A COMMERCIAL REAL ESTATE SURVIVAL PLAN

A Commercial Real Estate Survival Plan

Submitted on 05/08/2008 From NetGain Real Estate

Based on all the relevant economic data, what do the next twelve months have in store? NetGain has stated on numerous occasions that the next twelve months will be a difficult time for commercial real estate investors. You don’t need a degree in economics to know that consumers account for a majority (70%) of the economy and that as a group employed people propel the economy. From these deductions, one only has to look for two words in the newspapers to know where the economy is going: “hire” and “layoff”.

During the past six months, how many times has the word “hire” appeared in the newspapers? Practically none. During the past six months, how many times has the word “layoff” appeared in the newspapers? Almost every day. The obvious conclusion is that unemployment numbers are going up. Higher unemployment will result in declining consumer confidence, declining consumer spending, and finally a weaker economy.

Everyone knows the economy is weaker. The gross domestic product (GDP) grew a paltry 0.6% for each of the last two quarters. The key questions are how much worse will it get and how long will it be until the economy starts to improve? NetGain believes that the current economy will continue to decline. NetGain also believes that we have seen the worst of the slide and that any further declines in stock and real estate values will not be significant. The economic turnaround that everyone is looking for will begin within the next six to twelve months. This all assumes no foolish legislation or terrorist attack(s). Remember: This is only an opinion. The economy can certainly get much worse, and a turnaround can take longer than NetGain’s projection.

Until the economy does begin to strengthen, following are the essential features of a proactive survival plan for commercial real estate investors. The purpose of these features is to insure that you will be around for the next bull market.

Acquisition features
• Do not buy when the net operating income is below the market rate APR for debt service.
• Do not buy real estate where cash flow is based on raising the rents.
• Buy real estate that has real (operating) current cash flow (after debt service).
• Do not buy real estate where cash flow comes from a seller’s guarantee.
• Do not buy real estate where cash flow comes from tomorrow’s income projections and yesterday’s operating expenses.
• Remember, negative cash flow is the definition of a failing business.
• Given reasonable operating expenses, future rents will equal future value.
• Prior to purchase, validate that the current rents in place are at market rate.
• Prior to purchase, evaluate lease expirations, the cost to re-lease, and the cost of vacancy.
• What is the future outlook for rents where you own or where you are considering buying real estate?
• Pay more attention to rents than to replacement costs.
• What is the basis for lessees profiles to lease space?
• Buying below the market is an oxymoron.
• Focus on the bottom line, not the gross rent multiplier.
• Project what current expenses will be in the future.
• Do not buy someone else’s environmental problem(s).