Investors guide to your next Hotel Development

What external factors affect the hotel market?

A number of factors affect the performance of the hotel industry. These drivers include:

  • Domestic trips by US residents: Trends in domestic travel, especially business travel, and the total nights spent away from home directly affect demand for accommodation. As the number of trips made by US citizens rises, demand for hotels and motels to house them increases.
  • Consumer Confidence index: Changes in consumer confidence influence decisions that individuals make concerning expenditure on entertainment and traveling, particularly during a recession.
  • Consumer spending: Consumer spending levels have a direct effect on travel demand. When consumers are spending more overall, they are more likely to spend some of their money on travel and accommodations.
  • Inbound trips by non-US residents: Trends in international visitor arrivals and their lengths of stay influence demand for accommodation. A rise in inbound trips positively affects demand for hotels and motels.

Who are the key competitors in the hotel market?

As specified above, there are 74,372 hotels in the United States.

The market leaders (in terms of market share) include Hilton Worldwide Holdings Inc. (13.7%), Marriott

International Inc. (13.5%) and InterContinental Hotels Group PLC (7.5%).

The rest of the market is comprised of many smaller players.

What are the key segments of the hotel market?

A hotel is an establishment that provides lodging and, often times, meals and other services for travelers and other paying guests. A motel, on the other hand, provides lodging for motorists in rooms usually having direct access to an open parking area.

A particular hotel or motel can be classified by a number of characteristics, including whether it provides full or limited service, whether or not it is located in a metropolitan area, the state or region in which it is located, its price or rate level, the number of rooms, and whether it is independent or part of a chain operation.

Hotels and motels can also be segmented by room price rates. The establishments with room rates in the highest 30 percentile that are located in local or metropolitan markets are classified as upscale or luxury. The middle 30 percentile is classified as mid-priced, and the lowest 40 percentile as either economy or budget.

Overall, sales from hotels account for 87.4% of industry revenue and 82.0% of industry employment, though they account for only 44.0% of industry establishments.

Hotels that consist of 25 or more rooms provide 83.6% of industry revenue (with 62.7% of industry revenue coming from guest room rentals, 12.5% coming from food and alcohol sales, 4.2% coming from conference and meeting rooms and 4.2% coming from other charges), while hotels that offer fewer than 25 rooms only constitute 3.8% of industry revenue.

Motels provide about 12.6% of industry revenue. The relative proportion of revenue from each of these segments has been relatively stable over the past five years, although motels experienced some growth at the expense of higher-priced hotels during the recession.

How do hotels generate revenues and profits?

Clearly hotels generate revenues and profits from selling out their rooms.

However, as specified above, other key sources of revenue to consider are food and alcohol sales, and selling conference and meeting rooms.

What are the key financial metrics and costs in the hotel market?

The key financial metrics in the hotel market are as follows:


Industry profit is measured as earnings before interest and taxes. Industry profit have averaged 15.5% of sales in recent years.


The industry’s major expenses are purchases and cost of sales, such as bedding and room supplies. Many hotels also provide meals and liquor, either in individual rooms or in separate restaurants or dining areas.

Last year, purchases were estimated to account for 29.9% of an average operator’s revenue.


Labor is required in many aspects of hotel management, from front-of-house activities, such as front desk, concierge and related activities, to all back-of-house activities, including general management, accounting, marketing, room cleaning and servicing the kitchens, bars and restaurants.

Many hotel jobs have a low skill and training requirement, and employees can be hired on a part-time or casual basis. Because of this practice, many hotels have high staff turnover.

Therefore, there is a constant need for recruitment and training, which can be costly. Some operators have outsourced part of their staff services to specialist staff-recruitment agencies to lower recruitment costs.

Last year, industry wages accounted for approximately 25.7% of total industry revenue.

Rent and Utilities

Rent and utilities on average comprise 7.6% of hotel revenue.

Other Expenses

Marketing costs and royalty fees are another significant cost for those industry participants that operate on a franchise basis. Franchisees typically pay an annual fee of 4.0% to 6.0% of total revenue.

Other major costs include repairs and maintenance, promotional costs, commission paid to agents, bookings and internet fees, accounting and legal costs, motor vehicle expenses, stationery and printing, insurance and other administrative and overhead costs.

What are the key financial metrics and costs in the hotel market?

The key financial metrics in the hotel market are as follows:


Industry profit is measured as earnings before interest and taxes. Industry profit have averaged 15.5% of sales in recent years.


The industry’s major expenses are purchases and cost of sales, such as bedding and room supplies. Many hotels also provide meals and liquor, either in individual rooms or in separate restaurants or dining areas.

Last year, purchases were estimated to account for 29.9% of an average operator’s revenue.


Labor is required in many aspects of hotel management, from front-of-house activities, such as front desk, concierge and related activities, to all back-of-house activities, including general management, accounting, marketing, room cleaning and servicing the kitchens, bars and restaurants.

Many hotel jobs have a low skill and training requirement, and employees can be hired on a part-time or casual basis. Because of this practice, many hotels have high staff turnover.

Therefore, there is a constant need for recruitment and training, which can be costly. Some operators have outsourced part of their staff services to specialist staff-recruitment agencies to lower recruitment costs.

Last year, industry wages accounted for approximately 25.7% of total industry revenue.

Rent and Utilities

Rent and utilities on average comprise 7.6% of hotel revenue.

Other Expenses

Marketing costs and royalty fees are another significant cost for those industry participants that operate on a franchise basis. Franchisees typically pay an annual fee of 4.0% to 6.0% of total revenue.

Other major costs include repairs and maintenance, promotional costs, commission paid to agents, bookings and internet fees, accounting and legal costs, motor vehicle expenses, stationery and printing, insurance and other administrative and overhead costs.

Steps to Starting a Hotel

If you want to start a hotel, follow these steps:

  1. Determine the type of hotel you would like to start (e.g., how many rooms, luxury vs affordable, etc.)
  2. Determine the ideal location(s) for your hotel
  3. Determine whether you will build your hotel from scratch or renovate an existing structure
  4. Speak with architects and others who will be involved in building/renovating your hotel to determine costs
  5. Speak with local government to understand zoning and permit issues and associated costs
  6. Develop your hotel business plan that details your strategy, plans and financial projections
  7. Present your plan to investors and lenders to raise the required funding
  8. Build/renovate your hotel
  9. Recruit and train your hotel staff
  10. Purchase the required systems (e.g., reservation system, accounting software, etc.) to effectively manage your hotel
  11. Launch your pre-opening hotel marketing plan
  12. Open your hotel to the public

Maxx Labs 2018: 6 ways we will improve project delivery with drones

 Drone mapping is an indispensable tool during all phases of construction. Easy-to-use software allows them to create high-resolution orthomosaic, elevation and 3D maps in a matter of hours. Combined with built-in measurement tools and annotations, we can keep real-time tabs on projects and identify potential issues before they become costly.

Cloud-based maps make sharing and collaborating with everyone from site engineers to project owners simple.

Maxx Builders will use drones to quickly survey your job site and build maps. Instead of using human resources, heavy machinery & expensive surveying tools, that produce complex data, you can get the job done in half the time & money, with greater accuracy.

Showing Clients the progress of the project

When clients stay away from the job site and cannot afford to come to the site again & again & your current pictures are just not doing justice, drones can be an inventive way to show clients the progress of building, renovation, or inspection.

