Market Trends and Volatility on Real Estate Values

Assessing market cycles and risk is a necessary component of any investment strategy. Whether in a positive or negative cycle, there are opportunities in real estate beyond the “buy low; sell high” saying, depending upon long-term goals. However, it is much easier to assess previous trends. It is difficult to predict the future; otherwise, everyone would have predicted the market crash of 2008. To measure performance, we should look at how real estate compares to historical and emerging data, as well as other securities to mitigate risk.

Historical Data

Historical data includes sales information, vacancy rates, and interest rates. Sales data is widely used by the appraisal methods as it gives an indication of where property values have been. The downside is that sales comparables are often lagging and may not keep up with immediate corrections in the marketplace. Vacancy rates can tell us whether there is an surplus of spaces.

A great example is provided by Harvard Market Cycle Quadrants using vacancy and construction to show phases of the market cycle. If an increase in vacancy in a specific market is starting to occur, we may consider this phase to be an indication of an impending downward trend. Often new construction falls behind market phases. Once the market is in an expansion phase, companies look to new construction to capitalize on investment momentum. However, construction often takes time including design, permits and production. By the time the new product hits the market, there could already be a change in the cycle or even cause a change by increasing available units.

 

Another trend to look at is interest rates. When the Federal Open Market Committee raises rates, it affects the housing economy as well as investment properties. Generally as interest rates rise, a negative impact on residential properties will occur. Monthly payments increase and thereby affect affordability. As expected appreciation decreases, the desire to own may also decrease. And of course, interest rates affect investment yields. As the cost of borrowing increases, expected rates of returns must also increase. Recently, we have seen interest rates already increase with anticipated additional rate hikes throughout the year.

Securities

The risk of investing in real estate also must also be compared with returns on other security investments such as bonds, stocks, and treasury bills. Recently, the rates on treasury bills have increased, making those more appealing to more risk adverse investors. T-bill rates impact real estate income yields as investors then expect higher returns when compared to the benchmark of a riskless investment.

REITs are an alternative source of offsetting risk by investing in portfolio holdings and different asset types. Many of our clients are REITs and have positioned their success on the ability to purchase our value-add retail listings thereby increasing yield.

What is the future real estate outlook?

Using some of these indicators we make more informed predictions about the future of expected returns. While purchasing real estate always entails some risk, it also comes with reward. From at least 1985-2009, real estate investments exceeded the rate of inflation and produced investment returns. Increasing returns is also a hedge against concerns about inflation. While uncertainty in the market can be a factor affecting values, knowing how to analyze the trends can help offset volatility.

Our team is uniquely qualified to walk investors through multiple retail assets from single tenant, multi-tenant, to grocery anchored power centers and properly position dispositions ahead of the market curve.

Assessing the Risk of Commercial Cannabis and Real Estate

2018 brought about the legalization of recreational cannabis to California, providing a wealth of opportunities. Many of these opportunities, however, translate to risk. This new industry, in its wild west phase, has created a wave of disruption and is even effecting today’s commercial real estate landscape. Join us as we discuss title, debt, appraisals,leasing and how the cannabis industry could potentially influence a purchase or sale transaction.

There will undoubtedly be a real estate boom fueled by the cannabis industry, and transaction services will either be built around the industry, or existing companies will need to find a way to meet the demand. Properties have already hit the CA market and there are very limited services available for those trying to find their own point of entry into the cannabis industry.

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Disneyland Retail: a Case Study for Driving Value

Although not a standard street in the typical sense, Main Street U.S.A Disneyland is destination shopping at its finest: classic retail storefronts, a delicious candy store filled with fudge, toffee and caramel apples shaped as Mickey Mouse, an old movie theater playing “Steamboat Willie,” and even a French-style cafe where you can rest your tired feet with a cup of coffee. It’s no surprise that Disneyland is supposed to be the most magical place on earth, so why wouldn’t it resemble the most magical of Main Streets?

