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Limited Inventory and Local Businesses’ Desire to Own Their Locations Can Be Drivers of Value in Local Commercial Market

By Andrew Cornish

It is often said that emotions and aesthetics drive the values of residential real estate and anticipated returns drive commercial real estate values. This is logical and typically the case for larger real estate projects. However, the need to fix real estate expenses has increasingly become a determinant of value for commercial real estate in Jackson Hole that is within the financial reach of local businesses. This influence has often caused investors to accept returns that would be considered to be the lower end of the range in other markets.

In 2015, Teton County saw eight sales of office buildings where the estimated net annual income from market rental rate equated to between 4.47% and 6.16% of the properties’ acquisition prices (known as the “capitalization rate”). By comparison, the Burbach and Associates, Inc. Real Estate Investment Survey for 2015 (a commercial real estate survey covering areas including Denver, Houston and Colorado Springs) reported higher capitalization rates for smaller suburban offices ranging from 6% to 8.5%, with an approximate mean of 7.5%.  The comparison of these rates provides that Teton County commercial real estate purchasers are more likely to accept modest returns from rental when acquiring real estate.

The first step to comprehending the rationale behind such local market and investment dynamics is understanding Jackson Hole’s commercial rental real estate rates. In general, commercial leases vary from a gross lease, where the landlord provides a “turnkey” property and pays all associated expenses, to a net lease, where the landlord charges a base rental rate and then passes through the real estate operating expenses to the tenant in addition to the base rent. A pure net lease is often referred to as a “triple net” lease, with the three “nets” being for taxes, insurance, and building maintenance. Most frequently in Jackson Hole, leases are simply referred to as being a “net lease,” with only some of the operating expenses being passed to the tenant. It is the responsibility the business owner to negotiate the lease and what expenses it will incur in occupying the rental space.

For an office building in Teton County, rents for good quality space often are in the neighborhood of $22-$28 per square foot, with the landlord passing through the costs of property taxes, building insurance, grounds maintenance and routine (not structural) repairs. Building operating expenses can vary significantly between buildings depending on their age, energy efficiency, green areas and utility demands of the tenant. Review of operating data in the Jackson area reveals that these operating expenses typically can range between $4.00 and $7.00 per square foot of building area. Combining figures central to both ranges (base rent plus building operating expenses), an estimate for the total expense for the occupancy of a good quality office space is in the range of $30 per square foot. With these rental rates in mind, capitalization rates below that observed in markets outside of Teton County begin to make sense. More specifically, the above table provides some insight into the rational of the owner-occupant real estate purchaser on a hypothesized 2,500 square foot office building based on a 5.5% rate of return.

As noted in the preceding table, the cost of building occupancy under a hypothesized purchase scenario is comparable, if not slightly better, than leasing. Admittedly, the downside to this scenario is the necessity of dedicating $320,000 of capital to the acquisition. A non-occupant investor, when viewing the above pro forma, would point out that the forecast of net operating income (were the building to be rented rather than owner-occupied) of $58,750 is only $7,595 above the estimated debt service of $51,155, and that only receiving $7,595 on a $320,000 equity down payment is less than 2.5% return on equity. For the owner-occupant, an easy reply to this shortcoming is that fixing its business location and securing future occupancy costs from dramatic increases is worth every penny of accepting a lower initial return on equity.

If this article convinces an investor to accept that Jackson Hole’s lower capitalization rates are based in reason, the question then becomes, “is commercial real estate in Teton County only a target for owner-occupants?”  The answer to this question certainly is property dependent, but the short answer, in my opinion, is “no” when considering the market fundamentals that are driving the returns in the first place. The motivation behind owner-occupants wanting to acquire their office or commercial space is directly linked to a rental market with limited inventory. This lack of inventory presents the probability that landlords will continue to raise rents, which is likely a reality in light of Teton County’s recent decision to not expand commercial zoning. As commercial property value is tied to the level of income it generates, the prospect of increasing rents implies that commercial real estate in Jackson Hole has a greater probability of appreciating at a more robust rate than that of real estate in a community where new office inventory is more readily available and rents have less upward pressure.

