Philip Blumberg on Buying Office Buildings
CEO of American Ventures Discusses Commercial Real Estate Acquisition
(PRWEB) June 26, 2007 -- Investing in office buildings can be highly profitable, but the process is fraught with pitfalls and vulnerability. As professionals know, most of these hazards can be identified and addressed prior to buying the building. But, with non-traditional buyers coming into the commercial real estate market recently, Philip Blumberg put together a 5 step rule-of-thumb based on two decades-plus of commercial real estate deals as a guide for them:
1. Inspect and Survey. An attractive building is always a positive, but don't be fooled by aesthetics. Do an inspection of the underlying mechanical, electrical and safety systems to determine their remaining life and whether they meet current codes.
2. Financing. Financing markets are shifting rapidly, so evaluate all options. Aim for as much flexibility in your financing as you can to take into account changing real estate markets. For example, tenantleases: If a large percentage of the building's leases expire in a given year, don't allow your financing to terminate in that same year. If real estate markets are not robust and you suffer significant vacancies in the building, you may find financing is not available to pay off the existing loan.
3. Financial Projections. Often, financial projections fail to take into account post sale adjustments. One example is property taxes - in many jurisdictions the sale itself triggers a new tax assessment, which often raises taxes higher than they were prior to the sale. Have your financial advisor run the numbers based on the likely higher property tax rate, not the pre-sale rate.
4. Insurance. In today's world, particularly in the southeastern United States, obtaining insurance is difficult at best. Prior to committing to buying a building, be very careful to determine insurance availability, cost and exact coverage limitations. Read the fine print. Better, have your lawyer do it.
5. Tenants. Large tenants can be an advantage for their stabilizing influence, but they can also be a disadvantage. In a down market, a large tenant poses an enormous liability. Under the threat of a non-renewing, an owner is vulnerable to either a large vacancy or to acquiescing to demands for lower rent or for improved lease terms. Buildings with small tenants sometimes have more operational headaches, but no single tenant can force an owner into a lease that is damaging to the financial feasibility of the building.
Of course, there's more to it than this -- and you'll need to work closely with surveyors, structural engineers, lawyers, lenders and insurance experts. The 5 rules above are a good organizing principle for investing in commercial real estate.
This article is the latest in a series authored by Philip Blumberg, Chairman & CEO of Coral Gables, Fla.-based American Ventures. The next article will be a detailed look at the top five points for sizing up a REIT.
About Philip F. Blumberg
Philip Blumberg is Founder, CEO and chairman of the American Ventures group of companies, which operates real estate investment funds for corporate pensions, foundations, banks and other institutional investors. His professional memberships include the Urban Land Institute, the National Council of Real Estate Investment Fiduciaries, the National Association of Industrial and Office Properties, the Pension Real Estate Association, the Institute of Real Estate Management and the Builders & Owners Management Association.
Philip Blumberg holds and has held many civic and not-for-profit positions including serving on the Board of Governors and Board of Directors of the Florida Chamber of Commerce, on the Board of Directors of the Beacon Council and the Florida Council of 100, Vice Chairman of the Board of Directors of the Greater Miami Foreign Trade Zone, Chairman of the Greater Miami Chamber of Commerce 2000-2001, member of the Westshore Alliance, the Tampa Bay Partnership, the Miami Business Forum, the boards of Miami Dade Community College Foundation, the Community Partnership for Homeless, WAGES, the Orange Bowl Committee, the University of Miami Board of Trustees, the chairmanship of the City of Miami's Botanical Gardens Selection Committee, co-Chairmanship of the Olympic Soccer Organization Committee of South Florida, and membership of Miami's Blue Ribbon Task Force on City Administration.
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