Land Use in CT and a Great Resource for Information

I recently attended a class on Land Use in Fairfield County. Here are a few takeaways that I think are helpful for home buyers, investors and real estate agents.

  • A useful survey is less than 10 years old. If zoning regulations have changed, setbacks and coverage limits can become obsolete.
  • A GIS map is not a survey. A GIS map is a geographic information system paid for by a municipality. It is an aerial mapping. All measurements are approximate and it is not a survey. A survey is drawn to scale, has the property address and tax ID, and is signed and sealed by a licensed surveyor. Surveys also have references to older surveys and land records.
  • A good survey has an easily convertible scale such as 1″ to 20′ or 1’’ to 30’.
  • There are several types of agencies that impact land use in CT: Inland Wetlands & Watercourse Agency (IWWA), Conservation Commission, Planning and Zoning (P&Z), Coastal Area Management (CAM), Planning & Zoning Board of Appeals (PZBA), and the Health Department. There are 169 different sets of land use regulations in the state of CT.
  • Low Impact Developments (LID’s) treat storm water at the source rather than at the “end of the pipe” as an afterthought. LID’s minimize impervious areas that don’t allow for good drainage, disconnect impervious areas, infiltrate run-off, and conserve buffers and forested areas. Pervious driveways, such as Flexi-pave, and rain gardens are good ways for homeowners to help improve water drainage.

If you’d like to know more about land use and flood management in Fairfield County, go to www.frangione.net

Questions to Ask When Considering Small Commercial Space

When working on a small office or retail space deal, don’t forget to ask all of the right questions. These are just the basics. Click on the “commercial” post category for other considerations that can be overlooked at a great expense to an unrepresented tenant.

  • Do you understand the true space costs? Are you performing a true “apples to apples” analysis when comparing different properties? Do you fully understand the different lease types, such as Full Service, Gross, Semi-Gross, Net, Triple Net, etc.? Are you taking into account the Landlord’s interior finishes and materials, tenant Improvement (TI) contributions, useable vs. leasable space, and lease incentives?
  • What is the base rent on usable square footage? Many commercial leases have a base rent, that is, what you pay for the actual square footage of the space. But “loads” and “CAM” (Common Area Maintenance) fees may be added to this rate, increasing your monthly rent. List in the lease exactly what your CAM fees will cover and not cover, how often they are to be paid, and how much they can be increased each year. If you will be required to help with the cost of major renovations like parking lot repaving, or any type of structural repairs get it in writing. Have the landlord list when these repairs we last made and when they are scheduled or anticipated to be done in the future.  CAM fees might include security, advertising, permits, landscaping, snow removal and system repairs.
  • Are there any special taxes, property fees other fees? If so, get them in writing. Make sure each fee is identified individually, how much each fee will cost you, and how often you will have to pay the fee(s).
  • Who Pays for What? List specifically what is included in the lease and what is not included and who pays for each line item. Some costs that may or may not be included in the lease are utilities, property taxes, and maintenance such as cleaning, snow removal and lawn-care.
  • What public and private utilities can you use or access from your unit? Is the unit cable and telephone ready? If not, is it in an area where you can get these services and who are local providers? Will you set up your own utility accounts? Some landlords may pay your utilities and then bill you for them. Will the landlord be required to provide proof of what you really owe if you do not get billed directly from utility companies?
  • What is the length of the lease and the penalties involved in breaking it, such as losing your security deposit. How long will you need the space and how long will it meet your business needs?
  • Did you limit the personal guaranty? While Landlords typically want the Tenant to personally guaranty the entire lease, often we can negotiate a limit to the amount of the guaranty, in terms of dollar amount or the term of the guaranty
  • Is the space measured correctly? Did you verify the Landlord’s dimensions to make sure you are not paying rent on non-existing space?

Analyzing Real Estate Investments

These are common approaches to analyzing real estate investments. The second group of approaches takes into account TVM (Time Value of Money).

