Ultimate goal of cash flow
- More is better than less
- Sooner is better than later
- Certain is better than uncertain
Pro-Forma Operating statement
Used to analyze annual operating cash flow of real estate investment
PGI - Potential Gross Income
- Total income a property might generate in a year in ideal circumstances
Commercial Property
Rent x SF = Total annual rent + Other Income
Residential
Rent per unit x units x 12 + Other income
Vacancy & Collection Allowance
Sometimes there is not a tenant or sometimes tenants don't pay
V&C <>10% Loose market
Effective Gross Income = PGI - V&C
Operating expenses
Net operating income = NOI = EGI - OE
PRO-FORMA OPERATING STATEMENT
Potential Gross Income - PGI
LESS Vacancy & Collection Allowance - V&C
= EFFECTIVE GROSS INCOME - EGI
LESS Operating Expenses - OE
= NET OPERATING INCOME - NOI
LESS Annual Debt Service - ADS
= BEFORE-TAX CASH FLOW - BTCF
Operating Expenses
Include
Property Taxes
Hazard Insurance
Utilities
Management Fee
Maintenance & Repairs
Bank & Legal Fees
Reserve for capital improvements
Exclude
Mortgage interest
Depreciation allowances
Actual capital improvement expenses
EG: Office building 15,840 sf GLA
10,800 rents for $12 psf
5,040 rents for $10 psf
V&C = 10% of PGI
OP Expenses
Prop Taxes 15,900
Insurance 12,000
Utilities 13,900
Cleaning 5,000
Repairs 6,000
Reserve 12,000
Mgmt 8,100
TOTAL 72,900
Purchase price 885,000
Mortgage: 75% ltv, 9% interest 30 yr ammortized
Pro Forma
PGI 10,800 x 12 + 5,040 x 10 180,000
V&C @ 10% 18,000
EGI 162,000
- Operating Expense 72,900
NOI 89,100
- Annual Debt Service 64,088
Total 25,012
Capitalization rate R = NOI/V
Measures the current income of a property relative to its value or purchase price
Cap rate is used to evaluate the quality of an investment
High cap rates good when you are BUYING
Eg: R = 89,100/885,000 = 10.07%
Cap rates are also used to estimate value V = NOI/R
If the market cap rate is 9% estimate property worth- V = 89,100/0.09 = 990,000
Cap rate limitations
Cap rates ignore income growth (and capital gains)
Cap rates ignore risk
Other ratios & multipliers
Cash-on-cash return
COCR = NOI - ADS / Purchase price - loan
eg: = 89,100 - 64,088 / 885,000 - 663,750 = 11.3%
Mortgage Constant
MC = ADS / Loan eg: 64,088 / 663,750 = 9.7%
The "cash" cost of the debt including both principal and interest
Financial Leverage
If R > MC the investment has positive financial leverage and added debt raises the COCR
MC < R < COCR
If R < MC the investment has negative financial leverage and added debt will lower the COCR
MC > R > COCR
Operating Expense Ratio - OER
OER = OE/EGI (Estimated Gross Income) = 72,900/162,000 = 45%
Breakeven Ratio - BER
BER = OE + ADS / EGI = 72,900 + 64,088 / 162,000 = 84.6%
Debt Coverage Ratio - DCR
DCR = NOI / ADS = 89,100 / 64,088 = 1.39
Small Property Investment
Key Rules
- You make all your money the day you purchase the property
- The bets real estate investments you make are the ones you don't
Research the market
- Pick a neighborhood and research it for 6-12 months
- Drive it several times a week
- Build a database (Every Property)
Asking & Selling prices
Size, BR, Bath etc
Quality and condition
How long on market
Rentals
Rental rates
How long vacant
Lease terms
Wednesday, December 29, 2010
RE: Property Management & Leases
Property management involves the leasing marketing managing and overall maintenance of real estate.
Residential Property Management
- High degree of tenant relations
- Short term leases = High tenant turnover
- Apartments, condo, coops & homeowner association
- Single family housing
Commercial Property Management
- More complex but less emotional
- Retail - traffic onsite
- Help tenants attract customers
- Industrial
Roles of property manager
Position the property in the market and advertise it to prospective tenants
To do this the property manager may start by developing a management plan that
- Analyzes current market conditions
- Evaluates the subject property and its positives
- Outlines the investor's objectives
The management plan is then used to make recommendations regarding the property, position it in the market and help determine appropriate rate schedules.
- Continue current use
- Conversion
- Rehabilitate
- Modernize
Select tenants and negotiate leases
The manager may act as his own leasing agent or may hire a broker to lease the property for him.
Manager must be concerned with long-term viability of property
A leasing agent may be primarily concerned with a commission
Tenants should complement one another
Retail properties often use percentage rent
A wide variety of issues must be incorporated into the lease itself
- Commercial leases can be very complex
- Residential leases are more standardized
Collect rent and maintain good tenant relationships
Oversee administrative tasks
Preparing budget
Maintaining property
Hiring and overseeing employees
Recordkeeping
Legal issues for property managers
Americans with Disabilities act (ADA)
Accessibility
Employment
Fair Housing Act (FHA)
Prohibits discrimination on the basis of race, color, religion, sex, handicap, familial status, and national origin
Common Leasing Issues
Term of lease
Residential leases - max 1 year
Commercial leases - 99 years - 5 years or 10 years
Security deposit
Residential - 1 month rent
Commercial - Varies
Possesion of premises
Lessor grants the tenant an implied convenant of quiet enjoyment
Landlord may enter with notice or in emergency
Eviction
3 day notice for non payment
14/30 day notice for other lease violations
Use of premises - Any legal use unles restricted in the lease
Improvements to premises
Maintenance of premises
Assignment and subleasing - subleasing is allowed unless prohibited in lease
Recording a lease - typically only in long-term ground/mineral leases
Options: for renewal; for purchase
Types of leases
Ground lease
Net lease - double-net and triple-net lease
percentage lease
step or graduated lease
Indexed lease
ground lease
oil and gas lease
Residential Property Management
- High degree of tenant relations
- Short term leases = High tenant turnover
- Apartments, condo, coops & homeowner association
- Single family housing
Commercial Property Management
- More complex but less emotional
- Retail - traffic onsite
- Help tenants attract customers
- Industrial
Roles of property manager
Position the property in the market and advertise it to prospective tenants
To do this the property manager may start by developing a management plan that
- Analyzes current market conditions
- Evaluates the subject property and its positives
- Outlines the investor's objectives
The management plan is then used to make recommendations regarding the property, position it in the market and help determine appropriate rate schedules.
- Continue current use
- Conversion
- Rehabilitate
- Modernize
Select tenants and negotiate leases
The manager may act as his own leasing agent or may hire a broker to lease the property for him.