If clients are not able to come view the job site regularly, drones are very helpful in providing a visual standpoint that they wouldn’t have seen from the ground.

It is not just the task of showing the client what is happening if they can’t be there, it can also help with projects that haven’t even begun yet.

Drones do a great job of giving designers and architects an idea of what putting an adjacent structure up will look like, and how the aesthetics will change a very large project in a community in regards to open space on the ground and upwards.

Images recorded from a drone can be merged together to provide a short time-lapse video highlighting the progress being made on site. As a result, Maxx Builders teams and clients will be better informed of what’s being achieved and can ultimately make more educated decisions without needing to physically attend the site. Software within the drone enables it to follow a pre-defined flight path every time in order to maintain consistency of progress reports.

Monitoring Job Sites

When you have to frequently shuttle between multiple job sites, or have multiple projects for multiple properties; putting up a drone to monitor the progress, work, safety standards improves the overall performance of the project.

When your workers are on a job site, the main objective that any project manager could wish for is keeping them productive. It is understandable that energy levels will ebb and flow, but you can also detect if any equipment shows up missing, or if other areas may need more workers designated to them for special accommodations.

Site Assessment

Successful projects start by analyzing construction sites before the work begins. Looking at projects from the actually surface of the project is one perspective. Reviewing the project from an aerial perspective may open up new insights. The new knowledge can generate new ideas of how to manage a project right from the outset.

Project Management

Professional sports have used game films for years to analyze how teams move on the field. Contractors can use drones for similar purposes.  We will analyze how their resources are moving on the entire construction site. Opportunities for changes are realized by analyzing different perspectives.

Surveying the Site

Drones in construction have made the task of surveying land much easier and more cost effective. Equipped with a surveying specific drone,we can fly the drone over the stretch of land, collect images and use photogrammetry software such as Drone Deploy to generate 2D/3D structural models, volumetric measurements and topographical maps. Ultimately, We will be able to focus more on analysing the data rather than spending time trying to acquire it using traditional surveying methods.

Identifying Mistakes

Mistakes are inevitable on all construction projects, however it’s the speed at which they are identified that determines the implications it has on the project. Regular drone inspections of a site can unearth mistakes much quicker, therefore enabling swift action. With an aerial view, drones can identify errors that are less visible to the human eye from a lower level.



Guide to Building Medical Facilities

Building a medical facility is very different than constructing any other sort of building. There are many eventualities that those building medical facilities need to take into account. It is a very demanding and competitive area that contractors need experience and knowledge to succeed in. The number of potential situations that a building contractor needs to take into consideration are numerous. This article mentions some of the aspects of constructing a medical facility that contractors must take into account. The features in this article are simply examples and do not constitute a comprehensive list of important construction features. To learn more about what it takes to build a medical facility, read on.


One of the many aspects of medical facility construction that building contractors must take into account is backup generators. Depending on the type of service provided, the entire building may need to be wired to run on these generators in the event of a power outage. This aspect of building construction is especially vital in areas that are prone to inclement weather and natural disasters, as there is a higher chance of a power outage in these areas. Building a facility so that backup generators can reliably and effectively provide power is not easy, and only specialized construction companies can do it. MH Williams has a great deal of experience building facilities that are prepared for all eventualities that may cause power outages, such as thunderstorms, hurricanes, and tornados.


It is unpleasant to think about, but the reality is that medical facilities need to be kept clean and germ free more than the average building. Building one in such a way that all surfaces can be easily cleaned and disinfected is of paramount importance. This is especially true of the floors. They must be able to withstand a large amount of foot traffic, as well as be cleaned and disinfected quickly and thoroughly.


One of the trickiest parts of building a medical facility is estimating how many people will use it in the future. It is easy to find out how many patients comparable facilities in the area have treated in the last year, but a new facility must be built in such a way that it can accommodate all population growth. It is also fairly easy to access statistics relating to projected population growth, but the number of patients the facility will have to serve in the future does not necessarily correlate completely with population growth as a whole. For example, older people need more care, and a medical facility will have to be built with the age of the population in mind,


Another concern when constructing a medical facility is freedom of movement. In a medical facility, many emergency situations occur and force medical personnel move quickly through the building. The building must be designed in such a way that their freedom of movement through the structure is not impeded. Also, it is important that staff and patients be able to move freely in non-emergency situations. This is easier said than done, as there may be upwards of a thousand people inside the building at any one time. Enabling the flow of foot traffic throughout the building is one of the most important aspects of building a medical facility.

Commercial roofing 101

A commercial roof replacement is a major investment – one you want to enter into with eyes wide open. What is involved in installing a new roof? Will you be tearing off the existing roof, or simply installing the new one over the old? What type of roof do you want? All of these and more affect your bottom line.

Let’s delve right into some of these questions. First, what kinds of roofs are on the market today, and how long are they expected to last?

Your Choices in Commercial Roofing

Let’s look at your options for flat roofs. Most commercial buildings use these flat roofs because they cost less and are easier to maintain. In truth, though, no roof is completely flat — or at least it shouldn’t be. Most “flat” roofs are pitched between 2 and 10 degrees to prevent water from pooling and causing costly damage. Let’s take a look at a few of the common commercial roofing options.

Built-up Roof

This roofing system consists of alternating layers of roofing felt, waterproofing material, and hot tar (or bitumen).

  • Pros: Fire resistant, inexpensive, and will last for 10 plus years.
  • Cons: Installation is messy and materials give off a strong odor.

Single-Ply Roof

This type of roof consists of a single layer. This layer could consist of EPDM (ethylene propylene diene monomer), PVC (polyvinyl chloride), or TPO (thermoplastic polyolefin). For an easy way to keep these single-ply options straight, check out our Roofing Material Cheat Sheet, which outlines the differences.

  • Pros: This roofing system is flexible, easy to install, and usually lasts between 20-30 years, depending on weather and surrounding conditions.
  • Con: This type of roof is only one ply, which leaves you more vulnerable to punctures and damage.

Sprayed Polyurethane Foam

Also known by its acronym, SPF, this roofing system is a liquid sprayed over an existing roof, and then treated with a protective coat to help it last longer.

  • Pros: It’s lightweight, flexible, and insulates well.
  • Con: Although it can last 20 years or more, the protective coating needs to be reapplied every 10-15 years.

Asphalt Roll

This is one of the oldest forms of roof, and consists of a flat layer of granulated rolled roofing.

  • Pro: This system is cheap and quick to install.
  • Con: It usually only lasts about 10 years, depending on the structural slope of roof.

Sheet Metal

Also known as standing-seam roofing, this type of roof consists of interlocking panels of steel, aluminum, copper, iron, and other metals.

  • Pros: These roofs are known to be lightweight, durable, and to last 20 plus years, depending on the slope of the roof.
  • Con: This roofing system is one of the most expensive roofing choices on the market.

Roof Installation Costs to Expect


  • Roof Removal and Disposal – $1.00-$4.00 per square foot, depending on how many layers need to be removed.
  • Built-Up Roof – $2.50-$5.00 per square foot
  • Single-Ply Roof – $3.00-$4.00 per square foot
  • Sprayed Polyurethane Foam – $1.50-$6.00 per square foot
  • Asphalt Roll – $1.50-$2.50 per square foot
  • Sheet Metal Roof – $5.00-$10.00 per square foot

Please note, these cost estimates are conditionally based on the thickness of roof, surrounding conditions, as well as other factors mentioned below.

