Term. Conservatively assess your present and projected needs. You don’t want to be stuck leasing space that you don’t need or that does not fully meet your needs. When in doubt, go with a shorter lease term.

Neighbors. Are there any that could become a nuisance? Will your landlord agree to not allow a tenant that is in a similar line of work? Are there any tenants that handle or discharge hazardous chemicals?

Actual Usable Space. The space you actually use is the usable space. Rentable space includes a common area factor for the space you share with the other tenants, such as elevators, stairwells and common entry areas, hallways and bathrooms. Measure the usable space and calculate the rent per usable square foot compared to alternative space options.

Gross or Net. Will the lease be on a “gross” basis (the landlord pays for taxes, utilities, insurance, etc.) or a “net” basis (the tenant pays for these expenses)?

Tenant Improvements. Who will pay for improvements or alterations and repairs to the space prior to moving in? They will be your responsibility if the lease specifies acceptance of the property as is.

Renewal Option. Is there one? Options are good. It would be nice to get some extension options.

Purchase Option. Again, options are good. Would the landlord be willing to give you a purchase option with a specific price and terms?

Cancelation Option. Are there any terms under which the landlord will let you out of the lease? Cancel the lease? Any terms that might be better than simply paying the lease through the term?

Sublease or Assignment. Do you have the right to sublease the property or assign the lease agreement to another party?

Security Deposit. Will it be held in an interest-bearing account? For whose benefit? What may the deposit be used for?

Code Restrictions and Zoning. Could existing or planned building code, zoning or infrastructure changes restrict your ability to operate and expand?

Parking. Enough for you and yours? Free or for an extra fee?

Relief. If you become unable to use the space because of damage or a disaster, do you still have to pay?

Lease Agreement. Use a standard lease form approved by your real estate commission or board of realtors. It will be a good and basic agreement not “tilted” to either party. Add to or delete from it with caution and with the advice of a lawyer experienced in real estate transactions.

“ Healthy-looking people are more likely than sickly ones to be repaid when they lend money or perform a favor. It appears humans want to maintain amicable relationships with people that will live longer and have more time to ‘make it worth our while.’”  Apparent Health Encourages Reciprocity, May 2011, Evolution and Human Behavior

(Sec. 1031 “Like-Kind Exchange”)

Internal Revenue Service Code Section 1045 permits an individual to roll over capital gain from the sale of “qualified small-business stock” held for more than six months if other small-business stock is purchased within 60 days. But if the transaction is an asset sale, as opposed to a stock sale, Section 1045 is not applicable.

Asset sales still can qualify for favorable tax treatment if the transaction falls within the “like-kind exchange” rules of Section 1031. Section 1031 provides that gain or loss is not recognized if property held for productive use in a business or for investment is exchanged for property of a “like-kind” to be held for similar purposes. Machinery, buildings, land, trucks and rental houses are examples of property that may qualify.

Unfortunately, the rules for like-kind exchanges do not apply to exchanges of the following types of property:

• Property used for personal purposes, such as a home or a family car
• Stock in trade or other property held primarily for sale, such as inventories, raw materials, and real estate held by dealers
• Stocks, bonds, notes, or other securities or evidences of indebtedness, such as accounts receivable
• Partnership interests

To qualify under Section 1031, there must be an exchange of like-kind property. The exchange of real estate for real estate and the exchange of personal property for similar personal property are exchanges of like-kind property. For example, the exchange of land improved with an apartment building for land improved with a warehouse, or a panel truck for a pickup truck, are like-kind exchanges. An exchange of city property for farm property, or improved property for unimproved property, would also qualify as like-kind exchanges.

An exchange of personal property for real property does not qualify as a like-kind exchange. For example, an exchange of a piece of machinery for a warehouse would not qualify. In addition, an exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. Whether you engaged in a like-kind exchange in that situation depends on an analysis of each asset involved in the exchange.

