Industrial Basics – Why Care About Ceiling Height?

You’ve probably seen ceiling height called out in listings for warehouses and manufacturing buildings. But why should that number matter to you?

What is “clear ceiling height”?

  • “Clear ceiling height” is the height at which product can safely be stored on racking. It’s also defined as the height of a building from the floor to the bottom of the lowest-hanging item on the ceiling, such as sprinklers or HVAC ducts.

Why should ceiling height matter to you?

  • Warehouse capacity is determined by clear height. So, a tenant can increase the capacity of a warehouse by 10% to 25%, just by increasing clear height from 32 feet to 36 feet. After all, true warehouse capacity is how much product can be stored in a three-dimensional space—a measurement of volume (cubic feet) rather than area (square feet).

How have ceiling heights changed over time?

What impact do ceiling heights have on building operations?

  • A pallet of goods generally measures 64 inches, meaning that a building with 32-foot ceilings can stack between four to six pallets high. A building with 36-foot ceilings can provide between 10% and 25% more capacity. But the cost of the additional height has to measured against the cost of a larger building with lower ceilings—assuming that a user could actually make use of the higher ceilings.
  • Low ceiling heights affect how much inventory can be stored in a building, as well as what kind of equipment and machinery can be used or moved around in a building. Many manufacturers have equipment that requires high ceilings—think monorail systems to move merchandise for processing.

Can low ceiling heights be remedied?

What’s the takeaway?

  • During site selection, ensure the team you’re working with is thinking creatively in order to identify the space you need for your operations. Ceiling height is one of many factors that can help you maximize a warehouse’s full potential.

This post originally appeared in Jonathan Aceves’s blog and is republished with permission. You can read the original here. 

4 Reasons why you benefit from Exclusive Representation in Commercial Real Estate

In a commercial real estate transaction, a seller can leave a lot of money on the table if the buyer is well represented and they are not.  Worse still, the seller may look to the buyer’s broker for advice and mistakenly believe that they are being represented and receiving advice that is in their best interest.  How do you know if you need independent representation?  Every seller can benefit from having their own representation, and I will lay out a few reasons why below, as well as a few case studies.  

“Plans fail for lack of counsel, but with many advisers they succeed”   

A few years ago, an owner who we will name “Steve” owned an automotive shop on a busy downtown corner.  He was approached by his neighbor, who wanted to buy his building for what Steve believed to be a fair price.  Steve accepted the offer and closed on the property.  A few months later, he realized that due to the capital gain on the fully depreciated building, his taxes were nearly a quarter of the sales price!  Not only had he underpriced the building, but after paying off his mortgage, the burden from tax bill started a process which ultimately led to his bankruptcy.  If a good agent had advised him, they would have advised him of his tax implications, as well as making sure that the sale price was in line with the market.

About two years ago, a woman we will name “Sherry” owned a home in a downtown neighborhood.  Her family was growing, and she wanted to purchase a larger home.  She put an offer on a nearby home which was for sale by owner.  Neither buyer or seller had any real estate experience, and they used a form they found online.  Once the property was under contract, she put her home up for sale by owner.  Within days, a buyer’s agent brought her an offer on her home. Sherry wanted to make sure that the contract was contingent upon her closing on the other property, which the buyer’s agent assured her it was.  There were some complications with her loan, and the seller of the property she was buying refused to give her an extension—and she was forced to terminate.   When she asked the buyer’s agent about terminating the contract on her home, she refused, and said that they would sue for specific performance if she did not sell.  Ultimately, she was forced to sell her home under market value, and rented an apartment across the street.  If a good agent had been involved, Sherry would not have been forced to sell her home for below market value, and likely would be living right now in what she considered her “dream home”.