Manager must be concerned with long-term viability of property
A leasing agent may be primarily concerned with a commission
Tenants should complement one another
Retail properties often use percentage rent
A wide variety of issues must be incorporated into the lease itself
- Commercial leases can be very complex
- Residential leases are more standardized
Collect rent and maintain good tenant relationships
Oversee administrative tasks
Preparing budget
Maintaining property
Hiring and overseeing employees
Recordkeeping
Legal issues for property managers
Americans with Disabilities act (ADA)
Accessibility
Employment
Fair Housing Act (FHA)
Prohibits discrimination on the basis of race, color, religion, sex, handicap, familial status, and national origin
Common Leasing Issues
Term of lease
Residential leases - max 1 year
Commercial leases - 99 years - 5 years or 10 years
Security deposit
Residential - 1 month rent
Commercial - Varies
Possesion of premises
Lessor grants the tenant an implied convenant of quiet enjoyment
Landlord may enter with notice or in emergency
Eviction
3 day notice for non payment
14/30 day notice for other lease violations
Use of premises - Any legal use unles restricted in the lease
Improvements to premises
Maintenance of premises
Assignment and subleasing - subleasing is allowed unless prohibited in lease
Recording a lease - typically only in long-term ground/mineral leases
Options: for renewal; for purchase
Types of leases
Ground lease
Net lease - double-net and triple-net lease
percentage lease
step or graduated lease
Indexed lease
ground lease
oil and gas lease
RE: Contracts and Closing
Elements of Contracts in Real Estate
Offer and acceptance - Only happens when both parties agree to exactly the same terms
Consideration - Something of value given up by each party
Capacity to contract - Legally competent, No undue influence
Legal purpose
Real estate sales contracts are subject to the statute of frauds meaning that they must be in writing to be enforceable.
Real Estate Contracts outline the following provisions:
Names of buyer and seller
Description of the property - Legal Description
Fixtures
Purchase price and terms of financing - Earnest money
Type of interest to be transferred and the type of deed to be conveyed
Date and time of closing and possession
Agency disclosure
Contingencies - Inspection, financing, selling other property, buying new property, entitlements
Seller obligations - maintain property, insurance, keep current on mortgage and taxes, title evidence, deliver deed
Escrow arrangements -for taxes and reserves
Provisions should the property be deestroyed or damaged prior to closing
Remedies incase of default
Broker's commission
Signature of all parties
From contract to closing
Truth in lending act (TILA) disclosure within 3 days
3 day right of recission
Good faith estimate of settlement costs - 3 business days
Appraisal - Lender "owns" the appraisal. Borrower has the right to a copy
Loan commitment - conditional on nothing major changing (eg: job loss, property condition, major purchases by borrower or change in credit worthiness)
Due Dilligence - whole house; pest; well and septic; radon and mold
Commercial property considerations
- Environmental value assessement
- Entitlements
Insurance commitments - Property, Mortgage, Title
Removal of contingencies
The Closing Process
Real Estate Settlement Procedures Act (RESPA)
GFE
Prohibits kickbacks and referral fees
Allows borrower copy of appraisal
Limits $ to be held in escrow accounts
HUD-1 settlement statement
Signing paperwork and transferring deed
Transfer of possession
Offer and acceptance - Only happens when both parties agree to exactly the same terms
Consideration - Something of value given up by each party
Capacity to contract - Legally competent, No undue influence
Legal purpose
Real estate sales contracts are subject to the statute of frauds meaning that they must be in writing to be enforceable.
Real Estate Contracts outline the following provisions:
Names of buyer and seller
Description of the property - Legal Description
Fixtures
Purchase price and terms of financing - Earnest money
Type of interest to be transferred and the type of deed to be conveyed
Date and time of closing and possession
Agency disclosure
Contingencies - Inspection, financing, selling other property, buying new property, entitlements
Seller obligations - maintain property, insurance, keep current on mortgage and taxes, title evidence, deliver deed
Escrow arrangements -for taxes and reserves
Provisions should the property be deestroyed or damaged prior to closing
Remedies incase of default
Broker's commission
Signature of all parties
From contract to closing
Truth in lending act (TILA) disclosure within 3 days
3 day right of recission
Good faith estimate of settlement costs - 3 business days
Appraisal - Lender "owns" the appraisal. Borrower has the right to a copy
Loan commitment - conditional on nothing major changing (eg: job loss, property condition, major purchases by borrower or change in credit worthiness)
Due Dilligence - whole house; pest; well and septic; radon and mold
Commercial property considerations
- Environmental value assessement
- Entitlements
Insurance commitments - Property, Mortgage, Title
Removal of contingencies
The Closing Process
Real Estate Settlement Procedures Act (RESPA)
GFE
Prohibits kickbacks and referral fees
Allows borrower copy of appraisal
Limits $ to be held in escrow accounts
HUD-1 settlement statement
Signing paperwork and transferring deed
Transfer of possession
RE: Real Estate Agency
Agency: Relationship between a buyer or seller of real estate and the licensee who represents that person is an agency relationship
Agent: Individual who is authorized and consents to represents the interests of another person.
Fiduciary duty to the principal. Putting the principal's interests above your own.
Principal is the person on whose behalf the agency acts.
Distinguishing between Client and Customer
Client: Agent owes a fiduciary duty
Customer: Agent owes honesty and fair dealing
Single Agency; Dual Agency and Transaction Brokers
Single agency: Agent represents only one party in any single transaction
Subagency is created when one broker appoints other brokers or salespersons to help perform client-based functions on the principal's behalf.
MLS typically make participating brokers subagents of the seller unless a separate agency agreement has been set up.
Subagent has same obligations to the principal as the original agent
Dual Agency: Agent represents TWO principals in the same transaction
Eg: What does an agent do if a client wants to purchase or lease a property from another client. Agent may assume the role of a transaction broker and facilitate the sale without being an agent for either party
Larger office may assign Designated Agent to each principal to provide client-based services. The broker then functions as transaction broker
Duties of a seller's agent
Promote interests of the client with utmost good faith, loyalty and fidelity
Present all offers to the seller ina timely manner
Disclose all facts about the buyer or tenant
Advise the client to obtain outside expert advise regarding problems or questions which are present but outside the agent's expertise
Account in a timely manner for all money and property received
Protect the client's confidences, unless disclosure is required
Types of disclosures
- Environmental hazards
- Physical condition of property
- Material defects in property
- Material defects in the title to property
- Material limitation on the client's ability to perform under the terms of the contract
Duties of transaction broker
Same as above
Protect confidences of both parties to the transaction
Disclose material adverse facts that they know
Listing Agreements, MLS Systems and Commissions
Listing agreement is contract that creates agency relationship between seller and broker
Exclusive right to sell listing - Broker is paid commission regardless of how the sale is made
Exclusive-Agency listing - Seller works with only one agent but may sell property on his own
Open Listing - Any number of brokers. Only the one bringing a buyer is paid
Net listing - Fixed minimum price. Anything paid above that goes to the broker
MLS: Mechanism by which brokers make their listings available to one another
The amount of and who pays the commission are determined by the listing agreement
Commissions are split between the seller's agent the seller's broker the buyer's agent and buyer's broker. The amount of split is determined by the salesperson's contract with the broker and the MLS agreement.