Depreciable tangible personal property (not to be confused with property held for personal use) can be either “like-kind” or “like-class” to qualify under Section 1031. Like-class properties are depreciable tangible personal properties within the same general asset class or product class. Asset classes would include the following:

• Office furniture, fixtures and equipment
• Information systems, such as computers and peripheral equipment

A like-kind exchange need not be simultaneous, nor must it involve only two people. In other words, you need not sell your property to a buyer in exchange for his or her property. In fact, such an exchange would be rare. The more typical situation would be for the seller to sell his property to a buyer, and then purchase like-kind property from a different person. This is known as a deferred exchange. A deferred exchange is one in which you transfer property you use in business or hold for investment and later receive like-kind property to use in business or hold for investment. Detailed rules govern deferred exchanges, so be sure to consult with your accountant or attorney before undertaking such an exchange.

Special rules apply to like-kind exchanges between related persons. Under these rules, if either person involved in the exchange disposes of the property within two years after the exchange, the exchange will not qualify under Section 1031.

You bear great risk. Your wealth is concentrated in a single investment — your business. Your personal investment portfolio lacks diversification.

Are you listening? Do NOT rest your entire financial future on a single investment. At the very least, fund retirement accounts to their maximum. Investing in real estate should also be an absolute priority, and the best opportunity is the facility your business occupies.

If you don’t own the land and building your business now occupies, now’s a great time to make it happen. Real estate values are down. Way down. Ditto for interest rates. They’re not going to stay down forever. Far from it. The time to act is now.

With the rent you now pay you should be able to pay the interest, principal, taxes, maintenance and upkeep on a facility you purchase and with every payment you build equity and grow your personal net worth.

Scary? Of course. Charge forward with courage. The move makes so much sense. It’s not like you’re buying a second home. It’s less risky than that and the odds are — if you can be sure to not overpay — it’ll pay off handsomely.

Remember, though, it will take many years to pay down the principal portion of the debt you borrow to make the purchase, so buy as early as possible. Let time work its magic.

Answer: She is. You’re measuring on the basis of usable area while your landlord is charging you on the basis of leasable (aka rentable) area. It’s a common discrepancy, and one you should be aware of before you negotiate your next facilities lease.

Leasable area is the square footage that rent is actually being paid for and usually includes public or “common” areas such as hallways, entry areas, stairways and public bathrooms.

Usable area is the space actually occupied by the tenant as measured in square feet. This does not include the areas of the building that lie outside of the space you lease but are used by all tenants and guests of the building.

Your concern is the loss factor, the difference between rentable and usable areas. It’s expressed as a percentage of the former.

For example, if a landlord charges you for 5,000 leasable square feet but the usable area is 4,000 square feet, the loss factor is 20%. Compare apples to apples by always calculating the annual rental rate per square foot based on the usable area.

• Used to convert equity in a home into an income stream
• Must be 62 years of age or older
• Ownership of the home remains with the borrower/homeowner
• Money can be used for anything
• Need not be repaid until the borrower no longer lives in the home
• Lender will recover its principal and interest when the home is sold. If the home sells for more than is owed, the excess goes to the homeowner or his or her heirs. If sale proceeds are insufficient to repay the amount owed, HUD will pay to the lender the amount of the shortfall.
• Money provided to you from a reverse mortgage is tax-free.
• Offered by banks, thrifts and other financial institutions.

A reverse mortgage is a special type of loan used by older Americans to convert the equity in their homes into cash. The reverse mortgage is aptly named because the payment stream is reversed. Instead of the borrower making monthly payments to a lender as with a regular first mortgage or home equity loan, a lender makes payments to the borrower. Just as with a regular mortgage, ownership of the home remains with the borrower.

The money from a reverse mortgage can be used for ANYTHING from daily living expenses, home repairs and home improvements, medical bills and prescription drugs, to pay-off existing debts, education, travel, long-term health care, prevention of foreclosure, and other needs. In fact, proceeds from a reverse mortgage may be used to pay off an existing mortgage. If your home needs improvements to qualify for a reverse mortgage, a portion of the proceeds may be set aside for this purpose.

A reverse mortgage need not be repaid until the borrower no longer lives in the home. The lender will recover its principal and interest when the home is sold. The remaining value of the home will go to the homeowner or to his survivors. If the sales proceeds of the home are insufficient to repay the amount owed to the lender, HUD will pay to the lender the amount of the shortfall.