Factors That Affect The Cost Of Your Roof

Size and Type

This one may seem obvious, but nonetheless it’s an important factor in determining cost. Although a larger square footage means more materials and labor, the overall price per square foot may go down as the size of the roof goes up.


How many objects protrude out of your roof? These mean more work, and more areas to cut around and seal. Does the slope of the roof leave it prone to pooling water? Costs may rise if the slope needs to be increased, or if a drainage system needs to be installed.


Certain factors of the location can raise the price. Perhaps your commercial structure is located in an area that requires more permits. Or maybe the weather at your location makes it harder to work — bad storms or cold conditions can raise the costs of a roof replacement. These factors can cause the cost of a replacement roof to fluctuate by upwards of 30%.

Rezoning, Variance, or Conditional Use Permit: Which One Can Solve Your Zoning Problem?

You’re considering the purchase of a particular property, but know it doesn’t conform to the city’s zoning ordinance. As such, you’ve negotiated the purchase contract so that closing is conditional upon you first being able to bring the property, and your intended use of it, into compliance.

What type of application do you make? Rezone it to a district that expressly permits the existing use or the one you desire? Seek a conditional use permit (“CUP”) under the current zoning district where your use is a permitted conditional use? Or is a variance from the ordinance’s regulations the right decision?

In covering the topics below for rezoning, conditional use permits, and variances, this article will help you understand which avenue might make the most sense for you. In this article we’ll cover:

  • How these three options differ
  • What purpose each is intended to foster
  • Examples of the options
  • Common issues faced by parties making these requests
  • Which governmental entities review your application, which one makes the final decision, and what are the procedures for each proceeding, and
  • If the decision is appealed to the courts, how the court makes its decision

It should be noted there are no universal laws, set of terms, or processes for zoning. They vary on a state-to-state and city-to-city basis. So while this article will give you an understanding of some widely used concepts and their application, you’ll have to work with a land use lawyer to determine how (or even if) your city implements these ideas.


Let’s start with rezoning, but first, a quick caveat: although there are two types of rezoning actions, (1) an amendment to the zoning ordinance’s text that impacts all properties, or (2) an amendment to the ordinance’s map to change the use district of an individual parcel, because the first action is less common, this article will consider only the second.

That being said, let’s get to work.

Definition of Rezoning

Rezoning is the act of changing a property’s use district (e.g., commercial, residential, industrial, agricultural, and sub-districts within each) to a different district with regulations permitting the applicant’s desired use.

For explanations of other zoning terms, you can check out our article on common zoning terms.

Purpose of Rezoning

The purpose of zoning is to regulate land uses to serve the health, safety and general welfare of the public. To achieve this purpose, zoning laws address the impacts of land uses, including such things as:

  • Protecting all properties from potentially negative consequences of neighboring, incompatible uses
  • Protecting the value of properties by permitting them the most appropriate land uses, and minimizing potentially negative impact of nearby uses
  • Controlling the location and negative impacts of nuisance-like uses, and
  • Providing adequate public services (e.g., transportation, water and sewers)

Accordingly, a rezoning might be allowed where one of these objectives (or similar ones) is no longer being met by the existing use designation, and the proposed use would further one or more of these goals.

Examples of Rezoning

Rezoning may be appropriate in a number of different circumstances. For example, where a city wishes to replace an undesirable use with a more attractive use, it may initiate a rezoning to a district that doesn’t allow the undesirable use. This can occur, for instance, when a city replaces an intensive multi-family residential district to a less-intensive single-family district to reduce potential strains on public infrastructure, or other general welfare objectives.

Similarly, a property owner can seek a rezoning to change the use district to permit a new use that has become more appropriate due to the city’s development. For example, where undeveloped ground on the edge of the city limits had been limited to agricultural uses, and the city’s growth resulted in residential uses approaching the agricultural district, a retail commercial use may be appropriate to support the shopping needs of these neighborhoods. So long as the comprehensive plan included objectives for the city’s development that address the public need being filled in a rezoning application (here, supporting residents’ shopping needs), the rezoning may comply with the plan even if it didn’t specifically project the particular growth.

Requirements for Approval of a Rezoning

First and foremost, the rezoning application must comply with the procedures described in the municipality’s zoning ordinance, including things like (1) meeting with neighborhoods potentially impacted by the change, (2) meeting with city staff prior to application to discuss potential issues and ensure the application is in proper form, and (3) that any application fees are paid.

Secondly, the rezoning generally must comply with the comprehensive plan. As the plan is a guiding, and not binding document, the city may exercise some flexibility in finding compliance. The retail scenario above is a good example: the plan didn’t project that retail would be appropriate in the subject parcel, but it did note that retail to support residents was one of the plan’s objectives.

The city will then determine if the proposed use is either a permitted use or a conditional use within the proposed district.

Common Rezoning Issues

Next, let’s take a look at some common zoning issues. In this section we’ll talk about regulatory takings, spot-zoning, and “Not In My Backyard”, or NIMBY opposition.

Regulatory Taking
As described in our practical guide to zoning, if a city-initiated rezoning, and its attendant regulations, effectively deprive a landowner of all economically reasonable use or value of their property, it can be considered a regulatory taking. A taking occurs when the government exercises its power of eminent domain to acquire ownership of private property for a public use or benefit. While a government has this right, if it does so, it must compensate the landowner for the loss of its land.

In the case of a regulatory taking, although the government hasn’t taken title to the property, because its regulations rendered the land essentially worthless, the regulation is viewed as a taking, and the landowner must be compensated.

As described in this article on zoning terms, spot-zoning occurs when a single parcel is zoned differently than surrounding uses for the sole benefit of the landowner. Such zoning is unlawful. Although property may lawfully be zoned differently than surrounding uses, pursuant to guiding planning documents (e.g., the comprehensive plan), policies and zoning ordinances, such varying uses are typically permitted only because they serve a public benefit or a useful purpose to the surrounding properties.

A simple test to determine if a rezoning is spot-zoning is to consider whether the rezoning complies with the comprehensive plan. If it does not, then it is spot-zoning. A fix for this scenario is to amend the plan and ordinance to allow for the proposed use before the rezoning occurs.

NIMBY Opposition
An acronym for “Not In My Backyard,” NIMBY is an organized opposition to a rezoning based on the assertion that the new use will negatively impact the objecting parties’ properties. Such protest can occur in all three of the zoning actions considered here, but for sake of brevity, we’ll consider it as applied to rezoning requests.

NIMBY participants are most often residential property owners, and object to uses they believe will negatively impact their homes, including uses like:

  • Landfills, quarries, and industrial or manufacturing uses
  • Roadways
  • Halfway houses and homeless shelters
  • Low-income housing
  • Adult uses, and
  • Large-scale commercial developments (e.g., office complex, shopping mall, sports complex)

In considering such protest, cities will try and balance what the public as a whole needs (e.g., residents generally need shopping centers and roadways) with the desires of neighboring residential property owners.

One way to balance these potentially incompatible needs is the imposition of conditions on the new use. For example, if residents oppose construction of a new sports complex on the grounds that it will create consistent and disruptive noise, the city could require the development to employ larger setbacks or construct noise-buffering structures.