4 Reasons to have independent representation

  • Representation
    • The buyer’s agent has a duty of loyalty to protect their client’s best interest. Some brokers may attempt to practice what is called Dual Agency.  Dual agency is a slippery slope and frowned upon by most brokers.  Often what happens is that one party is treated as a “client”, and the other as a “customer”—meaning that client receives the duty of loyalty while the customer does not.  All these details should be clearly disclosed to both parties, and failure to do is an egregious license law violation.
  • Better Leverage
    • Another reason to have separate representation is for negotiating leverage. Commercial Real Estate agents, especially CCIMs, are trained to help negotiate the best possible price and terms.  If you are communicating any personal details to the buyer’s broker, then they have a duty to tell the seller—which may completely remove any negotiating leverage you may have had.  Think about it—any personal details which may make the Buyer think you need the money more than they need the property WILL be used against you.  Your exclusive agent’s duty is to protect those details, while working to tip the scales in your favor.
  • Pricing
    • If a buyer’s agent brings you an off-market offer on a property, how will you know if that price represents a fair market offer? Think about it—if someone is willing to go to the trouble to contact you, to do the due diligence and make an offer, could there be someone out there who would pay  a little more?  In my experience, off-market properties seem to sell for about 20% less than they might if they were properly marketed.  Your agent’s role is to make sure that you are priced in accordance with the market, and not leaving any money on the table.
  • Contracts & Due Diligence
    • Your agent should be familiar with the documents and amendments you are reviewing and will be able to advise you about their implications. They will be able to suggest language that would better protect you, or additional clauses to add. They should also remind you to talk with your CPA to determine what your tax consequences will look like.  You agent will also be able to help with due diligence items required by the Buyer—documents such as leases, tax returns, plats–as well as interfacing with government agencies for things such as permits, zoning details and environmental concerns.  They will also be able to connect with the appraiser, and hopefully give them what they need to appraise your property for the highest appropriate amount—something that a Buyer’s agent could not do.

We would love to hear from you!  Please comment below.   Have you ever been in a situation with an unrepresented party?  Or have you ever been in transaction where you lacked appropriate counsel? Do you have any horror stories from real estate deals where good advice could have made a difference?  

Additional Resources: 

SIOR – How to select a commercial real estate broker

Founders Guide – How to choose the right commercial real estate broker

Commercial Property Advisors – Choosing the right commercial real estate broker

This post originally appeared in Jonathan Aceves’s blog and is republished with permission. 

(c) 2020 Jonathan Aceves

What is a rent roll and how do you use it?

For commercial and multifamily investors, no two documents are more fundamental to understand an investment than the Rent Roll and the Operating Statements. We will be studying the rent roll, looking at some case studies, and hopefully improving our due diligence process.

So what exactly is a rent roll?

A rent roll is a list of the rental units of an income property, with some basic details essential for basic property underwriting.  It is one of the foundational documents needed to property understand a rental property.  

Basic Items contained in a Rent Roll Items.

Exact Information can vary by property type, but these are the most common:

  1. List of units
  2. Name of Tenant
  3. Rent amounts
  4. Beds/Baths
  5. Square footages of units
  6. Rent Per Square foot
  7. Prior Balances
  8. Market Rent
  9. Loss to Lease
  10. Lease Start/End
  11. Additional Fees
  12. Security Deposit
  13. Notes
  14. Date the Rent Roll was created

Rent Roll Uses

  • Loan Applications—When purchasing a property, a lender is going to want to see a proper rent roll.   You may have to create the rent roll if the owner doesn’t have one.  
  • Market Research—Are the rents low compared to market?  Is there an opportunity to raise the rents?  
  • Lease Expirations—Are there leases expiring over the next 30 days?   Are the tenants month-to-month or do they have long-term leases?
  • Rental History—Are there balances on accounts growing, or shrinking? Are there a lot of vacancies?  Do the tenants pay on time?  

How do make a rent roll?

  1. Example – Download the template at the end of this article
  2. Ask – If you are considering purchasing a property, ask the owner for the details.
  3. Find the Source Documents – Leases, County Records, etc.

Case Study

I received a call from an owner of a quadplex, who wanted me to study the property. I asked him to send me rent rolls and operating statements.  He didn’t have them, but sent me the leases and two year’s tax returns.   I put together a rent roll, and immediately saw issues.  First, his rents were $100 low compared to comparable apartments.  Second, three out of four of his leases were month-to-month.  Third, he had MAJOR collection issues—two of his tenants hadn’t paid rent in over six months, and all of them were behind.  These issues were immediately obvious from a review of the rent roll.  When I asked him about this, he got quite defensive.  He’d grown quite attached to his tenants, and wasn’t willing to evict them.  Obviously, it was going to be very hard to sell the complex in the condition it was in, and I advised him to deal with his tenants before selling the complex.  I often think about that owner because I’m not sure he realized the state that his property was in, and a quick review of a simple rent roll would have really helped him to prepare his property for sale.

We’d love to hear your stories and lessons learned about reviewing rent rolls from prior deals!  Comment below!  Also please share this with people you think may benefit from reading.

Resources

Click here for a Free Excel Downloadable Rent Roll and PDF Rent Roll Template.

