Analyzing Real Estate

by Clifford A. Hockley

Investing in real estate is a tricky business, and like the stock market, every investment will not be a great one. As a matter of fact, what makes a great real estate investment is keyed as much to timing and interest rates as it is to the true operating costs of a property.


I will grant you that every marketplace is different, and market conditions may force you into overpaying for a property you really want, but if return on investment is what you want, you cannot afford to overpay for real estate investments if you expect to retire on the income. Sure, there is a lot to be said for leverage and appreciation, but at the end of the day the cash flow is what counts.

So how does an investor assure himself that s/he is making the right decision and assembling an income and expense statement that is accurate?

1. Examine many similar properties at the same time.
It is helpful to examine similar pro formas at the same time. You will see what one owner or broker may include, and what another may leave out. Look at the market to see how long it is taking to find a new tenant. Talk to other real estate brokers, lenders and property managers in the market to establish a baseline.

2. Review operating numbers for the past three years.
Most financial analysis reports will exclude capital expenses. Bear in mind that you must reserve for capital expenses. The roof will leak, the HVAC will fail, and the main water line will break. I guarantee things will happen that you do not expect. Prepare financially for potential problems. Remember that real estate is an asset that wears out: doors need to be painted, carpets replaced, new faucets installed, etc. By reviewing three years of income and expenses, you will have a much better idea of vacancy rates as well as real expenses.

3. Obtain comparable rent income numbers.
Drive around the neighborhoods where your potential property is located. Call the brokers and the managers to find out what the rents are. Are there any concessions being given to rental units or lease space? Use this information to verify the figures you received for the property you wish to buy.

4. Examine the vacancy rate in the market place.
Each market and specific type of real estate investment has a vacancy rate. Some locations are better than others, and will perpetually have a higher occupancy rate. Look for concessions that have been offered. How will they affect your cash flow when you own the property? Why is your property full? Did the seller hastily rent to tenants from emergency aid shelters (yes, this has happened in weak markets). Banks will not loan on buildings with more than a 5% vacancy rate. They will, however, offer construction loans if you are renovating the building. This may give you some time to find tenants to fill a building, otherwise you will be forced to guarantee the rents, which means your hard-earned cash will not be at work making more money for you.

5. Talk to an appraiser regarding common incomes and expenses in the marketplace.
This seems like common sense, but no one seems to do it. The agent representing you is motivated to close a transaction. They may not be experienced, or may not provide all of the information you need. You need accurate information to make an informed decision.

6. Review the BOMA and IREM expense analysis books for the marketplace.
These books are updated every year and can give you an in depth look at how properties are operating.

7. Ask for schedule "E" tax return information for the property.
Many sellers will refuse to supply the schedule, but in my mind, the proof is in the pudding.
In my conservative opinion, cash flow is what the investor seeks. If your property has an 8% -10% positive cash flow after all of the adjustments discussed above, it should make sense. Many buyers also use CAP rates as an indicator of value; I find it to be a lagging indicator if you compare your property to others in the marketplace. Just because other investors are buying a 4% CAP property, does not mean you should. Maybe the market is overheated, perhaps there is more demand than supply, maybe you should look in a market with 8% - 11% CAP rates, or perhaps low interest rates give you the opportunity to buy something with a low CAP rate and still make money.

You should look at comparison indicators as you pursue your investment strategy:
CAP rate, cash-on-cash return, debt coverage ratios, price per unit (or price per square foot for comparable properties in the same marketplace), percentage of expenses (are they inline or understated). Don't forget to look at the financing and due diligence costs as part of your transaction.

All this analysis may mean that you will make lower offers than another investor. It may mean that you will not be willing to pay as much as a seller wants.
On the other hand, do you want to buy a property that will not appraise, or worse yet, not have a positive cash flow? I do not think so.

Live Theater & Shopping

excerpt from Shopping Centers Today

Federal Realty Investment Trust’s Village at Shirlington, in Arlington, Va., gained a dramatic anchor last month — literally. The locally based Signature Theatre production company moved from its space in an industrial garage to a 48,000-square-foot playhouse at the center. The Village is an outdoor, Main Street-style shopping center last renovated in 1989 and made up largely of restaurants and cafés. Tenants include Capital City Brewing Company, Caribou Coffee and Johnny Rockets. Shoppers can have dinner and then see a show, and Sam Sweet, managing director of Signature, says this has worked out very well. “We’ve promoted it as a total entertainment experience,” he said. “Instead of having to find parking and run across the street, people can park in the free garage, walk into Shirlington, perhaps have dinner and see a show.”


