which can be used in various products. There are also high set-up costs from advertising and marketing costs. Increased research and development costs will match the more prominent firms to compete. There are also the risks of competing with a product or service that......
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Are “Income Tax-Free States” a Better Investment Opportunity?

Are “Income Tax-Free States” a Better Investment Opportunity?
Paying taxes is always a tedious thing to do; that is why some Americans specifically look for tax-free states to call home, so they can avoid one of the biggest contributors to their annual tax bill, especially if they want to improve their finances. Although they can save money in one way by living in income-tax-free states, people are risking to pay more in other ways because losing revenue is usually compensated with other taxes. Keep reading to understand what it means to live in a tax-free state and if it can be financially beneficial to you: Which Are the ‘Income Tax-Free’ States? The following states are tax-free states: Alaska - The state of Alaska has not had an income tax since 1980, despite several attempts to reinstate it.  Nevada - The state of Nevada doesn’t have a personal or corporate income tax. One reason for it is that Nevada brings a large source of revenue from gambling and tourism. Florida - The state of Florida does not have a statewide personal income tax, but it has a corporate income tax. Texas - The state of Texas doesn’t have an income tax, mostly because of its lawmakers and taxpayers who have fiercely fought to maintain this policy over the years. South Dakota - The state of South Dakota hasn't had an income tax since 1943, but it has a variety of special taxes, such as alcohol occupational tax, precious metal and energy mineral severance tax, various licensing fees, and more. Wyoming - The s......
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Common Metrics/Terms an Investor Uses to Analyze Commercial Real Estate

Common Metrics/Terms an Investor Uses to Analyze Commercial Real Estate
It’s not a secret that numbers drive real estate investment decisions. But the real question is, which metrics are valid? Which metrics matter? Depending on your investment goals and property type, some metrics are more important than others. The following metrics/terms real estate investors commonly use when making portfolio decisions: 1. Capitalization Rate (Cap Rate) Cap rate is mostly used for apartment complexes and commercial buildings. Capitalization rate can also be used for houses and small multifamily properties, but the flip side is that operating expenses are unpredictable with houses since you can’t know how often or how bad your turnovers may be. Cap rate allows you to compare properties in the same asset class with different characteristics that make direct comparison impossible. The disadvantage of the Cap rate is that it’s only a snapshot. It says nothing about the expected growth in expenses, rents, property value, and whether using leverage will increase your return. 2. Cash Flow When evaluating rental properties, it’s vital to figure out your expected monthly cash flow. When determining total expenses, you should include: Property taxes Flood and hazard insurance Water Sewer Garbage Electricity Property management General maintenance and upkeep Capital expenditures Vacancy rate 3. Return on Investment (ROI) RoI is helpful for analyzing how well a deal did in the past. This measurement is always good to have because you can’t adjust your future investing unless you know how your previous investments performed. 4. Internal Rate of Return (IRR) The internal rate of return is used to m......
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How Reverse 1031 Exchanges Work

If you have an investment property and are thinking about selling it and purchasing another property, you need to know about the 1031 tax-deferred exchange. This procedure allows the investment property owner to sell it and buy like-kind property while also deferring capital gains tax. In this article, you’ll find a summary of the main points of a reverse 1031 exchange—an often overlooked sub-section of a 1031 tax-deferred exchange. What Is a Reverse Exchange? A reverse exchange is a property exchange when the replacement property is bought first, and then the current property is sold or traded away. It was created to help buyers buy a new property before being selling or trade-in an existing property. This may allow the seller to keep the current property until the market value increases, thereby choosing the right time to sell for maximum profit.  Things you need to know about the reverse exchange: Reverse exchanges are different from delayed exchanges, where the replacement property has to be purchased after selling the current property. Timing issues still apply, so check with your accommodator as to what time frames you must meet. “Reverse exchanges only apply to 1031 properties and are only allowed when investors have the means to make the purchase. Like-kind” exchange rules usually don't apply to reverse exchanges. How a Reverse Exchange Works Standard like-kind exchange rules typically do not apply to reverse exchanges. Such rules usually allow a property investor to discontinue capital gains taxes paid on a property they have sold, as long......
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Which Commercial Real Estate Sectors Are Approaching Oversupply?

2020 and the years ahead won't come without difficulties for the commercial real estate market. In the United States, certain Commercial Real Estate sectors may be affected by oversupply. the Urban Land Institute states that construction during the current cycle has been below historical trends, but as the cycle matures, we need to look at whether markets are becoming overbuilt. Oversupply may be around the corner for these Commercial Real Estate Sectors: We expect to see some risk of oversupply in Class A multifamily and industrial properties, but the changes that have heightened the demand compared to historical norms should lessen the material impact on fundamentals, which are expected to stay solid. Please NOTE:    This is a general overview of the market sectors across the nation, your specific sub-market may be having substantially different experiences, please consult with a professional commercial real estate agent in your specific sub-market for more details. Industrial Real Estate Sector Industrial real estate also shows signs of overbuilding. Demand stays ahead of supply in both Europe and the U.S, leading to lower vacancy rates. However, as consumers continue to shift toward e-commerce, companies still have to adapt their supply chain strategies and drive the demand for well-located and high-quality logistics facilities. The industrial real estate sector is also heading for slower growth, according to a forecast by the Deloitte Center for Financial Services. The sector, which includes warehouses, flex spaces, distribution centers, and other industrial properties with storage facilities, has been facing sustained demand over......
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Is Investing in an Opportunity Zone Really Worth It?

