Fire Damaged America's Best Hotel Going Back Into Commerce As Office/Retail Center NEW ORLEANS, Louisiana. March 26, 2015 – Tulane Avenue is the most anticipated area in New Orleans for new developments, and the largest tract of land in the area will finally be put back into commerce after 4 years of work by a local commercial real estate broker. Louisiana Commercial Realty president Robert Hand says, "Our firm has been involved with almost every major development in the Tulane Avenue area, and we are proud to announce another vacant property will be put back into commerce. The fire-damaged America's Best Hotel at 2820 Tulane Avenue has been sold to a local businessman who hopes to transform the property into a new office and retail development."
The 4 year struggle to get the 32,579 square foot of land developed started in April 2011, after the property was severely damaged by fire caused by one of the hotel's residents who was cooking on a hot plate in a room on the third floor. The fire destroyed the roof and most of the third and second floor. The property went on the market to be sold in AS-IS condition, and many hopeful developers thought it could be revived as a moderately priced hotel. In June 2011, a developer agreed to purchase the property, but it turned out they did not have the proper financing and the property went back on the market. In October 2011, there were negotiations from a nearby property owner to purchase the property, but things fell apart when the buyer again could not get financing. Finally in January 2012, the property was purchased for $650,000 by a local hotel owner who believed Tulane Avenue was a good location and envisioned putting the property back into commerce as a hotel. The new owner incurred over $100,000 in fees from architects and attorneys just so he could present the development to the City Planning Department for approval, but after nearly three years he was still unsuccessful. The owner decided a hotel would require more effort and expense than he expected, and decided to entertain offers to purchase the property. A verbal offer from a local construction company in December 2014, for $1,000,000 could never be finalized in writing, but in February 2015, negotiations started with a local businessman who owned nearby retail property and wanted to do more in the area. Finally in March 2015, the businessman purchased the property for $1,060,000 under the name 2820 Tulane, LLC.
Hand says, "We are reminded when properties like this are put back into commerce, that real estate is often the vehicle by which the average person can achieve their lifelong dream. The seller of this property moved to the area 25 years ago, arriving in the middle of a recession with a dream to operate his own hotel. He purchased a small hotel in Houma and built the business up successfully, then sold it and used his family's life savings to buy this property. The buyer of this property is a trained physicist from Europe, whose most likely job was work in the military but sought a better life in the US. He now does work with the National Institute of Health and saves his money so he can buy real estate. It is the grit and determination of an average person, looking to make a better life for their family who in the end helps revitalize New Orleans and transform its landscape. We are proud to have been a part of helping people realize their dream."
About Louisiana Commercial Realty LLC
Louisiana Commercial Realty LLC, based in New Orleans, Louisiana, is known for marketing high value, complicated commercial properties. President Robert Hand is the only commercial real estate broker in Louisiana with an MBA and the CCIM and SIOR designations.
Valuing New Orleans commercial real estate accurately can be difficult at times, but using basic financial principles can help you calculate the market price with a higher level of confidence. Just remember that the price of any object is the equilibrium of supply and demand, but commercial real estate supply and demand can depend on emotional as well as logical factors. The challenge is to avoid these emotional traps and use rational analysis to price your property. Here are the three most common pricing traps that sellers fall into that are imperative to avoid.
While the price the seller paid has nothing to do with the value of the property nor what the seller thinks it might be worth, many sellers use their purchase price as the bottom line they will take when negotiating a price with a buyer. It is called "benchmarking" and it is an easy mistake because nobody likes to lose money on an investment. In more cases than not however, a seller is better off taking the highest price they can get and then reinvesting their money elsewhere to recoup their losses since trying to get an above market price might happen, but it might take you ten years to do so. You can prove it with math using the formula for present value: where i is the interest rate you can earn elsewhere and n is the time. Therefore if you wait 10 years to finally get a buyer at the $1,000,000 price you paid for property, you would have the same amount of money as if you sold the property today for $613,913 and put that money to work at 5% annually. This is a real disaster when holding land that does not appreciate in value since you still have to pay taxes and keep the grass cut.
Appraisals are restricted to using three pricing methods:
a. Income Approach-value based on the net operating income the property generates.
b. Cost Approach-based on what the cost would be today to build your property.
c. Market Approach-based on what other properties in the area have already sold for, adjusted for inequalities.