Proceeds from a reverse mortgage may be received in several ways: all at once (lump sum), fixed monthly payments (for up to life), a line of credit, or a combination of a line of credit and monthly payments. The most popular option, chosen by more than 60 percent of borrowers, is the line of credit, which allows you to draw on the loan proceeds at any time.

To qualify for a reverse mortgage the homeowner must be at least 62 years of age. There are no income or medical requirements and the house does not need to be debt-free to qualify for a reverse mortgage.

The size of the reverse mortgage that you can get will depend on your age at the time you apply for the loan, the type of reverse mortgage you choose, the value of your home, current interest rates, and, sometimes, where you live. In general, the older you are and the more valuable your home (and the less you owe on your home), the larger the reverse mortgage can be.

The costs associated with getting a reverse mortgage include the origination fee (which usually can be financed as part of the mortgage), an appraisal fee and other charges similar to those for regular mortgages. The money provided to you from a reverse mortgage is tax-free. But the funds received from a reverse mortgage may affect the borrower’s eligibility for certain kinds of government assistance, so you should check into this before getting a reverse mortgage.

Be assured that the lender cannot take away your home if you outlive the loan. In other words, the loan does not become due until your home is sold, is no longer your primary residence or you die. You cannot be forced to sell your home to pay off the mortgage loan even if the loan balance grows to exceed the value of your property.

To apply, you must first meet with a reverse mortgage counselor. You can obtain a list of the reverse mortgage counseling agencies by calling HUD at 1-888-466-3487 or accessing HUD’s Web site at www.hud.gov.

Reverse mortgages are offered by banks, thrifts and other financial institutions. Currently, four reverse mortgage products are available to U.S. consumers and one product is available in Canada. In the U.S., the most popular reverse mortgage is the federally insured reverse mortgage, called the FHA Home Equity Conversion Mortgage Program (HECM). The other major product is the Home Keeper reverse mortgage, which was developed in the mid-90s by Fannie Mae, a private national mortgage company.

If you or a loved one has modest income but a large amount of equity in a home, consider the reverse mortgage as a low-risk way to obtain income while retaining control of your homestead. See your financial advisor or a reverse mortgage counselor for more details. Proceeds from a reverse mortgage can even be used as capital for a business.

Be aware that scam artists charge thousands of dollars for information about reverse mortgages. This information is FREE from Housing and Urban Development (HUD). And HUD does not recommend using an estate planning service or any service that charges a fee for referring a borrower to a lender.

Market Method: Often referred to as comparable sales method. The question of “fair price” on any piece of real estate is answered by simply determining what similar properties have recently sold for. Real estate brokers can pull comparable sales data for you. The prices may be more art than science because no two pieces of real estate are exactly alike.

Income Method: This method works only for income-generating real estate. The question of “fair price” is answered by determining income generated by the business and then applying a fair rate of return. Following is a table of rates of return on various investments over the past 90 years. Buyers of investment real estate generally require anywhere from 8% to 16% return on investment. If the projected cash flow is estimated to be steady or steadily growing, then a very simple formula can be used to determine value. For example, if the property is projected to generate $100,000 per year in net income, and the buyer thinks a 13% rate of return is fair (given the overall characteristics of the property), then the value is $769,230.77, calculated as follows:

$100,000 = $769,230.77

0.13

Note: The type of income or cash flow used in investment real estate is net operating income (NOI).

Net operating income (NOI) is projected for income-producing property after deducting all operating expenses, including taxes and a factor for expected periodic vacancy and collection losses.

Note: Debt service is paid outside of NOI.

Asset Method: This method is often referred to as the replacement cost method, and is used primarily for owner-occupied real estate. The prospective purchaser asks, “How much would it cost me to build a building similar to this?” He then compares this to a building he is thinking of buying. The rational buyer would purchase an existing building if it could be done at a lower cost than building something new, but would still need to consider issues such as location, condition, maintenance costs, utility costs, remaining useful life, etc.

Which method should you use? Smart buyers use them all. When looking at a piece of property, they run the numbers using all three methods and consider the insight gained from each. They use the resulting information to assess what they think is smart for themselves, and also to negotiate strategically with the seller.

1. Durable Value: Unlike businesses, where value may swing wildly with the ebb and flow of profits, real estate has value aside from the cash flow it generates. Businesses almost always are valued on their profits. Real estate almost always is valued on the comparable sales method. That is, what do other properties of this type go for per square foot?