Agent: Individual who is authorized and consents to represents the interests of another person.
Fiduciary duty to the principal. Putting the principal's interests above your own.
Principal is the person on whose behalf the agency acts.
Distinguishing between Client and Customer
Client: Agent owes a fiduciary duty
Customer: Agent owes honesty and fair dealing
Single Agency; Dual Agency and Transaction Brokers
Single agency: Agent represents only one party in any single transaction
Subagency is created when one broker appoints other brokers or salespersons to help perform client-based functions on the principal's behalf.
MLS typically make participating brokers subagents of the seller unless a separate agency agreement has been set up.
Subagent has same obligations to the principal as the original agent
Dual Agency: Agent represents TWO principals in the same transaction
Eg: What does an agent do if a client wants to purchase or lease a property from another client. Agent may assume the role of a transaction broker and facilitate the sale without being an agent for either party
Larger office may assign Designated Agent to each principal to provide client-based services. The broker then functions as transaction broker
Duties of a seller's agent
Promote interests of the client with utmost good faith, loyalty and fidelity
Present all offers to the seller ina timely manner
Disclose all facts about the buyer or tenant
Advise the client to obtain outside expert advise regarding problems or questions which are present but outside the agent's expertise
Account in a timely manner for all money and property received
Protect the client's confidences, unless disclosure is required
Types of disclosures
- Environmental hazards
- Physical condition of property
- Material defects in property
- Material defects in the title to property
- Material limitation on the client's ability to perform under the terms of the contract
Duties of transaction broker
Same as above
Protect confidences of both parties to the transaction
Disclose material adverse facts that they know
Listing Agreements, MLS Systems and Commissions
Listing agreement is contract that creates agency relationship between seller and broker
Exclusive right to sell listing - Broker is paid commission regardless of how the sale is made
Exclusive-Agency listing - Seller works with only one agent but may sell property on his own
Open Listing - Any number of brokers. Only the one bringing a buyer is paid
Net listing - Fixed minimum price. Anything paid above that goes to the broker
MLS: Mechanism by which brokers make their listings available to one another
The amount of and who pays the commission are determined by the listing agreement
Commissions are split between the seller's agent the seller's broker the buyer's agent and buyer's broker. The amount of split is determined by the salesperson's contract with the broker and the MLS agreement.
RE: Real Estate Appraisal
Note: Competitive Market Analysis performed by a broker is not the same as an appraisal and does not serve the same purpose
Market Value: Most probable price that a property should bring in an open competitive market in which market participants have typical bargaining power and information
Other types of values for appraisers: Assessed value, Insurable value, rental value
Basic Principles of Value
Anticipation: Value affected by "what will be" in addition to "what is"
Change: Appraisals are only valid at a particular point in time
Substitution: The value of a parcel is affected by the value of the "next best alternative"
Contribution: The value of a part of the real estate depends on the value it adds to the whole
Appraisal Income Approach
Based on the principle that the property's value should be related to the cash flows that the property can generate for an investor
Approach is most useful for income producing properties or those that could be used to produce income
Gross Income Multiplier (GIM)
GIM = Value / Gross Income
Value = Gross Income x GIM
EG: GIM for warehouses in downtown is 8. Subject property is a warehouse withestimated effective gross income of 25k per year. Estimated value of property is
V=25k x 8 = 200k
Gross Rent Multiplier (GRM)
Used with residential properties
Uses monthly gross rents rather than annual gross income
Net Income Capitalization
capitalization rate = net income / value
value = net income / cap rate
EG: Cap rate for properties in an area is 12%. Subject property has expected first-year NOI of 240k Estimated value is V = 240k / 0.12 = 2,000,000
Market Value: Most probable price that a property should bring in an open competitive market in which market participants have typical bargaining power and information
Other types of values for appraisers: Assessed value, Insurable value, rental value
Basic Principles of Value
Anticipation: Value affected by "what will be" in addition to "what is"
Change: Appraisals are only valid at a particular point in time
Substitution: The value of a parcel is affected by the value of the "next best alternative"
Contribution: The value of a part of the real estate depends on the value it adds to the whole
Appraisal Income Approach
Based on the principle that the property's value should be related to the cash flows that the property can generate for an investor
Approach is most useful for income producing properties or those that could be used to produce income
Gross Income Multiplier (GIM)
GIM = Value / Gross Income
Value = Gross Income x GIM
EG: GIM for warehouses in downtown is 8. Subject property is a warehouse withestimated effective gross income of 25k per year. Estimated value of property is
V=25k x 8 = 200k
Gross Rent Multiplier (GRM)
Used with residential properties
Uses monthly gross rents rather than annual gross income
Net Income Capitalization
capitalization rate = net income / value
value = net income / cap rate
EG: Cap rate for properties in an area is 12%. Subject property has expected first-year NOI of 240k Estimated value is V = 240k / 0.12 = 2,000,000
RE: Deeds and Title transfer
Title to real estate means the right to or ownership of real estate.
A person who holds title would if challenged in court be able to recover or retain ownership or possession of a parcel of real estate
Methods of transferring title
Voluntary Alienation
Involuntary Alienation - Escheat; Eminent Domain; Foreclosure; Adverse possession
Devise and descent
Voluntary Alienation and Deeds
Deed is a written instrument by which an owner of real estate intentionally conveys the right, title or interest in a parcel of real estate to someone else.
A GRANTOR is the person who is transferring title to the property to someone else
A GRANTEE is the person receiving title to the property
General warranty deeds: Provide the greatest protection of any deed and the grantor is legally bound by certain covenants or warranties
Covenant of seisin - Possession
Covenant against encumberances - free from liens or other encumberances
Covenant of quiet enjoyment - Title is good against 3rd party claims
Covenant of further assurance - I will provide any documents you need to defend your claim
Covenant of warranty forever - I'll do this forever
The guarantees extend back to the origin of the property. Grantor defends the title against anyone who may previously have had a claim on the property - including himself.
Special warranty deeds - Guarantees that the grantor received title and nothing bad happened during his ownership but makes no promises about what happened before
Bargain and sale deeds - I own it but make no guarantees
Quitclaim deeds - I don't know if I own anything but if I do - you can have it
Quitclaim deeds are frequently used to cure a defect - a cloud on the title
Good Title
Marketable title - sales contracts require the seller to provide the buyer with good and marketable title to the property
Marketable title
- Has no serious defects and does not depend on doubtful questions of law or fact to prove its validity
- Does not expose a purchaser to hazard of litigation
- Can convince a reasonably well-informed and prudent purchaser acting on business principles and with knowledge of the facts and their legal significance that he/she could sell or mortgage the property at a later time
Other types of good title
Insurable title - One that reputable title insurance company would insure
Title of perfect record - No defects of any kind in the public record
Title Searches & Public Records
public recorcds contain information about many of the claims that may exist with respect to a parcel of real estate.