As I watched snow fall from the sky (ok fake snow) in front of Sleeping Beauty’s Castle, biting into my caramel apple, my inner real estate curiosity got the best of me and just in time for the holidays – I started to think if Main Street was a real street with non-Disney owned real shops, how sustainable would it be in a retail market? And how would it be valued?

Comparable Market Rents

From a financial perspective, we can compare Disneyland’s Main Street to many high-street retail environments, especially being located in Southern California. Main Street in Santa Monica is a beautiful water adjacent community with a collection of eclectic shops, bars, cafes, and restaurants. You’ll come across Urth Cafe, Coffee Bean, and local favorites like The Victorian and O’Briens. Rents on the street also seem just right for this wealthy area with prime asking rents over $5.00 per square foot/per month plus NNN expenses for just a small stretch of about a mile. And you won’t forget the very first Starbucks in California opened right there.

Downtown Ventura evokes old historic California charm with predominately local “mom and pop” shops and eateries. Strolling along you will come across locals grabbing a cup of coffee at Palermo or a late-night brew at Rookees Sports Bar. Although it certainly has its fill of national brands, rents around $2.00 per square foot/per month plus NNN expenses keep this ocean town balanced between up-ward rents and small-town charm.

That Destination Feeling

With people traveling to visit from all over the world, Disneyland creates a feeling of wanting to spend more money. In our recent article regarding the state of the Retail Industry, shopping centers and retail are taking note creating a “resort-type experience.” For instance, Westfield has recently created projects in the Woodland Hills/Warner Center area including The Village and the proposed $1B development at the Promenade. Retail is moving away from the old indoor mall concept. Rather, Westfield and other developers are investing in the consumer experience. Now, it is more common to find open-air concepts with beautiful landscaping, sculptures and art, music, DJ events, children play-areas, wine and beer tastings, and more to keep customers staying longer.

Millennials are contributing to the growing demand for experience-driven-retail. Our shopping center advisers’ resident millennial expert Marisa explains she will, “choose to spend $20 towards trying a new restaurant over buying a new top” in our recent article Boomers and Millennials. Retail is evolving to capture the new generation of customers. Disneyland is also evolving by creating new attractions for Star Wars and Marvel, to meet with new demands. Such new experiences will attract more visitors and more customers.

Property Positioning

Based on the above characteristics, our team would position the property to owners who look for highly sought-after trophy and core assets. Our unique Property Positing Matrix [see below] showcases assets across four quadrants. We could safely assume that Disneyland’s Main Street would fall along the bottom quadrants focused on buyers who enjoy long-term stability and strong trade areas rather than high-yield opportunities. And based on our transaction history of achieving historical low cap rates for many of our clients, our goals would be the same for such a property.

 

Ultimately, Disneyland’s main street retail would fit just nicely in today’s retail environment. The only downside is Disneyland does not serve alcohol (except for an exclusive members-only club); that means there are no local pubs to help foster sales. At least the $6.00 candy apples and $5.00 lattes are perfect for prime locations.

 

The Value of a Tenant During a Sale

Receiving an offer or pending renewal can seem exciting for any owner. However, when it comes to selling the shopping center, not all deals are created equal. In fact, it can affect the valuation process. For an owner, a vacancy can be a negative on the one-hand, and a value-add opportunity for a buyer on the other-hand: owners and buyers may have different visions and goals. Through our expertise in navigating such situations, our Shopping Center Advisers’ team provides solutions to our clients.

During the marketing and due diligence process, our team develops a strategy to position the property to various buyers. We offer a comprehensive national platform specializing in the disposition of multi-tenant and grocery-anchored shopping centers. As such, we understand the ins-and-outs of shopping centers including how to handle vacancies and pending leases during the underwriting and valuation stages. Then we craft a three-step marketing approach based on the valuation and ideal buyer pools to best position the property for a sale. Additionally, we understand that a shopping center is fluid and may undergo changes during this process. Before signing on the dotted line, however, it is important to understand the value of the lease and its effect on the center.