The appraisal is always based on assumptions which, using today's methods, don't allow an accurate price. For example, the income approach assumes the tenant does not default on the income, that taxes and expenses do not increase and that current expenses stated by the seller are accurate. Rarely does an appraisal calculate net operating income including maintenance sinking funds, even though air conditioners and roofs have a finite life and need to be replaced. And these are very large expenditures which can easily eliminate a years' rental income. The cost approach assumes you can build a new structure for a certain price, usually a per square foot estimate, when any accurate pricing would require a firm bid from a contractor based on specific drawings for the new project. The market approach assumes properties already sold would still have those buyers interested in your property and would have the same demand. Just because one person paid one million for the property down the road to build an apartment doesn't mean a different person who wants to build a po-boy shop would pay the same amount, or that the apartment buyer would have any money left to purchase your property.
Buyers don't care what you paid for it, just like the television show Pawn Stars, when someone walks in to sell an old item they bought long ago. The Pawn Store is only interested in what they can sell it for. Your cost is called a "sunk cost" in that you spent that money regardless of whether you hold or sell the property.
Pricing commercial property accurately can depend on the use a buyer might have, so it pays to ask a lot of questions. Here is a real world example. The subject property is a 10,464 square foot vacant building with three separate spaces: a 4,930sf restaurant, a 3,600sf retail space and a 1,934sf retail space.
This property could be sold to an investor who might rent the space for $16/sf, for a gross income of $167,424, if taxes and insurance costs are passed along to the tenants in a triple net lease.
The price of any investment property, stock or bond, is the present value of future cash flows, adjusted for risk and opportunity costs. The income on commercial real estate is measured by Net Operating Income, which is the income stream generated by the operation of the property, independent of external factors such as financing and income taxes. Gross income includes both rental income and other income such as parking fees, laundry and vending receipts, and any other income. Operating expenses are costs incurred during the operation and maintenance of a property, including repairs and maintenance, as well as insurance, management fees, utilities, supplies, property taxes and others, but excluding principal and interest, capital expenditures, depreciation, and income taxes. For a 10,000 square foot property 100% leased at $10 per square foot producing income of $100,000 annually with expenses of $25,000 annually, the Net Operating Income would be $75,000. If a buyer needs a 9% Cap Rate, the price of the property would be $833,000. If the buyer felt there was more risk than normal and required a 12% cap, the price would be $625,000. If the property were a high quality AAA rated large company such as CVS or Walgreens, the same property with the same income would trade at a 5.5% to 6% Cap Rate since 30 year Treasury Bonds trade at 2.97%, resulting in a price of $1,363,000.
If the investor had to lease the space, the risk of leasing the space would be factored in and there would be an expectation at least a 15% cap rate to assume that risk which would value the property at $500,000, using the formula below.
The seller could be able to command a higher price simply by finding a user of one of the spaces who would buy the property and lease the two remaining spaces. Simply by putting yourself in the buyer's position, you can determine the maximum price a buyer would pay. Here is how it works. A user, for example, of the restaurant is comparing the cash flows of buying versus leasing space. Using the "Law of Substitution", the restaurant owner would compare the alternative of leasing versus buying this property, and the market lease rate is $16.sf, plus $3/sf triple net costs, for an annual lease cost on 4,930sf of $93,670. The buyer could justify purchasing the building if the costs were less than the lease cost. Here is the cost to the potential buyer at various purchase prices. If the potential buyer can lease elsewhere for $93,670 annually, he/she would not be willing to pay a price for the property which would result in a cost of more than that, after taking into account the rental income. The above spreadsheet can be graphed to produce a maximum price which is the intersection of the line of rental cost and the line of net purchase cost.
The maximum price for this property a buyer could justify would be $1,320,000 which would result in a cost of $93,670 annually which is the same as the alternative property lease cost. There are some considerations, such a tax savings from depreciation but that is offset by the tax when the property is sold since the recapture rate is close to the ordinary income rate. There is also the benefit of principal paydown on the mortgage note which is offset by the owner's space cost of taxes and insurance and the maintenance and roof expenses. In summary, the best method to value a property is to put yourself in the most qualified buyer's position and determine what the alternative costs are for the buyer, then price your property using basic financial principals..
"benchmarking"- valuing a property not on the current market value or analysis but on some price you have in your mind that it is worth, based on what you paid for the property or a price someone, somewhere, long ago offered you that you turned down.
"net operating income" - gross income less operating expenses (maintenance, insurance, property taxes, management expenses, utilities) but before income taxes, interest and depreciation.
"sunk cost" - past costs that have already occurred and cannot be recaptured.
