This was shot while tooling down Interstate 40 between Flagstaff and Kingman, Arizona. It’s all part of a new feature for this blog entitled CRE Road Kill. Stay tuned for more CRE Road Kill.

Posted by Donald Teel – Arizona Commercial

In today’s commercial investment environment, property taxes can be lethal. Many investors are still paying property taxes that are reflective of the market run-up of 2000-2006 and not necessarily on the current valuations of their investments.

The questions are what can you do about inflated tax valuations, where do you turn and more importantly, how can investors challenge property tax values successfully?

Property Tax Analysis. Create an analysis of the assessed value of your property for the previous five years to determine the trend line. The analysis should show the assessed values and compare those with a legitimate Broker Price Opinion (BPO) to show market value trend compared to assess valuation trend. It might look something like the following (Download the FREE sample spreadsheet here).

Assessed Value VS Market Value Sample Analysis - Sample of Presentation for Tax Challenge

Commercial BPO. Secure a commercial property broker price opinion (BPO) for your property to help determine the market value trend line. Arizona Commercial can do this for you for a nominal fee. The report includes photos, recorded sales values, spreadsheet analysis and conclusion.

The BPO must include such detail as location within the market, property style, age, square footage, lot size, parking, vacancy/occupancy rates, number of leasable office/areas, and other issues that demonstrate the empirical value of the property.

Appraisal Approach. If the first two suggestions demonstrate that you have a potential tax overcharge, the final requirement may be to secure a full appraisal with detailed analysis of comparable properties. Appraisals are expensive and should only be used if the economics of the situation warrant such a measure. However, when push comes to shove, a certified appraisal will carry more weight than a commercial BPO.

Challenge Process and Procedure. States have specific procedures for challenging property taxes and the process must be respected in order to be successful.

The process will include forms, time frames and details that must be completed prior to consideration of a claim. Following these procedures and time limitations will be a critical factor. Most likely you will be required to pay the taxes while challenging their validity and if taxes are not paid in a timely manner, other negative consequences can occur in the form of interest and penalties and in severe cases, assessors may sell the delinquent taxes with a lien or even sell the property after a specified time.

Appealing a tax bill is not easy and may include several layers of review including a hearing for the property owner and even judicial recourse. Ask your County Assessor’s office for a copy of their appeal process.

Failure, Refusal or Inability to Pay Taxes. It is unlikely that a refusal to pay property taxes pending the outcome of a challenge will carry any weight and may further exacerbate the problem by creating a hostile situation.

Philosophical, political or principles of conscience are irrelevant to the process. However, in some cases, hardship may be considered as a factor in when and how the taxes are to be paid. Hardship exemptions are difficult when it comes to commercial property and typically are more successful when the property is a primary residence.

Generally speaking if an owner cannot pay the commercial real estate property taxes that owner should immediately communicate with the County Assessor’s office where the property is located and seek advice.

If a challenge is in order, owners may want to contact a competent lawyer with experience in real estate property tax law.

Declining Commercial Values. Most property types have declined in value and this naturally leads to an examination of all expenses related to market value and the cost of the property, including property taxes.

Declining values are now creating a backlog of challenges and yes, it can get very nasty, as some governments are deliberately protracting the challenges and the court cases to their advantage.

There is no doubt about it, however, that some owners are still paying taxes based on unsupportable valuations from previous years. Despite the declines, property taxes have continued to climb in far too many markets. As an example of the lagging, for the first time in 12 years, property taxes in some areas of Los Angeles County declined up to 15% while others increased.

Posted by Donald Teel, Arizona Commercial

Taking the guesswork out of commercial real estate investment requires more than a hope, a prayer and signature.

The genesis of commercial real estate investment is found in the analysis of the basic math surrounding the transaction. Costs, cash flow, depreciation, appreciation, money in and money out. Math is the science of the deal.

While the origin of commercial transactions is found in the science of basic mathematical functions, the art of performance is found in the crafting of the document; this is the model. Well crafted documents are extensions of the numbers and the intentions of the principals.

If there is to be any semblance of predictability of performance such must be memorialized and embedded in the language that constructs the investment, i.e., the purchase agreement or lease agreement.

Then too, the document’s credibility is only as good as the integrity of its signatories; their motivations. They who sign are those who are called upon to act in accordance with their written promises.

Summary: the deal is as good as the numbers (the Math), the performance is as good as the document (the Model) and the execution of the promises is only as good as the integrity of the principals (the Motives). Upon these three the investment hinges.

The numbers are the science, the document is the art and the performance is the warranty. Upon these three the deal hinges and the door of performance opens and closes.

I have seen and written a lot of documents. In my career I have seen short documents that were good and long documents that were bad. There have been times when the short word accomplished as much as the long word and vice-versa.

Good numbers, contrary to the opinions of some of my contemporaries, are seldom the guarantor of performance. My experience has shown me, countless times, that the integrity of the transaction is always found in the fulfillment of the promises of the principles and this only as a result of superior documentation, whether short or long.