Lease Terms

An institutional owner may like long-term leases, for instance, or be willing to provide Tenant Improvement (TI) allowances in exchange for higher per square foot rents. Another owner may prefer shorter-term leases or provide free rent instead of TIs. When a vacancy is positioned to prospective buyers, we can leave it up to them to create a vision for the space and center with the idea of negotiating their own deal. We don’t want to rain on the leasing professional parades either. Rather, in our article How Leasing Agents Can Create Value in the Sales Process, we describe how teaming-up with leasing experts can “drive value to the overall transaction.” It becomes a win-win for all parties involved.

Fair Market Rent

During the sale phase, tenants may be entering into their option notification period and desire to negotiate the Fair Market Rent. Prospective buyers are underwriting to specific market rents as part of their valuation and offer. If negotiations begin to take place this could impact a buyer’s future negotiation power and ultimately, their sales price. Part of our team’s diligence is to review the lease terms before going to market. We’ll be able to spot potentially overlooked items and advise accordingly.

Team Management

We can often be an extension of your management team. Many clients have different departments for leasing, asset management, and dispositions. While the leasing team is off and running trying to get spaces leased, the disposition team is focused on the transaction and sale. We act as a bridge across your internal departments to help align visions and goals. In our recent article Why You Need a Transaction Manager Role, we detail how our team provides a “unique promise” of facilitating “clear and direct communication.”

While revenue growth is important to any shopping center owner, the number one goal during the sale process is the actual sale. More specifically, maximizing value along with securing the right buyer. If you are not sure how a prospective lease may impact your property’s value, contact us and we’ll be happy to provide our in-depth insights.

Why You Should Work With a Transaction Manager

The role of a transaction manager is almost always found in residential real estate; no top producing agent or team would be caught without having someone whose focus is coordinating the transactions. However, when it comes to commercial real estate, where arguably the process can be even more detailed and timely, not every group or team has a transaction management department. The role of the transaction manager is extremely important: the focus is not just on coordination but strategy and keeping the deal flow for a secured closing. ™

As an integral component at Shopping Center Advisors, a transaction manager is vital to both the team and deal process. Having a single point of contact helps streamline the process for many of our clients, both private and institutional groups alike. Private individuals and funds find comfort in having a single point of contact who is responsible for the data and information gathering and coordination. A transaction manager role is no stranger for our institutional level clients – many of whom have dedicated managers and departments themselves. Our team is an extension of your in-house acquisitions team.

Team Process

In many teams, the division of labor is based on each person’s strengths. Those who handle the business development side are focused on increasing sales and relationships. Not every person can be a “jack of all trades.” A transaction manager can help offset the nitty-gritty and detail aspects of a transaction by staying on top of the salient business terms. The business development members can then focus on developing existing and new relationships. In our article,“Don’t Be a Lone Wolf,” Tom Lagos describes the Strategic Coaching program and surrounding yourself with “complementary team members and the results of a strength-focused team.” The manager can be a valuable position. As deals become more complex, the transaction manager can utilize his or her strengths to keep the deal flow focused.

Having great verbal and written communication is essential, as a transaction manager is often communicating across multiple avenues including phone, e-mail, and in-person. The goal of good communication is to manage expectations among the parties, and ensure documents are addressed timely. And in real estate transactions, timing is everything.

Deal Process

Before a property goes to market for disposition, the manager analyzes and oversees the documentation to be gathered. Often this includes abstracting leases, financial review, ARGUS modeling and/or oversight, and makes strategy recommendations based on the review process.

During the marketing process, the transaction manager can be responsible for integrating the documents using platforms such as Real Capital Markets. In our recent article, we share insights on how this platform provides a “War Room” component for uploading and maintaining the pertinent documents to a transaction. This tool is helpful for a transaction manager, who can oversee permission levels of prospective buyers. He or she is also often responsible for putting together data analytics on offers, and drafting counters.