Now that we’ve covered rezoning, let’s next move onto variances.

Definition of Variance

A variance is an administrative, discretionary, limited waiver or modification of a zoning requirement. It is applied in situations where the strict application of the requirement would result in a practical difficulty or unnecessary hardship for the landowner. Typically, the difficulty or hardship must be due to an unusual physical characteristic of the parcel.

Types of Variances

There are two types of variances: an area variance and a use variance. Not all jurisdictions permit both (jurisdictions that don’t allow for use variances generally believe the proper remedy for such situations is a conditional use permit).

An area variance is an exception to the district’s applicable regulations to allow the landowner to enjoy the same use of similarly-situated owners who do not suffer the unusual physical characteristics of the subject land.

A use variance permits a landowner to enjoy a land use that is otherwise prohibited in the existing district. Because use variances are more rare, we’ll just consider area variances.

Purpose of Variances

Firstly, jurisdictions would prefer as an equitable matter that a landowner enjoy the same privileges and burdens of similarly-situated owners, provided the applicant didn’t cause the irregularity.

Secondarily, there is some risk that absent a variance option, where a strict application of the regulations would unreasonably deprive a landowner of all economically reasonable use or value of their property, it may be considered a regulatory taking. Better to allow small deviations where no substantial harm is caused than to risk having to compensate a landowner for a regulatory taking.

Examples of Variances

Likely the most common area variance requests relate to setbacks (the distance between a building and a street or other protected feature, e.g., river). For example, a variance reducing the setback from a roadway might be appropriate where a (1) residential parcel is shaped oddly, and (2) because of this physical irregularity the applicant could not build a home of similar size to its neighboring, regularly-shaped, residential properties, if (3) the full setbacks were required.

Requirements for a Variance

As with all zoning requests, a variance application must comply with the zoning ordinance (procedurally and substantively) and comprehensive plan (though, as noted above, not all jurisdictions require compliance with the plan, and not all jurisdictions require a plan).

The applicant must establish that its property (1) has an unusual physical characteristic the applicant didn’t cause, and (2) if the subject regulation were strictly imposed, it would result in a significant and unnecessary hardship to the owner’s use of its property.

Because the variance allows an owner to operate under less stringent regulations, a city will want to ensure the variance isn’t simply a favorable treatment of the applicant. In order to verify that this isn’t the case, cities will look to earlier, similar variance requests. If they were granted, this supports the validity of the current variance request.

Common Issues with Variances

Sometimes people protesting the issuance of a variance will argue that the owner purchased the property knowing its unusual physical limitation would require a variance. However, this alone will not prohibit the issuance of a variance.

If a city grants a variance that appears to be essentially a favor to the applicant, or the applicant failed to show the hardship created, some may argue it is an unlawful spot-zoning.

Conditional Use Permits (CUPs)

Finally, let’s take a closer look at conditional use permits and see how these differ from rezoning and variances.

Definition of Conditional Use Permit (CUP)

Conditional use permits (often simply called CUPs) are uses permitted on a permanent basis within a district so long as the governing body’s conditions are met. Permitted conditional use permits are expressly listed for each district in the zoning ordinance. These uses require conditions because in their absence the use could negatively impact nearby properties. Conditional use permits are given at the discretion of the city.

Purpose of Conditional Use Permit

Similarly to the consideration of NIMBY protests, the city understands that some uses, while beneficial or necessary for the community, could cause certain negative impacts (e.g., increased traffic or noise). Imposing conditions that minimize such impacts allows the city to enjoy the needed use while also protecting the uses of nearby land.

Examples of Conditional Use Permits

A common conditional use permit allows for the operation of a home-based business within a residential district. Conditions designed to limit negative impacts of this business on the district could include such things as requiring traffic related to the business to park in certain areas (e.g., the home’s driveway) and limiting signage for the business. Another common conditional use is a church within a residential district, again with conditions to minimize the potentially negative impacts of the church (e.g., parking and additional traffic control improvements).

Requirements for Approval of a Conditional Use Permit

As with the above, a conditional use permit application must comply with the zoning ordinance and comprehensive plan. As relates to the ordinance, this primarily means the requested use is expressly permitted as conditional in the subject district. Where it does, where the applicant accepts the conditions imposed, and where all other ordinance requirements have been satisfied, the conditional use permit is granted as matter of right. If the owner ceases to comply with the conditions, it risks the revocation of the conditional use permit.

Common Issues with Conditional Use Permits

An applicant may argue the conditions imposed are too restrictive and unduly burden its use of his property. Alternatively, those opposing the grant of a conditional use permit may argue the regulations are insufficient to protect against the use’s negative impacts.

Additionally, if the conditional use permit is not in compliance with the ordinance, as with a questionable variance, it may be considered an unlawful spot-zoning.

Procedure for Approval & How Courts Examine Challenges to Zoning Decisions

Now that we’ve covered rezoning, variances, and conditional use permits, let’s next examine the process for getting approvals in place. In this section we’ll also take a closer look at what happens when a zoning decision is challenged in court.

Who Reviews Rezoning, Conditional Use Permit and Variance Applications

Generally an application for the three requests considered here start with the city’s zoning staff. They work with the applicant, explaining regulations under the ordinance, and modifying the application where necessary to make it compliant.

Though the process following staff’s review varies between jurisdictions, generally rezoning and conditional use permit applications are forwarded, along with staff’s recommendation, to the planning commission. The commission is an advisory board of residents who reviews applications with staff and counsel to determine if the request complies with the ordinance and, where required, the comprehensive plan. Following its review, the commission makes a recommendation to the city council, and the council gives the thumbs-up or thumbs-down. It should be noted, that in some jurisdictions the council may delegate its conditional use permit decision-making authority to the commission.

In the case of variance requests, the staff (following its review) forwards a recommendation to the board of zoning adjustment (“BZA”). In some jurisdictions the BZA will make the final approval or denial of a variance application, and in others the BZA will act like the planning commission, only making recommendations to the council. BZA decisions may, depending on the zoning ordinance, be subject to appeal directly to the courts or to the council.

Legislative vs. Administrative Review

Zoning decisions come in two different flavors: legislative and administrative (also referred to as quasi-judicial). Which flavor isn’t determined by which body makes the final decision (e.g., commission, council or BZA), but rather on the characteristics of the request itself. Because the procedural rules and protections are different as between legislative and administrative decisions, an applicant can expect different rules for different types of requests.

Legislative decisions apply to the community as a whole, and not only to an individual. In zoning the clearest example is the creation of, or a text amendment to, the zoning ordinance because it applies to all properties within the city. In contrast, administrative decisions impact only a single property or individual. For example, because a variance or CUP decision will only impact the individual property making the application, these decisions are generally considered administrative (however, some jurisdictions consider CUP decisions to be legislative).

There is disagreement among jurisdictions as to whether the rezoning a specific parcel is legislative or administrative. Some treat it as legislative, and others, pointing to the fact that it affects only a single parcel, treat it as administrative. Where legislative, these decisions (like all legislative decisions) may only be made by the governing body, e.g., the city council, board of alderman or similar body. Administrative decisions may be made (limited by state and local laws) by non-legislative bodies, e.g., the planning commission or BZA.

Legislative vs. Administrative Review Procedures

Because legislative decisions are by definition those with broad application to the community, they are based on the city’s discretionary powers. They are subject to Constitutional limitations, but otherwise aren’t required to have any specific rules or standards.  Of course if the zoning ordinance requires certain procedures, they must be followed.

