How to Analyze Financial Performance in Investment Properties : When looking at commercial properties of any type, you need to spend some time on the financial aspects of the property before you form an opinion on a price you think you can achieve. The financial aspect of a property can have a major impact on price and/or buyer interest. The financial aspects of a building or property can affect assets for many years and for this reason must be analyzed and identified.
We’ve detailed some of the main aspects of financial issues in a property buying or selling scenario. While these are not the only categories of activity and attention, they are the primary ones in most circumstances.
We recommend that you create a checklist of these items so that your property review and inspection process is enhanced and professional.
1. Asset Schedule: The property will contain many fixed and movable assets. This will usually be detailed on the asset register. A well-maintained commercial property will have an up-to-date asset list for you to review. Obtaining a list of assets at an early stage of consideration of a sale is productive because it will tell you in detail what you are selling and then become part of the due diligence process.
2. Banks and Personal Guarantees: Investment properties consist of leases and other documents supporting the tenant’s occupancy. The normal leasing process will involve and create some form of security that will be provided by the lessee to the owner during the lease term. It is important that this guarantee has the power and substance to replace the landlord in a situation where the lessee fails to meet the terms of the lease. At the time of the sale of the property, this security document must have some form of ability to be transferred or reissued to the incoming buyer. This process is called assurance assignment. You should consult with the owner’s attorney to identify the type of collateral involved and the ease with which it can be reached at the time of sale.
3. Capital Expenditures: Major items of plant and equipment replaced in commercial property are usually considered capital expenditures and are separately itemized for taxation and depreciation purposes over a period of time. Your local tax laws will set depreciation requirements as they apply to different types of capital expenditures. For example, a computer purchased for a building control system will depreciate much faster than an air handling unit purchased for an air conditioning manufacturer. A well-maintained property record will include a detailed list of capital expenditures and capital purchase dates. Property buyers will be interested in the depreciation this register provides on cash flows in the years to come.
4. Taxation and GST: Each country and property location has unique laws and tax requirements relating to property and particularly investment Properties. In the sales process, it is important to understand that these matters have been handled properly and up to date. It is sometimes necessary to look at the net returns for properties over the past few years that are applied to the tax return and filing process. You can also request written confirmation from the property owner that all tax issues have been updated.
5. Income and Rent Analysis: The income for a Properti is a reflection of the rent and occupancy permits in it. It is important to understand that the lease has been collected according to the lease or license and that all lease issues are up-to-date. Part of this process will also involve checking the lease review profile and expiration profile of all leases. A property with an unstable lease or a lease that is about to expire is likely to affect prices or buyer interest. When reviewing a tenant’s occupancy against a lease, you should review these originals and cross-references with the rental schedule and discussions or information provided by the landlord.
6. Independent Valuation: Many property owners will receive regular appraisals to support their property financing package. It was not unusual for such an assessment to occur every year. Importantly they are carried out by qualified and registered appraisers. If you look at this documentation and consider it in the pricing process for a property, it is wise to consider the independence of the actual valuation when it was made and its relevance to today’s markets. Some valuations for financing purposes may not be suitable for existing market conditions. It is a good idea to occasionally seek independent judgment that is true at the time of the sale or in preparation for the sale.
7. Land tax issues: Property land taxes have a direct impact on the investment aspects of commercial real estate. In different locations, the recovery and payment of land taxes are uniquely affected by local laws. In some circumstances the land tax may or may not be recovered from the tenant on the property. This will have a direct impact on the net profit and net profit of the property; This then has an impact on prices. Consultation with the financial advisor for the property owner, or the tax office, will achieve clarity on the impact of this taxation. Given that most agents and brokers are not tax experts, you should engage another appropriate tax professional.
8. Lease disputes: Rarely is there a property that does not have a lease dispute or has been affected by a previous lease dispute. For this reason, it is necessary to question the issue of lease disputes and their resolution. When in doubt, ask for copies of correspondence and subsequent agreements between the parties concerned. Unresolved rental disputes can jeopardize or slow down the property sale process.
9. Mortgage interest: Most commercial real estate properties will have some sort of mortgage to the financier. When a mortgage exists, it is necessary to understand how it will be handled or issued in the process of selling. The client should consult the mortgage to clarify this issue for you. In a depressed property situation, the sale of the property may need to realize a certain price before clear ownership rights can be achieved.