The playhouse is in a four-floor complex, with the first floor occupied by the Arlington County Library. The mostly musical repertoire includes Stephen Sondheim’s Into the Woods, which has been a big success, according to Sweet. Walls of glass in the lobby allow patrons to sit at the bar and look out onto the shopping crowd. With the mixture of retail and theater entertainment, Sweet says, traffic has increased, with more visitors walking in for ticket purchases.

Municipalities Adopting TOD Policy

By Amy Gardner and Bill Turque
Washington Post,March 13, 2007

Fairfax County embraced a new policy yesterday encouraging dense, pedestrian-friendly development near current and future transit stations, continuing the transformation of car-friendly suburban neighborhoods.

The policy, approved unanimously by the county Board of Supervisors, will promote "compact" development with a mix of housing, office space and retail stores within a half-mile of rail stations. The most intensive development would lie within a quarter-mile of stations. Fairfax is home to 10 transit stations, five for Metro and five for Virginia Railway Express.

The point, supervisors and the new policy say, is to create communities that encourage walking, biking and transit use to reduce sprawl and automobile travel.

Another purpose is to create a clear definition of so-called transit-oriented development -- a term that means different things to different people.

Last June, for example, the county approved MetroWest, a development of 2,250 homes as well as office and retail space at the Vienna Metro station, over the objections of residents who said the proposal lacked the mix of uses and neighborhood input needed for successful transit-oriented development. Previously, the county blocked a nearby neighborhood from selling to a developer who planned to build a high-rise project, on the grounds that the community was too far from the Metro station to qualify for the label.

Transit Oriented Development: Defined

Transit Oriented Development (TOD) refers to residential and Commercial Centers designed to maximize access by Transit and Nonmotorized transportation, and with other features to Encourage Transit Ridership. A TOD neighborhood has a center with a rail or bus station, surrounded by relatively high-density development, with progressively lower-density spreading outwards. For example, the neighborhood center may have a transit station and a few multi-story commercial and residential buildings surrounded by several blocks of townhouses and small-lot single-family residential, and larger-lot single-family housing farther away. TOD neighborhoods typically have a diameter of one-quarter to one-half mile (stations spaced half to 1 mile apart), which represents pedestrian scale distances. It includes these design features (Morris, 1996):

• The neighborhood is designed for Cycling and Walking, with adequate facilities and attractive street conditions.


• Streets have good Connectivity and Traffic Calming features to control vehicle traffic speeds.


• Mixed-use development that includes shops, schools and other public services, and a variety of housing types and prices, within each neighborhood.


• Parking Management to reduce the amount of land devoted to parking compared with conventional development, and to take advantage of the parking cost savings associated with reduced automobile use.

Transit Oriented Development generally requires at least 6 residential units per acre in residential areas and 25 employees per acre in Commercial Centers, and about twice that for premium quality transit, such as rail service (Pushkarev and Zupan, 1977; Ewing, 1999; Robert Cervero, et al, 2004). These densities create adequate transit ridership to justify frequent service, and help create active street life and commercial activities, such as grocery stores and coffee shops, within convenient walking distance of homes and worksites. However, other factors are also important beside simple density. Transit ridership is also affected by factors such as employment density and Clustering, demographic mix (students, seniors and lower-income people tend to be heavy transit users), transit pricing and rider subsidies, Parking Pricing and Road Tolls, the quality of transit service, the effectiveness of transit Marketing, walkability, and street design. A particular density may be inadequate to support transit service by itself, but becomes adequate if implemented with a variety of Transit Encouragement and Smart Growth strategies. The assumption that transit cannot be effective except in large cities with high population densities can be a self-fulfilling prophecy, because it results in transport and land use decisions that favor automobile travel over transit.