Article from Jeff Rohde on Roofstock with an overview of the Rent Roll.   Article from American Apartment Owner Association on the basics of the rent roll.

This post originally appeared in Jonathan Aceves’s blog and is republished with permission. 

Evans Georgia Outparcel Market Report

Evans, Georgia is not only the best place to live in the United States according to Money Magazine, but also a great place to conduct business.  If you are looking to locate your business in Evans, here’s some information that may help you as you search for a location.

From 2019 to 2020, the price of an outparcel averaged almost $900,000.  The outparcels in our study ranged in size from .54 acres to 1.16 but averaged .92 acres.

An outparcel is defined as a small lot on the outer edge of a shopping center, usually reserved for later sale of fast-food or chain restaurant, also called a pad site.  Generally, outparcels are around 1 acre in size.  In theory, the price of an outparcel should have some relationship to fundamental attributes such as access, visibility, demographics, and quality of the anchor or development that it sits in front of.

Sites that had full-motion direct access to traffic had the highest sale prices per acre.   515 Mullins Crossing had the highest sale price (1.296M/Ac) in our study and sat on a signalized intersection in front of a Belk-anchored shopping center.

Access is another important factor.  Washington road is a thriving commercial corridor partly because it has a turn lane (or suicide lane) on most of its stretch from Downtown Augusta past Evans.  Many commercial corridors are seeing medians and concrete barriers installed, and this limits access to the other lane, and creates “dead zones” or pockets where there is not enough traffic to satisfy retailer’s requirements.   Many shopping center developers limit access to the main road and give outparcels access via an internal road structure.  The Mullins Crossing Outparcels are good examples of this.  This can be an issue for Quick-Serve Restaurants (QSRs) that need to get parking and a drive-thru on a small site—having two curb cuts can be a good way to get cars in and out and still have room for parking.

Another consideration for retailers is off-site utilities.  Many shopping center developers size stormwater and parking in such a way to allow the outparcels to be very efficient—not only saving them money in site costs but also allowing them to be very efficient and potentially fit on a smaller site.

Something to be aware of is residual value.  Many anchors such as Wal-Mart will place Covenants, Conditions, & Restrictions (CCRs) on their outparcels, which will impact the number of users that occupy the outparcel, which would negatively impact their sale value.  Another item to consider would be size—although your current user may be able to use a site smaller than .7, most others can’t, and will make finding another tenant a challenge should your current tenant vacate.

You can find our Evans Outparcel Report here..  Please let me know if you see additional details for us to add, and don’t hesitate to reach out to us with questions.   For developers—what trends are you seeing as you search for outparcels?   For users—what are common themes you’ve seen across the best sites that you have occupied?   We’d love to hear from you.  Thanks for reading!

This post originally appeared in Jonathan Aceves’s blog and is republished with permission. 

Industrial Basics – Roll-Up Door Considerations

If you are interested in buying a warehouse or industrial building there are a few critical items to familiarize yourself with. Roll-up Doors are a defining feature of  industrial buildings, and it’s important for users and  investors to know some the details regarding their selection, use, and construction.

What are different kinds of industrial building doors?  There are a few different types of industrial doors; overhead doors, roll-up doors, and scissor doors.   Here’s an overview with some pros and cons for each type:

  • Overhead Doors (Or Sectional Doors)–these doors fold or bend to open, and slide into an overhead track.  They don’t coil, and they may have multiple sections, like residential garage doors.  When these doors are open, they hang overhead in front of the opening.
    • Pros: Often the panels that make up an overhead door are much wider and thicker than the small slats of a roll-up door, and can be heavily insulated.
    • Cons: Because the track hangs in front of the door, they limit the ceiling height of a building, and are seldom used for industrial buildings.
  • Scissor Doors (or Scissor Gates or Security Grilles) open to the sides, like a mesh, and often function as security measure in front of a storefront or opening, and can be used as a movable fence.  Often these doors are closed during operating hours for air flow and visibility.
    • Pros: These doors are easy slide open, and don’t take up much space. You can also easily see through them.
    • Cons: Generally used as security gates, often in conjunction with roll-up doors, and not usually used by themselves.  They also are not insulated and don’t block the elements.
  • Roll-Up Doors (Coiling Doors).  These doors are series of slats in a coil that pull into a drum with an enclosed greased spring.  They can be insulated or non-insulated.  These are are the industrial doors that probably come to your mind: ubiquitous in self-storage facilities and warehouses.
    • Pros:  Dont’ swing out (maximize space in warehouse), open and close quickly, are difficult to penetrate, and when open provide clear and open visibiliy.  Roll up doors coil into a drum, and provide maximum use of interior space.
    • Cons:  More difficult to insulate as they roll into

What size doors do you need?  That generally depends on what size vehicles will be using the door, what size the loading dock is, and how high the materials are that you will be moving.  For loading doors, trailers tend to be 8′-8’6″ wide, so a 9′ door will accommodate a 8’6″ trailer, and 10′ high door should provide unobstructed access to most trailers.

