An Insider's Guide to Commercial Real Estate In Chicago

Chicago's Building Equity Commercial Real Estate Featured on Globest.com

A big thanks to Globest.com for their coverage of this very blog. Check out the story below.

Local Brokers Find a New Marketing Tool

By Cari Brokamp

CHICAGO-Peter Lynn and Dan Rosenberg, co-principals with Building Equity Real Estate, have launched a commercial real estate blog. They hope their blog will serve as a tool in marketing properties as well as increasing their presence as brokers in the community. Lynn points to a dearth in CRE blogs one impetus for starting theirs, which they will use to reflect on news and trends and they hope will set them apart in the market.

Checking In: Commercial Real Estate in Chicago's Southport Corridor

One of Chicago's Hottest Commercial Retail Strips Has Cooled Off Considerably. Will It Heat Up Again? As recently as last summer, the Southport Corridor was widely considered one of the hottest neighborhood retail strips in Chicago. Asking rents peaked around $48 - $50 per square foot for inline space and $60 - $65 for corners. Today those rents are back down around 2005 levels: $30 to $38 psf for inline and $50 psf for corners. And there’s no shortage of available space. On a recent morning we counted 21 vacant storefronts, including prime corner space, on Southport between Byron and Henderson. Boutiques and sit-down restaurants are having a particularly tough go of it while daily needs mainstays like bars, salons, coffee shops and “fast casual” restaurants seem to be faring a little better. So what does the future hold for the Chicago Southport Corridor? Is Southport destined to become “the Armitage of Lakeview”, an outcome investors aggressively bet on last year? Or will it merely continue as a quaint offshoot of Wrigleyville? Will we see renewed interest from national brands? Or is Southport better suited to mom and pop tenants and the down to earth rents they command? We want to hear from you. Let us know what you think.

Peter Lynn & Dan Rosenberg
		Building Equity Chicago Commercial Real Estate  Web:: buildingequityre.com Email:: solutions@buildingequityre.com Phone:: 773.292.5188

Chicago Commercial Investment Property: It’s The Income, Stupid.

Today, everyone in Chicago commercial real estate is talking about getting back to basics. Well when it comes to commercial investment property in Chicago it doesn’t get any more basic than this: Income Equals Value. We talk to a lot of Chicago commercial property owners and investors who get hung up on capital expenditures. But if you’re preparing to bring your property to market and want to achieve maximum ROI, then income is where it’s at. Of course, generating additional revenue in today’s market is tough. But here are 3 tried and true ways to get more income out of your commercial real estate investment. 1. Bring rents up to market. Yes it’s obvious, but it’s also probably the most ignored rule of landlording. Analyze all leases for below-market rents. If you want to give a little preferential treatment to long-time tenants with good payment histories, fine, but don’t give away the store. 2. Separate revenue streams. Un-bundle parking tied to apartments or retail space. Offer it out to the broader market. Maybe there’s a tenant in a neighboring building who’s willing to pay a premium. 3. Monetize the entire asset. Signage, rooftop cell towers, basement storage, laundry. They’re all ways to boost income by monetizing otherwise passive areas of a commercial investment property in Chicago. Consult with your Chicago real estate broker to determine revenue potential. Yeah, it’s basic stuff, but that’s the whole point. It’s easy to take your eye off the ball and easy enough to get back into the groove too. Focusing on income will help you maximize the value of your Chicago commercial investment property.

Peter Lynn & Dan Rosenberg
		Building Equity Chicago Commercial Real Estate Web:: buildingequityre.com Email:: solutions@buildingequityre.com Phone:: 773.292.5188

Chicago Commercial Real Estate Owners Finding Motivation to Sell in Looming Capital Gains Hike

It’s a common refrain we hear from would-be sellers of commercial investment real estate today, not  just in Chicago, but with our clients across the country, “I’m on the sidelines for the next 6 to 12 months until the market gets better.” 

But even if the market does get better over the next 6, 12 or even 18 months, there’s a looming deadline that could make this waiting game backfire. It’s the expiration of the current 15% tax rate on long-term capital gains.

