Consumer Price Index (CPI)

Have you ever been eating at home or a friends house when the cook exclaims, "guess the secret ingredient?"  I heard a story about a Mormon missionary serving in France who thought it would be funny to add a special ingredient in his scrambled eggs for new missionaries.  One disliked the fact that the secret ingredient was cow brains enough to permanently dissuade him from continuing the joke.

A clause in your lease that includes an escalation based upon the CPI index, is a bit like that secret ingredient if you don't know it's there.

I recommend reading the article called How to Use the Consumer Price Index for Escalation published by the Bureau of Labor and Statistics (BLS).  You'll then be as smart or more than likely smarter than the Landlord on how it's used while avoiding costly oversights or miscalculations.

Triple Net (NNN)

Are you looking for a place to do business?  

A term you will likely hear during your search is “Triple Net”.  It sounds like a special device used to catch insects in the summer, but it’s not.  These 3 nets catch numbers not insects.  Triple Net is a term used to describe a type a lease, aka the Triple Net or NNN Lease.  

To assist in remembering the 3 nets, the acronym TIM will come in handy.  Think of good ol’ uncle Tim.  When calling a sign on an office building, a shopping center window or in front of an industrial building and the leasing agent says, “this space is $12 triple net.”  

What they are saying is, your monthly rent or base rent will be $12 times the amount of square feet to be leased, which produces an annual rent number.  Divide by 12 and this is the base rent.  Because it is a triple net lease there are additional charges or additional rent on top of base rent for Taxes (real property tax), Insurance (fire hazard insurance) and Maintenance (air conditioning, snow removal, lighting, etc...).  

Taxes Insurance and Maintenance (TIM) are the 3 nets referenced in the term Triple Net.  A pro rated estimated of the triple net charges can be added to the monthly rent payment or billed at the end of the year.

Another common term of interest related to leasing is CPI, which I will discuss in the next post.

Understanding Real Estate Terminology

I had a friend relate a story the other day that may help illustrate the importance of using a commercial broker.

My friend, we'll call him Tom, mentioned that he got an unexpected bill in the mail from his landlord for $3,500.  Tom further explained that when he assumed the lease for his office he didn't understand what triple net or (NNN) meant.  Unexpected costs like this can be avoided.  I could elaborate

Tom will be renewing the lease in the next couple of months, and I have encouraged him to hire a real estate broker to guide him through the renewal process to assist with real estate terminology, common practice and procedures, and most importantly to ensure fair market rent or better and assist in finding an adequate attorney who practices real estate law, who will be able to review and revise the lease to ensure fairness.

Next post I'll explain triple net (NNN), so no one else reading this blog will make the same mistake.

Determining Net Operating Income (NOI)

A standard formula for calculating Net Operating Income or NOI would helpful in the Grand Junction market to assist commercial brokers and principals evaluating properties based upon capitalization rate (cap rate).

Gross Potential Income (GPI) - Total potential income if all leases were at market value
− Loss to Lease (spaces leasing for less than market value)
− Vacancy and Collection Loss (actual figures preferred / sometimes figured as a percentage)
= Net Rent Revenue
+ Miscellaneous Income (income from late charges, signage, vending machines etc..)
+ Expense Reimbursements (utilities, taxes, insurance etc.)
= Effective Gross Income (EGI)
− Operating Expenses (taxes, maintenance, insurance, janitorial, management etc.)
= Net Operating Income (NOI)

Capitalizing a property’s NOI for the next year is often the easiest way of estimating the property’s present value. Generally, using next year’s NOI to capitalize is recommended.

It is important to make sure the NOI is accurate from the sellers perspective in order to avoid overpricing a property, and from a buyers perspective in order to ensure investment strength and avoid overpaying.

Smaller Industrial Buildings with Yard

One might think finding a stand alone industrial building with a yard would be easy to come by.  I've been searching today for one between 4,000 and 6,000 sq. ft. with two 14' overhead doors and a drain.  I've found plenty of smaller sized,  build-to-suit, multiple tenant buidings or stand alone buildings with no yard, but have had difficulty locating a propery either for  sale or lease that matches these parameters.

The onlne databases are limited however.  Some landlords will only place a sign on the property, making it invisible to all but those driving around.  So that is where I head to next, to see if I can pull a rabbit out of my hat.

The Lease Buyout

Over the past 4 months I have put together buyout options for 3 Tenants.  In the process I have developed a handy spreadsheet that makes the math and presentation come together much more quickly.  A buyout sounds simple enough; pay the remaining amount on the lease.  There are other costs however for landlords consider when a tenant requests an early termination.

1) The remaining amount on the lease, or the difference between what a new tenant will pay and what the current lease schedule states.

2) Rebate for commissions paid in advance for the lease.  A lease is a promise to pay and typically the landlord will pay a leasing agent or broker a percentage of the gross rents for the lease in advance.  If the tenant moves out however, the promised income may not come, and therefore a rebate on the commissions can also be requested.

3) Present value of cashflows.  The present value, or lump sum right now value of periodic payments over time is less than total amount over time.  This is also referred to discounted cashflow.  It was somewhat tedious to figure out, but now it's a handy tool in my toolbox.  

4) Any unpaid rents

In the buyouts mentioned above, the landlords decided not to demand the full payment but rather enough to cover the costs of releasing the space, such as vacancy loss, preparing the unit for another tenant, leasing fees etc...

Although the market and economy are turbulent, there are so many things to be learned now that will improve business practices during fatter times.

Mesa County & City of GJ Seek Ideas on Retail

Yesterday Mesa County held a breakfast meeting at the Egg & I in conjunction with the City of Grand Junction.  Local commercial brokers and developers were invited and in attendance. This was a continuation of a similar meeting held about 6 months ago.

Janet Rowland, Mesa County Commissioner opened the meeting announcing that Mesa County and the City of Grand Junction would like feedback and cooperation from the brokerage community and development community, because of their direct contact with retail businesses.  Mesa County continues to search for ways to reach out to retail stores and developers to create an inviting and appealing environment in order to stimulate sales tax income dollars and general economic development.  Metaphoically spekaing, they are seeking the best flowers and enviornment to attract the bees who stimulate economic pollination and thereby bolster the health and productivity of our local government. 

Debbie Kovalik, Grand Junction Visitors and Convection Bureau, presented statistics collected by the Bureau on hotel occupancy rates and a number of charts indicating industry activity in the Grand Valley.  The hospitality tax charged on hotel rooms is a revenue generator for the City and County.  Grand Junction has the highest occupancy rate in Colorado.  She would like to see more hotels built to meet the demand.

The essence of the brokers' and developers' comments can be boiled down to two main ideas.  

1) Prohibitive development fees.  Developers continue to struggle with the high cost of development due to fees charged by the City of Grand Junction, CDOT, Ute Water, and Clifton Water.  Ute water was specifically sited as having exorbitant and prohibitive water tap fees.  

2) Financing through the down time.  Many developers are holding onto projects difficult continue financing due to the ruptured capital markets.  City representatives and County representatives mentioned that there are programs for the developers that would enable the city to provide the banks assurance and stimulate the lending process.  These programs are now to be more widely publisized as a result of this meeting.

The meeting was informative and certainly established a sense of the City's and County's willingness to help stimulate retail development specifically in the underserved areas of Clifton, and areas targeted for redevelopment such as downtown.