Six Things a N2B Broker MUST Know to Succeed

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I have a passion for several things - family, faith, commercial real estate, fitness, and teaching.

When my office approached me to create and execute a training program for our New 2 Business Brokers - I welcomed the opportunity!

The first session was this morning, and I was greeted by ten smiling young agents - I have socks older than most of them - but I digress.

Attrition in our industry is similar to the survival rate in a tsunami - close to 70% of new folks in the business don't make it. Stunning!

What follows is a list of what I believe to be the essentials for ensuring a long career in commercial real estate brokerage. As our business is a sales game and many businesses rely upon sales as their lifeblood - I believe there are broader applications to any company owner who wants to limit turnover and provide purpose, autonomy, and mastery of their sales function.

Choose your company wisely. Companies such as CBRE, JLL, and Cushman and Wakefield enjoy an international footprint. My firm Lee & Associates is a local firm that became national in scope with two international offices, Others - Voit, Ashwill Associates, are dominant locally. Regardless, find the company that best suits your vision and culture.

Your mentor is critical. Commercial real estate is taught by doing - therefore the person overseeing the doing is tantamount to success.

Decide day one on a specialty. Unless your marketplace will not allow a specialty - because of the size or deal velocity - become an office, retail, industrial, land, or multi-family expert. Some in our trade slice and dice the product type even smaller to become the "go-to" in a size range - 10,000-20,000 industrial owners as an example.

Training is just the beginning. Training is crucial but just the beginning of the triangle of mastery. A solid training program must be paired with coaching, mentoring, and practice - in that order.

Your CRM is your heartbeat. Invest in the very best Contact Relationship Manager - CRM - you can afford. There are many, many good ones out there. Remember, the best CRM is the one that gets used. Don't get tangled up in all of the sexy features you will never use.

Strategically set up your practice. Once you've selected your specialty and CRM - endeavor to know EVERYTHING about every building, owner, tenant in your farm. Carefully log the information into the system and schedule regular contacts until you've "filled in all the blanks". Next, understand others who call on the same companies that you do - material handling, machinery movers, IT professionals, bankers, etc. You've now started a network of referral partners.

Don't forget to have fun! Too many in our industry take things much too seriously.

My Property Didn't Appraise - But Why?

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Recently, I counseled my sister-in-law. She is selling her house and the appraiser was scheduled to visit.

Although this column is commercial real estate focused, some of the same appraisal principles apply - plus my associate suggested I write something about the process and how slight assumption variations can cause wide swings in value.

So to all y'all out there with a bad number, here's why.

Reason one. Lender review. Since the financial music stopped in 2008, banks have been very careful to ensure appraisers don't have un-tethered reign. Consequently, appraisers are engaged by the lender - not the buyer or seller - and a strict review process is conducted once the appraisal is submitted. I've had appraisers assure me we were OK - only to have the review disagree.

Reason two. Rear view mirror. Comparable sales and leases are tantamount to a fair valuation - and are known in appraiser speak as the market approach. However, past history - done deals - only show you where you've been - not where you're headed. In an up-trending market, a sale that occurred three months ago may dramatically understate the current conditions.

Reason three. Assumptions. Market approach - has a second cousin - the income approach. Necessary for a proper look are recent lease transactions and the capitalization rate investors are paying. You remember capitalization rate - or cap rates, right? - a percentage measure of the net income divided by the purchase price. Well, in order to get there, an appraiser must assume a lease rate - tough to do because lease comps are not readily shared by commercial real estate professionals and a cap rate. As a cap rate is a measure of risk - the higher the risk, the higher the cap rate - the rate used can swing a valuation dramatically. Simple math - Income of $100,000 with a cap rate of 4.5% yields $2,222,222. But increase the cap rate to 5% and we get $2,000,000 - a delta of almost a quarter million dollars.

Last year - in this space - I provided four solutions if find yourself on the short-end of a valuation. In case you missed it, you can quickly catch up by clicking this link. The punch line - Seller reduces the price, buyer ups his down payment, parties cancel the deal, and/or compromise.

Should I Buy THIS Building?

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I received a call from an attorney last week. We recently completed a lease for his law firm and we swap referrals. 

This time the conversation centered around an opportunity with which he had been presented. 

