Investing in commercial real estate is a great way to generate wealth producing relatively consistent returns through monthly income or capital growth

Real estate returns are generated in two ways: income return and capital returns. The income returns comes from tenants’ rent payments and the cash that remains after all property expenses have been paid. Capital returns are the increase or decrease in the value of the property due to changes in market demand and/or inflation.

The first steps to investing in commercial real estate is to ask yourself why you want to invest in real estate and to define what type of investor you want to be. What kinds of returns are important to you?

An investor that is interested in income return, or stable cash flow, purchases a property that can provide a monthly income. The income return from real estate is directly linked to the rent payments received from tenants, minus the costs of operating the property and outgoing mortgage/financing payments. Analyzing this type of property has been likened to the analysis you may do if you were to buy a business. This means thoroughly examining the financial records of the property to prove it could stand on is own each month. Also important is the property’s ability to stay leased so that these financials remain.

When investing in a single-tenant office or industrial building this may mean you evaluate the current tenant more completely to be sure they intend to and can afford to continue leasing the building. For a multi-unit property, the strength of the leasing market and competitive rates of the property are more important.

One of our clients that favors triple-net investments recently reviewed the real estate deals he had participated in over the past couple of years. He found he was getting 9.4% return on cash and pointed out that the internal rate of return was even greater in that you are also reducing debt.

Unlike cash-flow investors, long-term or “hold” investors rely on capital returns through real estate appreciation to build their wealth. Capital appreciation of a property is determined by whether or not your property would sell for more than you bought it for. If so, then you’ve achieved a positive capital return. These investors rely on the simple strategy of patience. They look for real estate that will appreciate over time because of location, market changes, or inflation, or deals that provide an upside by offering the ability to increase cash flow or update the property.

The capital return is more difficult to calculate, and requires the property to be valued or appraised. The majority of the volatility in real estate returns comes from the capital appreciation component of returns. Income returns tend to be fairly stable. Capital returns fluctuate more and although this tactic can be riskier, many times the return is greater.

While you are out in your city, start looking at the real estate you see – from the retail center at the corner to the industrial building by your office to the vacant land by your house. Is the shopping center fully leased? What kinds of tenants occupy the buildings? An investor owns every one of these commercial properties.

Houston’s outlook continues to offer more options than the rest of the country in regards to businesses and job seekers alike, say local economic and development experts.

Most parts of the city have seen continued growth throughout 2011, and that momentum is not expected to slow down. The Houston metropolitan statistical area will add about 84,600 jobs this year, up from about 80,000 jobs added in 2011, according to the Greater Houston Partnership.

The Houston Business Journal has identified six Houston submarkets that experts expect to be active in 2012 — Downtown, The Woodlands, East End, Uptown, North and the Energy Corridor. Below is an excerpt about each area. Click on the submarket name for more thorough information.

North Houston
With many large corporations, including ExxonMobil moving or expanding to North Houston, we should expect to see land sales and spec construction increase this year. The corridor is appealing because it offers more available shovel-ready land, nearby residential, a strong labor pool, amenities and transportation. This aerial photo shows the new Exxon Mobil campus site under construction at I-45 North and the Hardy Toll Road. Photo Source: Brian Kennedy, www.birdseyehouston.com.

The Woodlands
The Woodlands continues to be a boon for energy companies drawn by Exxon Mobil’s planned corporate campus near the master-planned community. The demand for office space in the submarket — and the desire to be near Exxon — puts further pressure on the Class A office market. This growth should also positively affect the retail market.

Energy Corridor
Despite the exodus of energy companies flocking to The Woodlands, the Energy Corridor is still appealing to firms of its namesake. Dallas-based Trammell Crow Co’s purchase of 18.8 acres from the Texas General Land Office at the southwest corner of Interstate 10 and Eldridge for future development proves continued interest. Sources told HBJ last year that Trammell Crow anticipates doing a multiphase office campus, with construction starting in 2012. Besides office construction, growth in the multifamily industry in the corridor is focused on lifestyle and creating walkable communities.

Uptown
This link on the HBJ website was not working so we will update it when it become available.

East End
The Houston Dynamo’s opening game and the debut of the new BBVA Compass Stadium will occur on May 12, and with it comes an expected surge of people to the east side of the city. The 22,000-seat, open-air stadium will be a boost to growth and development on the east side of Interstate 59 downtown. Also promising for the area is the “Building a Better Houston” campaign, established between the Dynamo and BBVA Compass, which will focus on revitalizing Houston’s East End, among other initiatives. Rendering of the new Dynamo Stadium. Photo Source.

Downtown
Vacancy rates are expected to drop into the single digits this year due to rapid demand in the heart of the city, sending rental rates soaring. Last year saw the entrance of two new office buildings, Hess Tower and BG Group Place, (about 1.9 million square feet combined) and they sit at . 100 percent occupancy and 70 percent occupancy, respectively. Several new buildings have also designed, but are on hold until tenants can be secured. There are no large retail projects planned to date and any hotel projects are at the beginning stages. The addition of a free bus service on a 2.5 mile loop around downtown also will contribute to changes downtown. The contemporary-designed shuttle will connect workers, hotel guests and residents to the George R. Brown Convention Center, shopping and other amenities in the area. The Greenlink Circular Transit is set to start its first route in May.