  • Sales Comparison Approach: Compares the subject property to similar properties recently sold, and calculates an average price per unit or square foot to determine value.
  • Gross Rent Multiplier: A rough estimate of value. Generally used by investors that repeatedly buy the same types of property. Take your Sale Price and divide by Monthly Potential Gross Rental Income. This method determines the value of a property based solely on potential rental income for the first year. Limitations: It reflects a one year snapshot in time. It only helps to compare properties that have very similar operating expenses and have similar occupancy/vacancy rates.
  • Direct Capitalization (Cap Rate): Take Net Operating Income (NOI) and divide by Sales Price. It is expressed as a percentage of the sales price offered, or a percentage of the price you are willing to pay. It accounts for operating expenses, gross rents, non rental income, vacancy and credit losses. Limitations: It is a one year snapshot. It does not account for the present versus the future value of the dollar (TVM, time value of money), nor does it account for owner financing, tax implications, property depreciation and appreciation.
  • Cash on Cash: Looks at cash invested up front (not borrowed dollars), as related to the first year cash flow before taxes. Divide Before Tax Cash Flow (NOI less debt service and reserves) by the amount of cash invested for your down payment. This method accounts for the impact of owner financing (investing with borrowed money).  It also accounts for operating expenses, gross rents, non rental income, vacancy and credit losses. Limitations: It is a one year snapshot. It does not account for TVM, nor does it take into account owner tax implications, or property depreciation and appreciation. When comparing properties in different areas, a property with a lower cash on cash return might be a better investment if the potential for appreciation is more predictable.
  • Demographic/Trends Analysis: Projects potential appreciation and potential obsolescence by closely examining economic indicators, building and demographic trends (profiles of current and future buyers). Property appreciation will be driven by overall demand and scarcity in the market and impacted by obsolete property or community features.  It is important to know how rare a property is in the market and how likely demand for this property is to increase or decrease due to competing existing properties and planned new construction. The Economic Trends Report is a valuable resource for this approach. This approach answers the question: Does this property have or can it have what buyers will be looking for in the future? Limitations: You must have reliable first-hand experience in a given market.

The following approaches take into account the time value of money (TVM) and the investor’s tax situation.

  • IRR or Internal Rate of Return: Measures the average annual yield (percentage earned) on each dollar for as long as it remains in the real estate investment (entire holding period). It uses the initial amount invested, projected after tax cash flows, and projected after tax sales proceeds. Limitations: Reflects the return as long as the dollars stay in the investment and does not take into account reinvested returns. It measures an average annual return over time, so across multiple years it may exaggerate the impact of a single year with a very high return. This method can’t account for negative cash flows in future years nor can it account for the initial investment being phased in over time. It also does not account for returned dollars being reinvested as they are returned. You must make assumptions about future sales proceeds.
  • Net Present Value of Discounted Cash Flows (NPV): Determines the dollar value of an initial investment by taking the sum of the present value of all future cash flows, netted against (or compared to) the initial cash investment. If NPV is high the investment exceeds investor expectations for a desired annual return. This approach uses after tax annual cash flow and after tax sales proceeds. Often used to compare different types of investments. Limitations: Does not account for money reinvested during a given holding period.
  • Capital Accumulation: Takes into account return of and on investment in the circumstance where money returned is reinvested during the property’s entire holding period. Allows investors to compare two or more investment alternatives in terms of accumulated dollars rather than rate of return. Accounts for dollars that remain in investment and those that are returned from the investment and reinvested. Limitations: You must make assumptions about the potential sales price, as well as the potential returns of competing investments over time.

Negotiating a Commercial Lease – Don’t forget to Negotiate Details and Incentives

Are the terms of the commercial lease negotiable? Negotiable terms include the base rent, free rent, security deposits, length of the lease, how much your rent and fees can be increased each year, lease renewal options, penalties, etc.

  • Ask about the possibility of sub-leasing part of the space if your business doesn’t do as well as you’d hoped.
  • What are the terms for rent increases? This can be negotiated for future years with options and rights of first refusal when your lease term is up.
  • What insurance coverage does the lease require?
  • Amenities – Ask the landlord if there are any amenities he can offer, such as special reserved or covered parking. Request a moving allowance or free rent for the first one or two months.
  • Is the security deposit necessary? Landlord asks for Security Deposit as standard procedure, but do they require one?
  • Is the hold-over penalty too high? Standard hold-over penalties in first draft lease agreements are typically far higher than necessary.
  • Are you getting enough landlord incentives relative to other deals in the market? Are you getting accurate, current market data to insure you don’t pay too high a rental rate in relation to incentives?
  • Are you maximizing benefits like free rent before and after lease commencement, discounted rent for various time periods, Landlord contributions to tenant’s build-out costs, landlord improvements to the space, limits on future rent increases, etc.?

Experience tells us a Landlord’s “flexibility” changes constantly depending upon current occupancy rates in both their building and the competition, lease length, tenant’s use, parking requirements, financial strength of tenant, etc. Negotiations are especially important with lease renewals, since Landlords are most competitive at inception, when the space was vacant.