During the due diligence phase, the manager is then responsible for review of the purchase and sale agreement, coordinating the documents among multiple parties including the buyer and seller, and escrow and title. The Secured Close™ is our team’s unique promise of a managed transaction: facilitate clear and direct communication.

We create a detailed reporting and follow-up process that ensures the buyer, seller, and escrow agents are accurately following the purchase and sale instructions while mitigating any issues that might arise. Thereby, this proven process helps us keep all parties aligned during the transaction. While our team often represents the Seller in a transaction, our goal is to create a process where the buyer, seller, and escrow agents are following the purchase and sale instructions while mitigating any issues that arise.

Some states even have a specific role called the “Transaction Broker.” This role mirrors many of the tasks and expectations of a transaction manager. A transaction broker assists the buyer, seller, or both by performing specific roles related to the contract.

While a common role found in many real estate arenas, having a transaction manager has enabled our team to improve both our team process as well as the transaction process – not only for us, but our clients as well. We are therefore able to uniquely service shopping center owners. Whether you own a single shopping center or a portfolio across the nation, the Shopping Center Advisers are ready and able to help you through every step of the process.

Regulations and Implications of Drone Technology

Unmanned Aerial Vehicles (commonly referred to as “drones”) are without a doubt changing the commercial real estate transaction and marketing process. The use of technology has enabled brokerages to effectively market properties by providing quality aerials, parcel layouts, and give prospective buyers a larger perspective on how a property fits within the local market. Property owners and managers can use drones to keep an eye on their properties or show vacant spaces. Even online retailers are experimenting with delivering products via drones. However, it’s equally important to understand the rules and implications of using such technology. It is tempting to rush and purchase a drone and start watching it soar through the skies, but policies have tightened over the last few years. We’ll also share how to use drones for marketing your properties, so come back to see our newest posts. Before you fly, here are four (4) major impacts to consider:

1. FAA Regulations

On June 21, 2016, FAA released new regulation which took effect on August 29, 2016 (Part 107 to the Code of Federal Regulation). An individual must obtain a remote pilot certificate by meeting several requirements including, but not limited, to passing an initial aeronautical knowledge test or hold a part 61 pilot certificate. It is also important to note that this only applies to commercial drones under 55lbs. Aircraft over 55lbs must be registered and undergo a pre-flight check to ensure Unmanned Aircraft Systems (“UAS”) is in condition for safe operation.

2. Flying Restrictions

Some properties and areas may be under a restricted No Fly Zone. Drones can operate in Class G airspace. Recreational operators are required to give notice to UAS, the airport operator and air traffic controller, of its intent to fly within 5 miles of the airport and obtain the necessary approvals. Otherwise, other notable restrictions, including around stadiums, are prohibited within one hour before or after the scheduled time of an event. If your property may fall within a restricted area, it will be important to keep such restrictions in mind or obtain the necessary approvals before flying.

3. Operational Guidelines

To operate under Part 107 of the Code, the drone must adhere to the following operational guidelines: the aircraft must be in visual line of sight; fly under 400 feet and during the day; fly below or at 100 mph and not over people; and not fly from a moving vehicle.

4. Drone Options

There are several cost options when deciding upon a drone. A multi-rotor is the easiest and usually the least costly. It is typically used for aerial photography and videography, because they have great control over position and framing. Such drones, however, only run about 20-30 minutes on a charge. A Fixed Wing is the costlier option, but it is more efficient. Such drones can run for 16 hours or possibly more with fuel. The downside is they can’t hover in one still spot, so they are not ideal for general aerial photography.

The drone industry is growing quickly with U.S. industry experts predicting the creation of 100,000+ jobs and generating more than $82 billion in economic impact over the next 10 years. There are even attorneys specializing in the drone practice field by providing business formation, compliance, and obtaining FAA waivers. For real estate brokerage firms, many are sourcing companies and individuals with the proper licensing. This may make the most economic sense in the interim where the opportunity cost of FAA regulations and licensing may not be worth it. Larger brokerage firms and real estate companies may decide, in the near future, to incorporate full-time staff and personnel. The potential is here and will continue to grow.