Another example of durable value is that, with a business, if something bad happens, the value may go down to zero. Take a restaurant: Serve some really bad food for just a day or two, and the business may be ruined. In contrast, improvements to real property can burn down and the land still has substantial value. It doesn’t go to zero.

2. High Loan-to-Value Ratio: There are two types of value in any asset – tangible and intangible. Tangible value is far less volatile and risky. Banks will lend up to 80% on tangible value. Why? Because it’s safe. Not so for intangible value, which is the difference between total value of your business and tangible value of underlying assets. Real estate is 100% tangible value. Banks will lend more against real estate than almost any other asset.

3. Liquidity: Now don’t get me wrong. Real estate is an illiquid asset. But compared to a business, it almost could be considered liquid. Many more people are comfortable buying and owning real estate. And real estate sells more quickly than a business.

4. Low Relative Transaction Cost: Buying and selling real estate is relatively inexpensive. Owning it can be expensive, but marketing property for sale is quite easy and inexpensive.

5. Consistent Appreciation: Over the long term, real estate has proven to be one of the most reliable types of investments. As long as you don’t overpay and are careful to buy in desirable areas, it is almost impossible to lose money in the long run on real estate.

6. Low Employee Count: Owning real estate does require some work, but compared to a business, it’s a piece of cake. And one of the most difficult, expensive and time-consuming elements of business ownership is labor. You may not have to hire a single person to manage your real estate investment. Now that is beautiful.

7. Tax Advantage: Hold real estate for more than a year and, when you sell, you’ll enjoy long-term capital gains tax rates. This is the same as most other investments, but couple this with the fact that, if the real estate you purchase has improvements (i.e., is not raw land), you will be able to depreciate over time the value of the improvements. This will shelter income from tax as you own the property. When you purchase stocks or bonds, this is not possible.

8. Source of Capital: Over time, as you own real estate, you will no doubt pay down the debt you used to purchase it with. Couple this with likely appreciation in value and you build equity. This equity can become a valuable source of capital when times get tough or you need cash to take advantage of an investment opportunity. As we said above, banks stand ready and willing to lend on real estate. It’s something they do every day and are very comfortable with.

Most business owners suffer from a lack of diversification. So most of their wealth is tied up in their business. Real estate is highly recommended as a first step toward diversification. Probably retirement account contributions should come first, but real estate is a very close second. First your home, then the space your business occupies.

