Opportunity comes in many forms. Sometimes it’s the result of competent leadership. Sometimes it’s the result of leadership being beaten over the head so many times that they finally succumb and accept the inevitable. That appears to be the case for America’s next socioeconomic change. It was the theme NetGain chose for October: The next socioeconomic change and its impact on income property values.

Considering the enormity of publicity and the dire predictions promulgated by Secretary of the Treasury Paulson and Federal Reserve Chairman Bernanke, NetGain decided to put what it believes is the next socioeconomic change on hold until next month and examine our economy this month.

Why does NetGain care about the economy when its overarching interest is to provide information that minimizes the risk and increases the value of income property? Because whatever direction the economy takes, so goes the job market. And NetGain believes that “jobs” are the single most important driving force behind determining the value of income property.

Now, let’s back up, and get a better understanding of where we are as a country economically.

Where we are has been rehashed by the media and the politicians over and over. Simply stated and without pointing a finger at anyone, greed, leverage and poor oversight (what’s new?) has created the biggest threat to the American financial system since the great depression.
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The dramatic socioeconomic changes taking place in our country and for that matter the world beg for a re-examination of the business model for income properties. Because of the large number of income property types and types within types, the following re-examination will focus on the three core types of income property: Residential, office, and retail. These income property types are where people live, work and shop, and therefore represent the basis for any changes that might happen in the current income property business model.

What is a business model? The phrase describes all of the critical aspects of a for-profit undertaking. It would include the enterprise’s purpose, philosophy, products and/or services, strategies, infrastructure, organizational structure, sales practices, and operational procedures.

There are many factors that decide the make-up of a business model. However, there is one factor that dominates all the others: Customer/client and the relationship between the customer/client and the enterprise.
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Can a developer in Yuma, Arizona casually engage a commercial broker in Parsippany, New Jersey for the ideal loan package? Can a real estate investor in South Africa share successful strategies with an apartment owner in Anchorage, Alaska? In the world of Web 2.0, the answer is yes.

While exact definitions of Web 2.0 vary, one component crosses all: interaction. The individual visiting a website is no longer a passive receptacle of information, but instead becomes a contributor, editor, conversation partner, organizer, and colleague. How does this happen? Following is a review of common tools that open the doors for sharing and interactivity. All of these tools can be found and utilized on this website.
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The scenario: An income producing property grosses $60,000 per year, and half is derived from a retail sales store, the other half from an upstairs nightly rental. The retail store is under a lease and the two properties cannot be sold separately. The sales shop tenant pays the utilities; the nightly rental does not.

The solution: On a conceptual approach, the properties have to be viewed as a single entity operating two businesses. As a result, three profit-and-loss (P&L) statements would be required: One for each business and a consolidated statement. The consolidated P&L is for establishing the value of the property, and the individual P&Ls are for operating the property.

To establish net operating income (NOI), all operating expenses must be deducted. As bills are paid, every item that can be classified as an operating expense gets deducted from the income collected.

As far as allocation of operating expenses, the lease with the retail sales store should define which items they pay. If the property owner feels the store should be paying more of the operating expenses, that is a matter for renegotiation of the lease, and the result would depend on the leverage available.

Whatever items the retail sales store is not obligated to pay, the marketplace will determine how much of the remaining operating expenses can be reallocated to the nightly residents. There are no set rules other than what the marketplace will bear.