The cheapest rent does not guarantee the best deal. Make sure your landlord is on firm financial footing. Find a qualified tenant representative to advocate on your behalf.

Those are some of the guiding principles businesses should follow before signing a lease, according to commercial real estate experts.

Committing to leasing space — whether in an office building, shopping mall or warehouse — is a major decision for any business, but one that owners and managers often make without being armed with all the facts.

The reasons vary — they are so busy running their companies that they often do not have the time to research the market and seek proposals, they have never negotiated a lease, or have only limited experience doing so.

Or, they take the word of a real estate broker who represents the landlord, not paying attention to the fact that their interests and those of the landlord are not always the same.

“They get lulled into a false sense of security,” said Eric L. Nesbitt, a real estate attorney in Denver, and author of “Negotiating Commercial Property Leases.”

“They drive around, see names and numbers on signs on buildings, call and deal direct with the landlord rep,” he said. “They have a good rapport and think they’re getting a good deal. But, at the end of the day, that agent is going to get the best deal they can for the landlord.”

The tenant may think they got a break because the landlord’s rep took 50 cents or $1 off the lease rate as a concession, Nesbitt said. But, other tenants got $2 off.

Given the relatively weak demand and excess supply of commercial space, tenants should use that imbalance to their negotiating advantage. It’s still a tenant market in retail, depending on the area one is looking to lease in, said Walker Barnett, principal with Colliers International.

However, that is not true with industrial. With a 5 percent vacany level, the industrial market is swinging back toward the landlord, he said.

To fill empty space, many landlords are offering incentives that go beyond cutting the lease rate. Free rent, whether for one month or more, has become increasingly common.

Another example is a more generous allowance for tenant improvements. Landlords pay for improvements to get space ready for tenants up to a certain amount, say $10 per square foot. If the cost exceeds the allowance, the burden falls on the tenant to pay the difference.

By offering a bigger allowance, the landlord is shouldering more of the up-front cost.

Long before negotiating a new or renewal lease, tenants should know the financial health of the property owner.

That is one of the most overlooked aspects of a transaction and one that could come back to haunt the tenant if the landlord is foreclosed upon or does not make good on promises to do renovations or other improvements.

“You have to ask a lot of questions,” said David Zimmer, national president of the Society of Industrial and Office Realtors. “A lot is relative to the size and sophistication of the tenant and the deal. Some information will be readily available.”

Zimmer suggests asking the landlord’s lender for a reference. He also said tenants should insist on a nondisturbance agreement in the lease. Under this provision, the lender honors the landlord’s lease obligations if the landlord defaults on his loan.

A nondisturbance agreement trumps a common provision in leases indicating the lease is subordinate to the mortgage or deed of trust, Zimmer said.

Nesbitt and Zimmer both recommend businesses rely on a qualified tenant representative to find the space that fits their needs and negotiate the best lease.

There is no extra cost since a tenant’s representative splits the commission with the landlord’s broker, an arrangement similar to what happens in residential real estate.

“We like to tell our clients that in most cases, not only are we going to work with you, you are going to save more money than if you try to negotiate on your own,” Nesbitt said.

That is not to say business owners and managers cannot find space on their own, perform due diligence on the landlord, and successfully negotiate a lease.

“Is it possible? Of course,” said Frank Simpson, 2011 president of Certified Commercial Investment Member Institute.

“It’s possible for a lay person to operate on himself but you really need a surgeon to do it. Why would you not want to use a qualified broker? You’re busy. You’re selling widgets. You don’t know the pitfalls, you don’t know the opportunities that the market is allowing in this climate.”

Here’s a quick rundown on the term escrow from Yahoo Real Estate and The Lending Tree

If you’ve ever made an informal bet with a friend, you may have asked a third person to hold the money until the wager was resolved. When you take out a mortgage to buy a home, you’re doing something similar by opening an escrow account.

How it works

When you put money in escrow it is held by a neutral third party (called an escrow agent) who works for both the lender and the borrower. The agent’s role is to carry out the instructions agreed upon by both parties. The money is released when all the terms of the agreement are met. Escrow can be involved in anything from multimillion-dollar building projects to purchases made on online auction sites.

When it’s used

When your mortgage closes, your lender will usually require you to open an escrow account to cover property taxes and homeowner’s insurance. You’ll make an initial deposit, followed by payments to the account every month. (Usually these are added to your regular mortgage payment.) The escrow agent will then release these funds as your taxes and insurance premiums come due.

Its purpose

The idea is to protect the lender by ensuring that you pay your taxes and insurance on time. If you default on your property tax, for example, your municipality can put a lien on the house, which would make it difficult to sell. Or if your house burns down and you’ve neglected to pay the insurance, the lender would be left with no collateral.

