From the Desk of J. Scott Scheel - An Update, Inauguration, and the Value-Add Approach

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Commercial real estate strategies we may see employed during the Trump Administration 

It’s been a while since you’ve heard from us here at the Commercial Academy and I am so excited to share why we’ve been so quiet.  This past year has been an incredibly busy one as we’ve added an additional 1.5 million square feet across the U.S. to the portfolio, resulting in an additional scheduled $6.6 million of annual revenue in 2017, plus we've grown our team and added a new member to the family.  We've also been working on creating new and exciting educational programs which include lessons we’ve learned from this process– but more on that later.

Recently, I was fortunate enough to attend the inauguration of our 45th President, Donald J. Trump, and witness first-hand the peaceful transition of power that is a cornerstone of our democracy.  And while I was there, I started to think about what this change in power means.  For the first time in our nation's history, the mantle of power has been transferred not to a politician, but a businessman.

President Trump started his business empire in the world of commercial real estate; it is a business he knows well, and the knowledge he gained seems to be one of the skills he is employing to re-invigorate the American economy.

In many ways, President Trump's plans for the economy, such as the $1 trillion infrastructure plan, are similar to the strategies used for value-add commercial real estate.  Clearly, this strategy is a great tool to have in your arsenal as it can apply in a variety of areas, so let’s talk a little bit about how value-add commercial real estate works.

In the case of a value-add property, an owner would take on debt for the commercial property to complete necessary capital improvements.  By completing these capital improvements, the owner hopes to generate a stronger cash flow for the property by bringing in stronger, more established tenants and raising current rents.  Using this newly improved cash flow, the owner would then pay down the debt used to make the original improvements.  However, it is extremely important to remember that while this strategy can work for any commercial property, it can only be successful if the new cash flow outweighs the interest on the debt used to finance the property.

As an example, let’s say you were to buy a $1 million strip mall and took out the loan to cover the purchase price plus an additional $1 million for capital improvements to repair the building and common areas.  This would be a $2 million loan which would carry an estimated 5% interest rate and an amortization period of 25 years.  To see a return on investment the property’s gross income would need to cover two sets of expenses.  The first would be base expenses including property taxes, utilities, and other general items associated with day to day business needs.  The second would be the yearly debt service of $140,302 which would be owed to the lender on the $2 million loan.  If the property's rent roll and other income cannot cover these expenses, you would then default on the loan.

The value-add strategy is just one of the many, many tools we provide as part of the Commercial Academy – and it's also one I often use in building my own portfolio. My proven program has allowed me to create financial freedom for myself and hundreds of our students, and I want to share it with you – in person! I'm hosting the Commercial Property Academy live in sunny Orlando, FL this March 16-19.  This year's event is a whole new format with brand new technologies ready to share with you. Register now!

Yours in Success,

J. Scott Scheel

 

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