1. There’s No Place Like Home: Everyone’s #1 goal should be to own his or her own home and pay down debt so they’ll have a substantial amount of equity. Philosophies differ on whether a completely paid-off home makes financial sense, but I’d argue that full payoff is a prudent goal for the business owner. Why? First, most business owners have debt against their business. Assuming the business is organized as a pass-through entity (basically, any legal entity type besides a C-corporation), you’re getting an interest expense deduction – just as you would get for interest on home mortgage debt. Second, private business is a risky thing. You never know how the competitive or economic landscape could change in the future. Offsetting this risk with a paid-up home provides substantial comfort. Couple this with the fact that, legally, nobody can take your home away from you as long as you haven’t pledged it as collateral for a loan. So, if you own your home outright, you could suffer total financial catastrophe and still keep your house. Let’s never underestimate the comfort in that.
2. Occupy Your Own Real Estate: If your business rents real estate and you have substantial equity in your home, it makes sense to set a goal of owning the property that your business occupies. In simple terms, if you are going to pay rent, why not pay it to yourself? If your business is site-specific, such as a restaurant, this might be tough to accomplish but not impossible. The only answer is to negotiate hard, be persistent, and use whatever leverage you have as a good tenant. If you can’t get an outright purchase, go for an option and/or a lease-to-own agreement. If your business is not site-specific, you have the freedom to relocate. Find a great deal and make a move. It’ll be a chore but will surely pay dividends over time.
3. Set Clear Parameters: You know your usage needs. You also know your financial capabilities. Find a trusted real estate investor or broker and discuss your desires. Lay out details about the specific property that make sense for you. What geographic areas make sense? What characteristics must the site have? Do you want to be the sole occupant or lease to others? How many others? How much equity can you contribute? How much debt service can you and/or your business handle? Do you want a fixer-upper?
4. Location, Location, Location. Municipalities have substantial influence on the path of future development – primarily in their ability to locate new roads and highways, expand and improve roads and intersections, locate schools, build bridges, etc. In your efforts to buy real estate in an “up and coming” area, find out what is planned in your community. Determine what organizations do your city and county planning. Go talk to them. Ask them where the growth is now and what capital projects can be expected to take place in the future.
5. Deal Flow: The key to finding a good deal is finding lots of deals. Once you set your purchase parameters, get the word out. Tell every person and broker you know. Be willing to pay full commission. You might even consider hiring an exclusive broker-representative. Give them your parameters and tell them you want a good deal.
6. Don’t Overpay: With real estate, timing is everything. Another way to say it is: Patience pays. Your goal should be to find a really good deal. What’s a good deal? You want to pay less than prevailing comparable sales in your area. Good deals are available. Always keep in mind that your desire for a good deal is not just a matter of greed or luxury; it’s a matter of caution. Take your analysis with a grain of salt and a bit of humility. You could be a little off on your analysis – in the wrong direction. You or the property could suffer an unforeseen event. For all these reasons, you need a cushion. Buy right or don’t buy at all.
7. Due Diligence: As with most things, what you see may not be what you get. Before you buy, make sure you know what you’re getting. Never agree to purchase before you are totally satisfied with conditions. Environmental issues are #1. NEVER buy a piece of property without thoroughly checking environmental conditions. Hire an expert to do a Phase I environmental review. If the auditor finds cause for concern, have the seller pay for a Phase II review. If he won’t, walk away. And remember that commercial property is just like a house. Get an expert to check the structural, electrical, plumbing, etc. Fixer-uppers might offer the best opportunity for value appreciation, but be sure the only needs are cosmetic.
8. Financing: Rule #1 is to make sure your risk of default is low. Don’t buy if you don’t have the financial wherewithal to withstand some bad luck, such as long-term vacancies. Rule #2 is to shop around. As with your home, you’ll find many financing options when you buy commercial real estate. Study them carefully – assessing costs as well as appropriate amortization schedules. A quicker pay-down will reduce interest expense and build equity more rapidly, but you don’t want to risk default.
9. Own It Outside of Your Business: Don’t purchase your real estate through your business. You’ll lose much of the diversification benefit, because if your business fails, the real estate will go down with it. Buy it personally or through a separate legal entity. When the time comes to retire and/or sell your business, you’ll be set to rent your real property to the new owner. Can you say, “Passive income?” It’s a beautiful thing.

Real estate is an incredible thing to own. It has tremendous attributes, many of which beautifully complement ownership in a business. Of course, every investor should be leery of financial risk – risk that results from debt levels that could become difficult to maintain. So don’t expand into real estate imprudently. But when times are good and your company is generating excess cash flow (or holding extra cash or low levels of debt), consider adding more real estate to your personal portfolio. Long-term odds are it’ll pay big dividends.

Before you plunge headlong into the search for suitable commercial space, think carefully about whether you really need to find space now. It may make more sense to run your business from your home. If you’re just starting out in a business that doesn’t require significant space or ready access to the public, maybe you can keep expenses low by working out of your house or apartment.

Or, if you’re already renting space but looking to move, you might consider ways to improve your current lease situation and avoid the expense and inconvenience of relocating. Take another look at your lease – does it have an option clause, enabling you to expand into available space?

1.    Priorities. If you’re convinced that now is the time to move, think carefully about what you need, would like, and won’t abide. Take out a sheet of paper and list items in three columns: “Must Have,” “Nice to Have,” and “Won’t Have.” Your goal is to end up with a concise statement expressed in words (“downtown area”) or numbers (“maximum $3,000 rent”). When you begin to consider available space, you can use this list to quickly and concisely evaluate its suitability.

2.    Rent. The first issues to consider are the most obvious and, for many, the most important. Figure out the maximum rent your business can afford to pay per month. And if the landlord asks you to put down a security deposit before you move in, think about whether your reserves can handle a particularly big hit in the first month. Finally, consider how much money you can afford to spend to alter the space to fit your needs and tastes.