Did you obtain outside incentives? Did you check into economic incentives from local government? (tax rebates, relocation assistance, payroll subsidies during employee training, infrastructure improvements and others) Many times the statutory incentives can be negotiated up very substantially and an inexperienced company may not receive millions of dollars that they could have gained through such incentives.

 

Net Operating Income, Cash Flow and Taxable Income Calculations

Just posting a quick refresher for new and occasional investors:

Net Operating Income (NOI): Rental Income (less vacancy) – Insurance, Taxes and Maintenance

Cash Flow:  NOI – Debt Service (Mortgage payments including Interest) and Rental Commissions

Taxable Income: NOI – Interest – Depreciation (Cost Recovery) – Amortized Points and Cap Expenses – Rental Commissions

Please note that your cost to invest and equity do not impact your NOI calculations and your Cap Rate. Your cost to invest will impact your cash flow and your taxable income.

These are general guidelines. For more details and analysis, call Patricia Rattray at 203-570-2096.

 

Your Small Commercial Lease and Possible Restrictions and Limitations

  • Service and Vendor Limitations: Does the industrial park require you to use specific vendors, service providers or contractors for signs, lighting, renovations, build-outs, or any other services such as cleaning, alarm, cable, etc?
  • Signage and Appearance Limitations: Do restrictions exist that could affect your business such as all signs must be in black or blue, no larger than a certain size, or in an exact location?
  • Parking and Traffic Limitations: Are there any limitations on the number of parking spaces you and your customers can use? Are there restrictions on other tenants? Do or can you have reserved parking? Is there adequate handicapped parking?
  • Business Hours: Will there be restrictions on business hours or days of the week where you can operate your business or receive visitors and customers?
  • Nature of Business Protection and Restrictions: Will there be any restrictions on the nature of business you operate? Are there any restrictions on what you can sell, or, if you sell an item, will the landlord allow other similar, competing businesses to open while you are a tenant? Get it in writing that competing businesses or those with competing products are not allowed.
  • Other Tenants: What types of businesses do they run elsewhere in the complex? Are their business philosophies and values similar to yours? If your business practices are not a good fit, that could be a problem.
  • Zoning: Did you check to make sure zoning is correct? Don’t assume the zoning is suitable for your use. Different cities might have different zoning for the same types of businesses, specifically for research, industrial and medical companies.

Commercial Lease Basics

When working on a small office or retail space deal, don’t forget to ask all of the right questions. These are just the basics. Future posts will have other considerations that can be overlooked at a great expense to an unrepresented tenant.

  • Do you understand the true space costs? Are you performing a true “apples to apples” analysis when comparing different properties? Do you fully understand the different lease types, such as Full Service, Gross, Semi-Gross, Net, Triple Net, etc.? Are you taking into account the Landlord’s interior finishes and materials, tenant Improvement (TI) contributions, useable vs. leasable space, and lease incentives?
  • What is the base rent on usable square footage? Many commercial leases have a base rent, that is, what you pay for the actual square footage of the space. But “loads” and “CAM” (Common Area Maintenance) fees may be added to this rate, increasing your monthly rent. List in the lease exactly what your CAM fees will cover and not cover, how often they are to be paid, and how much they can be increased each year. If you will be required to help with the cost of major renovations like parking lot repaving, or any type of structural repairs get it in writing. Have the landlord list when these repairs we last made and when they are scheduled or anticipated to be done in the future.  CAM fees might include security, advertising, permits, landscaping, snow removal and system repairs.
  • Are there any special taxes, property fees other fees? If so, get them in writing. Make sure each fee is identified individually, how much each fee will cost you, and how often you will have to pay the fee(s).
  • Who Pays for What? List specifically what is included in the lease and what is not included and who pays for each line item. Some costs that may or may not be included in the lease are utilities, property taxes, and maintenance such as cleaning, snow removal and lawn-care.
  • What public and private utilities can you use or access from your unit? Is the unit cable and telephone ready? If not, is it in an area where you can get these services and who are local providers? Will you set up your own utility accounts? Some landlords may pay your utilities and then bill you for them. Will the landlord be required to provide proof of what you really owe if you do not get billed directly from utility companies?
  • What is the length of the lease and the penalties involved in breaking it, such as losing your security deposit. How long will you need the space and how long will it meet your business needs?
  • Did you limit the personal guaranty? While Landlords typically want the Tenant to personally guaranty the entire lease, often we can negotiate a limit to the amount of the guaranty, in terms of dollar amount or the term of the guaranty
  • Is the space measured correctly? Did you verify the Landlord’s dimensions to make sure you are not paying rent on non-existing space?