Also referred to as a user premium, an occupant superior is the purchase price an occupier of commercial real estate will pay compared to a commercial real property trader. Historically, owner occupants pay more for commercial real estate than traders – in some instances 20-25% more. Why would that be the situation?
I believe the next factors encourage the pricing difference. Financing. Generally, a buyer of commercial real property that will take up the building has more options with which to financing his purchase. He can utilize conventional bank funding which requires a 20-25% down payment, a 90% loan through the government – SMALL COMPANY Association loan, or private financing through friends and family. Typically, investors must rely upon debt with lower loans to value – 60-70% – which means a lot more cash invested.
Certainly, there are well heeled traders who can stroke a check for the whole purchase with no need for funding but these investors want a “deal” for tying up cash. OK, you might ask, how come the availability and cost of money encourage a buyer to pay more? The easy answer – payments.
If money is cheaper, the causing payment will be cheaper. An owner occupant can pay more because they can frequently borrow more. Assumptions. An income is bought by An investor stream – a leased building – which is produced through a tenant paying rent. Assumptions must be made regarding the sustainability of the income, if the income is above or below the existing market lease rates, and the likelihood the tenant will remain in the building after his lease expires. If an investor believes he’ll suffer a vacancy because the tenant can’t pay the rent or believes the tenant will vacate at the end of his lease, he must hedge his purchase by paying less for the building.
Because an occupant buyer is the “tenant”, all of these costly assumptions are avoided. Return on investment. The way in which an owner occupant views a return on investment is mixed from the trader. A glance is used by An owner occupant at the payment his loan creates, provides the operating expenses (property fees, insurance, and maintenance) and compares the total payment to a equivalent market lease. If the total payment is within an acceptable range – doesn’t surpass the marketplace rents by 20% – boom!
He’s in. A more complicated analysis is performed by the investor. What’s the income? If the income is above market, he discounts it. Just how much may i borrow based upon the income – or reduced income? Utility. How the building currently is or will be occupied is of little effect to the buyer.
His concern is the marketability of the building if it becomes vacant. How will it place fallow long? Will the building’s features appeal to a wide range of prospective tenants? Can I cause the income stream to increase as time passes? An owner occupant views the building akin to the purchase of a machine or the addition of an integral employee – will the building allow my business to grow? If so, the expense of the real property is a price to do business.
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If revenue is less than costs, the gross profit is negative — it isn’t a profitable company. What is the difference between revenue and profit? The revenue (sales revenue) is the sum of all cash inflows created by the business’s operations, as the profit is the total revenues minus total costs made by the company. What is the difference between income and profit and revenue? Revenue from operations is the amount of money brought in from the sale of goods and/or services; other revenue includes any gains made on investments or other non-operating activities.
Income and profit are essentially synonymous. Both terms refer to the amount of money you’ve made at the end of the operating cycle. In its simplest form, income is revenue less expenses. Profit is determined by subtracting costs from what? Profit is calculated by subtracting costs from income. How does cost affect profitability and revenue? There could be a number of answers to this relevant question, depending on what perspectives you use to answer them.