3.    Location. The physical location of your business is likely to be important to you, your employees, your customers or clients, and/or your suppliers. The more people and groups you need to please, the smaller the number of possible rentals that will fit the bill. Consider the neighborhood, commuting time, and access to public transportation.

4.    Length of the lease. It may be important for you to secure a space that will be yours for a long time to come – or you might want the flexibility of a shorter lease. Do you need to find a place right away? Or do you have the luxury of shopping around until you see the perfect spot? You need to assign a value – a priority – to the length of the lease and when it’s available.

5.    Size and physical features. Almost every tenant is concerned about the size of the rental. You’ll want enough space, but to keep the rent down, limit the size to what you really need. You’ll want the space to be well laid-out, comfortable, and welcoming to employees, clients, and customers.

6.    Parking. For many businesses, it’s essential to have ample parking – whether in a designated lot on the building site, on the street, or in a nearby parking garage. Parking may be a high priority for several reasons. If public transit is inadequate, people will need to drive to your business. If your business involves selling or servicing large items such as stereo equipment, customers will need nearby parking.

7.    Building security. If crime is a known problem in the neighborhood and customers or employees are assaulted or robbed, you may be found partially responsible if you have not taken reasonable steps to prevent criminal incidents, or at least warn of them. Your landlord, too, may ultimately bear some responsibility, but the portion of a jury award or settlement figure that you end up paying is hardly the point. You never want to be in a position of worrying about customers’ and employees’ safety. So think carefully about the security of the neighborhood, and if you conclude that the risk is too high, look elsewhere.

8.    Image and maintenance. The way a building looks – and how it’s maintained – will be important to some and practically irrelevant to others. In general, the more your business serves the public, the more important is the building’s appearance. If no one ever sees or visits your business, it may not matter much, except to you and your employees.

9.    Expansion or purchase potential. If you plan on growing your business or would like to own your building in the future, you may want to rent space that has the potential for expansion or purchase. You’ll save yourself the hassle and expense of another search and move to new space, and you may be able to lock in favorable expansion or purchase terms now, in your lease. Look for a lease with an option to renew or an option to buy.

10.      Neighboring tenants. It may be important to be in a building with certain types of tenants – for example, businesses that complement yours or provide a needed service. Lawyers, for example, may want to locate in a building where there are accountants or title insurance providers. Healthcare professionals may want to be near a hospital, pharmacy, or lab. Whatever your business, you may want to find a building that houses a health club, coffee shop, or a fast copy service that you, your employees, or customers will find handy.

Reprinted with permission from the publisher, Nolo, Copyright 2006.

A “predatory lender” is a mortgage company that purchases loans from a reputable company and then conveniently loses one or more of your payments during the transition period. Customer service is nonexistent and they refuse to accept items such as canceled checks or paid receipts as evidence of payment. First, you receive harassing phone calls from a collection agency demanding payments that you have already made. Then, you find yourself at the receiving end of a foreclosure notice and your home in danger of being sold at the courthouse door.

A typical story is that of Patricia Richards of Powder Springs, Georgia. Her mortgage was sold to Fairbanks Capital Corporation. Fairbanks then claimed Patricia had not made several payments and proceeded to publish her home for foreclosure. Not only was she about to lose her home, her excellent credit rating was also at risk. Since Fairbanks and their attorneys would not respond to Patricia, she was forced to hire an attorney at her expense to resolve the issue. Fairbanks beat a hasty retreat without any apology.

Based on the numerous reports, Fairbanks appears to be one of the major players in the predatory lending field. These reports can be accessed at many scam sites such as www.complaints.com and www.badbusinessbureau.com. Search these sites under keyword “mortgage.”

Other types of mortgage scams include failing to post your payments in order to collect late fees, overcharging for taxes and insurance and fees for nonexistent “property inspections.”

How can you protect yourself?  Deal with a reputable company that has a local office where you can make your payments and talk to a real person if there is a problem. Make all of your payments on time and be sure to keep a copy of all your bank statements. Respond promptly to any notices. Be alert to any charges that you do not understand. Correspond in writing, preferably via certified letter.

Source:  www.SolidGoldHomeBusiness.com