For the purpose of comparison, if the property in the preceding example was held for a period of five years in an environment that allowed rents to increase at 3.5% per year, the anticipated rent of the in the fifth year of ownership would be $67,416.98 (as compared to the income at the time of acquisition of $58,750). This would imply a value of over $1,225,000 at the same 5.5% capitalization rate ($67,416.98 divided by 5.5%), or an increase of nearly 15% in property value over the $1,068,000 acquisition price that was initially based on accepting a 5.5% return on the first year income of $58,750. Comparatively, if the property in the preceding example originally had been purchased at a 7.5% capitalization rate with the prospect of rents increasing only at 1.5% per year, its acquisition price would initially have calculated to be $783,333 ($58,750 divided by 7.5%) and would have a value after five years that would equate to $831,401 (the net income from the 5th year of operation of $62,355.11 divided by 7.5%). This increase of approximately 6% is significantly less than the nearly 15% increase in property value shown in the market with an increasing rent environment. When viewed in this light, the acquisition at a more “aggressive” starting price can be viewed as, not so much forgoing a return on investment, but a willingness of market participants to rely on the prospect of appreciation as a larger part of their return than that of annual rent collection. In summary, the Jackson Hole commercial real estate market is a competitive market that is driven by limited supply and healthy demand. The needs of local business owners contribute to competitiveness of this market, which can drive forecast returns to points lower than are typical for other markets with greater inventory. While the complexity of the commercial real estate market is one that requires some skill to negotiate, with proper due diligence, a commercial acquisition in Teton County can be viewed as making sense to the owner-occupant and outside investor alike.

Contact Andrew Cornish with questions regarding commercial
real estate resjh.com/031 or call 307-413-7799.

Practitioners of the two-handed cast hit the Snake River

By Mike Commins

There are no steelhead in Jackson Hole. There are, however, a number of local trout fishermen who travel long distances from Jackson Hole for the opportunity to fly fish for steelhead or Atlantic salmon. Many of those fishermen have learned to cast the long, two-handed fly rods commonly called Spey rods. Not surprisingly, the rods got their name from the River Spey, in Scotland, where they were invented.

Renowned local fisherman Howard Cole saw his first 15-foot Spey rod while fly fishing for steelhead in British Columbia in the early 1990s. He had been casting heavy 7 or 8 weight single-handed rods at the time, and the long, effortless casts the Spey guys were making, as well as their ability to make those casts without needing a back cast (an advantage when fishing in front of steep banks and obstacles) got his attention.

Wasting little time, Howard got his first two-handed rod, but soon discovered that Spey casting was not nearly as easy as it looked. At the time there was no YouTube to provide instructional videos, but fortunately for Howard, the Snake River in Jackson Hole was nearby and he and a small group of locals began to figure out things on their own.

Two primary methods of Spey casting (traditional and Scandinavian) were in practice at the time Howard and his friends were getting started. At the same time, a third variation was being invented by a group of fly fishermen who regularly fished for winter steelhead in the Skagit River in Washington State. The Skagit cast, as it came to be known, had the advantage of using a heavier and shorter head section to the line, allowing for a more compact casting stroke and helping a big fly sink fast in the high water of a Pacific Northwest winter. Howard joined the other early practitioners of the Skagit cast who were creating their own fly lines, by cutting lengths of different weights of line and welding them together to find that perfect combination of rod and line. It would be another 10 years before Rio, the Idaho Falls, Idaho, fly line company marketed its first Skagit line.

As the sport continued to evolve, smaller two-handed “switch” rods became available for trout enthusiasts who want the benefit of two-handed casting, but with a less stout rod that is suitable for trout. Switch rods are particularly effective at casting larger trout streamers and wet flies, and provide the additional benefit of keeping your Spey skills in shape for salmon and steelhead seasons.

Those looking to get into Spey casting should know that the informal casting sessions with Howard and his friends are open to all on Wednesday evenings, beginning around July 4 and continuing until early September near the Snake River Bridge. These sessions are the ideal opportunity for a novice caster to benefit from the years of trial and error of local anglers.