That holiday is set to end Dec. 31, 2010, at which time the tax rate will increase at least to its pre-2003 level of 20% for property owners in the 25% (or higher) tax bracket. And that means commercial real estate values will need to rise by at least 5 percent over the next 21 months in order to offset the increased tax liability. If, on the other hand, values fall or stay relatively unchanged, the bigger tax bill will add insult to injury for landlords already stung by the economic crisis.

That’s why we’ve been advising owners who plan on exiting their Chicago commercial real estate investments within the next two years, to bring their properties to market now. After all, appreciation over the next couple of years is a roll of the dice, but higher taxes are pretty much a sure thing.

The promise of higher taxes also provides motivation for sellers who need to raise cash for future acquisitions but may not want to deal with the restrictions and time pressures of a 1031 exchange. These sellers may find it’s better to take the capital gains hit now because today’s lower tax rate combined with lower prices will create greater overall buying power on the acquisition side.

Of course, you’ll want to talk to your accountant or financial advisor to get a better understanding of how the capital gains tax will affect your situation.

Bottom line. There are reasons beyond distress to sell today. For Chicago commercial real estate owners with a low cost basis and therefore a high exposure to capital gains, accepting a lower price now versus higher taxes later could be the lesser of two evils.

The following chart shows how the anticipated increase in the capital gains tax rate from 15% to 20% could affect an owner in several different scenarios.

  

Taking the proceeds from Scenario 1 and depositing them in an 18-month CD earning 2.25% will yield the same result as Scenario 3.

Peter Lynn & Dan Rosenberg
		Building Equity Chicago Commercial Real Estate Web:: buildingequityre.com Email:: solutions@buildingequityre.com Phone:: 773.292.5188

5 Big Mistakes Banks Make Selling Chicago Commercial Real Estate Owned Assets “FSBO”

Last year, a Chicago community bank on the far South Side foreclosed on an commercial investment property in Lincoln Park. Quality asset. Great location. Maybe that’s why the bank decided to market the building “For Sale By Owner.” They assigned a commercial loan officer with no commercial real estate experience to show the property, and started fielding inquiries. A few times a week, the L.O. would set aside his business at the bank and make the hour-long drive to Lincoln Park for showings. Pretty soon, we brought him a strong offer from an all-cash buyer. While the offer was winding its way through the bank bureaucracy, the L.O. went on vacation. And while he was sipping pina coladas on the beach, another buyer came along and presented a lower, contingent offer to one of the bank officers, which they accepted. Dozens of hours of wasted time. Tens of thousands of lost dollars. All because the bank wanted to save on the commission.

That’s usually the way it goes on a FSBO of any type, but when you’re dealing with commercial REO it’s pretty much a guarantee. Say what you will about Chicago commercial real estate brokers, but we exist for a reason, and the reason is we know how to sell commercial real estate. Here are five big mistakes financial institutions make when trying to sell commercial REO property “by owner.”

1. Denying the property is for sale.
Today, it’s hard enough to sell real estate when you ARE trying. But some banks are refusing to even acknowledge that property in their portfolios is for sale. It’s like the shelves are stocked, but there are no price tags on the merchandise, and the sign on the door says ‘No Customers Allowed.’

2. Limiting the offering to existing customers.
The first instinct at a lot of banks is to offer REO property to existing customers on an exclusive basis. But by narrowing the pool, banks are driving down the price of their own assets. A smart investor would always rather buy in a private sale than compete with the open market.

3. Refusing to cooperate with brokers.
Not listing with a broker is one thing. But refusing to cooperate with brokers on the buy side is absolute insanity today. Crazier still is telling a willing and able buyer that THEY should pay their broker’s commission.

4. Hiring the wrong person for the job
After losing time and value, most FSBOs ultimately wind up in the hands of a broker. But too many bank-owned properties wind up with the wrong broker. How do we know? Because we’re the second or third broker on too many deals to count. Commercial REO properties sell through brokers with commercial REO experience.

5. Overlooking terms in favor of price.
So the bank finally gets its price, but at what cost? It’s in due diligence where most deals get bogged down today. Buyers can’t get financing. Or they find something they don’t like upon inspection. Or they come at you with some crazy zoning-change contingency. All of these conditions cost time, and time is money. A good broker will help a bank evaluate offers based on all the terms of the deal and find buyers who can perform.