Regardless of the complexity of issues, safety and privacy concerns, drones will most likely continue to be a valuable resource to the commercial real estate industry.

What the California Legislation on Dual Agency Means for You

When the discussion of dual agency occurs, commercial real estate practitioners may rarely think of its implications. However, dual agency involves all parties including sellers, buyers, landlords, and tenants of both residential and commercial properties. California currently allows dual agency, so long as it is disclosed to the parties involved: a broker can represent both sides in the transaction. Some states, such as Colorado, Kansas, Florida, and Wyoming, prohibits dual agency; many others follow along the same lines as California. Recent proposed legislation by Assemblywoman Lorena Gonzalez, D-San Diego, could change that and the way we transact.

What is Dual Agency Legislation?

Assembly Bill 1059 was introduced by Gonzalez and would prohibit a brokerage firm or its licensees from acting as a dual agent. This impacts the entire brokerage firm. If passed, this would mean that Colliers International as a firm couldn’t act as a dual agent for both a seller and a buyer in a transaction, even if the buyer was represented by an agent in a different office.

In January 2015, Senate Bill 1171 was passed requiring disclosure of dual agency and agency relationships in a commercial property transaction; residential transactions already had this practice in place. The bill was also introduced shortly after the California Supreme Court ruled unanimously that a real estate professional representing a seller on a residential home purchase owed a “fiduciary duty” to both parties if the buyer’s agent works for the same brokerage. The ruling stated, “It is undisputed that Coldwell Banker owed such a duty to the buyer. We now conclude that the associate licensee, who functioned on the Coldwell Banker’s behalf in the real property transaction, owed to the buyer an ‘equivalent’ duty of disclosure.”

Varied Opinions On The Bill

Some proponents of the proposed legislation come from the commercial real estate community. Hughes Marino, CEO of a San Diego based tenant representation firm, believes this will provide more transparency. According to CoStar, Hughes states, “prohibition of dual agency would truly level the playing field for tenants offering them legitimate transparency and conflict-free representation.” Opponents believe the bill is too extreme and could change the commercial real estate industry in California. Another bill was introduced AB 1616 by Assemblywoman Jacqui Irwin, D-Thousand Oaks, where instead of banning dual agency all-together, expands current disclosure requirements. Both bills coupled with the Supreme Court ruling show evidence that there is increased focus on the consumer, to limit both potential conflicts of interest as well as increase transparency.

While AB 1059 does have some hurdles such as going through committees, the Assembly, and State Senate, before being sent to the governor, there is no doubt that this could cause disruption within the real estate brokerage community, especially among larger firms, and can certainly impact future real estate deal making. Brokerage companies, agents, as well as clients will need to pay close attention as the bill progresseses.

For more information on AB 1059, please visit: California Legislative Information.

ARGUS Enterprise: Warp Speed Ahead

While change can sometimes be worrisome, ultimately, newer software models have proven to be helpful. For instance, can you imagine being stuck using Windows 2000 in today’s world and having data storage in MB rather than in GB or TB (as is the case of my external hard-drive)? Or imagine hiring a programmer who only knew C++.

The latest software upgrade to the ARGUS platform is entering into the repertoire of commercial real estate professionals, known as Enterprise. While many companies have been hesitant to switch over right away in favor of keeping the older DCF model, the latest announcement from ARGUS includes ending its support of DCF licenses on June 30, 2017. Also, since I began teaching the program at UCLA Extension in 2015, many universities including UCLA Extension have no longer provided instruction in DCF. Although ARGUS has stated it is “committed to working with [customers] to ensure a smooth transition” many professionals have been concerned about how this shift will impact the commercial real estate arena.

In order to help better prepare you for ARGUS Enterprise, here are a few key changes:.