The Snake River sessions have evolved into the scheduling of a once-a-year event with demo rods, reels, and lines, as well as casting demonstrations.  Events like this have been dubbed “Spey claves” in the vernacular of two-handed fishermen, who appear to be more than willing to welcome new members to the Spey casting club. In late June, 2016, Howard hopes to bring the local Spey clave to a new level with a visit from the world two-handed distance casting champion, Travis Johnson. For dates and times of the event, as well as information on the Wednesday evening sessions contact Howard Cole at JD High Country Outfitters (307) 733 3270.

Understanding the Likely Location of a Home in Your Targeted Price Range

By Andrew Cornish

At times a homebuyer’s search parameters are dictated by a target purchase price, or range in price, rather than a geographic area. In this situation, it is important for the prospective homebuyer to understand where their anticipated expenditure level may “land them” in Teton County. This diagram thematically maps values in Teton County, with a graduation from greens to blues to yellows to reds showing a progression from Teton County’s least to more expensive properties. Notably, exceptions to the thematic map exist, and the services such as those provided by the Cornish|Lamppa Realty Group can be instrumental in finding exceptions to the depicted generalities.

To address the real estate market in a more focused way, it is has been divided into three market segments: “Local,” “Resort,” and “Luxury.”

Local

The term “Local Market” is meant to describe properties in which the buyer pool is comprised of people whose primary source of income is the local economy. Typically, this implies full-time residency and a need to be close to the necessities of everyday life, including schools and shopping. Considering the diversity of the local economy and the economic opportunity in a nationally-known resort community, this is not meant to imply that the “local population” does not reside in any and all parts of the valley. Furthermore, considering that the views and recreational opportunities which make Jackson a national destination are available throughout Teton County, this should not be interpreted as an inference that homes that are located in the “Local Market” are not often targets for second homebuyers. The Local Market simply identifies properties that commonly are purchased by participants in the day-to-day economy of Teton County. Geographically speaking, properties comprising the Local Market primarily are located in the Town of Jackson and South of Town market areas and are generally comprised of homes selling in the range of $1,200,000 or less (although exceptions are noted). Observing the above thematic map of assessed property values in Teton County, the concentration of Local Market properties are denoted by the blue and green-shaded regions in these areas.

Resort

As can be discerned by its name, the “Resort Market” is the classification for that part of the market having characteristics of and use by the resort community. This market segment includes properties that surround recreational hubs such as the Jackson Hole Mountain Resort, Teton Pines Country Club and Resort, Jackson Hole Golf and Tennis Club, and Spring Creek Ranch Resort. When considering properties in formal resort settings, it is intuitive that higher price points are garnered by such homes. However, to fully understand the Resort Market, its definition must be expanded to include all properties whose economic characteristics are most impacted by the purchasing power of an internationally-drawn pool of market participants. This expanded definition may include homes which appear to be in a more modest setting, but that benefit from a strength of value from their proximity to one or more of Teton County’s recreational draws. Properties within the Resort Market are located throughout Teton County and often range in price between $1,000,000 and $4,000,000. Observing the adjacent thematic map, Resort Market properties are denoted by the light green and yellow shaded areas near Teton Village, on either side of the Snake River, and in the golfing communities of Teton Pines, 3 Creek Ranch and the Jackson Hole Golf and Tennis.

Luxury

The Luxury Market segment is the descriptive term reserved for Teton County’s finest, and correspondingly most expensive, properties. In 2015, over 29 single-family homes sold with prices greater than $4,000,000. Examining this data in greater detail, 11 of these sales  were $9,000,000 or greater, which totaled over $122,000,000 in sales volume. Properties with exceptional characteristics are not uncommon in the Jackson Hole market. The central attributes that define a luxury home in Teton County are the home’s location and its quality of construction. However, a home in the Luxury Market likely is to be a composite of many factors in addition to these attributes:

Quality – A luxury home in Jackson Hole will be built with no expense spared. To some, this may imply the use of large diameter logs and reclaimed timber beams with wrought iron accents; to others, this may mean architectural concrete and floor-to -ceiling glass with a minimalist flair. Regardless of your taste, Teton County’s construction force is a proven entity when it comes to producing homes of exceptional quality and detail.