Administrative decisions, however, impact only the individual applicants, and thus provide some due process protections. These typically include the rights to:

  • Notice of a hearing
  • Present evidence and cross-examine witnesses
  • Legal representation, and
  • A written decision based on the evidence presented

Method and Standard of Reviews for Appeals to the Courts

If a council’s legislative decision is appealed to the courts, the court will generally look at any record of the council’s consideration, as well as making a “de novo” review. De novo is Latin for “anew” and means the court will consider evidence and arguments as if the council proceedings had never occurred. The court may even consider new evidence at trial that was not presented in the decision proceedings.

Based upon this review the court will determine if the proceedings violated Constitutional protections, either “facially” (meaning the ordinance on its face was unconstitutional) or “as applied” to the applicant aggrieved by the administrative decision. The burden of proof is placed upon the applicant, who will only prevail if it can establish “by clear and convincing evidence” that it suffered substantial detriment, and that the decision provided no benefit to the health, safety and welfare of the public.

Unlike the de novo review of a legislative decision, administrative appeals are based only on the record created at the proceeding. Following a review of the record a court will consider if the administrative body exceeded or abused its discretionary powers, or acted arbitrarily or capriciously regarding the applicant’s constitutional rights. If there is any evidence supporting the administrative decision, it will be upheld by the court.

Guide to Ingress & Egress in Commercial Real Estate

When property is purchased, buyers often make several assumptions. Buyers assume they will be able to use the property. Buyers also assume they can enter and exit the property. But, the rights to enter and exit the property may be separate from the ownership of the property. Ingress is defined as the right to enter the property and egress is defined as the right to exit the property. Others may also need or have a right to ingress or egress on your property. If proper care is not taken to understand and secure these rights, it could spell disaster for a commercial real estate transaction.

Ingress, Egress and Easements

The rights of ingress and egress are often secured by easements. An easement is a legal right to a limited use of another’s property. You may need an access easement to cross over someone else’s property to enter or exit your own property. You may need an easement on a private road that will allow you access to the property and ensure you can get to the main roads in the area. If there is a shared driveway, you may need an easement to allow you to use it.

Easements should be officially recorded, just as you would officially record the title to a property. Usually, you have the ability to sell an easement along with the deed to the property.

Others may have an easement on your property that gives them a right of ingress and egress as well. One typical example is the easement utility companies have on most properties. This easement allows them to enter a property to check meters and to repair or replace equipment essential to the working of the line. It is often not necessary for you to grant the easement to the utility company because in most jurisdictions the utility easement exists as a matter of law.

Special Issues of Landlocked Property

Some parcels of property are landlocked. They have no public access point. Landlocked parcels can be found anywhere. In a rural area where a large landowner is subdividing his or her land into smaller parcels, some of the parcels may be landlocked. In urban and suburban settings it is not uncommon to find a small store or other commercial enterprise surrounded by other businesses. The small store may be landlocked by its neighbors.

If a landlocked property does not already have an easement over adjacent property, you will need to secure an easement, or some other right of ingress and egress before buying the property. Otherwise you risk committing a civil trespassing offence every time you enter or leave your own property.

Landlocked commercial property in many jurisdictions does not come with an automatic access easement over neighboring properties. Lenders will require proof of the right of ingress and egress as part of the conditions of issuing a loan for the purchase of commercial real estate.

Neighboring landowners can sell an access easement. Sometimes neighboring landowners will want to limit the access an easement gives the landlocked property owner. However, easements are usually not a good way to strictly limit access. If limits are needed instead of giving an easement, the neighboring property owner should consider a different type of agreement.

How to Secure Ingress and Egress Without an Easement

Because under the law easements can both give to broad a right of access from the point of view of a neighbor and too narrow a right from the point of view of the easement holder, often other types of arrangements work better for securing the rights of ingress and egress.

Owners of landlocked parcels, or other difficult to access parcels, may wish for ingress and egress rights to be part of the deed, instead of as a separate easement. This provides several advantages to the owner of the limited-access property. It makes the process of documenting the rights easier. If the owner goes to sell the property later, having the rights explicitly in the deed will put the future buyer at ease. Having rights of ingress and egress spelled out, as part of the deed to property, is easiest to achieve when buying the access-limited parcel from the landowner who also owns the neighboring property you will have to cross to get to your property.

Sometimes a property owner will want a land use agreement. A land use agreement is a contract that spells out specific duties and responsibilities between the two sides. Land use agreements should be recorded with the county, just as an easement is recorded. A land use agreement gives the parties great flexibility in determining just how much access will be granted. A land use agreement can limit the tonnage of trucks that can cross the neighboring property, or whatever limits the two sides agree to. A land use agreement will also usually explicitly state what the limited-access property owner must pay for the upkeep of any roads.

Ingress, Egress, and Due Diligence

Verifying the ingress and egress rights is an essential part of the due diligence process when purchasing property. Even when access seems obvious, the source of the ingress and egress rights needs to be tracked down. Not only may a lender require such assurances, but it also helps avoid later legal trouble.

Part of the title search process should include documenting the ingress and egress rights. Such rights should be on the deed, in the form of a recorded easement, or land use agreement. If a title search cannot find a recorded document establishing the ingress and egress rights, the seller will need to demonstrate that he or she has those rights and then explicitly convey them to the buyer as part of the transaction.

These steps may be needed, even if the property is not landlocked. If the public access point is remote to the part of the property that is or is going to be developed, or certain weather conditions make the public access point impassable certain seasons, it is prudent to have easement or a land use agreement with a neighbor that provides more reliable and practical access to the property.

Commercial Real Estate Investing Terms & Formulas

Note All formulations are annualized.


1. Gross Scheduled Income (GSI)

GSI is the annual rental income a property would generate if 100% of all space were rented and all rents collected. If vacant units do exist at the time of your real estate analysis then include them at their reasonable market rent.

  • Rental Income (actual)
  • plus Vacant Units (at market rent)
  • = Gross Scheduled Income

2. Gross Operating Income (GOI)

GOI is gross scheduled income less vacancy and credit loss plus income derived from other sources such as coin-operated laundry facilities. Consider GOI as the amount of rental income the real estate investor actually collects to service the rental property.

  • Gross Scheduled Income
  • less Vacancy and Credit Loss
  • plus Other Income
  • = Gross Operating Income

3. Operating Expenses

Operating expenses include those costs associated with keeping a property operational and in service. These include property taxes, insurance, utilities, and routine maintenance. They do not include payments made for mortgages, capital expenditures or income taxes.

4. Net Operating Income (NOI)

NOI is a property’s income after being reduced by vacancy and credit loss and all operating expenses. NOI is one of the most important calculations to any real estate investment because it represents the income stream that subsequently determines the property’s market value – that is, the price a real estate investor is willing to pay for that income stream.

  • Gross Operating Income
  • less Operating Expenses
  • = Net Operating Income

5. Cash Flow Before Tax (CFBT)

CFBT is the number of dollars a property generates in a given year after all expenses but in turn still subject to the real estate investor’s income tax liability.