Title searches are regularly done to ensure that each transfer of the property was completed properly and that each past lien has been removed
Title Insurance
Covers against any defects that could be found in the public records, forged documents, incompetent grantors, incorrect marital statements and improperly delivered deeds
Lenders require insurance coverage. The buyer may also obtain coverage of their own
In the event of a claim on the property, the insurance company will typically pay all your legal expenses to defend the title and to get any documents necessary to perfect title.
A person who holds title would if challenged in court be able to recover or retain ownership or possession of a parcel of real estate
Methods of transferring title
Voluntary Alienation
Involuntary Alienation - Escheat; Eminent Domain; Foreclosure; Adverse possession
Devise and descent
Voluntary Alienation and Deeds
Deed is a written instrument by which an owner of real estate intentionally conveys the right, title or interest in a parcel of real estate to someone else.
A GRANTOR is the person who is transferring title to the property to someone else
A GRANTEE is the person receiving title to the property
General warranty deeds: Provide the greatest protection of any deed and the grantor is legally bound by certain covenants or warranties
Covenant of seisin - Possession
Covenant against encumberances - free from liens or other encumberances
Covenant of quiet enjoyment - Title is good against 3rd party claims
Covenant of further assurance - I will provide any documents you need to defend your claim
Covenant of warranty forever - I'll do this forever
The guarantees extend back to the origin of the property. Grantor defends the title against anyone who may previously have had a claim on the property - including himself.
Special warranty deeds - Guarantees that the grantor received title and nothing bad happened during his ownership but makes no promises about what happened before
Bargain and sale deeds - I own it but make no guarantees
Quitclaim deeds - I don't know if I own anything but if I do - you can have it
Quitclaim deeds are frequently used to cure a defect - a cloud on the title
Good Title
Marketable title - sales contracts require the seller to provide the buyer with good and marketable title to the property
Marketable title
- Has no serious defects and does not depend on doubtful questions of law or fact to prove its validity
- Does not expose a purchaser to hazard of litigation
- Can convince a reasonably well-informed and prudent purchaser acting on business principles and with knowledge of the facts and their legal significance that he/she could sell or mortgage the property at a later time
Other types of good title
Insurable title - One that reputable title insurance company would insure
Title of perfect record - No defects of any kind in the public record
Title Searches & Public Records
public recorcds contain information about many of the claims that may exist with respect to a parcel of real estate.
Title searches are regularly done to ensure that each transfer of the property was completed properly and that each past lien has been removed
Title Insurance
Covers against any defects that could be found in the public records, forged documents, incompetent grantors, incorrect marital statements and improperly delivered deeds
Lenders require insurance coverage. The buyer may also obtain coverage of their own
In the event of a claim on the property, the insurance company will typically pay all your legal expenses to defend the title and to get any documents necessary to perfect title.
RE: Private Restrictions on Property
Even someone who holds a fee simple interest in real estate is restricted in what they can do with the property
- Private agreements and claims may restrict how property can be used
- Encumberance is a right or interest by someone other than the property owner that affects the title or use of real estate
- Public regulation and other governmental action may limit an owner's use of the property
LIENS
Lien is a claim or charge against a person's property made to enforce the payment of money
Types of Liens: Mortgage Liens; Tax Liens; Mechanics Liens
If the required bills are not paid, liens can be used to force the sale of the proerty
Often liens simply represent a claim on the proceeds from the sale of the property whenever it occurs
Liens "run with the property" and encumber future owners
EASEMENTS
Easement is the right of one person to use the property of another for a specified purpose and under certain conditions that specify the extent of allowable usage.
Easement in gross - individual interest in the property
Appurtenant easement - associated with another parcel. Runs iwth the land. Meaning if either party to the agreement sell the property - the easement is sold with it.
TERMINANTING EASEMENTS
- Agreement of the parties
- Merger of the properties
- Abandonment of the rights
- Purpose of easement ceases
- Excessive use
Other ways someone may use your property
- Encroachment is unauthorized inversion on intrusion of fixture, building or other improvement over property line
License is revocable permission to temporarily use the property for a specific purpose
Profit a Prendre is a non-possessory interest in real property that permits the holder to remove part of the soil or produce of the land.
Adverse Possession
If an individual takes possession and uses real estate as if it were his own, eventually he may file an action in court to claim title through adverse possession
To do this - the use must be
- Open and notorious (Someone looked or obvious to anyone who looks)
- Continuous and uninterrupted 10-15 years
- Actual and exclusive (not just one of many)
- Hostile and without the owner's consent
- Adverse to the true owner's possession
Restrictive Covenants
Designed to help mitigate spillover effects among properties (positive/negative)
Restrictive covenants set standards for all the parcels within a defined subdivision. They govern the type, height and size of buildings that individual owners can erect, as well as land use, architectural style, construction methods, setbacks and square footage.
Covenants require private actions by other landowners to enforce. If not enforced for a long period of time, the right can be lost.
Property Taxes & Specials
Property Tax Assessment
- Property taxes are levied on the owners of real estate based on the assessed value of the property owned (ad valorem tax)
- Types of taxes - state/city/school district/counties/townships
- Most states exempt certtain real estate from taxation and local jurisdictions often provide tax abatements for certain industries
Property taxes are based on ASSESSED VALUE of the property. Not its true market value.
Assessed value is often fixed fraction of market value
Eg: Residential - 11.5%; Non-Profit - 12%; Commercial - 25%; Vacant Land 12%
Farm land is assessed based on its use value
Levying property taxes
Tax process begins with adoption of a budget. After budget is approved, an appropriation is passed to authorize the expenditure. Tax Levy is formal action taken to impose the tax.
Tax Rate is calculated by dividing the total funds needed by the taxing authority by the total assessed value of taxable properties in the district.
A mill is 1/1000 of a dollar or 0.001
EG: Budget estimates it needs 85,103,450 in property tax revenues.
Estimated assessed value of property in city was 2,673,854,934
Resulting tax rate is 85,103,450/2,673,854,934 = 3.1828%
Resulting mill rate is 0.031828 x 1000 = 31.828 mills
You owned a 125,000 house. Assessed value is 11.5% of actual value = 14,375
Tax bill is
State - Assessed value 14,375 Mill rate 20.000 Taxes Due 287.50
USD Mill rate 36.850 Taxes Due 529.72
City Mill rate 32.142 Taxes Due 462.04
County Mill rate 29.868 Taxes Due 429.35
State Mill rate 1.500 Taxes Due 21.56
Total $1730.17
If you owned a commercial building worth 2.35 million
Assessed value 587,500 Tax bill 70,711.50
Special Assessements
Infrastructure improvements (streets, sewers, sidewalks, etc) in new developments and existing neighborhoods are financed using special assessements
City pays for improvements using general obligation bond
Princial and interest payments on the bond are asessed to the property owner on the tax bill
Pros - property owner gets to borrow at city's financing rate
Cons - City assumes default risk
Urban Planning & Comprehensive General Plan
Urban planning is necessary to ensure that required public services are available for urban growth as it occurs.