Reclaiming Suburbia

Excerpts from "Breaking the Density Deadlock" by ALAN EHRENHALT

Tysons Corner isn’t much to look at. I don’t mean simply that it’s unattractive — although it is — but that when you pass through it, along the main commercial strip of Route 7, in Northern Virginia’s Fairfax County, you don’t even get the feeling that anything substantial is there. You see a long, loose string of office buildings built in the 1970s and ’80s, scattered over a stretch of two or three miles, few of them close together or in any way congruent with each other. You pass two huge regional shopping malls, both tucked behind vast parking lots and barely visible from the highway. You don’t know for sure when you’ve reached the place, and there’s no way to tell when you’ve left.

If you work in local government anywhere, the odds are you have heard the joke that there are two things Americans can’t stand: sprawl and density. I refer to it as a joke, but in fact it comes close to being a literal truth. Millions of Americans who live in places like Fairfax County visit places such as Boston and San Francisco and wish they could recreate some of that urbanity and elegance for themselves. But faced with the reality of what true urban sophistication requires — height, big crowds, and strangers from the city flocking in on trains, they back off. That’s the deadlock of density.

The developer of this project, the Macerich Co. of California, is pressing all the right New Urbanist buttons. Its computerized graphics envision spacious plazas, sculpture gardens, skating rinks and performance space. Macerich talks about making the Intersection of Routes 7 and 123 into a new “Central Park,” a “100 percent downtown corner.”

Most intriguing of all, Macerich is promising to take the blank acres of asphalt that dominate Tysons now and superimpose a grid that would provide 54 additional pedestrian-friendly streets for traffic to move in, generate a huge increase in sidewalk capacity, provide up to 14,000 curbside parking spaces, and in the end create something that doesn’t just possess the density of a city but actually looks like a city.

My guess is that when all of this development is completed, 10 or 15 years from now, I do not expect that Tysons Corner will much resemble the green pedestrian oasis pictured in the computerized Macerich sketches. But I think it will be quite a bit better than what is there now. I also think it will be a commercial success.

I’m convinced of that because I see all around me a generation of young, mainstream, middle-class adults — label them any way you want to — who are looking for some form of mid-level urban experience, not bohemian inner-city adventure but definitely not cul-de-sacs and long commutes. There are more of them coming into the residential market every year. They like the idea of having some space, but they aren’t fleeing in terror at the mention of density. They aren’t willing to sell their cars, but they appreciate the advantage of having another way to get around. If Tysons Corner is rebuilt on a reasonable human scale and with a modicum of physical appeal, they will go for it, imperfect as it may be.

And then we will begin to see experiments of this sort in suburbs all over the country, launched by developers and local governments that may still be a little nervous about density but will know one thing for sure: If Tysons Corner can be reborn, nothing in the suburbs is beyond hope.If the effort to rebuild Tysons Corner somehow succeeds, it will become a national model for reclaiming suburbia.

Urban Redevelopment Do’s & Don’ts

By Michael S. Weiner

The last 50 years of real estate development have often been innovative, but also, in many cases, downright dreadful in the approach to redeveloping downtown areas. Today, city fathers struggle with breaking from the past trends of urban sprawl and walled communities to redevelop urban areas that will increase downtown real estate values, attract businesses and residents, and enhance cultural and civic activities.

The success or failure of these endeavors will have lasting economic impact on those cities in competition to become regional destinations, capturing discretionary spending or seeking to exponentially increase their current tax base. Failure to create an economically sound downtown can ruin a city. Finding the right formula can catapult a city into the national limelight, creating a trickle down effect that results in higher-priced real estate, a strong retail and business environment, and a reputation that draws people to the area.

Do enter a third generation of thought. Before World War II, neighborhoods in urban areas seemed to evolve organically. Many times neighborhoods were organized along ethnic lines. This was immediately followed by the era of urban sprawl, massive malls, and the introduction of walled communities. At that time, there was an aversion to urban areas and people were fleeing to the perceived safety of the suburbs.

Don’t think this is suburbia. Many cities cannot resist the temptation to create suburban centers in urban pockets. Large areas are leveled to create a contrived center that is nothing more than an outdoor mall. The problem with this strategy is that cities are not capitalizing on the already existing local flavor, history, and charm to create vibrant, dynamic areas to which crowds will flock. They tend to have a “walled-in” feeling, one that excludes the urban environment rather than invites.