How you benefit

Escrow can benefit borrowers by helping them spread insurance and tax expenses evenly over 12 payments. For example, assume your yearly property taxes are two payments of $1,000 each, and your insurance is $400 annually. If you paid these directly, it would mean three large payments a year; your escrow costs, however, would be a manageable $200 a month.

Escrow payments

Your escrow account will have a built-in cushion — if you miss a payment, the lender must still be able to pay your accounts on time. However, federal law prohibits lenders from requiring more than two months. expenses in escrow. And because your tax and insurance costs will change slightly from year to year, the lender will review and adjust your escrow payments annually.

When escrow may be waived

In most states, the money you place in an escrow account earns no interest for you. For that reason, many borrowers prefer to pay their taxes and insurance directly. Lenders may agree to this if your down payment is more than 20 percent, although some will raise your interest rate slightly to compensate. Once you agree to putting funds into an escrow account, however, it is difficult to cancel it, so make sure you fully understand the arrangement before your mortgage closes.

Location:
13922-13982 Westheimer Road
Houston, TX 77077 (Map)

Property Highlights:

More Information:
Barton Kelly
Site Package
713-722-1250
barton@clay-co.com

• Clayco Academy purchases site of new Baytown Academy Sports, Houston Business Journal
• Two Clay & Co Execs Awarded CCIM Designation, REDNews
• The newest Houston-area Academy Sports + Outdoors store, at 6425 Garth Road, has a new landlord, Houston Chronicle
• The Deal Sheet, Real Estate Bisnow

A CCIM (Certified Commercial Investment Member) is a recognized expert in the commercial and investment real estate industry. The elite designation is earned after successfully completing over 160 hours of case-driven study and submitting a comprehensive portfolio demonstrating the depth of their commercial real estate experience. Finally, they have demonstrated their proficiency in the CCIM skill sets by successfully completing a comprehensive examination. Only then is a designation candidate awarded the coveted CCIM pin, joining the ranks of highly skilled commercial and investment real estate experts.

• Disaster Relief And Disaster Training (DRADT) specializes in responding to disasters immediately and share the needs of survivors via social media; allowing you to join the relief efforts. Visit www.texasfirerelief.com for information on how to help.
• Houston-based Friends for Life brought in its mobile shelter to help treat injured Bastrop animals until their owners can be found. Make a donation to them here.
• Pearland High School is collecting items to provide relief to our Texas neighbors displaced by the devastating wildfires. The community is invited to join in this effort to help these families by donating the items listed belYou may bring your contribution to the Sheryl Searcy Ninth Grade Center Choir Room (room 1500), between 7:00 a.m.-3:00p.m. on school days.If you prefer, you may make a monetary contribution to benefit theTexas Wildfire Relief Fund. Please make your check payable to PHS, and notateTexas Wildfire on the memo line. The drive ends on Friday, September 23, 2011.
• Buy this shirt and 100% of profits will benefit the AmericanRed Cross with their efforts in Texas.
• Friends of Texas Wildlife supports the rehabilitation of native Texas wildlife and the promotion of co-existence of wildlife and humans through education. Go here to find out how to support their efforts through donations or volunteering.
• The Houston-area Red Cross has opened 3 shelters around Houston to assist over 130 people.  For updates, to volunteer or to help by giving a financial donation, click here.
• This new site has been set up to keep the public updated on information on the wildfires.

UPDATED

• Tuesday night, El Real Tex-Mex will present “Pray for Rain” a four-course interactive dinner to benefit the wildfire victims. Chef/owner Bryan Caswell and Underbelly’s Chris Shepherd will team up for create a “Texas-style” menu, and Hay Merchant’s Kevin Floyd will contribute margaritas and drink pairings. Windsor Village United Methodist Church pastor Kirbyjon Caldwell will also be present to open the evening with a prayer. The dinner tariff is $85 per person, including beer and margaritas, and the dinner begins at 7 p.m. with cocktails served for half an hour beforehand. Reservations are required, and all proceeds from the dinner will go to Society of Samaritan, a local Magnolia organization that Caswell and Shepherd came into contact with while bringing foodstuffs to Waller and Montgomery counties on Friday.
• To help local farmers affected by the Texas wildfires, Urban Harvest has set up a Wildfire Farm Relief Fund (WFRF). The public can make donations to the WFRF fund and to buy their products, which will all help support the farmers’ day-to-day lives. Checks should be written to Urban Harvest and 100 percent of these donations will go directly to the farmers. Checks, cash or credit card donations are tax deductible and can be made at any of the Urban Harvest Farmers Markets, or mail checks c/o Urban Harvest, 2311 Canal, Suite 200, Houston TX 77003.

Real Estate BISNOW The Deal Sheet (Sept 6, 2011)
Clay & Co has been selected as the exclusive leasing agent for a 94k SF industrial building on the South Loop at Mykawa Road. The building is comprised of 78k SF of warehouse space and 16k SF of office space. Central Transportation Systems occupied the facility through August of this year.

9821 Katy Freeway, Suite 875
Houston, TX 77024