In retrospect, I have seen great documents backed by great numbers end in disaster due only to the diminished capacity, whether intentional or not, of a Principal Party to perform as promised. Lawyers want us to believe that documents are everything. I have seen good deals with superior documents go south because of bad intentions.

Nothing can overcome a Principal with a misguided principle, no matter the document, no matter the math.

Then too, I have seen miserable documents when placed in the hands of principled Principals run their course without incident.

After more than two decades I have learned that the math, the model and the motives are the three inseparable ingredients of any commercial real estate transaction; the most powerful being the later.

To me, this is the holy trinity of real estate investment and one cannot function without the other two.

Upon these three the deal hinges.

 I’ve mentioned the SNDA in previous posts (Subordination, Non-Disturbance, and  Attornment). The ND portion refers to non-disturbance of the tenant’s right to have its lease  recognized as valid in the event of the foreclosure of a senior trust deed. The S refers to the  Subordination clause and the A refers to the Attornment clause. I’ll discuss the Subordination  and Attornment clauses in separate blog posts. From the Tenant’s standpoint, the non-disturbance clause (“ND”) is most important. 

The use of the Non-Disturbance Agreement depends on the timing of the recording of the trust deed and the recording date of the lease (or the recording of a Short Form Notice of Lease) ,collectively “Notice”. Usually neither the Tenant nor the Landlord want the whole lease recorded. The lease may or may not provide for the recording of a Short Form Notice of Lease. As a Tenant you may want a Notice recorded. Check with your attorney for advice.

Both California and Arizona follow the race-notice theory of recording. [If you'd like more information about how recording of documents works in Arizona, contact Donald Teel at 928.777.8100.]  The first legitimate document recorded has priority over subsequently recorded documents. If a trust deed is signed on January 2, but not immediately recorded, and the lease is signed on January 10 and its Notice is recorded on January 11, while the trust deed has not yet been recorded , the lease would have priority over the trust deed. If the trust deed were subsequently foreclosed, it would NOT have the right to evict the Tenant so long as the Tenant was not in default under the terms of the lease.

However, if the trust deed were RECORDED first the lease would be subject to the priority of the trust deed. If the trust deed were foreclosed, the foreclosing party could evict the Tenant! The reason most Tenants want the ND is that they usually have spent quite a bit of money on leasehold improvements, moving costs would adversely impact their bottom line, they may have spent substantial amounts branding their location, and they may be out of business while moving to a new location. A Non-Disturbance agreement should protect the Tenant in those circumstances.

Before entering into a lease, or when renegotiating a lease, the Tenant should determine whether or not there is a recorded trust deed encumbering the property. If there is, the Tenant should make it a condition of the lease that the Landlord provides a Non-Disturbance agreement signed by the lender. Obtaining a Non-Disturbance Agreement often depends on the negotiating position of the parties. A tenant leasing 1,000 square feet of retail space in a mall probably won’t be able to obtain the lender’s consent to a Non-Disturbance agreement. However, a major Tenant in a development should insist on an ND agreement. Merely having the ND clause in the lease will not protect the Tenant if the lender has not provided the signed agreement. The ND clause may provide that the Landlord will use its best efforts to obtain the lender’s Non-Disturbance Agreement. In the standard lease used by commercial brokers in Carlsbad and the rest of San Diego, the lease ND clause provides that if the landlord doesn’t obtain the ND agreement within 60 days, the Tenant may go directly to the lender to try to obtain the Agreement. Without the lender’s signed agreement, the Tenant is at risk. [Contact Donald Teel to review the lease form used in Prescott and the rest of Arizona.] There are various forms of ND clauses and agreements. Be sure to have the language reviewed by your attorney if you want to protect your rights to retain your lease rights in the event of foreclosure. 

If you have general questions about commercial leases, please send us a note at Lee@leesterling.com

Allan Woodruff, CCIM

We’ve all been hearing  and reading “gloom and doom” from the media.

But we know from history that turning points come while the masses are still moaning about how bad things are.

So are we at a turning point? Are we close enough to jump back into the market?

Here are a few facts investors can consider in refining their commercial real estate investment strategies on either the buy or sell side:

1. The deleveraging process will take more time as we work through the process of restoring sanity to private and corporate finances. We’ve lived through a period of very high leverage which must be unwound.  Habits and attitudes must change as investors take a more realistic view on risk, increase savings and reduce spending.
2. Yes, there are economic “green shoots” being seen this spring. Witness the stock market rally and an upturn in existing single-family residential (SFR) real estate sales in February. Consumer Confidence rose slightly from March to April, according to the Conference Board. SFR affordability has reached a multi-year high due to collapsed prices and interest rates at their lowest levels since about 1971. The “transition point” (the inflection point at which prices fall slower than they had been) seems to have occurred in the SFR market, so there is evidence that SFR prices will find a bottom soon.  Prices are typically at early-2004 levels or lower.
3. In the commercial real estate, cap rates (net operating income divided by sales price) have been moving up. This has increased downward pressure on prices, and is a reflection of the higher vacancy factors and lower rents that many owners have encountered. “Commercial follows rooftops”, and the commercial market still has more workout time.
4. Multi-family has seen the largest increase in cap rates. This sector had previously held up best, while retail, office and other commercial sectors were impacted by the poor economy. 
5. Increasing commercial foreclosures will exert additional price pressure on all commercial sectors.
6. Markets tend to overshoot on the way up, and again on the way down. This provides investors a great opportunity to buy when “there’s blood in the streets” if they watch key metrics and turning points.