Location – There is no one location in Teton County in which a property must be located in order to be considered as a luxury property. Luxury buyers may desire to be close to the ski slopes or may want seclusion and their own trout stream, both of which exist in Teton County. As examples, the recently developed Shooting Star golf course in Teton Village provides the opportunity for resort living at the base of the Jackson Hole Mountain Resort, while the east bank of the Snake River from its intersection with the Gros Ventre River and northward is a setting providing 35 acre+ homesites for secluded ranchette properties in such developments as Bar-BC, Bar-B-Bar and Riva Ridge.

Water Frontage – Being perhaps a subcategory of location, water frontage significantly can increase the value of a home and can up to double the value of a vacant site. The view and  fishing amenities provided by the Snake River or Gros Ventre River, as well as any of the spring creeks that traverse the valley, is a “must have” attribute for some Luxury Market participants.

Teton Views – As the center piece of Grand Teton National Park, the granite spires of the Teton Range arguably are one of the most treasured views in the western United States. Many luxury homes have been sited specifically to maximize the benefit of such views.

Proximity to Public or Protected Lands – Less than 3% of Teton County is available for development, with the balance being a mix of national forest, park, wilderness, elk refuge, BLM
land, or other conservation easement lands. Proximity of a home to public land can provide protected view corridors and easy access to boundless recreational opportunities.

Any one of the above attributes considerably can impact the value of a luxury home. The existence of more than one of the above attributes may enhance value exponentially. The sales prices of homes in the Luxury Market in 2015 ranged from its bottom demarcation value of $4,000,000 to a highest sale of $21,500,000, with an average value for this segment of approximately $7,700,000.

Observing the adjacent thematic map of assessed property values in Teton County, the concentration of higher-value properties are denoted by the areas which progress from yellow to red-shaded regions. Concentrations of high-value property can be noted on the west side of the Snake River in Teton Village (skiing / golf), Teton Pines Golf Club (golf) and Crescent H Ranch (fishing / outdoor recreation). Luxury homes also are noted on the east side of the Snake River from its confluence with the Gros Ventre River at the Bar-BC Ranch Subdivision and extending northward following the Snake River towards the boundary with Grand Teton National Park.

Big-name Artists Visit an Intimate Venue in Jackson Hole

Located in downtown Jackson, the Performance Theater at the Jackson Hole Center for the Arts is perhaps the most intimate venue in which you could ever hope to see a big-name artist perform. Having only nine rows on its main level and an equal amount in the balcony, the claim that there is not a bad seat in the house needs to be modified to “there only are excellent seats in the house” when speaking about the 500-seat theater.

Were you to walk into the empty theater, you might think it a more likely venue (from the standpoint of size) to accommodate a community production or high school orchestra concert – and the Performance Theater is in fact made available for groups such as Dancer’s Workshop, Off Square Theatre Company and the local schools to showcase their hard work and talent. However, putting aside the opinion of the parents of budding cellists and actresses, one of the more remarkable aspects about this venue is the slate of performers that have come to play.

For the 2015-2016 season fortunate Jacksonites and visitors were treated to a lineup that included Garrison Keillor, Grace Potter, John Hiatt, Lyle Lovett, Robert Earl Keen and Elvis Costello.

Protecting Your Home Investment

By Sara Van Genderen

A home typically is one of the largest financial investments that you make. After finding the Jackson Hole home of your dreams and working with your local Realtor to get the property under contract, title review is an essential part of the due diligence inspection. The title insurance review process minimizes the risk of title issues and protects a buyer’s ownership rights.

Title insurance starts with a search of the Teton County Clerk public land records for matters that could affect title or use of a property. Once under contract, the seller generally is required to promptly provide the buyer with a title commitment for review.  The title commitment is issued by one of the local title companies whose professionals search various public records to identify any potential title issues, such as taxes, liens, restrictive covenants, and easements encumbering the property.  The title company’s search additionally identifies title risks, such as mechanic’s liens, tax judgments, unreleased mortgages, pending bankruptcy, litigation, or probate issues.  Any identified issues that do not allow for clean transfer of title must be corrected for a clean transfer to occur.  In Teton County, buyers often work with a local real estate attorney to review the title commitment and resolve issues prior to closing.

A title commitment typically is divided into two parts: (1) Standard Exceptions; and (2) Special Exceptions. Standard exceptions are those that are not specific to the property, while special exceptions are, and both are exceptions to coverage under the title policy.

