AzOfficeSpace.Com
2008

  Tips to be a Smart Buyer

There are typically two main reasons for property acquisition and may not be mutually exclusive;
1) A Buyer acquiring property for investment.
2) A Buyer acquiring property for their own use.
Although the purpose may overlap, each perspective has nuances and issues to be concerned with. Please consider. . . .

1. BUYER ACQUIRING FOR INVESTMENT

Decisions made for investment acquisition are typically focused on financial issues, including rate of return, risk, and leverage. 
The general outlook for investment is considered good: Our Metro Phoenix population continues to expand at about 85,000 net new people per year. The local economic engines have changed from cattle, cotton and citrus, to chips, credit card centers, and tourists. Importantly, the Valley has added over 150 miles of new freeways with more funded and scheduled to be completed in the next several years. The Freeway system has made not only the edges of the Valley more accessible, but the center has become a significant supporting hub. Recently, Maricopa County residents passed a continuation of the half cent sales tax, which will add not only more freeways, but expanded light rail system across the valley. Climb on board . . . . .

Investment Buyers should consider:

• Central Phoenix rental rates have had the least amount of variation over the course of the years. Although their peaks were not as high, their lows were not as low. The prices in Central Phoenix currently are much higher with contributing factors being speculation on impacts from the new Light Rail mass transit system, a new ASU downtown campus, Cultural building expansions (including a re-done Civic Center).  The public projects total almost $1 billion. Land prices in Central Phoenix are at an all time high.
• Parking availability (or lack of) is one of the biggest reasons for losing Tenants. Newer projects brag about parking ratios of 5:1000. Tenant densities continue to increase.
• The metro Phoenix Tenants have not been seduced by fabulous architecture or stylish amenities. Some of our largest users are only regional offices of major corporations. They pay for function, not fancy. In a related fashion, the Valley is often accused of being a sea of houses with red tile roofs. This carries over to Tenants expectations of quality in their office space. Many of the new Office Condo's have a similar look and feel.
• Compared to the overall U.S., we have a higher turnover of tenancy. This is due to the rapid growth and the general newness of things. Buildings histories are limited and cannot be tracked to identify stability as well.
• The average tenant occupies less than 4,000 square feet. Many statistical studies by major firms don't evaluate the impact of smaller users.
• Current Cap rates on sales are below 8%. NNN leased properties are changing hands at 6% or less. This is due in part to availability of 1031 tax exchange motivated Buyers and low interest rates. As the Fed continues to bump interest rates, the Cap rates may rise, but look for a continued strong demand to suppress the CAP rates for awhile.
• Any information that exposes the Sellers motivations is valuable. For example, knowing a loan has a balloon coming and the bank is anxious, may really help your cause.
• Don't assume anything works in the property. Have everything inspected by reputable and bonded professionals, including environmental, survey, HVAC, zoning, roofs, plumbing.
• Some cash investors make the mistake of skipping environmental or survey work. This may save you $5,000 today, but could haunt you when time comes to sell.

2. BUYERS ACQUIRING FOR USE

The issues that Users are concerned with will vary slightly from Investors. Generally, it may be a question of whether it is better to buy or lease. Buying gives you control of expenses, managment, annual cost increases (rent bumps), and occupancy time. Importantly, you also retain something when you are done with the occupancy, namely equity and appreciation. As rental rates have climbed to their current levels, it is almost a truism that the economics of Buying are far better than leasing, assuming you buy what you need. Buyer Users ideally find a property that fits the physical requirements that they would otherwise have to lease. For most Buyer Users, the issues and time required in owning a property larger than their own needs takes away from their ability to focus on their main income, that being their business. The proliferation of Office Condo's and Buyers "over buying" will make for some interesting leasing situations.

Buyer Users should consider:

• Multiply your cost of capital rate by the price of the building, then add the property operating costs (about $7 on an average single story building). The result will be the equivalent full service rent per foot that you would be paying if you leased. The difference between this and the market rent will tell you whether it makes sense for you to own.
• Many new Office Condo's are sold as shell spaces.  Cost of improvements could exceed $50 per foot.
• Most buildings don't come the exact size you need. To measure your risk with buying a larger property, do the math if the building was empty except for you. Remember, operating expenses continue for vacant space.
• Location issues are more important for a Buyer User than an Buyer Investor. Specifically, you need to identify where your employees come from, where your Clients come from, and where your competition is located.
• Similar to building a custom home, many buyers under estimate the time and finances required to make the place what you want it to be. Identify good professionals prior to closing and have firm budget numbers done before you commit to the ownership.
• Always evaluate the property as if you were not a Buyer User. Would this property be attractive to another Investor Buyer? When you sell, the likelihood is that the next Buyer is an Investor.
• Buyer Users can often qualify for 90% loans via the SBA. The process has become much easier and timely. Qualifications include two years in business and that you will be occupying at least 51% of the property for your own business. Conventional loans often require at least 25% down payment, but may not require you to occupy as much of the building.
• Seek tax and business advice about the ownership structure. Do you want the property as a separate business? What are your plans for your business? Some Buyers may elect to form an LLC with key personnel as minority interests. This may provide incentives to retain employees, but could cause problems if they are not the one's you want to keep.

Call the Buyer & Tenant Agent, Jeff Jennings, for more details
or FREE expanded reports at 602-265-4600