See the attached article, “Here Comes the Sun: The Recession May Be Over”, by Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co, Inc.

In summary, commercial owners may still benefit from selling now, and re-entering the market at lower prices later. Buyers should be careful… make sure the project is solid, with conservative assumptions. The great financing now available can help make the project work.

Our REO Service is a great way for investors to buy at very attractive prices. If you are seeking commercial investment advice, please email me or, if you prefer, you may call me at (928) 830-2599.

25,000 SF Retail - Prescott, Arizona

This is an excellent opportunity for an investor to acquire a value added, well located commercial investment property in Prescott, Arizona.

The existing lease is a new 10-year absolute NNN lease with increases and percentage rent and two five-year options to renew.

In addition, the property includes a 4,500 sf pad for retail expansion.

Property Description:
ASSUMABLE FINANCING. 5.75%, 27 year note, 15 years with option to renew at market rates. 8% CASH ON CASH. Single Tenant new 10-year Absolute NNN Lease with Escalations and Percentage Rents. 25,000 sf. Investor opportunity to acquire a well located, value-added asset with no landlord responsibilities. Includes a 4,500 sf Pad for additional expansion. Goodwill of Central Arizona is one of the largest and oldest nonprofits operating in the state of Arizona for more than 60 years.

Location Description:
Located within the Prescott Towne Center, a 53,000 sf retail center comprised of 3 buildings directly across from Village at the Boulders with Super Wal-Mart, Big Lots, Tuesday Morning, JoAnn’ s and Dollar Tree.

Prescott is located 90 miles NW of Phoenix with a mild 4 season climate resulting in a healthy growth rate. The Prescott MSA has a population base of approximately 100,000 and a trade area of approximately 165,000.

For more information about this property or any other commercial real estate investment opportunity in Prescott Arizona, email Mary Jo Kirk, CCIM or call me at 928.710.4045.

It is not that I am reluctant to be completely transparent with a client. That is the easy part. The difficulty lies in communicating to commercial property investors that they may be facing a new commercial reality.

Our new commercial reality contains several characteristics that make buying and selling, leasing and landlording and other forms of investment more precarious than perhaps in times past.

Heads I Win Tails You Lose

Commercial real estate values are tipping and for some investors it doesn’t matter what side of the coin comes up.

In a majority of major commercial markets commercial property is softening and for those who purchased in 2005-2007, things may be less than stellar. This is also true of commercial real estate markets like Prescott, Arizona.

Owners who purchased in the 2005-07 framework invested at the top of the market…they bought high.

Commercial Investment Reluctance

Investor reluctance is a second factor impacting the answer to the “What do you think my commercial property is worth?” question.

We are in the shadow of hesitation. Lack of confidence is creating a wait and see menality for some investors. This simply means that commercial property owners will need to be more creative with respect to how they attract tenants and buyers.

Commercial Financing Rules

Lenders are implementing both new and more stringent commercial property financing rules. It is simply more difficult to find funding than it was in 2002-2006 and lenders are burning through spreadsheet analysis in an attempt to only fund the most promising and secure loans.

Yes, lenders are lending! But lenders are lending more cautiously and they are less willing to bet on traditional performance with respect to property appreciation. In fact, they are factoring in depreciation based upon performance actuaries present in the market.

All is not lost. We are simply in need of a dose of creativity with respect to investing and divesting of commercial property.

Need new strategies? Call me at 1-877-380-1000 or, if you prefer, you may email me.

2997 Centerpointe East, Prescott, Arizona - Newer Industrial

This is but one example of the tenant-investor opportunities available in the central and northern Arizona market areas.

Centepointe East features the newest industrial property opportunities in the market and this piece is the most affordable of them all.

Property Description:

New free standing industrial building with 3 overhead doors, good parking, in new business park. Ask about Owner terms for potential purchase.

Location Description:

Located off Highway 89A between the communities of Prescott, Prescott Valley and Chino Valley, easy access to 1-40, and 1-17

Lease and Purchase Information:

There are three suites available within this building; Two 1,500 s.f. and one 2,000 s.f. Best of all they are priced at an amazing $0.25 per s.f. per month, plus NNN. In addition, this property can be purchased with a potential seller financing.

Contact me about this property or email me. If you prefer, you may call me toll free at 1-877-380-1000.