In short, a friend of his is eyeing a building and approached my friend on becoming a partner. 

The counsel I gave the counselor was post worthy – so here goes.

First, compute the potential revenue. In this case, my friend was not going to occupy the building with his business. So, the opportunity will strictly be an investment. Also, the real estate is currently vacant. Considered should be the rent a tenant(s) will pay – not a puffed-up version – but a real true number. Next – how long will it take to lease the space. Finally – what concessions will have to be given to attract a paying customer? Oh yeah, if 100% is every tenant paying every month on time – you might want to figure in a shrink factor of 5-10% in case someone slow pays or stiffs you.

Next, add up the expenses. Biggest in this line of figures is property taxes. Insurance, maintenance, and utilities tag along as well. Don’t forget – the property taxes will rise in accordance with your purchase price. Make sure you take this into consideration.

Now, subtract the expenses from the potential revenue. The difference is a return – also known as a Net Operating Income. However, from this amount you’ll need to make sure you allocate some dollars for a new roof or a blown AC unit – lest you are swiping your Visa Card when your tenant is broiling on a July day.

OK. Now we have realistically modeled our income, subtracted real expenses, and created a reserve for major repairs.

Most would now do some math – return divided by the purchase price. This simple formula allows you to see what your percentage return is for an all-cash purchase – with no loan. In today’s market – this percentage should be 5.5% at a minimum. Frankly, I like 6%+ much better. Because, likely the purchase will be financed and with creeping interest rates – you don’t want the advantage of leverage to be a disadvantage. Said simply, if your borrowing costs exceed the all-cash return – YOUR spendable amount – after you pay the bank - will be much less.

Now, take a reality check. Remember, you have made some assumptions on the market rent and time it will take you to fill the vacancy. Will the deal still make sense if the lease up time is double? What if you can only get 75% of the rent you anticipate? Remember 2008? Yeah. Me too.

It’s the numbers, stupid! Investing in real estate is all about the cold analysis of the deal. Please don’t fall victim to the “but I love it” syndrome. 

Are Commercial Real Estate Brokers Un-necessary?

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Recently - in this space - I opined about commercial real estate technology and whether technology will replace the role of a commercial real estate broker.

If you missed the post, shame on you! But, here's the punchline - Not likely, due to a myriad of reasons.

Today, I endeavor to discuss the function of a commercial real estate broker - in a deal - and to what extent that participation is necessary.

Before we address the question, a bit of background. Most commercial real estate transactions - be they a new lease, a purchase, or a lease renewal in an existing space  - employ two sides - a procuring agent - those representing the buyer or tenant and an owner's agent - those representing the owner of the building. In California, agents are allowed to represent both ends of the transaction - also known as dual agency.

Each side has a purpose.

Tasked with finding a tenant or buyer is the owner's agent. This effort is filled with all manner of marketing initiatives - to brokers and prospects. Sometimes an owner believes he can short-circuit the search for a buyer or tenant by planting a sign on the fornt yard and digitally advertising. Problems arise when the inquiries pour in, tours are required, and a negotiation ensues. OK, an agreement has been reached - now what? Certainly, a broker's role on the seller's side is crucial.

Conversely, a procuring agent's goal is to locate a space for his client - the occupant. If a list of available buildings was easily accessed by a business looking for space - the contribution made by a procuring broker would be lightened - not eliminated but diminished. Residential agents face this challenge as all listed houses are public facing through sites such as Zillow, Realtor.com, and Redfin. A homebuyer can find out what is available with a swipe of an app. The only consumer-facing commercial real estate site is Loopnet. Accuracy of complete availability is limited as there is no governing realty board to create accountability for the submissions. So, a key to the walled garden of commercial real estate availabilities is secured through an agent.

I once heard the reason flight attendants are on board an aircraft during your cross-country flight - is in case of an emergency - not to serve you honey glazed peanuts. A similar set of crash precautions is contributed by the agents in a deal. Problems arise and a skilled practitioner can counsel you through various solutions. We recently guided a seller through a buyer's request for repairs. What started as a high six-figure ask was whittled down to a mid-five-figure take - all because of our web of contractors. Don't ever underestimate the power of a great network when it comes to solving a problem.

So, unfortunately, dear reader, a commercial real estate professional is a necessary evil in a transaction.