Database Benefits Valuation Clients as Commercial Real Estate Market Demands Skilled Navigation

When I began entering commercial real estate data into a database in 1995, I never imagined it would mark the beginning of an evolving 14 year project. And the same project would wind up having an unusual but suitable name.

Today the product of this effort is a powerful proprietary analytical tool which is being leveraged to provide exceptional benefits for discerning valuation clients throughout Southeastern Massachusetts.

Known as the  Market Mouse database, as a reference to the agility of a mouse in maze adeptly probing and efficiently navigating in search of the most optimum destination or outcome,  this relational database truly is one Mighty Mouse! 

Market Mouse has little resemblance to an automated valuation model (AVM), statistical data product or “valuation instrument”. Indeed, time tested skills such as technical aptitude, cognitive thinking  and constant street level information gathering are still employed. Rather the  Market Mouse data management system has a supplemental role in much of valuation and brokerage activities in which I am retained.

Today the database contains close to 6,500 individual commercial property, transaction and listing records totalling over $3.0 Billion among 70 individual property classes. Linked to 1,300 of the property records are high quality digital images. 

Since its humble inception, a consistent “quality in and quality out” focus has been at the core of Market Mouse. Along with this commitment is the drive to develop unique and meaningful data sets achieved through a range of sorting, filtering and grouping capabilities. Whether analyzing by location, name (buyer, seller, lender or broker), property type or characteristic, time frame, and a host of dollar ranges, its all possible with Market Mouse.

The majority of records cover properties within Barnstable, Dukes (Marthas Vineyard) and Nantucket Counties. In 2007 and 2008 along with a series of tweakings completed by one smart professional programmer, data collection was expanded to nearby Bristol, Plymouth and Norfolk Counties. To date, these efforts have provided a solid return on investment on several levels.

Contact me today and discover how Market Mouse can further your goal of deriving real benefits and reliable outcomes in your next valuation  project whether for one property or a portfolio.

Joseph P. Egan is a MA Certified General Real Estate Appraiser with over 25 years of professional valuation experience. Through a specialization in commercial real estate and closely-held businesses, since 1991 he has completed over 650 appraisal, brokerage and consulting assignments concerning all types of commercial real estate assets and going concerns located on Cape Cod, Martha’s Vineyard, Nantucket, and Plymouth County, MA. Clients served generally include attorneys, banks, corporations, developers, investors, and owners of closely-held and family businesses. Prior to relocating to Cape Cod, Joe worked in the New York Metro Area and throughout CT with leading regional and national appraisal firms such as Cushman & Wakefield. Please contact Joe here.

For Many the Right Buyer is Close at Hand

A review of recent transaction activity since September 2008 reveals an interesting insight for Cape Cod commercial property and business sellers looking for the right buyer: your buyer may just someone you already know.

In far more than a handful of recent deals involving all kinds of commercial properties and Cape Cod businesses, the buyer has been someone the seller knows or is affiliated.

Most often this association is rooted in an existing business, landlord-tenant or employment relationship. In many other instances the buyer just happened to be an adjacent property or business owner.  In business sales, an amicable deal with a competitor or supplier has brought some others to the closing table.

It appears these deals are being struck as private “off-market” transactions suggesting the phrase, “When you’re ready to sell, let me know.  I may be interested,”  is paying off for many motivated buyers.

Naturally, the primary reason why these buyers are particularly motivated is the synergistic benefit the opportunity typically offers. Since the property or business is familiar to the buyer, the lower degree of pre-purchase due diligence can be an added incentive. Bankers seem to be willing to warm up to these types of transactions as well. For some, dealing direct and the potential to save on transaction costs are often perceived as another mutual benefit.

Despite what appears to be a favorable outcome, there is some downside to selling to someone you know under a private transaction.  

First, whether a business or property sale, choosing not to expose the opportunity to the open market will limit the chances of obtaining a maximum price and optimum terms which would otherwise be achieved through competitive bidding among multiple buyers. 