What have been your experiences with the selection and operation of industrial doors?  Are you satisfied with your current doors?  Do you have a certain type or size of industrial door and have regrets or lessons learned?  We’d love to learn from your experience!

This post originally appeared on Jonathan Aceves’ Blog.

Why 3D Virtual and Video Tours are Critical in Marketing Commercial Real Estate Right Now

In the post-pandemic world, ensuring that your commercial property can be toured and understood remotely is essential for it to compete in the marketplace.  Due to the Pandemic, tenants are increasingly wary of letting strangers walk through their buildings–this is especially true for multifamily and office. 3d and virtual tours are the best way to accomplish that, and we’ll discuss reasons why and the different kinds of tours in this article.

Reasons for the increasing popularity of 3d Virtual tours:

  • Social Distancing Requirements
    • Showings are more complicated now than ever—many buyers are hesitant to view space, and many tenants do not want strangers in their buildings.
    • During this time, commercial properties with 3d virtual tours will stand out against their competitors.
  • 3d Tours create More traffic
  • 3d tours Help tell the story of the property
    • 3d tours create virtual spaces that a buyer or tenant can use to understand the layout and feel of a property.  They help convey the visual information that can be difficult to explain in text or in still photos.
    • Some 3d tours also create floorplans or “Dollhouses” that help make it easy for a prospect to visualize the space.
  • 3d Tours help with Out of Town Buyers/Tenants
    • Prospects are often looking at many options from far away, and you have just a few moments to capture their attention. A 3d Tour makes it easy for them to understand.
    • “Decision makers aren’t always able to tour every property, 3d tours give them a feel for the space and ensures that your building is in consideration.” Peter McGuone, CBRE, SVP

What different types of tours are there?

  •  3d Virtual Tours–these are rendered and allow you to virtually walk through a property.  Matterport is a good example of this sort.
    • With 3d Virtual Tours, lots of scans are processed to create a rendering of the space.  These are the most immersive, giving a user the ability to tour the space.  These are also some of the most challenging to create.  For an example see this video.  
    • Also, for an overview of all the major providers of Virtual Tour Software, see Ben Claremont’s video on the subject.
  • Virtual Tour–think Zillow’s tour feature.  These tours are not rendered, so they are more like a collection of 3d pictures, that are labelled.
    • You can still click on “Living Room” or “Foyer” and look around the different 360 pics, but you cannot virtually walk through the building.  On some platforms, you can click on an adjacent picture, and it will take you there, but it is not as smooth as a 3d Virtual Tour.
  • Video Tour–This is…well, a video tour.  They can be guided or unguided.
    • Guided – These are useful and often can be a great supplement to a 3d virtual tour.  The guide can walk through the space, describing the features and benefits of the space,
    • Unguided – Think of a video camera being taken through a property–Zillow has a video tour feature and most of the videos placed there are unguided video walkthroughs.

We would love to hear your experience with 3d Virtual Tours.  As a Broker–do you currently use them, and have they been helpful?  As an Owner–how important is it to you to have 3d tours on your listings?

This post originally appeared in Jonathan Aceves’s blog and is republished with permission. 

The Basics of Historic Tax Credits

What are historic tax Credits?  Historic Rehabilitation Tax Credits are available for developers who renovate historic buildings.  These include federal and state historic tax credits.  The federal tax credit is 20% of the qualified expenses over 5 years.  Most states (GA and SC included) have 25% tax credits, often with a cap.  Georgia’s tax credit is capped at $300,000 for the time being, and South Carolina’s is capped at 1,000,000. 

Which buildings qualify for this credit?  Buildings located in historic districts or individually listed in the national register of historic places qualify, also buildings deemed by the state historic preservation office to be historically significant. 