Banks have an obligation to their shareholders to maximize the value of their assets. But selling Chicago commercial REO property by owner is a sure fire way to do just the opposite.

Peter Lynn & Dan Rosenberg
		Building Equity Commercial Real Estate Web:: buildingequityre.com Email:: solutions@buildingequityre.com Phone:: 773.292.5188

Apartment Investment in Kenwood: A Solid Commercial Real Estate Play on Chicago’s South Side

People in Kenwood and Hyde Park on Chicago’s South Side are already talking about the “Obama Effect” - an increase in Chicago commercial real estate values expected to result from Barack Obama’s ascent from a Georgian on Greenwood to the White House on Pennsylvania Avenue. Maybe it’ll happen; maybe not. But high occupancy and a stable rent roll make this 49-unit apartment building on Drexel Boulevard a solid commercial investment property no matter who's in office.

Located at 4408-4412 S. Drexel Blvd., the courtyard building is over 90-percent occupied, and features a high-visibility location on the boulevard, a new boiler and water heater and four new porches. It’s currently generating $420,000 in gross annual income, and a buyer is likely to find some upside in rents.

With everyone scouring the landscape for distressed real estate deals, here is a stabilized asset that can balance out a diversified portfolio or provide a great opportunity to trade up. In addition, its strong fundamentals should make this a relatively easy deal to finance for the qualified investor.

Contact us for more information and to set up a showing.

Peter Lynn & Dan Rosenberg
		Building Equity Chicago Commercial Real Estate Web:: buildingequityre.com Email:: solutions@buildingequityre.com Phone:: 773.292.5188

Don’t Hire a Residential Agent for Your Chicago Commercial Real Estate Transaction

The housing bust has created a tough and somewhat unexpected predicament in commercial real estate today. A large number of residential agents are flocking to this side of the fence in hopes the grass will be greener. Not surprisingly, many of these new arrivals don’t have the requisite skills or knowledge or, worse yet, they know just enough to be dangerous. Commercial real estate brokerage and residential brokerage are different professions that attract different kinds of people with different skills. We’ll be the first to admit that residential real estate is not our thing. Likewise, there are many aspects of commercial real estate that residential brokers can’t just step in and learn overnight.

If you’re an property owner or investor considering a commercial real estate transaction, here are 3 reasons you should not be represented by a residential broker.

1. Valuations:
Residential brokers typically price a listing using one method: comparable sales. Commercial real estate brokers, on the other hand, often use two or more valuation methods, including comps, cap rates, gross rent multipliers, etc. Residential valuation methods don’t work for commercial real estate, and commercial valuation methods don’t work for residential. Case in point: we recently took a listing for a stabilized apartment building in a great location that had been listed with a residential broker for FOUR YEARS. Why didn’t the building sell during the best seller’s market for investment property in the history of mankind? Because it was grossly overpriced. Why was it grossly overpriced? Because the residential agent didn’t know what they were doing.

2. Operations:
The systems, materials, costs and people involved in operating homes and commercial properties are vastly different. If a broker isn’t dealing with commercial property on a daily basis, then it stands to reason they aren’t going to be familiar with the way these properties operate – and the income and expenses associated with operating them. That’s going to lead to some bad advice at some point during the transaction.

3. Marketplace:
Neither commercial nor residential sales in Chicago occur in a vacuum. They’re subject to the conditions, trends and forces of the marketplace. These variables are always changing and therefore always exerting pressure on individual properties. Is occupancy trending up or down? How does that impact rent growth? What’s the availability of financing for this or that asset type? Today’s distressed-property market only magnifies the knowledge gap. It’s tough enough for a residential agent to jump into residential foreclosures not to mention anything having to do with commercial real estate. Once again, it’s knowledge that you develop over time.

You don’t service a Mercedes at a Toyota dealer. You don’t go to the dentist to have your eyes examined. And you don’t hire a residential real estate agent to sell commercial property. You just don’t.

Peter Lynn & Dan Rosenberg
		Building Equity Chicago Commercial Real Estate Web:: buildingequityre.com Email:: solutions@buildingequityre.com Phone:: 773.292.5188