User Interface

The first notable change is the user interface within Enterprise. The look and feel of Enterprise are meant to be intuitive for Microsoft Office users, with some semblance to Excel. Many of the entries, like in the Rent Roll tab, populate various rows, tabs, and drop-down options. You are also able to scroll and create multiple row entries. The language and terminology between DCF and Enterprise in many situations remain relatively unchanged; however, the method of entry provides more options, easier flow, especially for more complex modeling situations.

Reporting Options

In the DCF model a user can export the entire file into an excel document. With Enterprise, this feature has been modified. There are now many reporting options in Enterprise – more than even one user may even need, so the ability to export everything into Excel is a bit more difficult. Valuation Reports alone has eight options, and Tenant Reports has nine. Instead, you can export an individual report to an Excel or PDF file. Some users have the option of creating “Report Packages,” depending upon the license, which combines several different options together into a customized Excel or PDF file.

Complex Recovery Structures

While creating complex recovery structures isn’t new, Enterprise has made it a bit easier to see what exact expenses have been included into the expense pools, as well as if there are any detailed items such as administrative fees, or capped costs individually by the tenant.

IRR Matrix

One of my favorite updates to Enterprise is with the IRR Matrix table, found under Valuation Reports. After basic inputs are made, such as purchase price and entry and terminal cap rates, a user can easily see the IRR table for the analysis period and also make immediate adjustments if necessary.

File Exporting

Enterprise allows the ability to export the property file to a DCF file format, which is “.sf,” so even though you may be working off Enterprise, a group still using DCF can review your file. Keep in mind, however, that due to it being simply a different program, there may be variations in the cash flow and valuation results. A warning message will typically pop-up requiring the user to agree to this.

Automatic Saving

Unlike DCF, Enterprise doesn’t automatically save every change you make, which can be both a positive and a negative. One of the biggest complaints of the DCF format was trying to model different scenarios: you would have to save the original file separately. In Enterprise, you can make changes to the scenarios (such as changing the entry CAP Rate or Analysis Period) to see how this would affect the model, without having to keep the change if you didn’t want it hard-coded. This is a great way to see the updates in a live setting.

While migrating or changing to a new platform is never without trials or errors, many groups have already been making the switch or are at least easing into the new model. And, Enterprise has already made a variety of software updates. When I first started teaching at UCLA Extension, we used 10.0. The latest model version 11.6 was released in April 2017.

Of course, at Shopping Center Advisers we are here to help with your commercial real estate modeling needs and are equipped to handle any complex scenario using the latest and greatest technology.

Contact us here: http://shoppingcenteradvisers.com/contact/

Shopping Center Advisers | The Lagos Team | Getting Your Documents Ready for the 21st Century

Getting Your Documents Ready for the 21st Century

Shopping Center Advisers | The Lagos Team | Getting Your Documents Ready for the 21st Century

The acquisition days of getting a large box of due diligence files are almost long gone, just as the days of the “floppy” drive and CDs. In fact, my own laptop no longer has a CD portal: our world is progressing rapidly to leverage technology platforms and Commercial Real Estate is no exception. Research has shown that digitizing documents saves both time and money. For instance, instead of wasting time looking for paper files and then spending money on mailing costs, you can find exactly what is needed and send them to the appropriate parties almost instantly.

And further, having key documents not readily available can actually hinder the transaction process and potentially delay escrow. If there is a missing lease file and the Buyer is coming to the end of his or her due diligence period, as an example, it is likely that there may be a request for an extension, or a potential re-trade if that missing file contains terms that can materially impact the economics of the deal.

A missing file can be easily avoided earlier on in the process with digitization. To help get your files ready for a property disposition, here are three key tips.

Document Scanning

Prior to positioning the property on the market, ensure all your files are not just collecting dust in a large storage unit or filing cabinet. There are many state-of-the-art scanners. Or, if you would rather have someone else perform the heavy lifting, document scanning companies can provide efficient services. A centralized storage system can decrease issues where files may be stored in different physical locations.

