2 However we will briefly examine the general concept of tax deferral. If the owner exchanges his property for a qualifying like-kind property and complies with the rules of Section 1031, the entire tax may be deferred.

There are three general methods appraisers use to value commercial real estate:

Cost Approach 2. Sales Comparable Approach 3. Income Capitalization Approach

The Cost Approach arrives at a value by determining what it would cost to replace the property being assessed.

The Sales Comparable Approach analyzes recent sales on comparable properties and makes assumptions based on the sale price per foot and then applies that sale price per foot to the subject property in order to arrive at a current market value. The Income Capitalization Approach analyzes the income and expenses generated and incurred on the property and then capitalizes the Net Operating Income (cash flow before debt service) in order to arrive at a current market value. (This assumes of course the property does in fact generate income. Some borrowers feel that the appraised value should be the value underwritten by the lender.

Cap Rate Net Operating Income / Value (or Purchase Price) A cap rate is merely an expression of the unleveraged annual return on one's investment.

Value Net Operating Income / Cap Rate (input)

Commercial property is often used as a source of profit for investors. If you are interested in buying commercial real estate, it is important to determine how much the property is worth in terms of market value.

Understanding The Varieties Of Equity Capital Involved In A Commercial Real Estate Transaction

2 However we will briefly examine the general concept of tax deferral. Assume a sale nets the owner $100,000, creating a tax liability of $20,000. Cost Approach 2. Sales Comparable Approach 3. Income Capitalization Approach

The Income Capitalization Approach analyzes the income and expenses generated and incurred on the property and then capitalizes the Net Operating Income (cash flow before debt service) in order to arrive at a current market value. Some borrowers feel that the appraised value should be the value underwritten by the lender.

Cap Rate Net Operating Income / Value (or Purchase Price) A cap rate is merely an expression of the unleveraged annual return on one's investment.

Value Net Operating Income / Cap Rate (input)

Sponsor Equity: This is the cash investment contributed by owners of a project.Preferred Equity: Preferred equity is similar in structure to a mezzanine loan; however, many of the complexities involving mezzanine debt are avoided. Institutional Joint Venture Equity: Institutional investors have a strong appetite for joint ventures with experienced owner-operators or developers. In many instances, institutional equity partners seek to limit overall property leverage to between 50% and 60%, thus lowering the internal rate of return to the sponsor.Institutional joint venture equity transactions generally are structured so that the institutional investor contributes between 80 percent and 90 percent of the required equity, with the sponsor investing the remainder. Sponsor Equity2. Preferred Equity3. Mezzanine Debt4. Senior Debt

Introduction to Commercial Leases - Part two

If the value is still there I'll go in and check the place out. Problems cost money, updates make money. Watch the show "Income Property" on HGTV. The yard was scaring people off because the house was in a nice neighborhood where people took care of their yards. Now lets discuss selling the property.

If you are just starting out with commercial property you are going to need capital and large cash flows. If you are listing your commercial property for $100,000, this means the agent would get up to $6,000. So if you're profiting $20,000 per home you could make $20,000 on 1 home selling it by yourself, or $28,000 selling 2 homes through and agent. If times are slow, use an agent.

What if this is your 10th commercial property investment?

If you are making $ 20,000 profit per flip, you should have roughly $200,000 cash to work with plus your initial working capital. If you can flip each commercial property investment in 3 months, making $20,000 each, you could have $184,000 at the end of the year.

Now buy and finance 4 homes again. A lot depends on your tenant.

If you are renting out another part of your home to offset your mortgage, do not rely on the payments coming from your tenant.

If you are renting a vacation home, congratulations!

If I do this, I can pay my payments on the house, pay my rental agency, and I have a cool place to hang out 35 weeks out of the year! This is an ideal vacation rental home.

Then decide if you can afford an agency or if you have to do it all yourself.

A Complete Guide to Investing in Commercial Property

As we move on in this article, we'll discuss additional lease types and become familiar with lease additional clause, strategies and identify common terms used in commercial leases.

Ground Lease

A ground lease is as lease for land alone, and is typically a long-term net lease. Following the end of the lease term of a ground lease, title to the land and improvements reverts to the lessor/property owner.

Step Leases

While the lease payments vary over time and the term of the lease, the actual payments are calculated and disclosed prior to the signing of the lease agreement.

Indexed Leases

Additional lease clauses

Lease Renewal Options

Commercial leases often grant a tenant the ability to renew a lease for a pre-specified period of time following the initial lease expiration. However, the rate at which the lease may be renewed is specified in the initial lease contract. Even though the tenant is not obligated to renew the lease, hence the term 'option', the tenant is not bound by the lease to remain and may decide to find another location for the business if either the business requires it or the tenant so desires.

If additional contiguous space cannot be provided in a reasonable time frame for the tenant, an owner may agree to relocate the tenant within the building or shopping center within a specified time period.

Financial impact of lease clauses

After a decision has been made to lease commercial space a commercial real estate specialist may be enlisted to prepare a financial report which quantifies the potential tenant's lease costs and which compares and contrasts alternative leases.

Base (contract) rent: This is the specified, pre-defined contract dollar amount for periodic rent (monthly payments).

Total effective rate: This is simply the total effective rent divided by the square footage.

Average annual effective rent: This is the total effective rent divided by the total years of the lease term.

In many commercial leases, the base rent does not necessarily equal the effective rent.

Here then is a basic formula for calculating a tenant's effective rent:

The base (contract) rent + (Additional Costs - Concessions and/or allowances) = The Total effective rent paid which will be paid by the tenant.

From the owner's perspective

Here then is a basic formula for calculating effective rent from the owner's perspective:

Base (contract) rent - (Net additional costs - Concessions and/or allowances) = The owner's Total effective rent as income.

A sublease is a separate lease in which the tenant may lease all or part of the leasehold interest to another tenant while retaining liability for the property and primary lease to the owner.

Rental rate risk: It may be necessary to sublease at below-contract rent.

Tenant quality risk: It may not be possible to find a high-quality tenant.

Lease-term risk: A sub-lessee may want a shorter or longer lease than that of the primary lease.

Lease agreement risk: A sub-lessee may want concessions, allowances, and other features that are not provided in the primary lease.

An assignment of lease is where all of a tenant's leasehold interests in a property are transferred to a third party.

There are many different ways to structure lease transactions, clauses and financial implications in commercial real estate leasing.

An important item to remember is that many lease clauses will be applied to a cost to either the prospective tenant or the owner.