Second, experience has shown that private sales tend to begin with some general conversation on the topic and then quickly ramp up from there. Absent proper planning and pricing this can put both parties in an awkward and sometimes untenable situation where they eventually ask, “How did we get here and this fast?” 

Sound financial planning, legal and valuation assistance is the best hedge against these risks. 

For motivated commercial property and business sellers looking to privately transact with someone they know, the take away here is this:

The prospective buyer is likely to have a unique benefit to leverage and a solid familiarity of your business or property. And to be confident you are striking the right deal, be sure to first obtain proper financial, legal and valuation assistance.

Joseph P. Egan is a MA Certified General Real Estate Appraiser with over 25 years of professional valuation experience. Through a specialization in commercial real estate and closely-held businesses, since 1991 he has completed over 600 appraisal, brokerage and consulting assignments concerning all types of commercial real estate assets and going concerns located on Cape Cod, Nantucket, and Plymouth County, MA. Clients served generally include attorneys, banks, corporations, developers, investors, and owners of closely-held and family businesses. Prior to relocating to Cape Cod, Joe worked in the New York Metro Area and throughout CT with leading regional and national appraisal firms such as Cushman & Wakefield. Please contact Joe here.

SBA Loan Changes Seek to Increase Capital Access For Small Businesses

WASHINGTON, DC – Important changes have been made to help SBA lenders increase access to capital for small businesses.

The first major change permits new SBA loans to be made with an alternative base interest rate, the one month LIBOR rate, in addition to the prime rate, which was previously allowed. In recent months, both the prime and LIBOR rates have not yet returned to their historical relationship of roughly 300 basis points. The change seeks to correct the mismatch between the rates which are apparently squeezing SBA lenders out of the lending market, since their costs are based on the LIBOR rate.

The second change allows a new structure for assembling SBA loans into pools for sale in the secondary market. The enhanced flexibility in loan pool structures can help affect profitability and liquidity in the secondary market for SBA guaranteed loans. In turn, by using the average interest rate loan pools are easier to create, providing more investors with an incentive to bid on these loans.

“The challenge small businesses face today is not the cost of capital, it is access to capital,” said SBA’s Acting Administrator Sandy K. Baruah. “Interest rates are at historically low levels meaning money is inexpensive, yet lenders aren’t lending and borrowers aren’t borrowing. This indicates markets are frozen due to liquidity concerns. This interim final rule is an important step to re-energize the lenders to make SBA-backed loans and will help open the gateway of capital for entrepreneurs.”

To learn more about SBA’s guaranteed loan programs visit www.sba.gov.

Innkeepers Get Creative to Attract Off-Season Guests

A recent article in the Portland Press Herald highlighted how Maine innkeepers looking to market off-season accommodations have found success by offering guests packages appealing to their special interests. The special packages go well beyond offering discounted room rates and romantic get aways, and are attracting visitors interested in a wide range of activities, workshops and niche past times.

Although food centered activities such as chocolate making and gourmet cooking seem to be among the most prevalent, the range of entertaining offerings is wide and interesting. 

The Waldo Emerson Inn in Kennebunk offers quilting events which reportedly generate about half of the inn’s winter receipts. The Camden Harbour Inn in Camden now offers historical walks as part of their Thanksgiving package. 

At the Kendall Tavern Inn Bed and Breakfast in Freeport, spiritual retreats and calligraphy, scrapbooking and quilting events have filled the inn at times when vacancies are otherwise high. Alpaca and fiber arts workshops are offered at The Royalsborough Inn at the Bagley House in Durham.

The special packages do more than fill time for guests and from a marketing and financial perspective appear to make good sense. For one thing, the activities insure guests will have something interesting to do while visiting in the dead of winter. Innkeepers offering group type special events such as murder mystery weekends, report such events tend to attract group travelers. The events also promote repeat visits, provide an opportunity to turn a causal inquiry into a booking, and support continued employment for the most well-trained staff.

Cape Cod innkeepers already offering or planning to offer off-season special packages with a niche theme are encouraged to comment or share interesting insights.