Do encourage jaywalking. Though this may sound a bit unusual, urban areas actually lend themselves to this type of civil disobedience, given the greater pedestrian density in vital urban areas. Consequently, it’s important to have no more than two lanes of road traffic, and to discourage car speeds of more than 30 mph through the use of traffic circles, speed bumps, and stop signs. Parallel parking also slows everyone down.

Don’t fall for the fallacy of mixed use. Too many developers cling to a belief that an apartment building with a few thousand square feet of retail thrown in on the ground floor constitutes “mixed use.” This is usually a formula for disaster simply because the limited number of tenants cannot support these small retailers. These small mixed-use projects have limited parking and residents tend to get angered by others using their space. These projects are clearly not a new urban environment and usually fail. A watchword for redevelopment should be “sustainability,” retail survives only with enough households conveniently located using its services and buying its goods.

Do capitalize on history. Successful downtown redevelopments reflect their cities’ history and personality. They build on their roots and successfully market their new “old” images. As a result, people know what they’re getting when they decide to live, dine or visit. It’s that “branding” thing that advertising firms love so much.

The world is sprinkled with examples of locations that have become attractions based on the authenticity of their culture. Pamplona has the running of the bulls. Sedona, AZ has capitalized on its rock formations and Indian art. Aspen, CO carved an initial reputation on its classical music festival. People flock to different neighborhoods of New York City for different experiences--to Tribeca, Chelsea, Greenwich Village, the Upper East Side, and Central Park West, to name just a few. But these experiences did not just happen; they evolved, becoming unique to their districts and locales.
There’s no question that the concept of New Urbanism will continue. It is up to the real estate community to create the proper, and profitable, destinations.

The BOHO Philosophy

BOHO Developments seek to offer a compelling alternative for those who are dissatisfied with the choices provided by conventional development. Conventional development emphasizes the private realm, auto dependency, single use pods, privacy, exclusivity, and bigger and bigger private residences. BOHO Developments emphasize the public realm, walkability, mixed uses, community, diversity, and quality over quantity.

A Walkable Community
BOHO Developments pragmatically accommodates cars, but are be designed for people. They are to be very walkable. Cars travel slowly, and sidewalk and street designs emphasize pedestrian comfort and safety. There are plenty of interesting things to walk to, because of the fine-grained mix of uses. Walks won’t be too long, because the development is relatively compact. And the walks are safe, because there are plenty of eyes on the street at all times.

Environmental Considerations
BOHO Developments site plan, as well as construction and management procedures, emphasize resource efficiency, environmental protection and restoration. Developments incorporate elements of nature in the neighborhood and make them part of people’s daily experience. Street trees are especially important.

A Place for Commerce
The commercial center of a BOHO Development have retail stores that serve the practical everyday needs of the BOHO Development residents and its surrounding neighborhoods – needs that are currently not well served. And because of its unique character, rare good urbanism, and easy access, they also attract businesses that are a destination for citizens of the entire metro areas and beyond.

A Place to Live
The residential elements of A BOHO center cover the entire spectrum from small loft apartments above shops to larger live/work condominiums. Developments aspire to keep the scale of individual buildings rather small, which will enhance the ability to have an attractive mix of housing types throughout the neighborhood.

A Place to Work
BOHO Developments feature a traditional fine-grained mix of different residential types as well as retail stores, office space, civic buildings, people-friendly streets, squares, and recreational facilities. Live-workloftsandtraditionaloffices are pivitol the neighborhood, as the daytime occupants and visitors they draw to the neighborhood will be very helpful in maintaining a vibrant, active, daytime environment.

A Place to Gather
BOHO Developments incorporate civic gathering places, which include public green spaces, pedestrian-oriented streets, recreational facilities, shops and restaurants. These civic places reinforce a sense of neighborhood and help provide the glue that holds the people of the community together.

Importance of Independents

by David Grogan



Over the past few years, a number of economic studies -- including two conducted by Civic Economics, a leader in the field of progressive economic development -- have consistently calculated that locally owned businesses contribute more than three times as much economic value to a community than do chain retailers. So when the San Francisco Locally Owned Merchants Alliance (SFLOMA) asked Civic Economics to conduct a similar economic study of San Francisco, the firm's partners told SFLOMA that they weren't interested.


They wanted to do something more.