The main aim of Opportunity Zones is to encourage long-term investments, especially in low-income rural and urban areas throughout the country, and to boost the economy. An Opportunity Zone is an economically distressed rural or urban community that has been identified by state, local, and federal qualifications. Opportunity Zones offer a great investment opportunity for smart real estate investors. However, investors should bear in mind the risk profile of Opportunity Zone deals, which can be much higher in some targeted census tracts than the exchange. The key is to stay diversified while taking advantage of the capital gains tax relief that is available through the program. On the other hand, if investors remain diversified, there may not be enough funds flowing to these vehicles. Only time will tell if this latest program will succeed in identifying the areas that will benefit most from the subsidy, as well as in overcoming the issues that have limited the effectiveness of similar initiatives. Although this concept sounds socially responsible, investors are only delaying or deferring their capital gains taxes.  This program could be good for investors in the sense that it lowers their capital gains taxes, but whether or not it’s going to be good for the people in those communities is still to be seen within the next decade. However, waiting may not be the best move for investors, since these assets are as cheap as they’re ever going to be. Opportunity zones offer three benefits that make real estate attractive to professional inv......
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What Is a “Leed Certified” Building, and Are Tenants Willing to Pay More Rent for One?

What Is a “Leed Certified” Building, and Are Tenants Willing to Pay More Rent for One?
LEED (Leadership in Energy and Environmental Design) is a green building certification system that is internationally recognized and provides third-party verification that a community or a building was built and designed using strategies for improving performance across all the most important metrics: energy savings, CO2 emissions reduction, improved indoor environmental quality, water efficiency, and stewardship of resources. It can be applied to all building types – both commercial and residential. LEED includes a point system to score green building construction and design. The system is categorized into five main areas: Sustainable Sites, Energy and Atmosphere, Materials and Resources, Water Efficiency, and Indoor Environmental Quality. Buildings get points based on how successful sustainable strategies are achieved. More points mean a higher level of certification, which range from Silver, Gold, to Platinum. Leadership in Energy and Environmental Design is focused primarily on new, commercial buildings. The more points you get, the higher your rating will be. Getting the LEED status can require significantly higher costs on the part of a company or a builder but can also provide huge cost savings over time, including higher rents, state and local tax breaks, and many other perks.  It is certain that green buildings are becoming increasingly popular, and tenants are looking for more sustainable solutions. LEED certification will improve your building’s image and establish you as a green building leader. And because sustainable green buildings are more positively viewed in today’s market, you will be able to charge higher rates. These buildings are also cheaper to op......
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If zoning or codes change while I own a property, do the changes automatically apply to my property?

If zoning or codes change while I own a property, do the changes automatically apply to my property?
Can a city change my property zoning without my permission? Yes, a city can change your zoning classification without your permission. Legally speaking, zoning is an exercise of what is known to be police power. It does not happen often, and we’re not saying it is a fair practice. But it is possible. “Police power” is used in the sense that a city's general powers under state constitutions can do what they think is necessary for general safety, health, and welfare. The most common case of rezoning is when a property owner, or a future land purchaser, asks for a more advantageous classification. In many cases, this is called a rezoning petition.  Usually, cities do this when they have some kind of policy goal to maximize. For instance, they might have decided that a specific part of town needs more or less residential density (which means housing units per acre). However, If the rezoning makes your property less valuable, this could be a downzoning. You might want to research that idea. Will zoning amendments negatively impact what you can do with your property or your ability to refinance, enlarge, or sell it? Can You Be “Grandfathered” into the Old Zoning? Typically, these amendments increase minimal dimensional requirements, or they decrease the kinds of uses permitted on the property. These regulations can severely restrict existing owners’ use of their land. Accordingly, municipalities can often protect the owners from difficulties caused by zoning amendments by “grandfathering” current building lots. The local zoning bylaw may provide tha......
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Do I need an attorney for my commercial real estate deal, or is my broker enough protection?

Does a seller or a buyer of commercial real estate really have to hire an attorney? The unmistakable answer is, "Yes!" A broker is a licensed professional who you hire to negotiate the sale or purchase of a real estate for a fee or a commission. However, they are typically not attorneys. Many of them will clearly state that real estate brokers are not providing legal advice. Real estate brokers don’t usually get paid unless they close the deal (or unless you are somehow obligated to pay a commission, for example, by withdrawing from a deal). Therefore, brokers are usually not going to take care of the legal details and may even try to push a deal to close as fast as possible. Be sure that separate legal advice from a good real estate lawyer is usually worth the additional cost. It's much more cost-effective to hire an attorney to get the deal done right than to get involved in an expensive lawsuit. A good attorney can also be crucial to getting a beneficial purchase. Also, keep in mind that it’s best to hire an actual commercial attorney who deals with this kind of transaction daily. It may cost a bit more than a general lawyer, but it’s well worth it. What does a real estate attorney actually do? The job of a real estate lawyer is to negotiate and make a transaction happen in a peaceful way that's amenable and fair to all parties. A real estate lawyer takes over after......
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