Comprehensive Plan is used as a guide when making specific land-use and other urban policy decisions. It presents a vision for what the community will look like in coming decades.
Comprehensive plan should be used to anticipate and prepare for growth and the infrastructure needs that will come with that growth.
Comprehensive Plan projects
- Population & Employment
- Land use requirements
- Housing needs
- Community facilities & utilities
- Transportation needs
ZONING CODES
Zoning ordinances are local laws that divide land in the jurisdiction into zones each with its own restrictions on the type of permitte use and the maximum intensity of that use
- Private agreements and claims may restrict how property can be used
- Encumberance is a right or interest by someone other than the property owner that affects the title or use of real estate
- Public regulation and other governmental action may limit an owner's use of the property
LIENS
Lien is a claim or charge against a person's property made to enforce the payment of money
Types of Liens: Mortgage Liens; Tax Liens; Mechanics Liens
If the required bills are not paid, liens can be used to force the sale of the proerty
Often liens simply represent a claim on the proceeds from the sale of the property whenever it occurs
Liens "run with the property" and encumber future owners
EASEMENTS
Easement is the right of one person to use the property of another for a specified purpose and under certain conditions that specify the extent of allowable usage.
Easement in gross - individual interest in the property
Appurtenant easement - associated with another parcel. Runs iwth the land. Meaning if either party to the agreement sell the property - the easement is sold with it.
TERMINANTING EASEMENTS
- Agreement of the parties
- Merger of the properties
- Abandonment of the rights
- Purpose of easement ceases
- Excessive use
Other ways someone may use your property
- Encroachment is unauthorized inversion on intrusion of fixture, building or other improvement over property line
License is revocable permission to temporarily use the property for a specific purpose
Profit a Prendre is a non-possessory interest in real property that permits the holder to remove part of the soil or produce of the land.
Adverse Possession
If an individual takes possession and uses real estate as if it were his own, eventually he may file an action in court to claim title through adverse possession
To do this - the use must be
- Open and notorious (Someone looked or obvious to anyone who looks)
- Continuous and uninterrupted 10-15 years
- Actual and exclusive (not just one of many)
- Hostile and without the owner's consent
- Adverse to the true owner's possession
Restrictive Covenants
Designed to help mitigate spillover effects among properties (positive/negative)
Restrictive covenants set standards for all the parcels within a defined subdivision. They govern the type, height and size of buildings that individual owners can erect, as well as land use, architectural style, construction methods, setbacks and square footage.
Covenants require private actions by other landowners to enforce. If not enforced for a long period of time, the right can be lost.
Property Taxes & Specials
Property Tax Assessment
- Property taxes are levied on the owners of real estate based on the assessed value of the property owned (ad valorem tax)
- Types of taxes - state/city/school district/counties/townships
- Most states exempt certtain real estate from taxation and local jurisdictions often provide tax abatements for certain industries
Property taxes are based on ASSESSED VALUE of the property. Not its true market value.
Assessed value is often fixed fraction of market value
Eg: Residential - 11.5%; Non-Profit - 12%; Commercial - 25%; Vacant Land 12%
Farm land is assessed based on its use value
Levying property taxes
Tax process begins with adoption of a budget. After budget is approved, an appropriation is passed to authorize the expenditure. Tax Levy is formal action taken to impose the tax.
Tax Rate is calculated by dividing the total funds needed by the taxing authority by the total assessed value of taxable properties in the district.
A mill is 1/1000 of a dollar or 0.001
EG: Budget estimates it needs 85,103,450 in property tax revenues.
Estimated assessed value of property in city was 2,673,854,934
Resulting tax rate is 85,103,450/2,673,854,934 = 3.1828%
Resulting mill rate is 0.031828 x 1000 = 31.828 mills
You owned a 125,000 house. Assessed value is 11.5% of actual value = 14,375
Tax bill is
State - Assessed value 14,375 Mill rate 20.000 Taxes Due 287.50
USD Mill rate 36.850 Taxes Due 529.72
City Mill rate 32.142 Taxes Due 462.04
County Mill rate 29.868 Taxes Due 429.35
State Mill rate 1.500 Taxes Due 21.56
Total $1730.17
If you owned a commercial building worth 2.35 million
Assessed value 587,500 Tax bill 70,711.50
Special Assessements
Infrastructure improvements (streets, sewers, sidewalks, etc) in new developments and existing neighborhoods are financed using special assessements
City pays for improvements using general obligation bond
Princial and interest payments on the bond are asessed to the property owner on the tax bill
Pros - property owner gets to borrow at city's financing rate
Cons - City assumes default risk
Urban Planning & Comprehensive General Plan
Urban planning is necessary to ensure that required public services are available for urban growth as it occurs.
Comprehensive Plan is used as a guide when making specific land-use and other urban policy decisions. It presents a vision for what the community will look like in coming decades.
Comprehensive plan should be used to anticipate and prepare for growth and the infrastructure needs that will come with that growth.
Comprehensive Plan projects
- Population & Employment
- Land use requirements
- Housing needs
- Community facilities & utilities
- Transportation needs
ZONING CODES
Zoning ordinances are local laws that divide land in the jurisdiction into zones each with its own restrictions on the type of permitte use and the maximum intensity of that use
RE: Legal Property Descriptions
A proper description of real estate is essential for legal documents relating to real estate.
A LEGALLY SUFFICIENT description is one that would: Allow a competent surveyor to define the exact boundaries of the property. An address is insufficient.
Three methods are typically used to legally describle real estate
- Metes & Bounds Descriptions
- Rectangular survey system
- Recorded plat system
METES & BOUNDS DESCRIPTION
Property is described by starting at a designated place on the parcel - the Point of Beginning (POB). It proceeds around the property's boundaries following the description given. The description MUST always end at the POB.
METES: Distances used in the description
BOUNDS: Directions of the boundaries that enclose the land
MONUMENTS: Identifying landmarks
RECTANGULAR SURVEY SYSTEM
Created after the revolutionary war. System is based on two sets of intersecting lines
Principal Meridians run North & South
Base Lines run East & West
Each principal meridian is its own base line
- Both principal meridians and base lines are located by reference to degrees of longitude and latitude
- Each area is assigned to a particular meridian and base line.
Township lines are SIX miles apart - running EAST & WEST
- Define strips of land called township tiers
- Township tiers are designated by consecutive numbers north or south of base line
Range Lines are SIX miles apart running NORTH & SOUTH
- Define strips of land called ranges which are designated by consecutive numbers east and west of the principal meridian
Township Squares: Are 36 SQ Mile squares formed by intersections of the township lines and range lines.
Sections - Each township square is divided up into 36 sq mile sections
Subdivision of a section - Each section is divided into halves (320 acres) and quarters (160 acres)
- In turn, each of these parts is further divided into halves and quarters. Each is defined in relation to its position in the section.