Matt Cunningham, who founded Civic Economics with business partner Dan Houston, told BTW, "We wanted to advance the research. We thought it would be interesting to see something else out there."


The new economic study, which got underway about three weeks ago, will analyze a number of factors.


First, the study will seek to determine locally owned merchants' total market share in San Francisco. Second, incorporating data from Civic Economics' previous studies, "Economic Impact Analysis -- A Case Study: Local Merchants vs. Chain Retailers" and "The Andersonville Study of Retail Economics," the new report will analyze the impact of an "x-percent" increase in local shopping and then determine what exactly happens to the extra money going back to the community.


"We don't think [a study like this] has been done," Cunningham said.


Significantly, a large portion of the money that was raised to fund the study is from the bookselling community, said Hut Landon, executive director for the Northern California Independent Booksellers Association (NCIBA) and SFLOMA's project coordinator for the study. In addition to NCIBA, among the study's other supporters are the American Booksellers Association, the Great Lake Booksellers Association, the New Atlantic Independent Booksellers Association, the Pacific Northwest Booksellers Association, the Mountains & Plains Independent Booksellers Association, and individual booksellers.


"We think this study will be great for locally owned merchants. It will give us some talking points with consumers," Landon said. Noting that past research indicates that consumers who buy an average of 10 books per year buy only four of those books from their local bookstores, he added, "This will give them some other reasons to shop at their local independent bookstore. If they shift their spending habits ... look at what happens to the local economy. This report will quantify that."


In addition, since there are few municipalities that are not seeking additional revenue, independent retailers around the country will be able to take this study to their local lawmakers to show them one simple solution to their monetary woes -- supporting locally owned businesses, Landon said.


Similar to the Austin and Andersonville reports, the San Francisco economic study, which as yet does not have a projected release date, will be relevant to all communities. "This study can be used by everybody," Landon said. "We are happy to share this information."

BOHO Centers Design Charrette

What is a BOHO Design Charrette?

Based on the pricipals of New Urbanist Design Charrette, it is

• An open process that includes all interested parties
• A collaborative process involving all disciplines
• A process that produces a feasible plan.

The Charrette combines this creative, intense work session with public workshops and open houses. Its an intense collaborative planning process that harnesses the talents and energies of all interested parties. We bring it a team of professionals experienced in the Town Planning disciple to create and support a feasible plan that represents transformative community change.

The workflow of the Charrette involves a series of design sessions and public input cycles for multiple, consecutive days. All interested parties are invited at scheduled intervals: the city planner, fire department, public works, planning and zoning, council members, and local business owners. Stakeholders in the community become aware of the complexities of development and design issues, and everyone works together to arrive at the best possible solution. They are also welcome to visit the Charrette Studio site throughout the Charrette during open hours. In this way, it does not consume large blocks of time for residents or officials. This input is used to refine the alternatives and create more detailed plans that are again reviewed and critiqued by the public during an open house. The design team further refines and narrows the feedback into a final plan and set of implementation documents to be presented for public confirmation on the final night of the Charrette.

Benefits of a Charrette:
Conventional approaches to the public approval process are failing. Even high quality architectural and planning projects with demonstrable public benefit may lose support without a collaborative approach. The public design Charrette has emerged as an alternative to the "design and present" convention. Charrettes provide a framework for creating a shared vision with community involvement, directed by consultants representing all key disciplines.

It is important to note that the project is not complete when the Charrette is over. Plan refinement and further feedback occur through discussions and a follow-up meeting approximately a month after the Charrette. This allows everyone to check in on the refined Charrette plan and to allow for one final review and comment.

What are BOHO Centers?

Briefly,

BOHO Centers are the natural evolution in the high density retail-based mixed use development model that is emerging onto the real estate scene. Imagine if you took one of the popular faux "Mayberry" Lifestyle Centers, stripped away the faux-ness, reduced it to the scale of a small Parisian block or five and built a completely sustainable development that respects as well as enhances its surrounding environment to create a Sense of Place.

Add to the mix some affordable housing lofts for the creative class and workforce, a couple town home lofts for empty nesters... throw in professional services space, unique virtual office spaces, and balance the standard retail chain stores with emerging and authentic shops such as independent bookstores, emerging retail brands, art galleries, grocery store, bodegas, cafe's...

Then you have a BOHO Center