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Using CoStar from my perspective

4/11/2018

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I've been pretty engaged in the CCIM and SIOR threads nationally on the recent phenomenon of CoStar now being the only real national commercial property player ever since Xceligent went out of business. There are almost as many opinions as there are people, but there is one common theme, and that is, people don't seem to like CoStar and there's a surprising amount of anger directed towards them, resenting the monopoly they have, and often griping about cavalier treatment by CoStar reps and by poor data.
 
I was a reasonably satisfied Xceligent user for many years, and found the system easy to use and the data accurate enough, though far from perfect. Shortly after they ceased operations, I signed a contract with CoStar, feeling that I couldn't really represent myself properly with prospective clients without a database from which to draw information when needed, whatever it might be. And - I'm an industrial broker, so my perspectives are limited to what I find important. I think it's similar to what office brokers would feel, but much different from the needs of retail brokers and investment brokers. And all are worlds apart from the needs of residential agents.
 
So: CoStar from my perspective: the local representatives that I've dealt with couldn't have been nicer or more professional. The contract I signed for 2 years was reasonable. The system has a lot of features, many more than Xceligent had. But the property information, from my perspective, isn't quite as complete or as accurate as Xceligent's was. Assigning arbitrary numbers, I'd say Xceligent was about 85% accurate and Costar is about 75%. This could be different market-by-market, though. My guess is that broker-input systems like Catalyst, or cooperative broker efforts such as in Columbus, Minneapolis, Nevada, are about 90 to 95% accurate because the information is put in by the brokers. Xceligent and CoStar relied/rely on employees who are not in the industry canvassing the markets to get property information, and they don't always get it right. May not be their fault - many brokers won't give them the time of day.
 
NAR has a new system for agents called RPR; Realtor Property Resource. It’s intriguing.
 
So where does RPR fit today, and where could it fit? The industry is crying for something better. RPR might have the potential to fill the need, but it's not even realistically in the conversation today, and unless something changes, it won't be. It looks like a robust platform from a technology standpoint - but if it relies on local MLS systems to populate the commercial property data, it's as irrelevant as you can get.
 
I really doubt that any market the size of Cincinnati would successfully integrate commercial property information into the MLS system because commercial firms wouldn't want all the calls from residential agents. This is not to disparage the skills it takes to be a successful residential realtor - the good ones are highly skilled, work very hard, and I'd never buy a residential property without one. But Commercial listing agents get enough time-wasting calls from their own peers who want to show properties, and qualifying people for arranging showings is hard enough, but to have to do that for residential agents would be mind-numbing. So there'd never be buy-in for integrating commercial listings into MLS.
 
But going back to Columbus, for example, or for the CINDAT model we had in Cincinnati 20 years ago, if you can get all major players to be a part of it, to buy in, so to speak, then you have the basis of a local CIE (Commericial Information Exchange) system that could work, and with RPR, be superior to CoStar. There's a market need for that to happen.
 
But will it? It isn't easy. In local markets, the large companies like CBRE, and to a lesser extent, JLL, Cushman & Wakefield, Colliers, are reluctant to be in a CIE because they feel that they are providing most of the value, and that the smaller companies or the tenant rep companies benefit at their expense. There's an economic way to handle that, but it's complex.
 
My feeling is that NAR, SIOR, and CCIM could collaborate, and a national Commercial CIE system could result, that would at worst, be a strong competitor for CoStar, and at best could lead the industry in that commercial agents are already paying to belong to these organizations, so the economic impact on agents could be minimal.
 
To succeed, pilot programs in cities like Columbus Minneapolis, Las Vegas - just for example - would have to be huge successes for the concept to take off.
 
If I were younger and in a different place in my working career, I'd love to be a part of it.

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An interesting wrinkle in the sale of commercial property

4/4/2018

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Commercial Real Estate is a broad category, though it may seem otherwise.
Newer agents cut their teeth on small leases or as a ‘caddy” on larger ones, and often gravitate to the sale of small empty buildings, usually to the entity that will occupy the space. This is especially true of office and industrial buildings, maybe not so much for retail.
 
A lot of new lingo has developed over the years. Now, those who sell and lease buildings are part of a group called “occupier services.” This is intended to distinguish them from those who sell occupied buildings as investments – currently the hottest product class in the U.S. market.
 
But one thing they have in common: almost everywhere in the U.S. taxing authorities have very little understanding of values in the market for all commercial buildings, especially not industrial, so the tried-and-true  method for determining value is to track public records for the amount of a sale – and bingo! That’s the new value. For those who own and occupy buildings for a long time without transferring ownership, the taxing authority – in Ohio, the County – will usually value the property below market, as to consistently do otherwise is to be challenged in court, and owners and their attorneys usually have far more weapons at their disposal to win tax appeals on their merits. So, to keep values below market is self-serving for the taxing authority, but not so much for those who live in the taxed area.
 
This being said, there’s a dirty little secret in the sale of net leased property. Tenants are obligated by their leases to pay rent to landlords, and as additional rent, the real estate taxes (and other actual owner costs) costs. If the building hasn’t sold in a long time, the taxes can go way up – to the surprise of the tenant – when the taxing authority sees the amount of the sale in the public record.
 
But what if the building and land is sold as a part of the sale of the enterprise itself? In other words, when investor X decides to by Widget Manufacturer Y, the real estate is only part of the asset sale. Often, the LLC that owns the real estate remains the same – the LLC itself is part of the sale, but there is no ownership change.
 
What happens then? Almost always, nothing involving the real estate or its value. And this can easily be justified, as it may very well be that the enterprise has elaborate value-add components within the building, and many times with intrinsic value far in excess of the real estate. In other words, the structure that provides the shade and shelter may have a value that is not important, or even  meaningless. To the buyer of the enterprise, it is crucial and very valuable. To a buyer of the building and land for a wholly different use – the property could be worth less than zero.
 
So why not buy the LLC in every case when you want net leased real estate? There’s really no reason not to, and it certainly will curry favor with your tenant, who, of course, is your willing accomplice, as the existing real estate tax is almost certain to stay lower this way, for reasons listed above.
 
 
 
 

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