To read the full Portland Press Herald article, INNovative Lodging Ideas click here.

Restaurants Get Needed Refill on Tax Break

The recently passed Emergency Economic Stabilization Act of 2008 included an extension of the accelerated depreciation allowance for qualified leasehold and restaurant improvements and for certain improvements to retail space.

The National Restaurant Association hailed the passage of this “side order” provision extending the current 15-year depreciation schedule for improvements made to restaurant buildings in 2008 and 2009, and for new restaurant construction in 2009. 

According to Dawn Sweeney, President and CEO of the National Restaurant Association. “A faster, more accurate depreciation schedule has a direct impact on a restaurant’s bottom line. By shortening the depreciation schedule to 15 years, Congress has given operators cash flow to reinvest in their businesses, allowing them to grow and add more restaurant jobs.”

Cape Cod Commercial Real Estate Prices and Assessments Inconsistent

Whether you are a buyer, seller, broker, banker, or appraiser no doubt the recent decline in Cape Cod commercial real estate sales has made pricing or valuing a property much more difficult. As we entrench deeper in the current market cycle, many practitioners needing a continuous finger on the pulse of prices and values will creatively apply alternative methodologies. In our market area, in lieu of an appraisal or other formal analysis the leading and most time honored proxy for real estate pricing or valuing is the property’s municipal assessment. 

I thought it would be interesting to see how this anecdotal alternative has measured up recently by comparing recent Cape Cod commercial property sale prices with their respective assessed value. The data sets included sales prices from 93 transactions completed between January 2008 and June 2008 and their Fiscal Year 2008 assessments. The properties sold were located throughout all areas of Cape Cod. This is what the analysis revealed:

• Nearly 30% of the recorded sale prices were below the assessed value and the remaining 70% were transacted at sale prices above the prevailing assessed value.
• In 17.4% of the transactions, the sale price and assessed value fell within 10% above or below 100% of the assessed value.
• Among all transactions, sale prices were on average 128.5% higher than the Fiscal Year 2008 assessments. The median was 120.5% higher.

As the analysis shows, property assessments are often an unreliable proxy for establishing a reasonable price or market value of Cape Cod commercial real estate. The analysis doesn’t suggest the assessments are flawed or established superficially. Additionally, assessing professionals I have encountered throughout the region are among the most astute, capable and concientious practitioners I have encountered in my 25 years in the real estate business. What’s more, assessed values are established for a unique purpose incorporating special criteria, specific time frames and statutory guidelines.

In a market cycle where the number of Cape Cod commercial property sales are trending down, price levels are in a state of flux and property assessments provide inconsistent guidance, where do we turn?

In short, I suggest doing what always produces superior results in a challenging market: adopt a back to the basics mindset where there is no substitute for well developed, comprehensive market intelligence and a willingness to devote more time investigating and truly understanding key market nuances.

 Joseph P. Egan is a MA Certified General Real Estate Appraiser with over 25 years of professional valuation experience. Through a specialization in commercial real estate and closely-held businesses, since 1991 he has completed over 600 appraisal, brokerage and consulting assignments concerning all types of commercial real estate assets and going concerns located on Cape Cod, Nantucket, and Plymouth County, MA. Clients served generally include attorneys, banks, corporations, developers, investors, and owners of closely-held and family businesses. Prior to relocating to Cape Cod, Joe worked in the New York Metro Area and throughout CT with leading regional and national appraisal firms such as Cushman & Wakefield. Please contact Joe here.

Using Rules of Thumb to Value or Price a Business – Salt to Taste

Rules of Thumb are either a single or tight range of multiples assigned to an income stream generated by a particular business. They are also available for just about any business and do vary from industry to industry.

Rules of Thumb should not be considered synonymous with transaction data points or multiples derived from specific transactions usually reported by a party involved in an actual business sale such as a business broker or other intermediary.  