  • Net Operating Income
  • less Debt Service
  • less Capital Expenditures
  • = Cash Flow Before Tax

6. Gross Rent Multiplier (GRM)

GRM is a simple method used by analysts to determine a rental income property’s market value based upon its gross scheduled income. You would first calculate the GRM using the market value at which other properties sold, and then apply that GRM to determine the market value for your own property.

  • Market Value
  • ÷ Gross Scheduled Income
  • = Gross Rent Multiplier


  • Gross Scheduled Income
  • x Gross Rent Multiplier
  • = Market Value

7. Cap Rate

This popular return expresses the ratio between a rental property’s value and its net operating income. The cap rate formula commonly serves two useful real estate investing purposes: To calculate a property’s cap rate, or by transposing the formula, to calculate a property’s reasonable estimate of value.

  • Net Operating Income
  • ÷ Market Value
  • = Cap Rate


  • Net Operating Income
  • ÷ Cap rate
  • = Market Value

8. Cash on Cash Return (CoC)

CoC is the ratio between a property’s cash flow in a given year and the amount of initial capital investment required to make the acquisition (e.g., mortgage down payment and closing costs). Most investors usually look at cash-on-cash as it relates to cash flow before taxes during the first year of ownership.

  • Cash Flow Before Taxes
  • ÷ Initial Capital Investment
  • = Cash on Cash Return

9. Operating Expense Ratio (OER)

OER expresses the ratio (as a percentage) between a real estate investment’s total operating expenses dollar amount to its gross operating income dollar amount.

  • Operating Expenses
  • ÷ Gross Operating Income
  • = Operating Expense Ratio

10. Debt Coverage Ratio (DCR)

DCR is a ratio that expresses the number of times annual net operating income exceeds debt service (i.e., total loan payment, including both principal and interest).

  • Net Operating Income
  • ÷ Debt Service
  • = Debt Coverage Ratio

DCR results:

  • Less than 1.0 – not enough NOI to cover the debt
  • Exactly 1.0 – just enough NOI to cover the debt
  • Greater than 1.0 – more than enough NOI to cover the debt

11. Break-Even Ratio (BER)

BER is a ratio some lenders calculate to gauge the proportion between the money going out to the money coming so they can estimate how vulnerable a property is to defaulting on its debt if rental income declines. BER reveals the percent of income consumed by the estimated expenses.

  • (Operating Expense + Debt Service)
  • ÷ Gross Operating Income
  • = Break-Even Ratio

BER results:

  • Less than 100% – expenses consuming less than available income
  • Greater than 100% – expenses consuming more than available income

12. Loan to Value (LTV)

LTV measures what percentage of a property’s appraised value or selling price (whichever is less) is attributable to financing. A higher LTV benefits real estate investors with greater leverage, whereas lenders regard a higher LTV as a greater financial risk.

  • Loan Amount
  • ÷ Lesser of Appraised Value or Selling Price
  • = Loan to Value


13. Annual Depreciation Allowance

Annual depreciation allowance is the amount of tax deduction allowed by the tax code that investment property owners may take each year until the entire depreciable asset is written off.

To calculate, you must first determine the depreciable basis by computing the portion of the asset allotted to improvements (land is not depreciable), and then amortizing that amount over the asset’s useful life as specified in the tax code: Currently 27.5 years for residential property and 39 years for nonresidential.

  • Property Value
  • x Percent Allotted to Improvements
  • = Depreciable Basis


  • Depreciable Basis
  • ÷ Useful Life
  • = Annual Depreciation Allowance

14. Mid-Month Convention

This adjusts the depreciation allowance in whatever month the asset is placed into service and whatever month it is disposed. The current tax code only allows one-half of the depreciation normally allowed for these particular months.

For instance, if you buy in January, you will only get to write off 11.5 months of depreciation for that first year of ownership. Likewise, say you sell in January, then you will only get to writeoff half-month depreciation for that final year of ownership.

15. Taxable Income

Taxable income is the amount of revenue produced by a rental on which the owner must pay Federal income tax. Once calculated, that amount is multiplied by the investor’s marginal tax rate (i.e., state and federal combined) to arrive at the owner’s tax liability.

  • Net Operating Income
  • less Mortgage Interest
  • less Depreciation, Real Property
  • less Depreciation, Capital Additions
  • less Amortization, Points and Closing Costs
  • plus Interest Earned (e.g., property bank or mortgage escrow accounts)
  • = Taxable Income


  • Taxable Income
  • x Marginal Tax Rate
  • = Tax Liability

16. Cash Flow After Tax (CFAT)

CFAT is the amount of spendable cash that the real estate investor makes from the investment after satisfying all required tax obligations.

  • Cash Flow Before Tax
  • less Tax Liability
  • = Cash Flow After Tax

17. Time Value of Money

Time value of money is the underlying assumption that money, over time, will change value. It’s an important element in real estate investing because it could suggest that the timing of receipts from the investment might be more important than the amount received.

18. Present Value (PV)

PV shows what a cash flow or series of cash flows available in the future is worth in today’s dollars. PV is calculated by “discounting” future cash flows back in time using a given “discount rate”.

19. Future Value (FV)

FV shows what a cash flow or series of cash flows will be worth at a specified time in the future. FV is calculated by “compounding” the original principal sum forward in time at a given “compound rate”.

20. Net Present Value (NPV)

NPV shows the dollar amount difference between the present value of all future cash flows using a particular discount rate – your required rate of return – and the initial cash invested to purchase those cash flows.

  • Present Value of all Future Cash Flows
  • less Initial Cash Investment
  • = Net Present Value

NPV results:

  • Negative – the required return is not met
  • Zero – the required return is perfectly met
  • Positive – the required return is met with room to spare

21. Internal Rate of Return (IRR)

This popular model creates a single discount rate whereby all future cash flows can be discounted until they equal the investor’s initial cash investment. In other words, when a series of all future cash flows is discounted at IRR that present value amount will equal the actual cash investment amount.

Guide to determine value of Multi-family Real Estate

Most consumers do not grasp the difference between the price and the value of a product or service. Price is simply the amount of money paid or charged for something. When we focus on price, we are focusing on the short-term acquisition of a product. Value, on the other hand, focuses on the long-term aspect of the purchase.

Price is what a buyer spends, and value is what they receive in the transaction. When a buyer has received more value from a product than what they spent, this purchase is viewed as possessing great value. If a buyer values your product and can find a solution to his problem with your product more than he values his money, then he will purchase your product. People who focus on cost focus on the total cost of ownership, but people who focus on value focus on the total picture and how the product will create a solution.

Hyperbolic Discounting

Now, how can we compute value in real estate and specifically multifamily real estate? There are basically three methods of calculating real estate value: the cost approach, the sales approach, and the income approach. The sales approach is widely used in valuing single family homes, and the cost approach is utilized for properties that have few comps and for new properties (such as a church or school). Let’s focus on the income method, which utilizes the net operating income and cap rates to determine the property’s value. This is by far the best method to analyze apartments.

This may explain why strategies such as wholesaling and fix and flipping are extremely popular to investors. These strategies employ much shorter time horizons than multifamily investments. A wholesaler can earn a profit in a matter of weeks, while a multifamily investor usually needs to dedicate a much longer time horizon to execute his business plan to generate his return.

There are other challenges that investors encounter when deciding upon multifamily investments, such as lack of capital or lack of experience, but I feel that not being able to focus on the long-term dissuades many investors from multifamily investing.