Sharing Files

Dropbox, Google Documents, and SharePoint are examples of free and low cost solutions that are user-friendly and accessible to anyone given the appropriate links and permissions. You can upload the files and send them to the Listing Broker or the receiving party within a matter of minutes. Even mailing a USB Drive is now considered a less efficient method of delivering materials. The benefit is truly accessibility. The files can be accessed anywhere at any time – even by a busy buyer while traveling away from the office.

Organization

Having a clear and concise method for organizing files is also helpful. Once the files are scanned, a system of creating folders such as “Leases” for all lease documents and “Reports” for all third party reports will enable searchers an easier time going through the documents. A concise method can also decrease the likelihood of confusing files or errors. Real Estate companies have often multiple properties and large amounts of documents that can become misfiled if not properly organized.

Avoid having a missing file delay your property from hitting the market, or causing escrow delays. And be sure to connect with your Shopping Center Advisers to help make file coordination as smooth as possible and get your property ready for the 21st Century.

Lagos Shopping Center Advisers can help make due diligence organization and coordination a smoother process, just get in touch with us.

Shopping Center Advisers | The Lagos Team | Top 5 Underwriting Mistakes in Commercial Property Transactions

Top 5 Underwriting Mistakes in Commercial Property Transactions

Shopping Center Advisers | The Lagos Team | Top 5 Underwriting Mistakes in Commercial Property Transactions

We’ve all been there, staring at an offering memorandum or Excel Spreadsheet wondering why the numbers aren’t matching exactly. Or somehow a tenant’s actual base rent doesn’t quite match the Rent Roll. Many underwriting mistakes happen not intentionally, but rather through a variety of distribution channels. Understanding the economics of the real estate transaction is an essential part of the deal for all parties involved including, buyers, sellers, and agents and brokers. And when there are mistakes in the underwriting, it can affect pricing as well as the smoothness of the transaction. Even with a well-trained eye, mistakes do happen.
There are five common mistakes than can be alleviated to help your next transaction process with ease.

1. Valuation Timing Doesn’t Match Current Rents

As tenancies often have rental escalators the current rent maybe slightly higher or different than when the property was first placed on the market, or when the Rent Roll was prepared. Shopping Center Advisers (SCA) tip: ask for a current and updated Rent Roll to verify rents.

2. Property Taxes Aren’t Updated

There are many states that reassess the property taxes upon the sale of the property (such as California). However, the operating expenses can sometimes reflect the ownership’s current property tax amount, which can be lower especially if the property has not traded for many years. SCA tip: recalculate the property taxes as needed and verify the percentage rate.

3. Not Getting Leasing Updates

There are often moving parts with tenant leases, for instance, a tenant may be in the process of exercising an option (extending). Or, a vacant space may have an offer to lease. These timely updates can significantly impact the valuation of the property. SCA tip: inquire about any and all leasing updates.

4. Assuming ARGUS is Flawless

We would all like to think that technology is perfect; however, like most programs, the information exported is only as good as the information inputted. ARGUS is an intricate platform and one minor change can trigger a wrong calculation. For instance, having the rent show as $/Month (amount per month) instead of $/SF/Month (amount per square foot per month). SCA tip: check the ARGUS run against the Rent Roll.

5. Not Reviewing Specific Lease Clauses

One paragraph can change the entire economics of the deal. For instance, if a Big Box retailer has the right to terminate the lease early or is not responsible for paying their portion of the property taxes. SCA tip: ensure that the entire lease and any subsequent amendments are read in its entirety.

Paying close attention to these five underwriting mistakes will help you analyze the deal while minimizing some risk. With especially large transactions, it is helpful to have many eyes looking at the deal and determining appropriate procedures. As such, besides having an in-place analyst and acquisitions team, ask your real estate professional as well as third party vendors for a review. The more thorough the underwriting review process, the less likely to have avoidable errors.