Standard Exceptions may include:

• Taxes or assessments against the property which are not shown as existing liens or shown by public record
• Easements, liens, or encumbrances not shown by public record
• Encroachments,  violations, variations, or adverse circumstances not shown by public record
• Unpatented mining claims and reservations or any right to remove to sand and gravel
• Water rights
• Liens for unpaid services, labor or materials not shown by public record

Special Exceptions may include:

• Taxes not yet paid
• Homeowner association assessments
• Reserved subsurface mineral rights
• Access or utility easements
• All matters and restrictions delineated on the official plat
• Covenant, Conditions and Restrictions provided in the Declaration of Covenants for the subdivision in which the property is located or other deed restrictions.

To minimize the risk of any exceptions creating title issues which may “kill” a real estate deal, working with the title company and an attorney to delete or resolve the exceptions is a buyer’s best solution. In Teton County, a few examples of common title issues are easements or unique restrictive covenants. An access easement may give persons other than the owner the right to cross the homeowner’s property. In Jackson Hole, we often see easements that may allow neighbors to cross a property via foot, horseback or vehicle to gain access to neighboring public lands or private property. It is important to identify the location of such easements to determine if it will affect your use or enjoyment of the property. View corridor easements also may be in place to permanently protect views of the Teton Range and may prevent you from building or landscaping in certain areas.

A declaration of covenants, conditions or restrictions (“CC&Rs”) for a subdivision is recorded against a property.  The CC&Rs generally establish a homeowners association which is authorized to control certain aspects of the property, such as home design or restrictive uses.  During title review, a buyer always should carefully read the CC&Rs because the buyer will be expected to comply with the rules and restrictions. CC&Rs may prohibit a buyer to keep horses or other livestock (urban chickens are the rage) or may have rules prohibiting tree cutting within the subdivision, which may impact property views.

A final title issue of which a buyer should be aware is a provision in the standard Wyoming Association of Realtors contract which provides by default that a seller may purchase an owner’s title insurance policy that in effect “insures over” a discovered defect. It is often advised that a prospective buyer has an attorney review the entire contract before signing and consider modifying or eliminating this provision so that transfer of clean title is required.

After you’ve worked through the title review process, the purchase of an owner’s policy at closing will protect a homeowner from title risks and challenges as long as you own the property.

Sara Van Genderen is a partner with Mullikin, Larson & Swift, LLC since 1993 where her practice includes real estate, corporate and employment law.

Former Marine Pilot Builds Restaurant Group On Principals Of Hard Work and Generosity to Employees and Community

By Brigid Mander

While Jackson Hole may not be the easiest place to start a business, those with determination and a willingness to work hard can make it happen. There are plenty of local success stories.  Most are out of the public eye, but others are prominent, such as in the case of Joe Rice, founder of the Blue Collar Restaurant Group.  Like so many current residents, Joe Rice visited Jackson once to ski, and thought he liked the place a lot. So in 1989, Joe and his wife Denise moved here, and bought a simple taco stand named The Merry Piglets. They manned it slavishly themselves those first few years, setting themselves on a road to success. Today they see the sum of all the talented people they have been able to hire – and keep on board – as the key to that success.  In recognition of that, they are taking those successes and giving back to their employees and to the community at large.

This story of accomplishment and being in a position to improve other’s lives wasn’t in the cards for a guy like Joe Rice. He grew up poor in New Jersey. His father died while he was still in school. But Rice wasn’t the type of kid to accept the fate laid out for him – and he didn’t.

Gifted with academic smarts, athletic talent,and a driven personality, Rice was awarded a track scholarship to Princeton University. After graduation, challenge and excitement beckoned, so Rice joined the Marine Corps to become a pilot. “I always wanted to learn to fly, and I felt that doing it in the Marines would be the biggest challenge,” said Rice. “When you go in the Marines, they try to get you to quit. You have to really want to be there. I learned hard work growing up. I’ve always been this way – to challenge myself and be around the best people.”

Rice spent seven years as a pilot in the Marines, followed by three in the Reserves. “I came up to Jackson to ski once – I had a friend in the Marines who kept telling me check it out – and I really liked it.” Once Rice and Denise arrived, they saw opportunity in the Merry Piglets taco stand – a business that no one else wanted.