Historic Tax credits are incredibly complex instruments.  They can be used to make historic renovation projects feasible that otherwise would not make financial sense.  They can be coupled with other programs such as the opportunity zone program or enterprise zone programs.  This article will cover some of the basics and provide links to helpful resources. 

What are financial guidelines?  First, you must spend more than the adjusted basis in your renovation.  Make sure to talk with a tax professional to help you organize this calculation, but basically you must spend an amount greater than what the building is worth. Second, only certain expenses are eligible for the credit—these are “qualified rehabilitation expenditures” (QREs).  QREs include construction costs, taxes, consulting expenses, architectural costs, among others.  Generally, additions to the building do not quality, as well as furnishings, commissions, and appliances.   

Are there guidelines for the renovation?   Yes.  The secretary of the interior has guidelines for the renovation they’d like applicants to follow, repairing rather than replacing historic elements, preserving distinctive finishes and features, and maintaining the historic character of the building.  You can see their 10 principles here

Is there a requirement to hold the property for a certain amount of time?  Yes.  You must hold the property for 5 years. 

Who can use historic tax credits?  In many cases, application of the Federal tax credit is limited to passive income for taxpayers with adjusted gross income above $250,000.  Real estate professionals, short-term rental operators, and C-corps are exempted from this rule.  See questions 35-37 here.  

How do you apply?  We generally recommend that an applicant work with a consultant and an accountant to help them with the applications.  Reach out to us and we can connect you with expert consultants. 

We’d love to learn from you and hear your feedback!  Have you ever participated in a historic tax credit project?  Have you evaluated a historic renovation? 

This post originally appeared in Jonathan Aceves’s blog and is republished with permission. 

The Four Primary Uses of Sale-Leasebacks

The Four Primary Uses for Sale-Leasebacks

All business owners should be familiar with the Sale-Leaseback as a tool for raising capital and potential exit strategy. As opposed to bank financing, the Sale-Leaseback can have some advantages, and today we will explore the four different ways they can be used by a business owner.

  1. Financing: Allows for off-balance sheet financing (100% of equity can be made available for investment, as opposed to 75% with traditional financing) and at a lower cost
  2. Improved Returns: Firms may earn a higher return on their primary business rather than in real estate, so they consider moving capital to principal business to expand operations
  3. Balance Sheet Improvements: Tool for improving the balance sheet which can be important for exit planning and larger corporations
  4. Exit/Repositioning: When a firm determines they want to exit a given market/location, they can execute SLB to cash out of a given asset in advance, and then have 5-10 years to find new location.

Financing

Sale-leasebacks are a popular means for companies to fuel growth by moving capital out of real estate and into their principal business.  Often, releasing capital in real estate is more affordable and has better terms than bank financing.  With bank financing, you may only be able to release 75-80% of the equity in your real estate, and that loan will likely come with a 3-year balloon payment.  And often the appraised value of the building is the value of the vacant building.  With a Sale-leaseback, a business owner can tap into 100% of the equity in the real estate, with no balloon payment, and often the value of the NNN lease to an investor is higher than the appraised value of the empty building (depending on the owner’s creditworthiness and balance sheet).  Also, a risk of bank financing is that if the appraised value falls below the agreed-upon LTV, the loan is in default and immediately called (think 2008).  The sale-leaseback puts the market risk on the new owner.

Improved Returns

If the returns from a company’s principal business are higher than the returns on the real estate, it often makes sense to move equity out of real estate and invest it in the company’s core business.  The goal is always to maximize return.  For example, if the business is able to gain a 20% return from day-to-day operations, and the ownership of the real estate where the business resides is only netting an 8% return, returns would increase if the business could divest of the real estate to allow for greater investment in the core business.  Through the signing of a long-term lease, the real estate can be sold, the business remains in operation in its current location, and operations could conceivably be expanded with the opening of a new location or other operational expansion. 

Balance Sheet Improvements

As a seller looks to exit their business, it can become important to improve financial statements.  With this strategy, the seller replaces a fixed asset with a current asset. This increases the current ratio (current assets/current liabilities).  Sometimes referred to as the Working Capital Ratio, investors see this as an indication a company’s ability to service its short-term debt. 

Exit/Repositioning

A Sale-leaseback can be a useful tool for a business that knows it wants to move from a given location into another market or trade area in the future.  It can also be a means to exit from an overly specialized or obsolete building.  An example could be a prison or a hospital, or a retailer realizing that growth is moving in a given direction and determining that in 10 years it will move to follow growth, or that they will centralize their operations in a new building. 