Although there may be some limited exceptions, the fact is while easy to apply and understand, valuing or making a purchase offer on any business by relying on a Rule of Thumb is not a good idea. There are several valid reasons why:

• At best, a Rule of Thumb is an anecdotal average and if applied across the board it tends to penalize the best performing businesses and reward the poor performers.
• In a related sense, although some massaging may be attempted, Rules of Thumb are fairly static and do not go far enough in accounting for variations from business to business. Examples of these key variations may include differences in customer and employee loyalty, lease terms, location, cash flow trends, supplier relationships, the nature and quality of the FF&E, and barriers to entry.    
• Reliably developing the correct income stream to apply against a Rule of Thumb can be tricky. If this important task is incorrectly developed and the Rule of Thumb is subsequently applied, it could very well be equivalent to a double mistake.
• Ray Miles, the creator of the largest and oldest business transaction database and founder of the Institute of Business Appraisers suggests using a minimum of ten data points or transaction multiples in valuing a business under a Sales Comparison oriented approach. How convincing is that single Rule of Thumb or tight range looking now? 
• A certain mystery surrounds Rules of Thumb. For instance, like urban myths, who actually creates them and under what circumstances are they formulated (based on completed deals or general expectations, cash or seller financed transactions)? And how do Rules of Thumb stack up against empirical transactional data? 

Whether you are a business owner or looking to buy a business, no doubt somewhere along the line a Rule of Thumb or two will be placed on the table. If you are inclined to partake, just remember to reach for and apply a little salt.

Success Tip: Aim for the Center and Price it Right From the Start

Experts agree the single most important thing you can do before listing your commercial property for sale on the open market is this: price it right.

Here are three main reasons why: 

1. Even in real estate, first impressions are lasting. A smartly priced property will generate and maintain much more attention from the start.
2. A property priced too high often sends the wrong message, especially to a savvy buyer or cooperating broker actively seeking only sensible opportunities offered by serious sellers. The fact is most prospects initially operate in a cursory “know it when I see it” fashion and take then the time to dig deeper once their interested is piqued. Failing to develop the initial interest due to an unrealistic listing price could serve to make your listing a nonstarter.
3. Relying on a pricing strategy which employs a series of price reductions is generally not a good plan. To begin with, after each price change the task of making all interested parties (past and future) aware of the price change can be difficult. Multiple price changes can also send out the “only testing the waters” impression and that’s one fishing trip serious prospects are adept at avoiding. Lastly, many smart and well advised buyers routinely interpret successive price reductions as growing desperation on the part of the seller.

While not an exact science, setting your sights on the center of the pricing target is the best way to bring your commercial property to the market. For objective and reliable assistance in establishing a sensible list price for your commercial property and featuring your listing on CapeCodBusiness.com™, please contact me. Working together we can pool our resources and experience to help you get what you desire: getting to the closing table in the most optimum time frame with an agreement that makes good sense.

A Price to Pay for Too Much Focus on Price?

In navigating the cross currents of the Cape Cod commercial real estate marketplace it seems many commercial real estate participants are missing the big picture by focusing too much on price levels. Much like an adept physician seeking to develop a timely and supportable prognosis by probing, prodding and questioning a patient, reliably deciphering market factors requires looking well beyond the leading indicators or “gimmies” such as price levels. Along with the seasoned physician, this is where the commercial real estate market participant’s cognitive skill comes fully into play!  

Certainly recent prices paid for similar Cape Cod commercial properties will always be relevant indicators. However, the most important thing to remember about real estate prices — like cherished school photographs taken in early September and eventually passed on to relatives months later at Christmas – much can change in between! Since real estate transactions often take many months to consumate, report and be acknowledged by the marketplace much can and will change in between. It’s no wonder real estate prices are what economists call a classic lagging indicator. Couple this fact with the forward thinking and “not at real time” nature of real estate markets, the inherent limitations from an over reliance on price levels are apparent. 

In a market cycle where the number of commercial real estate sales are trending down, price levels are in a state of flux,  and the supply of available properties is abundant, it’s no wonder the real estate market is an imperfect marketplace.

