Cash

flow and expenses: Keys to successful commercial dealsThe current economic climate, particularly as it pertains to real estate, has elevated at least two risk factors to new levels of importance in the purchase and sale of commercial property. More than ever before, cash flow and expenses emerge as two of the most important keys to a successful deal. Buyers and sellers need to be aware of important items each will look for when evaluating a property. Cash Flow Positive cash flow is essential to profitability. Consequently, cash flow projections are a critical element of pre-sale due diligence, providing perhaps the best available indicator of revenue. Cash flow projections provide a snapshot of the property, including the tenants, former tenants, and future tenants. That information and more can be learned from projections-if the right questions are asked. From the buyer's point of view, an area of primary interest is the credit worthiness of the property's tenants. Are tenants habitually late with the rent? Do they frequently ask for rent concessions? Are there many write-offs, as verified by a comparison of rent billings to cash receipts and bank records? Another aspect of the property's standing that should be investigated is the longevity of the tenants. Have the tenants been there for a long time, or has there been a constant stream of new tenants? If so, then why: Is the neighborhood changing? Is the property in need of repair? Are rents too high for the location and/or condition of the property? From the seller's perspective, once the property's records are in order, the main concern is the buyer's ability to finance the purchase. The seller does not want to get caught in a situation where the property cannot close at the last minute because the buyer does not have the funds. Expenses "Expenses" is a broad term that encompasses many areas. In this context, expense can best be defined as the cost of running the property compared with the amount of rent received by the property's owner. Here, too, the economy plays a role. The cost of utilities, for instance, has skyrocketed. Many leases do not contain an escalation clause for such overhead costs, and that can impact the property's profitability. Other prospective expenses include the cost of pending or ongoing litigation, tenant disputes, tax liens against the property, and the clean up of EPA or building department violations. It is also important to review several years of expenses to get a picture of the property's historical cost, including upcoming union negotiations for porters or elevator operators; the cost and frequency of repairs; and the existence of ongoing service contracts. The benefits of a detailed review of the existing and potential costs and expenses involved in running a profitable property cannot be overstated. These evaluations are beneficial to both parties. Existing owners should evaluate their costs and expenses regularly to help ensure they are getting a fair price for the property; buyers need to get a true picture of what they are buying. Robert Gilman, CPA, is a partner at Anchin, Block & Anchin, LLC, New York, N.Y.