The InSite Difference consists of four carefully selected points of differentiation, each derived from our belief that there is a GREAT way to represent our clients. We aspire to be GREAT brokers and our client list of business owners, investors and developers recognize and appreciate this commitment. The four pillars of the InSite Difference are:
Maximizing Owner Value
Managing Transactions
Making Markets
Providing Decision Advantage
This article focuses on the first pillar: Maximizing Owner Value.
What Maximizing Value Means: A point of differentiation
Maximizing value means more than simply matching a buyer and seller, sitting back as the deal unfolds and waiting for the money. Value really lies in the eye of the beholder or, in this case, our client. Some clients prioritize ROI while others place their highest priority on the timeliness of transacting and the opportunity cost of not doing so. A third category of clients value the probability of a successful closing the most. In this case, we focus on the deal’s terms and conditions, and less on the actual dollar amount.
At InSite Commercial Realty, we strive first to understand how our clients attribute value, only then can we truly support them in achieving it. Regardless of where a client places top priority, we look at how to maximize value before they even think about selling.
For clients placing the highest value on ROI, our primary focus is increasing cash flow by a) checking rents against leasing rates at competitive locations, b) analyzing operating expenses and ratios to determine if and how a property can operate more efficiently, and c) by modelling strategic capital improvements to the property. Increasing cash flow before the client decides to sell benefits them in two ways: in the short run with increasing profits. In the long run by positioning the property for sale with a history of higher Net Operating Income. Making strategic capital improvements may lower a property’s operating expenses, as in the case of replacing an aging HVAC system, while reducing a buyer’s perceived risk when conducting their Property Condition Analysis. Capital investments made by a Seller means fewer potential sources of deferred maintenance to a Buyer.
With clients for whom ROI is not the paramount concern, InSite brokers call on their collective 60+ years of experience with the nuances and intricacies of commercial transactions to structure deals with terms and conditions that speak to our clients’ definition of value, and then shepherd the transaction to ensure our clients’ success in transferring their ownership.
Cap Rates and Value
We will delve into the mechanics of Capitalization Rates in a later article. For our purposes here, the Cap Rate is simply an indicator of an investment property’s Risk/Reward ratio given its price, location, condition and the nature of its cash flow. Cap Rates offer a solid basis for comparing one investment property a) to another property of the same type, b) to a property of a different type, c) to a similar property in a different geographic market or submarket, and, finally, d) to the return available to the Investor from a different asset class, such as a Financial Asset.
While the Cap rate is the barometer of choice in the CRE investment community, I am not a fan of solely using it to indicate value. A truer measurement of Investment Return is the Cash-on-Cash return. Rather than relying on a Cap Rate calculation, Cash-on-cash equates the cash flow you project earning to the amount of money you need to employ to get that return. This provides a truer indication of an investment’s efficiency.
As an example: paying $1,000,000 for an asset projected to yield $100,000 in cash flow, produces a 10% Cap Rate ($100,000/$1,000,000). For that same asset, financing the $1,000,000 purchase with 25% Equity and 75% Debt, your Cash-on-Cash Return (excluding Debt Service) on Equity is 40% ($100,000/$250,000).
To an InSite broker, Maximizing Owner Value means truly understanding and appreciating how the client attributes value, how they prioritize the terms of a deal. If ROI is the primary motivator, then we work with them to increase cash flow. If timing or more certainty in a transaction is paramount to price, we negotiate deal structures to meet that primary concern.
A GREAT broker truly offers more than simply matching Buyers with Sellers and getting a Property Under Contract. A GREAT broker helps the client optimize cash flow before heading to the market for sale and uses their experience and wisdom to solve for the client’s definition of Value.
Learn more about Ross Goldstein.