"cap rate" - capitalization rate. The rate of return used to value an income stream which can be composed of current and future income or expected capital gain.
copyright 2012 www.louisianacommercialrealty.com.
Last Wednesday, President Obama was the lead story on many television stations, proposing a new plan to eliminate "conflicts of interest" that investment advisors have with their clients.
This begs the question: Can government regulate ethical behavior? This article explores how ethical behavior is incentivized, either on purpose or by neglect, even down to how the real estate industry regulates emails and signs posted that property is for sale.
In speaking to AARP last week, President Obama said, "Financial advisors...shouldn't be able to take advantage of their clients." What you didn't hear on the news was Secretary of Labor, Tom Perez, discussing "the corrosive power of fine print, hidden fees and conflicted advice" and that the president also promoted Massachusetts Senator Elizabeth Warren, who has been popular since her 2012 election with a platform stating that the financial industry takes advantage of people. 
Obama's plan to regulate ethics is to be presented by Labor Secretary Perez, who on a conference call with reporters, was joined by John Bogle, founder of the largest mutual fund family, Vanguard. What you also did not hear is that Vanguard's business model doesn't offer financial advice and Vanguard directly competes with firms that do offer one-on-one education on financial issues. For the average person who wants personal financial education, the best source is often a highly trained, licensed financial advisor. There is always a fascinating story behind the story, and the backstory here is that the new claim for additional government regulation will not work.
The untold story is that the financial industry is already one of the most heavily regulated industries. Financial advisors only get into the industry after an intensive hiring process where only the most qualified are accepted. Advisors must pass a test to become licensed by FINRA (Financial Industry Regulatory Authority), the not-for-profit organization authorized by Congress to supervise the 637,000 brokers in the US. In addition, each office where the financial advisors are employed has an operations staff that reviews account paperwork and transactions, and most offices have replaced their sales manager with a compliance officer. The accounts of each financial advisor are reviewed regularly to insure compliance with a client's investment objectives, and accounts that are too active receive letters and phone calls from the office's compliance office. Financial advisors cannot send emails or letters to clients without approval and can not use excessive language in any communications. 
Morris Bart could never be a financial advisor because he could not imply that all you needed to do was call him to get your money. The reality is that financial advisors are trained to provide a high level of service to clients which encourages referrals which helps them grow their business. Like buying a car or a house, consumers have the responsibility to become educated about their purchases to make the right decision, and in the investment arena the best education on investments can come from your local financial advisor.
The free market is more efficient than government at weeding out the poor performers, if we just let it work. Educated consumers seek out the best service providers, and poor service providers go out of business. That's why businesses are always evolving, trying to provide the highest level of service.
The real estate industry is also highly regulated, but not like you thought. Licenses are issued by each state's Real Estate Commission. There is HUD and FHA and FNMA and GNMA but there is no federal government real estate agency regulating real estate agents. Louisiana created its Real Estate Commission in 1920 but it wasn't until 1972 that agents had to pass a test to obtain their license. While the Louisiana Real Estate Commission's main function is to issue the licenses, they are also charged with protecting the public's interest.
The LREC is the only resort for consumer/agent disputes and while every purchase and sale agreement references the parties will abide by the LREC rules regarding deposits, the fact is that the LREC tells parties in deposit disputes to take their claim to court. The only other real estate body is a trade organization, NOMAR (New Orleans Metropolitan Association of Realtors) which was chartered in 1915 by the National Association of Realtors that applies ethical standards only to its paid members.
The Louisiana Real Estate Commission has adopted Rules and Regulations pursuant to the authority granted in the Louisiana Revised Statutes, Title 37, Section 1435. The Rules and Regulations serve as an extension of the Real Estate License Law and assist the Commission in enforcement. The rules regarding the conduct of agents cover a wide range of topics, including advertising, mold, franchise operations, presentation of offers, and broker cooperation, but nothing about procuring cause, which is widely misunderstood.
The rules lay the groundwork for ethical behavior and agents are required to complete continuing education. The rules are sometimes very detailed, even going as far as explaining how to send emails. In 2012, 14 years after Google was founded but only 12 months after Snapchat, a special section of rules was finally adopted on how to properly use the Internet:
Advertising by signs must include the following:
Nominate a friend's best or worst email signature and get $10 donated in your name to your favorite charity. Send your nomination to roberthand@cox.net.
Interested in graduate school? For a free lesson on configuring email signatures to add pictures and hyperlinks to websites, or icons that link to facebook, twitter or linkedin, send us an email.