10. Operating costs: Running a commercial property will involve operating costs associated with operating costs. Most properties of a certain type in the same location will have the same operating costs. However, if a property has excessive operating costs above average in the area, then the property is likely to be difficult to sell. Most property buyers understand the average cost of property that is considered realistic for each property. He also said that real estate agents and brokers should be very aware of average spending and the analytical process that must be applied in this situation. Operating costs are analyzed on a $ per m2 or $ per ft2 basis (depending on your location, monetary base and country)
11. Mandatory fees: These are usually referred to as rates and taxes. This will involve things like water rates, land taxes, council rates, and any other form of levy filed by the legal entity. Importantly, the resulting charge should be analyzed for similarity with similar properties in the same region. Part of the rating process involves a statutory assessment of the land on which the buildings and property are located. While some property owners like to think that their valuation is high and justifiable (and therefore gives substance to the selling price of the property), it is this valuation that forms the basis for charging and paying legal fees. Astute property investors will always question the statutory judgments rating agencies make in an attempt to limit or reduce the amount of mandatory rates and fees paid annually.
12. Lease reviews: A significant concern in property sales is the size and stability of future rental reviews. It is the rental reviews that will sustain the cash flow and hence the attractiveness of the property to buyers. It is important that the broker or real estate agent reads all leases, before a price assessment or sales method is given. It is very likely that a review of the projected lease and the details in the lease may deter or attract buyers to the property.
13. Arrears in rent: Existing rent arrears must be identified with the property owner. Matters related to law enforcement should also be identified. It is possible that the property has a history of rent arrears and instability. Look for these things and question cash flow stability. A property’s history of financial performance over the past few years is the best way to achieve this.
14. Current building budget: This will involve the current budget for the current building in the current budget year. A good building budget will be written and supported by a good strategy, projection, and property control. At the time of a potential property sale, it is important to understand that current financial performance is in line with the expected building budget. If there are advantages or disadvantages, it is necessary to explain the reasons. If you don’t do this, property buyers will.
15. Side agreement or deed: Occupancy and use of Properties may involve additional side agreements and deeds. This could be with the tenant or a neighboring property. This kind of document will have an impact on sales even though it may not be listed on the property you are selling. Such a document will usually be supported by a common law aspect. If there are such arrangements, you should seek more detail and clarity on how they will be handled at the time of sale. One common occurrence here is the existence of a rental incentive given to the lessee at the beginning of the lease term. When this situation occurs, the most common settlement method is the release of the agreement by the owner prior to settlement. This can be a contract condition.
16. Sinking funds: It is not uncommon for sinking funds to be in larger properties. The fund is basically set up to set aside money to cover repair and maintenance costs of key items. This usually does not include items of a modal nature. For example, the repayment funds can be used to cover the cost of painting the exterior of a large building such as a shopping center every five years. If there is a settlement fund, it is important to understand how it will be handled at the time of the sale. Consultation with the client’s attorney and accountant is essential to the process.
17. Tax depreciation schedule: The property will have a tax depreciation schedule. When properly maintained, this schedule has the ability to reduce net property income in years to come. This is a direct tax benefit for property buyers who will consider a depreciation schedule as part of the sale and settlement. As a broker or agent in sales, you must check the existence of documentation and identify what is meant by the sales process. A well-organized and detailed depreciation schedule will make selling a property more attractive.
18. Short-term rentals: Many properties have short-term leases or regular occupancy that are active around the clock. It is very important to know the mechanism of this dwelling and how to stop it. You don’t want short-term occupancy to jeopardize stability and the sales process.
19. Undocumented rental occupancy: Some may refer to this as ordinary rent; however casual rentals can create worry and uncertainty in the sales process. Some tenants can claim long-term occupancy from a prior casual rental agreement with the landlord. Of course, this type of lawsuit must meet legal requirements to be defended or enforced by a court; however you should be careful in such circumstances as it can slow down or even jeopardize the sales process.
20. Guarantees and guarantees: At the time the property is built, the normal guarantee and performance guarantee process applies from the construction process. At the time of the sale, you need to know whether such things apply or exist. A copy of the documentation is very important. Furthermore, in existing buildings where recent fit out activities have created a new building, there may be guarantees and guarantees for lease construction. This will be transferred to the new owner of the property in most circumstances, but the documentation to allow this to happen must be created appropriately. This is a matter of lawyers acting for clients.
21. Utilities costs and supply: Any commercial property will be supported by a supply of water, gas, electricity, and communication systems. The supply process needs to be understood along with the process costs. Obtaining an up-to-date copy of the account for the service will help you here. It is possible that some utilities will be supplied directly to the tenant and some will be supplied directly to the building owner. Any discrepancies in supply must be identified and documented. The cost of supply should be compared to the average of other properties in the area.
This puts an end to matters relating to financial due diligence. This is a major problem that applies to the sale of commercial real estate; however you should look for other items as each property has a unique performance and financial structure.
Your review of these items should include gathering all original documentation as part of the review process. Your records taken of any comments and findings must be properly maintained to protect you in the event of a dispute or dispute. Given that commercial real estate involves large cash flows and extensive legal documentation, the frequency of disputes is quite high. The only way to protect you here is with your quality record, a wondering mind, and good documentation.