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Commercial Real Estate Terms for Investors DECODED: Part 1

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Commercial Real Estate Terms for Investors DECODED: Part 1

By: Steve Sadler, CEO, Allegiancy

April 06, 2015

At Allegiancy, we know that many of our commercial property owners don’t claim to be financial experts. Many made a good investment, or perhaps inherited one, and now they simply would like it to perform well and/or gain value.

As asset managers, we also understand that an informed investor is a better investor. In that spirit, we present our decoder’s guide (part 1) to key financial terms for commercial real estate ownership.

Asset Manager versus Property Manager

At Allegiancy, we are asset managers, and we’ve found that many people are unsure what that means. Simply put, the asset manager acts like the CEO of the company for each property and is responsible for strategic thinking and for hiring an on-site property manager, or facilities manager.

Here are the key differences: 

Asset Manager

Strategic – The asset manager is the CEO of the building and is responsible for the business looking into the future, seizing opportunity, seeking to maximize returns for the owner, while maintaining the building’s quality. In other words, an asset manager drives strategic decision-making and ensures tactical execution.

Proactive – Asset managers are always looking into the future for the property – thinking about potential vacancies 12-24 months ahead and planning for capital expenditures. Asset managers are preparing for what’s ahead long before the future actually happens.

Property Manager

Tactical – receives instructions and directives from the asset manager and addresses maintenance requests and tenant service items. Typically makes sure the building is well cared for, that the HVAC works, the lawn is mowed, and the windows are clean.

Reactive – the property manager takes calls and complaints and reacts to tenant issues; looks at problems today and responds tomorrow, but is not generally thinking about what is coming six to 12 months from now.

Stable Property 

A well-performing property, well leased and producing regular income and dividends for its owners.  An investor typically buys this stable property type to generate regular income for the long-term.

Value-Add Property

A property that may have occupancy issues and/or need capital expenditures. Investors typically buy this property type with the plan to fix it up and then sell it at a profit within a period of time.   Investors usually are looking for capital gains from improved value more than steady income and are likely to have a shorter investment horizon.

Lease Roll-Over/Lease Expiration

The stability of a property’s income stream is determined by the duration of in-place leases. Careful examination of the rent roll will reveal what percent of monthly income is at risk due to expiring leases. Naturally, the more tenants who have leases extending far into the future, the more likely property income will be stable.

The asset manager will look at tenants with leases expiring two years out, asking if the current tenant is happy and about future space needs. Is the tenant expanding or shrinking at that location?

The asset manager will direct property managers to be touring the space when the tenants are not there as well – closely looking at the condition of their suite and asking: how much space is actually being used by people? What areas can we offer to improve or upgrade? How can we make the tenant’s space more usable and efficient?

A good asset manager continually monitors tenant satisfaction and lease expirations, so that he is never surprised. In that way, owners’ investments are maximized.

Occupancy Rate

The percent of the commercial property that’s leased by tenants and paying rent.

Vacancy Rate

The percent of building that’s currently not leased and not generating income.

At Allegiancy, we work diligently to keep the occupancy rates above 90 percent, and the vacancy rate at less than 10 percent. Typically if a building has a mortgage, it must stay above 70 percent just to break even – that is, just to pay the mortgage and bills.

A strong asset manager will put on the full-court press in leasing if occupancy is at risk of dropping below 90 percent. That means working closely with local leasing experts to make certain we are doing the marketing and public relations necessary to get prospects interested in the space.

An excellent leasing effort can take four to six months to generate the desired increase in prospect traffic in a building, and then another six months to negotiate and sign a lease. That’s why it’s important to start this effort at least a year in advance of a potential vacancy, preferably earlier.

In summary

Every commercial office building needs a leader – we like to say they need a CEO running the asset.   We also believe that every owner and investor should have direct access to the person managing their building.   Asset managers should be extremely responsive to clients.

If you are an owner or investor in commercial real estate and have questions or concerns about your commercial property, contact Allegiancy today.

Steve Sadler manages commercial properties that have outperformed their peers by 45 percent since 2006. The company has approximately $300 million in assets under management and delivers clients attractive returns and profitable, hassle-free investments in commercial real estate. Allegiancy grew by 62 percent last year, largely due to referrals from satisfied clients.

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