1 Section = 1 SQ Mile
1 SQ mile = 640 Acres
43,560 SF = 1 Acre
66'x 660' = 43,560 SQ Ft
One Chain = 66 Feet
One rod = 4 Chains = 264 Feet
One furlong = 660 Feet = 10 Chains
One Acre = 1 Chain x 10 Chains = 66 Feet x 660 Feet = 43,560 SQ Feet
Correction Lines:
The curvature of Earth means that range lines are not strictly parallel. Few townships are exactly six miles square.
To adjust for this, every FIFTH township line (both north and south of the base line) are termed CORRECTION LINES
On each correction line, the range lines are measured to the full distance of six miles apart. Thus the correction lines are exactly 30 miles apart from each other at each point in line.
Similarly every FIFTH range line is a guide meridian. Thus the guide meridians are exactly 30 miles apart from each other.
30 Mile square area bounded by two guide meridians and two correction lines is called a GOVERNMENT CHECK
RECORDED PLAT SYSTEM
Under recorded plat system a subdivision plat is prepared by a licensed surveyor or engineer
The plat divides the land into numbered or lettered lots and blocks.
Other characteristics of the area are outlined in the platting documents - eg streets, easements etc
Legal description then refers to the plat records:
LOT & BLOCK NUMBER
NAME or NUMBER of subdivision plat
Name of county & state
MEASURING ELEVATIONS
Elevations can also be part of legal property descriptions.
DATUM is a point line or surface from which elevations are measured or indicated
A LEGALLY SUFFICIENT description is one that would: Allow a competent surveyor to define the exact boundaries of the property. An address is insufficient.
Three methods are typically used to legally describle real estate
- Metes & Bounds Descriptions
- Rectangular survey system
- Recorded plat system
METES & BOUNDS DESCRIPTION
Property is described by starting at a designated place on the parcel - the Point of Beginning (POB). It proceeds around the property's boundaries following the description given. The description MUST always end at the POB.
METES: Distances used in the description
BOUNDS: Directions of the boundaries that enclose the land
MONUMENTS: Identifying landmarks
RECTANGULAR SURVEY SYSTEM
Created after the revolutionary war. System is based on two sets of intersecting lines
Principal Meridians run North & South
Base Lines run East & West
Each principal meridian is its own base line
- Both principal meridians and base lines are located by reference to degrees of longitude and latitude
- Each area is assigned to a particular meridian and base line.
Township lines are SIX miles apart - running EAST & WEST
- Define strips of land called township tiers
- Township tiers are designated by consecutive numbers north or south of base line
Range Lines are SIX miles apart running NORTH & SOUTH
- Define strips of land called ranges which are designated by consecutive numbers east and west of the principal meridian
Township Squares: Are 36 SQ Mile squares formed by intersections of the township lines and range lines.
Sections - Each township square is divided up into 36 sq mile sections
Subdivision of a section - Each section is divided into halves (320 acres) and quarters (160 acres)
- In turn, each of these parts is further divided into halves and quarters. Each is defined in relation to its position in the section.
1 Section = 1 SQ Mile
1 SQ mile = 640 Acres
43,560 SF = 1 Acre
66'x 660' = 43,560 SQ Ft
One Chain = 66 Feet
One rod = 4 Chains = 264 Feet
One furlong = 660 Feet = 10 Chains
One Acre = 1 Chain x 10 Chains = 66 Feet x 660 Feet = 43,560 SQ Feet
Correction Lines:
The curvature of Earth means that range lines are not strictly parallel. Few townships are exactly six miles square.
To adjust for this, every FIFTH township line (both north and south of the base line) are termed CORRECTION LINES
On each correction line, the range lines are measured to the full distance of six miles apart. Thus the correction lines are exactly 30 miles apart from each other at each point in line.
Similarly every FIFTH range line is a guide meridian. Thus the guide meridians are exactly 30 miles apart from each other.
30 Mile square area bounded by two guide meridians and two correction lines is called a GOVERNMENT CHECK
RECORDED PLAT SYSTEM
Under recorded plat system a subdivision plat is prepared by a licensed surveyor or engineer
The plat divides the land into numbered or lettered lots and blocks.
Other characteristics of the area are outlined in the platting documents - eg streets, easements etc
Legal description then refers to the plat records:
LOT & BLOCK NUMBER
NAME or NUMBER of subdivision plat
Name of county & state
MEASURING ELEVATIONS
Elevations can also be part of legal property descriptions.
DATUM is a point line or surface from which elevations are measured or indicated
RE: Water Rights & Types of ownership
Water Rights
Riparian Rights Doctrine - Used in states EAST of Mississippi where water is plentiful
Riparian Rights - Common-law rights granted to owners of land along the course of river, stream or similar body of water
Equality of rights - Same rights for all riparians
Reasonable use
Ownership extends to the center of the body of the water
Prior Appropriation Doctrine:
Applies in WESTERN states because water is scarce
Under prior appropriation doctrine, the first landowner to use body of water for some beneficial economic purpose has right to use all the water needed
A permit system is typically used to keep track of water rights which can be sold
Littoral Rights - Apply to owners whose land is adjacent to navigable body of water
Ownership of land extends to the high-water mark of lakes and navigable rivers
REAL PROPERTY vs PERSONAL PROPERTY
Real Property: Interests benefits and rights that are included in the ownership of real estate
Personal Property: Legal interests in any item NOT permanently attached to the land
Fixture: Personal property that has become part of the real estate because it is permanently attached to the land or an improvement. Fixtures generally transfer with the real estate unless they are specifically excluded.
Trade Fixture: Article owned by a tenant and attached to rented space or building or used in conducting a business. Trade fixtures must be removed before the last day of the lease and the cost of repairing damage is the responsibility of the tenant.
CONFLICTS OF FIXTURES
When conflicts arise as to whether an item of personal property is a fixture courts apply several tests to determine if an item is a fixture
- Intent of parties
- Test of attachement - was the item permanently attached to the real estate. Can it be removed without damaging the sorrounding property?
- Test of adaptability - Was the item specifically designed/modified to fit the real estate
OWNERSHIP RIGHTS IN REAL ESTATE
Fee Simple Absolute estate - Fee relates to ownership of land; Simple suggests ownership is without restrictions
Fee simple interest provides all of fundamental legal rights associated with the real estate, unabridged and unaltered
- Possess the property
- Use and modify the property
- Exclude others
- Sell or give the property to whomever I want
Qualitified Fee Estates - Owner's rights can be terminated based on the occurence or nonoccurence of some specified event
- Determinable Fee
- Fee on condition subsequent
Each qualitified fee interest has an accompanying future reversion interest that may never be realized
Life Estates
In ordinary life estate, the GRANTEE is called a Life Tenant and enjoys full ownership for the duration of his or her life. The interest terminates upon the grantee's death.
