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Cap. Rates

Investors are always talking Cap Rates. You hear it at cocktail parties: drug stores are selling at a 7 cap, or more likely today, a 6 cap. 10 caps are a thing of the past. It sounds like code, shrouded in mystery, for those “In the Know” only.

The definition of a Cap Rate is, quite simply, the Capitalization Rate of the income generated by real estate. Originally defined by the Appraisal Industry, for all its mystery it’s a measurement. A measurement by which institutions or large investors buy real estate. It’s a predictor, but not a guarantee. If you have a hundred buildings leased to 100 “Credit Rated Tenants” then you can rely on the fact that your buildings for the most part will return at the cap rate you’ve determined. However, if you own one building and Worldcomm or more recently GM is your tenant, your Cap rate may change drastically, overnight.

Cap Rates are basically, the Net Operating Income of a building (N.O.I.), divided by the value or market price of the building. Cap Rates are calculated on buildings, traditionally, where the tenancy runs a minimum of ten years, and often twenty years.

In Our Local Market of New Haven and the shoreline, people often discuss cap rates on properties where the leases only extend five years. This doesn’t give a Buyer a true picture of stability. That’s one of the reasons that drug stores are valued by some investors. Pure net leases where the Tenant pays all the bills and is signed up for twenty years is a pretty stable investment, particularly in shoreline towns like Clinton, Westbrook, or even, for that matter, larger industrial, warehouse, distribution and commercial hubs like Wallingford, North Haven, Milford.

In a multi-tenant light industrial property, calculating a cap rate is just the same as it is for a retail strip or power center. N.O.I. divided by market price, and N.O.I. takes into account, vacancy losses, maintenance and all other expenses. The difference between being an investor in New Haven, which is commonly referred to as a second or third tier market, and a city like Chicago or Memphis, is that we don’t fill our buildings with credit rated tenants. We are populated by family owned companies, privately held, that have been in business for generations. That may not turn on the institutional investor, but that’s where local investors have the edge over a REIT or large investor from New York City. Cap rates and credit ratings are great, but there’s still a lot to be said for knowing your tenant company and counting the cash return on your initial investment. - Kristin

June 20, 2006

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The Rise of Full Service Real Estate Agencies, again

The Real Estate Market appears to be slowing .Economic indicators point to the trend continuing. Soon, a For Sale By Owner sign on a 7,000sf building in Branford isn’t going to make the phone ring. Knowledge of companies looking to expand or contract, and contacts in the industry will once again be valued by all Sellers, not just the ones who leave the job to the people who do it everyday.

Similarly, as more properties come to market, Full Service Brokerage Firms will become more and more valuable to the Commercial Real Estate Purchasers who have businesses to run they will remember that Professionals, who offer a complete package of services and work on the Business Owner’s or Investor’s behalf, are worth their weight in gold.

Commercial Real Estate Practitioners are Professionals. The good ones pride themselves on advanced education, ethics, and their consultation services. They become as important to an investor or business owner’s financial/professional team as a good lawyer, an excellent accountant and a great financial tax/estate planner. It is less acceptable than ever, to work with an agent who simply sticks a sign in the ground, or turns on the lights and hands a tenant or buyer a fact sheet. If your agent is still doing that, fire him or her and interview a new agent. There are too many good people in the field for you to be stuck with a dud.

There are several things to seek in a Commercial Real Estate Broker, or in a Residential Agent, for that matter. Don’t just hire your Brother-in-Law or your daughter’s ex-math teacher. Find out what services the company provides and how qualified your agent is.

Tenant/Buyer Representation: In Connecticut, Commercial Real Estate and Residential Real Estate (home) Buyers are more often than not, represented by a Buyers’ Agent. This agent owes its allegiance to the Buyer or Tenant, not to the Seller or Landlord. Just like a Good Listing Agent, a Good Buyer’s agent will provide Buyer or Tenant with an outline of the process, a new homebuyer’s package or a listing of contractors whom a Tenant can contact to Fit-Up Office or Manufacturing Spaces.

Education: States demand Continuing Education as part of the remaining an active licensee. However, any commercial agent should go above and beyond, learning everyday, whether through the Global S.I.O.R. (Society Office Industrial Realtors) Network Education Foundation, CCIM, IORETA, NAIOP, ICSC. Similarly, residential specialists can achieve designations like ABR, GRE and more.

There is no reason to work with someone who won’t be an asset to your team. Commercial Professionals in Connecticut must be familiar with Environmental Law to be of value to their clients, Budgeting, Operating Expenses, Market Norms for Maintenance costs and the like. Whether Buying a million square feet in downtown Stamford, an historic office in New Haven’s Ninth Square or leasing two rooms of office in Guilford or Branford. Commercial Property acquisition from Wallingford Industrial Space, to Distribution in Rocky Hill or Investment in Old Saybrook, or anywhere in between, requires knowledge and diligence on the part of your agent. If they are afraid of your questions, find someone else. - Kristin

June 2, 2006

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