We’d love to learn from your experience! Have you ever considered a Sale-Leaseback? As a broker, have you ever put one together? What have mistakes have you made/lessons learned?

This post originally appeared on Jonathan Aceves’ Blog and is republished with permission.

The Four Primary Uses of Sale-Leasebacks

The Four Primary Uses for Sale-Leasebacks

  1. Financing: Allows for off-balance sheet financing (100% of equity can be made available for investment, as opposed to 75% with traditional financing) and at a lower cost
  2. Improved Returns: Firms may earn a higher return on their primary business rather than in real estate, so they consider moving capital to principal business to expand operations
  3. Balance Sheet Improvements: Tool for improving the balance sheet which can be important for exit planning and larger corporations
  4. Exit/Repositioning: When a firm determines they want to exit a given market/location, they can execute SLB to cash out of a given asset in advance, and then have 5-10 years to find new location.

Financing

Sale-leasebacks are a popular means for companies to fuel growth by moving capital out of real estate and into their principal business.  Often, releasing capital in real estate is more affordable and has better terms than bank financing.  With bank financing, you may only be able to release 75-80% of the equity in your real estate, and that loan will likely come with a 3-year balloon payment.  And often the appraised value of the building is the value of the vacant building.  With a Sale-leaseback, a business owner can tap into 100% of the equity in the real estate, with no balloon payment, and often the value of the NNN lease to an investor is higher than the appraised value of the empty building (depending on the owner’s creditworthiness and balance sheet).  Also, a risk of bank financing is that if the appraised value falls below the agreed-upon LTV, the loan is in default and immediately called (think 2008).  The sale-leaseback puts the market risk on the new owner.

Improved Returns

If the returns from a company’s principal business are higher than the returns on the real estate, it often makes sense to move equity out of real estate and invest it in the company’s core business.  The goal is always to maximize return.  For example, if the business is able to gain a 20% return from day-to-day operations, and the ownership of the real estate where the business resides is only netting an 8% return, returns would increase if the business could divest of the real estate to allow for greater investment in the core business.  Through the signing of a long-term lease, the real estate can be sold, the business remains in operation in its current location, and operations could conceivably be expanded with the opening of a new location or other operational expansion. 

Balance Sheet Improvements

As a seller looks to exit their business, it can become important to improve financial statements.  With this strategy, the seller replaces a fixed asset with a current asset. This increases the current ratio (current assets/current liabilities).  Sometimes referred to as the Working Capital Ratio, investors see this as an indication a company’s ability to service its short-term debt. 

Exit/Repositioning

A Sale-leaseback can be a useful tool for a business that knows it wants to move from a given location into another market or trade area in the future.  It can also be a means to exit from an overly specialized or obsolete building.  An example could be a prison or a hospital, or a retailer realizing that growth is moving in a given direction and determining that in 10 years it will move to follow growth, or that they will centralize their operations in a new building. 

 

Using Rent Curves to Study Multifamily Rental Rates

This is Jonathan Aceves with Meybohm Commercial Real Estate, advising business leaders and helping them make wise real estate decisions.  Today we’re going to be discussing Multifamily Rent Curves.  

 

How does one set out to study multifamily rental rates?  We do this by building a rent curve.  Let’s say you want to study the rental rates for housing in Martinez, GA.  We would do a survey of rental rates at apartment complexes in the area, and plot them on a graph.  The graph would start out looking like this:

Then we would separate them by class.  Class is a ranking system given to multifamily properties by investors, generally A, B, C, and D.  A properties are generally newer, amenitized, and really nice.  B properties are usually good, but maybe a little older, maybe not the same level of amenities.  C properties are in not-so-great areas, in fair condition, usually schools aren’t so good.  D properties are in bad condition and really rough areas, these are the kind that you wouldn’t go to at night.  Once you’ve broken them apart by class, you draw a curve over them.  You would end up with something like this:

 

It is interesting to note the steepness of the curve, and the distance between the different curves.  Another thing to note is that market changes shift the curves.  This is what we see in rapidly gentrifying areas—the entire curve moves out.

 

So how do you use the rent curve?  Well this helps investors identify opportunities for repositioning.  It also helps you identify management problems.  If I see a complex with below-market rents, I try to figure out why.  Is it a problem that an investor can fix?  

 

Thanks for reading!  Please like and share with those you think might benefit from this.  We’d love to hear from you! What are your thoughts about rental rates?