The person who will receive the property upon the death of the grantee is called the REMAINDERMAN and has a REMAINDER interest
If the life estate is based on the lifetime of a person other than the life tenant, it is known as an ESTATE PUR AUTRE VIE "for the life of another"
LEASEHOLD INTEREST
When the lease is created the rights are separated into LEASEHOLD INTEREST ("Less-Than-Freehold") for the tenant or lessee and A leased fee interest with a right of reentry for the lessor or landlord
JOINT OWNERSHIP OF REAL ESTATE
Tenancy in common - Traditional form
- Proportional interests
- Equal rights of use and possession
Joint Tenancy with right of survivorship - When I die, my co-owners receive my interst in the real estate
Unity of time/title/interest/possession
Condominiums and Coops
Condo ownership - Fee simple ownership of units and tenants in common for common grounds.
Cooperatives - Residents purchase shares in a non-profit corporation in proportion to the value of their units
Time Shares - A form of ownership that splits the interst further by time
Riparian Rights Doctrine - Used in states EAST of Mississippi where water is plentiful
Riparian Rights - Common-law rights granted to owners of land along the course of river, stream or similar body of water
Equality of rights - Same rights for all riparians
Reasonable use
Ownership extends to the center of the body of the water
Prior Appropriation Doctrine:
Applies in WESTERN states because water is scarce
Under prior appropriation doctrine, the first landowner to use body of water for some beneficial economic purpose has right to use all the water needed
A permit system is typically used to keep track of water rights which can be sold
Littoral Rights - Apply to owners whose land is adjacent to navigable body of water
Ownership of land extends to the high-water mark of lakes and navigable rivers
REAL PROPERTY vs PERSONAL PROPERTY
Real Property: Interests benefits and rights that are included in the ownership of real estate
Personal Property: Legal interests in any item NOT permanently attached to the land
Fixture: Personal property that has become part of the real estate because it is permanently attached to the land or an improvement. Fixtures generally transfer with the real estate unless they are specifically excluded.
Trade Fixture: Article owned by a tenant and attached to rented space or building or used in conducting a business. Trade fixtures must be removed before the last day of the lease and the cost of repairing damage is the responsibility of the tenant.
CONFLICTS OF FIXTURES
When conflicts arise as to whether an item of personal property is a fixture courts apply several tests to determine if an item is a fixture
- Intent of parties
- Test of attachement - was the item permanently attached to the real estate. Can it be removed without damaging the sorrounding property?
- Test of adaptability - Was the item specifically designed/modified to fit the real estate
OWNERSHIP RIGHTS IN REAL ESTATE
Fee Simple Absolute estate - Fee relates to ownership of land; Simple suggests ownership is without restrictions
Fee simple interest provides all of fundamental legal rights associated with the real estate, unabridged and unaltered
- Possess the property
- Use and modify the property
- Exclude others
- Sell or give the property to whomever I want
Qualitified Fee Estates - Owner's rights can be terminated based on the occurence or nonoccurence of some specified event
- Determinable Fee
- Fee on condition subsequent
Each qualitified fee interest has an accompanying future reversion interest that may never be realized
Life Estates
In ordinary life estate, the GRANTEE is called a Life Tenant and enjoys full ownership for the duration of his or her life. The interest terminates upon the grantee's death.
The person who will receive the property upon the death of the grantee is called the REMAINDERMAN and has a REMAINDER interest
If the life estate is based on the lifetime of a person other than the life tenant, it is known as an ESTATE PUR AUTRE VIE "for the life of another"
LEASEHOLD INTEREST
When the lease is created the rights are separated into LEASEHOLD INTEREST ("Less-Than-Freehold") for the tenant or lessee and A leased fee interest with a right of reentry for the lessor or landlord
JOINT OWNERSHIP OF REAL ESTATE
Tenancy in common - Traditional form
- Proportional interests
- Equal rights of use and possession
Joint Tenancy with right of survivorship - When I die, my co-owners receive my interst in the real estate
Unity of time/title/interest/possession
Condominiums and Coops
Condo ownership - Fee simple ownership of units and tenants in common for common grounds.
Cooperatives - Residents purchase shares in a non-profit corporation in proportion to the value of their units
Time Shares - A form of ownership that splits the interst further by time
Wednesday, December 22, 2010
Monday, December 20, 2010
REIT - IRR
Real estate investments can generally be put into three classes: Core, Value-added, or
Opportunistic.
Core investments are safe, stabilized properties that generally produce steady
income streams and have low risk.
For core assets, investors generally seek an internal rate of
return (IRR) of between 8 percent and 12 percent.
Core-plus or value-added properties generally
require direct equity participation and operational expertise. This may include renovating or
repositioning a property to create a stable cash flow that generates property appreciation.
The IRR target for value-added properties is 12 percent to 16 percent. Opportunistic investments generally involve a major capital injection into a failing property and are furthest along in the risk spectrum
.
For opportunistic deals, the IRR goal is 20 percent or higher.
Opportunistic.
Core investments are safe, stabilized properties that generally produce steady
income streams and have low risk.
For core assets, investors generally seek an internal rate of
return (IRR) of between 8 percent and 12 percent.
Core-plus or value-added properties generally
require direct equity participation and operational expertise. This may include renovating or
repositioning a property to create a stable cash flow that generates property appreciation.
The IRR target for value-added properties is 12 percent to 16 percent. Opportunistic investments generally involve a major capital injection into a failing property and are furthest along in the risk spectrum
.
For opportunistic deals, the IRR goal is 20 percent or higher.
Monday, December 6, 2010
Franchising
“When it comes
to resources, the
mantra of the suc-
cessful entrepre-
neur is to minimize
and control rather
than maximize and
own.”
Analysis
of potential profit margins can indicate key financial variables, such as return on
investment, net profit, cash flow and timeframe. At the store level, franchisees look for a
20% return on investment.
Once the potential franchiser’s financial analysis is complete, the entrepreneur should
focus on the service delivery system (SDS), a core feature of any franchise. The SDS
gives franchisees the resources to focus on exploiting the opportunity. They are not
distracted by acquiring the machinery, suppliers, land or building — those come from
the franchiser.
“Eighty-five per-
cent of all suc-
cessful entrepre-
neurs spend at
least three to five
years in their
industry learning
the language and
niches before set-
ting out in that
industry to start a
business.”
With the SDS as its core, the Franchise Relationship Model (FRM) further defines the
franchise relationship. The FRM deconstructs the entire franchise model so each part is
isolated, examined and optimized with the goal of providing the ideal, most profitable
product or service. To see what makes a franchise unique, focus on its FRM. This model
incorporates all the key elements — marketplace, demographics, contracts, financials —
around the customer and the SDS. Once it is in place, the FRM provides a common basis
for discussion among all the parties involved.
“Customers will
not beat a path to
your door, instead,
you must build a
roadway to them!”
Since real estate is often a franchise’s largest capital expenditures, site selection must
incorporate a number of essentials. Among the factors considered are:
•
•
•
Primary target audience density — Are enough customers nearby?