They built Merry Piglets into a full-fledged Mexican restaurant, and since then, Blue Collar has gone on to run a number of eateries, including Sidewinders, Noodle Kitchen, Artisan Pizza, Bubba’s and Liberty Burger.

That might seem like plenty of work in itself, but former-Marine Rice is not one to relax. Since he has come to call Jackson home, he felt a few things were missing from the community. So Rice has undertaken two new projects. One is to build a 25,000 square foot indoor athletic facility for youth and adults, as well as breaking ground on an 80-90 unit apartment complex to help mitigate the costs and stress for Blue Collar employees of Jackson’s increasingly scarce housing.

Rice is a tough guy to compliment. He shrugs off accolades, and passes them on to his team, citing values he learned before arriving in Jackson. “I owe my success to being in the Marines,” he said. “It just sets you up for a certain way of doing things. Take care of your people Lead by example. If something needs to be done, do it yourself. [At Blue Collar] if somebody needs something, we help them.”

Rice credits the success of Blue Collar to this code, and to the type of employee it attracts. “We have had people working with us for over 20 years – everyone is treated as an equal,” said Rice. “They know they can and should give constructive criticism and speak up. Some of the best ideas have come from our staff. Our people really take care of each other. If you don’t have good people, you don’t have anything.”

“[Rice] is invested in everyone’s welfare – and everyone knows it, said Tracey Joralemon, manager of Merry Piglets, who has worked with Rice and Blue Collar for 20 years. “He is invested in the community and the new generation. He came from the working class and he doesn’t forget it.”

“You don’t even know [Joe and Denise] are the owners,” said Megan Watson, a server who has worked at Rice wants to bring opportunities into the community for other local athletes.

“I have three daughters, and I always told them they could do anything they want. Just because you come from Jackson Hole doesn’t mean you can’t go to the best schools and pursue your sports.”

The facility will have a 100×200 meter indoor field for soccer and lacrosse, as well as strength training, stretching, and agility training rooms. “My passion is helping kids, but we will have adult leagues too. And anyone coming to Jackson with nothing, Rice and his wife found the perfect place to build careers, raise a family, and to give back to a place that might be a globally known destination, but that still maintains its small town western American values.

“I always wanted to live in a place where my kids could live in an outdoors environment. Growing up here gave them some really good values. People might have different political views, and this and that, but at the end of the day people help each other.”

Condominium Hotel Properties Show Growth In Value & Income Generation

By Andrew Cornish

Condominiums have long been a way to provide Teton County market participants an opportunity to own property without the responsibilities associated with detached, single-family homes.

In 2001, the condominium concept was expanded for the Teton Village market with the advent of the first condominium hotel (condo-tel) property. The condo-tel form of ownership combines the attributes of income from a hostelry front desk with lifestyle benefits such as ski storage services, discounted dining and the prospect of being greeted by name as you check into real estate which you own. Add to these benefits the recent trends of increasing income and unit appreciation, and it is no wonder condo-tels have become an attractive form of property ownership to many.

Admittedly, condominium hotel ownership may not be for everyone, as property access typically closes for a brief period during the shoulder seasons to allow for cleaning and owners may be financially incentivized to make their units available for rental for a minimum number of days each season. However, to many, these points are less significant than the potential for income generation and property appreciation.

Notably, since the stabilization of the market post recession, owners of condo-tel units have received both increased income and property value. Observing sales from Hotel Terra and Teton Mountain Lodge properties, it is noted that the 2015 average sale price per square foot of these units is over 73% greater than their 2012 post-recession low. While review of the data underlying this measure indicates that a small sample size and the recent prevalence of larger upper-floor units has contributed to this growth being an overly-optimistic gauge, the indication of a return to vibrancy for this section of the Teton Village housing market is solid by any measure. Not surprisingly, a positive relationship between value and rental income level is noted when observing that the 32% growth in price per square foot of this condo-tel sample since 2013 roughly parallels the approximately 29% growth in revenue per available room for Teton County hostelry properties that was reported by the Jackson Hole Chamber of Commerce DestiMetric data for this same period.

For information regarding condo-tel and all resort properties, contact the Cornish | Lamppa Realty Group resjh.com/009 or call 307-733-8899