If you understand the value and the various benefits that multifamily offers, the decision of delayed gratification will be a no-brainer. So what are the benefits of multifamily, and how do we determine the value?

6 Benefits of Investing in Multifamily Real Estate
Here is a list of benefits:

  1. Cash flow. Apartments generate monthly income, what I like to refer to as wallet money. I compare cash flow to dividends paid by stocks. The money rolls in every month.
  2. Control. You are the captain of your own ship. You have the ability to control every decision that affects your investment.
  3. Tax advantages. It’s not what you make, it’s what you keep that’s important, and real estate offers tremendous tax benefits. Why would the government create advantages for this tax class? The government realizes it does not have the ability to deliver affordable housing, and by offering these benefits, it is trying to stimulate the private sector to step in and fill the void.
  4. Economy of scale: This is a huge advantage when trying to scale your business. I find it much easier trying to collect rent from 30 tenants in my apartment building rather than running all across the city to collect from my single family homes. It is easier and more cost effective to have more units under one roof.
  5. Ability to force the appreciation: The value is not as reliant on comps as it is your ability to increase the value through growing the NOI.
  6. Velocity of money: This refers to the ability to refinance a property, withdraw the equity, maintain control of the asset, and invest the refinance proceeds into another property. Banks are the ideal example of “velocitizing” money. They borrow funds from their customers and lend the proceeds out to individuals looking for loans. The faster the money moves, the wealthier you become.

Multifamily Valuation: How to Calculate Value in Multifamily Investing
Now that you’ve seen the incredible benefits that the multifamily space provides, how do you calculate value? In multifamily investing, it is all about the net operating income (NOI) of the property and the fact that the investor is purchasing the property based on an income stream. Let me provide you with a few definitions:
Operating ExpensesCosts that are incurred to maintain and run a property. Some examples include trash, snow plowing, and pest control.
Capital ExpendituresAn expenditure for an asset that will improve or extend the useful life of an existing asset for a period to exceed one year. Some examples include water heaters, driveways, roofs and A/C units. I like to set aside $250 per unit per year in a cap ex account to address these “repairs.”
You may have to set aside a larger amount, depending upon the age and condition of the property. The cap ex figure falls below the net operating income, so it does not affect the value of the asset, but it will certainly affect your cash flow, i.e. the money you put in your pocket!
Net Operating IncomeAnnual income generated from a property less total operating expenses.
Cap RateThe rate of return on an investment property based on the income. Cap rates are specific to a market and are affected by the type of property class (A, B, C, D) you are investing in. A broker should be able to tell you the cap rate in his market.

Property Class

  • A Properties: Newest, shiniest asset. They contain many amenities and cater to white-collar workers. Expect low cap rates, around 2-4. This class of asset is poor at cash flowing but has the ability to appreciate greatly. I tend to think that investors choose A properties to maintain their wealth, not create it.
  • B Properties: Built within the last 20 years, this class caters to a mix of white and blue-collar workers. This type of property may show a bit of deferred maintenance, but overall, it has a nice mix of cash flow and potential appreciation. Look for cap rates around 5-7.
  • C Properties: My first real estate brokers defined C properties as “crap” properties, but loved their ability to generate substantial cash flow. I tend to agree with his candid analysis. These properties are usually 30+ years old and have deferred maintenance issues. Cap rates hover between 8-10 on these properties.
  • D Properties: The lowest class of property. They are usually located in inner cities where it’s difficult to collect the rent and vacancy rates are high. These properties are highly management intensive, and the tenant base is often difficult to deal with. Investors get lured into investing in these properties due to the low prices, but soon realize they got more than they bargained for. 

The goal is to increase the NOI by either increasing revenues or by decreasing expenses. You are trying to force the appreciation of the asset by increasing the NOI.  The term that is thrown around to accomplish this task is “reposition.” When you reposition an asset, you are adding value by changing the appearance of the property or the operations of the property, all to increase the NOI. You are focusing on the value-adds to a property.

Example of a Successful Multifamily Reposition
Let me give you a quick example of a reposition on one of our assets and different types of value-adds we instituted. We purchased a property that had rents that were well below market, and many units that were vacant. Our goal was to address desperately needed deferred maintenance, while filling the vacant units.
We eventually filled all the vacant units and increased the rent rates on the current tenants from $450 per month to $625 per month. In a span of 12 months, revenue exploded from $53,000 per month to over $90,000 per month. In this example, we were able to increase the value of the property from $4.1 million to just over $6.3 million in only 12 months!
Examples of Value-Adds
Potential value-add items might include:

  • Adding upscale touches, such as two-tone paint and upgraded kitchen floors
  • Offering amenities, such as a fitness center or clubhouse
  • Instituting Ratio Utility Billing System (RUBS)
  • Changing the zoning on a property to a more favorable use
  • Generating new sources of revenue, such as laundry, pet fees, late fees, application fees and storage fees
  • Renovating a property to allow the owner to increase rents
  • Increasing the quality of the tenant base
  • Repositioning a C Property into a B property

All of the value-adds listed above need to focus on either increasing the revenue or decreasing the expenses. If you decide to install granite countertops, but you realize that this upgrade has failed to increase revenue, this would NOT be a value-add. One of the biggest mistakes investors make is to over-improve a property without focusing on the ability of the improvement to increase revenue. (I’ve done that a couple of times. OUCH!)
This is the beauty in multifamily real estate. You have the ability to increase the value of your asset by employing sound management principles to increase the NOI, thereby increasing the value.

How to Calculate Multifamily Value Using Cap Rates
Now let’s tackle how you calculate the value of a property using cap rates. You would take the NOI of a property and divide it by the cap rate.
NOI/Cap Rate = Value
For instance, if the property had an NOI of $150,000 and the cap rate was 6, the property value would be $2,500,000 (150,000/.06). If the NOI increased to $180,000, the value would increase to $3,000,000. A $30,000 increase in NOI generated a $500,000 increase in value.
Cap rates have an inverse relationship with market value. When cap rates compress, as we are witnessing in the current real estate market, the value increases — and vice versa. It’s fantastic when you own property and cap rates are falling, but a real bummer when you are trying to invest. The formula for cap rates is:
NOI/Price = Cap Rate
For example, if the property had an NOI of $50,000 and was listed for $500,000, then the cap rate would be 10 ($50,000/$500,000).
Our strategy is to purchase assets based on actual numbers. We ask the seller to provide us with the last 12 months of income and expense figures, as well as the rent roll. Once you purchase on actuals, your job is to go to work on the NOI. In life, it’s not what you buy but what you pay that is critical to the success of any investment.
My goal in this article has been to describe what “value” is, why some investors are hesitant to jump into multifamily investing, the benefits of investing in this asset class, how to analyze a multifamily property and how to implement value-adds to an investment. Remember, at the end of the day, it’s all about the income versus the expenses.

Investing in Commercial Properties 101

If so far you’ve invested only in single unit residential properties, stepping out of your comfort zone, into commercial properties, can be a startling experience.  However, like anything else once you accomplish something, it gets a bit easier after each time.  Same goes for commercial investing.  It seems intimidating at first, but it’s like any other type of investment.  It requires due diligence, proper management, and a full understanding of all the figures.  Once you can fathom the idea of owning multiple units, everything else is straight forward.  If you are debating whether to invest in commercial real estate, here are some facts that may help you to decide.