But given the current scenario where do we turn, beyond price levels, for more answers in this imperfect or unstructured marketplace? In short, I suggest back going to the basics where greater reliance is collectively placed on four additional key market indicators:

1. Contract prices for properties currently under agreement.
2. Regularly updated figures on transaction volume with demand ranked by property sector.
3. Familiarity with sensibly priced comparable listings with a sharp focus on the number of days-on-market, any history of price changes, and possibly the number of showings and feedback.
4. Most importantly, obtaining from a reliable source the who, what, where, when, how and why surrounding any pending or closed transaction. Sources may include the Buyer or Seller, an attorney, broker, tenant or other party.  And in the current tight credit market, consider the perspective of a trusted local commercial banker to be invaluable.

Clearly seeing the big picture beyond price levels, understanding all the moving parts and applying sound investigative skills will separate you from the pack in the coming market cycle. Over reliance on one piece of information such as price levels is essentially reaching for the low hanging fruit and a sure sign of hanging on to 2004-2007 market thinking. The times (and the market), they are a changin!

 Joseph P. Egan is a MA Certified General Real Estate Appraiser with over 25 years of professional valuation experience. Through a specialization in commercial real estate and closely-held businesses, since 1991 he has completed over 600 appraisal, brokerage and consulting assignments concerning all types of commercial real estate assets and going concerns located on Cape Cod, Nantucket, and Plymouth County, MA. Clients served generally include attorneys, banks, corporations, developers, investors, and owners of closely-held and family businesses. Prior to relocating to Cape Cod, Joe worked in the New York Metro Area and throughout CT with leading regional and national appraisal firms such as Cushman & Wakefield. Please contact Joe here.

Survey Assesses Thinking and Strategies of U.S. Real Estate Professionals in Current Economic Climate

In Grant Thornton LLP’s 2008 Real Estate Survey, nearly six in 10 real estate executives (57%) have a pessimistic outlook regarding the U.S. economy for the next year, and almost half of the respondents (48%) have similar feelings about the real estate industry’s business outlook. These numbers show a sharp decline in optimism from 2006, when only 15 percent of respondents had a pessimistic outlook about the economy, and a scant five percent were pessimistic about the real estate industry’s outlook.

Despite these pessimistic economic and industry outlooks, respondents’ attitudes toward their own companies remain much more positive. Half of the respondents express an optimistic outlook for their own companies in the coming year, and only 12 percent had a pessimistic outlook. In 2006, 80 percent of respondents had a positive outlook for their own companies in the next year.

When asked about the single most important issue facing their industry in the next year, more than one-third of real estate executives (36%) chose the national economy. Other concerns included earnings and operation results (21%), the ability to access capital (19%), tenant relationships (10%), and rising costs (5%), among others. 

Survey respondents also weighed in on anticipated rate changes in the market. These are some of the predicted rate changes in the coming year:

• 69 percent think the unemployment rates in their market will increase.
• Three-fifths (61%) predict vacancy rates will rise in their market.
• 79 percent of respondents expect capitalization rates to increase nationally.
• 76 percent believe the capitalization rates will increase in their market.
• Half of respondents (51%) think interest rates will decrease.

Survey respondents are focused on a wide range of issues and strategies, including:

Grant Thornton LLP’s 2008 Real Estate Survey was designed to elicit the opinions and activities of a broad range of real estate industry professionals. The real estate executives were polled in two ways. First, an invitation to participate in the online survey was sent to nearly 1,900 real estate contacts in Grant Thornton’s database. This effort was followed up with a communication to 4,000 developers, owners and investors who are members of the National Association of Industrial and Office Properties (NAIOP). NAIOP’s members include developers, owners, investors and other professionals in the industrial, office and mixed-use real estate industry. A total of 341 survey responses were collected between March 2, 2008, and March 26, 2008.

Respondents of the survey described themselves as developers (41 percent), real estate investors (17 percent), real estate owners (11 percent), and asset managers (9 percent). Others included real estate property managers (5 percent) and construction contractors (1 percent).

Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd, one of the leading global accounting, tax and business advisory organizations. Visit Grant Thornton LLP at www.GrantThornton.com.