April 2019

Commercial Real Estate Attorney | Bukowski Law Firm | Austin, TX

Commercial Real Estate Terms You Should Know

It’s normal for a particular career field to have its own lingo, and commercial real estate investing is no different. As a new real estate investor, there are several key terms you need to know before you begin investing. Without a general knowledge of the key terms, fully understanding what’s going on in a commercial real estate transaction can be intimidating. Understanding the core terminology used in the commercial real estate field will help you easily navigate any investment deal.

Net Operating Income (NOI): This refers to the income you generate annually from an income property after property expenses have been taken into consideration. Aside from rent, you may also generate other revenue from your commercial space, such as parking or laundry.

Capitalization Rate: Often referred to as the cap rate, this refers to the net operating income (NOI) divided by an income property’s sale price.

Debt Coverage Ratio (DCR): This compares an investment property’s NOI with its debt service. Lenders use this ratio to calculate whether or not you will be able to generate enough income to pay your debts.

Cash on Cash Return (CoC): This is used to measure the ratio between an asset’s annual cash flow in relation to the commercial property’s down payment.

Building Classification: Property values are determined by asset classifications. Investment property falls under one of four main categories: Class A, B, C, or D. Class A buildings are almost new, at a highly attractive location, and are known for proper maintenance. Class B are average buildings with fewer amenities. Class C buildings are older than 20 years, and they need a lot of improvement and repairs. Class D buildings require extensive renovation and are not for beginner investors.

It’s important to be well versed in industry terminology in order to be successful in this market. A good understanding of the most commonly used terms as well as having an experienced real estate attorney in Austin, TX, on your team and you’ll be in excellent position to excel in the commercial real estate field.

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City of Austin to Once Again Attempt to Fix Land Development Code

As you probably recall, the City of Austin recently spent over five years planning a re-write of the Austin Land Development Code (“LDC”) – a process it called CodeNext. Then, back in August 2018, the City officially scrapped the process, stating “due to a combination of significant disruptions to the process, CodeNEXT [was] no longer a suitable mechanism to achieve its stated goals or address the critical challenges currently facing our City.”

But that was not the end of Austin’s re-write of the LDC. Indeed, at the time the City Council scrapped CodeNext, it directed the City Manager to “develop and propose a new process” to present another LDC. In response, on March 15, the new Austin City Manager Spencer Cronk sent a memo to the City Council seeking clarification on a number of issues so that he could better propose a method for updating the LDC.

Specifically, in his memo, City Manager Cronk asked the Council to clarify the following:

  • Scope of Code Revision – To what extent should the LDC be revised?
  • Housing Capacity – To what extent should the LDC provide for additional housing capacity in order to achieve the 135,000 additional housing units recommended by the Strategic Housing Blueprint?
  • Missing Middle Housing Types – To what extent should the LDC encourage more “missing-middle” housing types, such as duplexes, multiplexes, etc.?
  • Compatibility Standards – To what extent should the City’s compatibility standards be modified to provide additional opportunities for development?
  • Parking Requirements – To what extent should the City’s minimum parking requirements be modified to provide additional opportunities for development and/or encourage transit options consistent with Imagine Austin?

Unsurprisingly, the Council was split in how it should proceed in response to Cronk’s memo.

Three council members and Mayor Adler supported getting public input on how best to answer Cronk’s questions at their next meeting on April 11. After that, the Council could use that input to vote on the answers to the questions at the following meeting, on April 25.

In contrast, however, Council Member Alter suggested that the questions proposed in the memo were too divisive among the Council Members for a productive discussion to be had on them. Instead, Alter thinks the Members should focus on the areas of agreement between them, such as allowing residential uses in commercial zones.

As a result, it is not clear where the LDC re-write stands. As we saw with the CodeNext debacle, this is a HIGHLY politicized project and we expect there to be a long, convoluted negotiation just to determine the process for how the LDC can be re-written. Not to mention what should actually be included in the re-write.

So buckle in – it will be a while. We will update you as new developments arise.

Thanks to the Austin Business Journal for its continued coverage of this process.

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