What is a Commercial Property? A commercial property is any property over four units. It could span from a five unit varied use property to a 100-unit apartment complex. It could be a 20-unit mobile home complex or a small strip mall. If you invest in anything over four units, you are considered a commercial property investor. What makes commercial properties distinctive are the numerous income flows they provide. Instead of collecting rent from one tenant, you have multiple checks to collect. It sounds intimidating to jump from one tenant to ten, but it is often much easier than realized.

Economies of Scale: The idea of economies of scale is one of the reasons that the additional units are not really overwhelming. There may be ten different tenants, but the physical property remains the same. A single family property has one roof, one front yard and one living room. A five unit property still only has one roof and one front yard, so ultimately you are getting more for your purchase dollar. And management wise, you still only have one physical complex to worry about.

Vacancy Rates: There is a perception that dealing with multiple tenants is a nightmare when it comes to collecting rent, but the opposite is the case. With a single family property, if the tenant doesn’t pay, there is no income coming in and the property is inefficient. With a commercial property, there are multiple tenants paying rent, so one vacancy does not totally disrupt your business. Rent collection may be more consuming, but it is worth it to protect against a vacancy.

Increased Financing Options: Another perception is that it is extremely difficult to get financing for a commercial property. In reality there are many commercial financing options, including a handful of no income or limited documentation lender financing options. There are several commercial long programs aside from traditional lending. Banks as well as private lenders are attracted to large commercial projects, making it easier to find financing for these types of deals than small single family homes.

High Upside: When purchasing a single residential unit you are at the mercy of similar sales in the area. However, with a commercial property, comparable sales are not as significant. The property is evaluated based on the income it produces. An apartment complex with no vacancies is more valuable than what the market may indicate. Due to this, there is potential for higher appreciation. With the right commercial property, there can be a higher upside. There may be risk but the rewards are frequently much greater.

Instant Equity/Increased Cash Flow: A down payment on a commercial property can be anywhere from 25-40%, depending on the lender. This may hurt but the rewards are not far. You have instant equity from the first month you own a commercial property. With this equity comes the ability to generate a greater cash flow, which can be used to generate additional properties or make improvements on the property. Whatever you decide to do increased cash flow, this fact makes commercial properties an attractive investment.

Decreased Competition: The demand for commercial property is not as high as with single unit residents. There are less investors who have the means or desire to purchase these kinds of properties; therefor there is an advantage against your competition. You can take your time choosing and purchasing properties that you see value in without having to race against a bank levied deadline. You could end up sealing more deals on properties you actually want.

Commercial properties can be a great addition and while they may not be for every, these opportunities shouldn’t be blindly ignored on predetermined notions.

10 Things to Know about Commercial Real Estate Appraisal

These days, when it comes to the subject of commercial real estate, business owners and investors have a lot to absorb. This is multiplied greatly when it comes to obtaining an appraisal on a piece of commercial real estate, a process that can greatly differ from appraisals done for residential properties. According to expert mortgage lenders most of the value derived from a commercial building is based on the rental rates received, relative to the expenses that are paid out. The underlying asset is important, but not even close to the way that a residential property values assets.

According to Douglas McKnight, a veteran commercial real estate appraiser, there are 10 crucial facts you need to know about commercial real estate appraisals. Whether you want to buy or sell a commercial property or you just want to establish a value of a lease or lodge a property tax appeal, these facts will help you to know what to expect.

1.The Inspection Is Only a Small Part of the Appraisal Process

Depending on the size and complexity of the property to be appraised, it might take less than an hour to several hours to inspect the property. Some clients perceive this as the entire process but the truth is that it is just the beginning. Appraisers research public ownership and zoning records, investigate demographic and lifestyle information, and compile comparable sales, replacement costs, and rentals. They then analyze this information as it relates to the value of the property. Finally, they write a report on their findings. The inspection is just the beginning of an appraisal process that may take several days or even weeks.

2. Don’t Try to Misrepresent the Facts

Appraisers are expert skeptics. They will request to verify anything that you tell them from other sources. They may even ask questions that they already know the answer to simply to test the credibility of the people showing him the property. Appraisers constantly think about how they will defend their opinions if they are brought to court, even in positions where litigation appears unlikely. If you misrepresent any facts, the appraiser will automatically discount your credibility.

3. Don’t Withhold Information

You may be asked to provide a property tax bill, a set of drawings of the property, income statements, and other items. You may not know why the appraiser is requesting certain items, but it is best to provide whatever you can. The more you provide, the faster they can complete the assignment. Afterwards, if you dispute the appraiser’s value opinions and produce additional information that wasn’t provided from the get go, you have lost valuable time.

4. Appraisers Must Adhere to a Strict Code of Ethics

Appraisers are obligated to follow the Uniform Standards of Professional Appraisal Practice, which requires them to furnish an unbiased opinion. Failure to abide by this may result in disciplinary action from the state, including revocation of an appraiser’s certification. So if an appraiser refuses to do something you ask, it is possibly because of the requirement to obey these ethics.

5. The Client Is the Party That Orders the Appraisal

If the purpose for the appraisal is for financing, the lender is the client, and therefore orders the appraisal. Appraisers have an obligation to maintain client confidentiality. So the appraiser cannot release the appraisal report or any other confidential information to you, when you are the borrower. If the purpose is to appeal property tax rates the appraiser won’t release the results to the property tax board without your permission. So if you are afraid that the appraised value might be higher than the assessed value, you can rest assured that the appraisal is confidential.

6. Identify the Intended Users

Ensure the appraiser knows who you want to use the report. If you are buying a property, that could mean you plan to share the appraisal with the seller, your lender and possibly your local property tax appeal board. These parties will be made known in the appraisal report and are the only ones who are authorized to use the report.

7.There Are Three Types of Reports

A “restricted use report” can only be used by the client and is the shortest and least costly type. Fees vary based on the size of the property and the scope of the appraisal, but a starting point may be $2000 to $2,500. A “summary report” summarizes the data and analysis and can be used by any intended user and can cost upwards of $3,000. A “self-contained report” contains all of the details of the data and analysis, but is rarely requested. The appraiser can guide you as to what type of report you will need.

8. The Type of Report Is Separate from the Scope of Work

The type of appraisal is not based on the amount of work involved in reaching conclusions. With a restricted use or summary appraisal, the appraiser will accumulate huge amounts of information that are maintained in a work file but not included in these types of reports. Consequently, the differences in fees between the three types of reports are less than the amount of information each of them contains. So the same amount of work is done for all types of reports, the difference is what is included..

9.Consider the Date of Valuation

Instituting the date of valuation is imperative. Appraisers can appraise property as of the date of inspection, as of a past date called a “retrospective appraisal”, or as of a future date called a “prospective appraisal”. It is important that you establish the correct date of valuation for your needs.

10. Consider the “Property Interest” Appraised

Property interest refers to what your interest in the property is. Let’s say you want to know what a warehouse property is worth free and clear because you will be moving your business into it; here you are interested in what’s called the “fee simple interest.” You simply want to know the value of the building and its property. Now, let’s say you want to know what a property is worth to a landlord when occupied by particular tenants, here you have a “leased fee interest.” Finally, let’s say you want to know what a lease is worth to a tenant, so here you have a “leasehold interest.” This is a common request when looking to buy businesses since the value of the lease is to that business needs to be known.