How many people pass the location — This can vary from day to night.
Car traffic patterns — Inbound and outbound traffic from a neighborhood have cer-
tain characteristics. A corner lot, traffic congestion and the location of traffic signals
can make certain sites more or less attractive.
Location visibility — This depends on such variables as signage, elevation and how
much time it takes for the building or the sign to become visible to approaching cars.
Visibility also can change from season to season due to foliage or snow and ice.
Local building ordinances — Governmental building restrictions can affect site
selection and may involve experts, such as land use attorneys, civil engineers and
architects. These costs invariably are passed on to the franchisee.
Traffic entrance and exits — Drivers need easy access to the property. Traffic flow
also determines whether customers can make a spontaneous purchase without risk-
ing an accident. Drive-through windows pose a special consideration that can affect
traffic patterns.
The neighborhood — Businesses, like individuals, have neighbors. What constitutes
a good business neighbor? Do you want the synergy of being near a competitor or
should the franchise be set among unrelated businesses? Clustering similar business
generates more like-minded traffic, and that increases competition.
“Retailers should
change their em-
phasis from the
quantity of stores
they open to the
quality.”
Stephen Spinelli Jr. co-founded Jiffy Lube International and became its largest
franchisee with 47 stores that posted 39 consecutive profitable quarters. He now teaches
entrepreneurial studies at Babson College. Robert Rosenberg, CEO of Dunkin’ Donuts
for 35 years, led the firm’s growth from 300 units to more than 3,000. He is now
on the Board of Directors of Sonic, America’s Drive-In. He is also a member of the
International Franchise Hall of Fame. Sue Birley is the former director at National
Westminster Bank, the world’s largest franchise lender.
to resources, the
mantra of the suc-
cessful entrepre-
neur is to minimize
and control rather
than maximize and
own.”
Analysis
of potential profit margins can indicate key financial variables, such as return on
investment, net profit, cash flow and timeframe. At the store level, franchisees look for a
20% return on investment.
Once the potential franchiser’s financial analysis is complete, the entrepreneur should
focus on the service delivery system (SDS), a core feature of any franchise. The SDS
gives franchisees the resources to focus on exploiting the opportunity. They are not
distracted by acquiring the machinery, suppliers, land or building — those come from
the franchiser.
“Eighty-five per-
cent of all suc-
cessful entrepre-
neurs spend at
least three to five
years in their
industry learning
the language and
niches before set-
ting out in that
industry to start a
business.”
With the SDS as its core, the Franchise Relationship Model (FRM) further defines the
franchise relationship. The FRM deconstructs the entire franchise model so each part is
isolated, examined and optimized with the goal of providing the ideal, most profitable
product or service. To see what makes a franchise unique, focus on its FRM. This model
incorporates all the key elements — marketplace, demographics, contracts, financials —
around the customer and the SDS. Once it is in place, the FRM provides a common basis
for discussion among all the parties involved.
“Customers will
not beat a path to
your door, instead,
you must build a
roadway to them!”
Since real estate is often a franchise’s largest capital expenditures, site selection must
incorporate a number of essentials. Among the factors considered are:
•
•
•
Primary target audience density — Are enough customers nearby?
How many people pass the location — This can vary from day to night.
Car traffic patterns — Inbound and outbound traffic from a neighborhood have cer-
tain characteristics. A corner lot, traffic congestion and the location of traffic signals
can make certain sites more or less attractive.
Location visibility — This depends on such variables as signage, elevation and how
much time it takes for the building or the sign to become visible to approaching cars.
Visibility also can change from season to season due to foliage or snow and ice.
Local building ordinances — Governmental building restrictions can affect site
selection and may involve experts, such as land use attorneys, civil engineers and
architects. These costs invariably are passed on to the franchisee.
Traffic entrance and exits — Drivers need easy access to the property. Traffic flow
also determines whether customers can make a spontaneous purchase without risk-
ing an accident. Drive-through windows pose a special consideration that can affect
traffic patterns.
The neighborhood — Businesses, like individuals, have neighbors. What constitutes
a good business neighbor? Do you want the synergy of being near a competitor or
should the franchise be set among unrelated businesses? Clustering similar business
generates more like-minded traffic, and that increases competition.
“Retailers should
change their em-
phasis from the
quantity of stores
they open to the
quality.”
Stephen Spinelli Jr. co-founded Jiffy Lube International and became its largest
franchisee with 47 stores that posted 39 consecutive profitable quarters. He now teaches
entrepreneurial studies at Babson College. Robert Rosenberg, CEO of Dunkin’ Donuts
for 35 years, led the firm’s growth from 300 units to more than 3,000. He is now
on the Board of Directors of Sonic, America’s Drive-In. He is also a member of the
International Franchise Hall of Fame. Sue Birley is the former director at National
Westminster Bank, the world’s largest franchise lender.
Thursday, April 29, 2010
TYPES OF LIQUOR LICENSES IN NEW JERSEY
TYPES OF LIQUOR LICENSES IN NEW JERSEY
For many years people in New Jersey have referred to licenses as either “C” or Broad “C” liquor licenses. The fact is, liquor licenses types are currently identified by an identification number that is issued by the State. It consists of a 12-digit number divided into a 4 groups. A sample license number would look like this: 1406-33-001-001. The first 4 numbers denote the county and the town, the second two numbers denote the license type, the third group is for the town’s use and the last group denotes how many times the license has been transferred.
The second group of numbers which denotes the type of license can fall into any of the nine following types:
31 – Club – Sell any alcoholic beverage but only for immediate consumption on the licenses premises and only to bona fide members and their guests.
32 – Plenary Retail Consumption License with Broad Package Privileges
Sell any alcoholic beverages for consumption on the licensed premises by the glass or other open receptacle and also to sell any alcoholic beverages in original containers for consumption off the licenses premises. You can have both a restaurant and a package store with the same license. FORMERLY BROAD “C”
33 – Plenary Retail Consumption License – Sell any alcoholic beverages for consumption on the licensed premises by the glass or other open receptacle and also to sell any alcoholic beverages in original containers for consumption off the licensed premises. Restaurant is permitted but not a package store with displays. FORMERLY A “C”
36 - Plenary Retail Consumption License (Hotel/Motel Exception) – Same as “33” with the exception of the issue to a Hotel/Motel of 50 to 100 or more rooms only.
37 - Plenary Retail Consumption – This license is issued to a non-profit Musical or Theatre Corporation Pursuant to the Provision of the N.J.S.A.
34 – Seasonal Retail Consumption ( May 1 through November 14) – Same as a “33” but only for Summer season.
35 - Seasonal Retail Consumption License ( Nov. 15 to April 30) – Same as “33” but only for Winter season
43 - Limited Retail Distribution License – Sell any unchilled, brewed, malt alcoholic beverage in quantities of not less that seventy-two fluid ounces for consumption off the licensed premises; but only in original containers.
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