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Commercial Real Estate Appraisals|Overcoming a Low Appraisal

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The commercial real estate appraisal can be a very interesting process. You often feel that you already know what the value of the property is, but now you’re waiting for someone else to see if they validate your opinion.

At the same time, you’re relying on an appraiser who may not be an expert at valuing your exact type of property in your exact geographical location. This is because appraisers often work on valuing a wide range of properties in many different cities. So when they’re valuing one particular property, they need to become as much of an expert as they can on that one property. As a result, they end up relying on the people who really are the experts.

They end up calling the commercial real estate brokers in the area who have closed transactions on what may be comparable properties, asking these brokers details about those transactions. From this information and from their own interpretation of how it applies to the property, the appraiser arrives at his value for the property.

In the process, different appraisers can come up with a wide range of values for a property. This can depend on which comparable transactions they’re utilizing for the appraisal, how they’re interpreting the information, and how well they understand the subtle nuances between the comparable properties that they’re using and the subject property that they’re appraising.

As an example, two comparable properties that the appraiser is using could be ten blocks away from the property being appraised – but with each property being ten blocks in the opposite direction from the subject property. The appraiser, not being a full-time expert in this particular real estate market, might not recognize that one of those two comparable properties is in an area that commands lower prices. The other comparable property may be in an area that is very similar to the property being appraised. If the appraiser is unaware of the differences in these areas, it will impact the value he will give in his written appraisal.

In addition, both the underlying reason for the appraisal and the instructions given by the person paying for it can affect the final value arrived at for the property. If someone is getting a property appraised just because they want to feel good about their own net worth, the appraisal may come in at the highest value that a buyer could expect to pay for the property.

But if a lender hires an appraiser because they’re thinking about lending money on a property, the lender is going to want to get a more conservative valuation of the property, and the final value given by the appraiser will probably lean more towards the lower end of what a buyer would pay for the property.

So when it comes to getting an appraisal, recognize that it’s a very subjective process, and that there are different underlying factors that will impact the final appraised value of the property.

If you disagree with an appraisal, please note that you will need actual and verifiable facts to get it adjusted. One of your best sources to get you the information that you require are real estate brokers that specialize in your particular type of property.

If your appraisal doesn’t come in where you need it to, following are a few of the things you can do to overcome this problem:

1.  Renegotiate the sales price with the seller to get close to the appraisal or ask the seller to take a second mortgage where you may make a lump sum payment at a later date or a short term loan where the buyer makes monthly payments to the seller.

2.  Increase the down payment to come into line with the appraised value. If this presents a major hardship to the buyer, then you may try to do a combination of getting the seller to lower the price and having the buyer put up a larger down payment.

3.  Ask to see and review the appraisal. If you have some actual and verifiable facts that are different from the report, you can send them to the appraiser and ask for a meeting to discuss the differences.

4.  You can ask the lender to get a second appraisal. Usually, you will have to pay for this second appraisal if the lender agrees to do it.

5.  Apply with another lender.

Always remember that real estate always involves negotiation and compromise, so keep negotiating until you have come up with a solution.

As I say throughout my blogs, if you have any real estate questions that I can assist you with, please feel free to contact me, as I truly want to help. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.

Triple Net Lease Definition

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The definition of a triple net lease is a lease under which the tenant is responsible for paying the taxes, insurance and maintenance, in addition to the lease payments on a property. Triple net leased properties are often defined as single tenant, stand-alone retail properties such as banks, restaurants (fast food and casual dining), drugstores or dollar/discount stores, however investors have the choice of a wide variety of triple net leased properties.

Characteristics of triple net lease properties

Asset Type – They can be retail, office or industrial

Tenant Credit Quality – They can be investment grade or below

Lease Term – This varies from five to twenty-five years

Value and Size of Property – They can be from $2,000,000 to $100,000,000 or more and from 2,000 square feet to 250,000 square feet or more, as well as a single tenant to multiple tenants.

Location of Property – They can be in small towns or in major metro areas

You can define triple net properties by the ones with the strongest fundamentals as the most likely to continuously pay you income and maintain their value through any economic downturn. Fundamentals refer to being located in a prime location with a solid credit tenant on a long term lease. Prime location not only means in a good physical location for the particular type of business, but also means being in an area that matches the demographics of the tenant.

Here’s a video from EPI Properties discussing NNN properties. Below this, I continue my discussion on NNN Properties. (Please note that I’m not endorsing the company represented in the video, but am referring to them for general information purposes only.)

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Benefits of triple net lease properties

Consistent cash flow – Strong credit tenants on a long-term lease give net lease investors a predictable income stream for a long period of time.

Hedge Against Inflation – These properties typically have consistent rent escalations which offer a hedge against the inflation risk.

Passive Investment – In addition to the monthly rent payment, triple net lease tenants are responsible for all operational aspects of the property (including insurance, taxes and maintenance). This makes it attractive to investors that want ease of management.

Great for Estate Planning – The ease of management, potential step up in basis, and the consistent cash flow make NNN properties a very attractive option to investors that have estate planning considerations.

Exit strategies – These are usually easy to implement, as this is a product that is in demand in good times and in bad times. You can usually sell or get financing for this type of property in any economy.

Tax advantages – As long as the IRS will allow deductions for depreciation of assets, real estate will provide you with tax advantages that can offset income from the real estate investment as well as ordinary income protection. To fully understand this, you may want to seek out a tax advisor or accountant. Only real estate can provide you with these types of tax advantages.

Risks of triple net lease properties

Vacancy risk – If the property goes vacant, it becomes 100% vacant and it is typically a single use building, thus showing you the importance of the quality of the credit of the tenant and the length of the lease term.

Bankruptcy or Default – If the tenant becomes bankrupt or defaults on the lease, it can negatively affect the cash flow and the value of the property.

Real Estate Risk – Triple net properties are not immune to risks associated with all real estate, including the potential loss in value.

Triple net lease properties are not averse to risk; however, with the right amount of homework, close scrutiny of the particulars of the deal and making sure that they align with your goals, they can be very lucrative investments with very low risk.

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me, I truly want to help. My way of giving back is to give away my knowledge. Thank you for reviewing this blog.

Owning Commercial Property|The Property Manager’s Role

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As an owner of commercial property, the property manager is an agent acting as a trustee on your behalf.  The property manager’s primary objective is to oversee the maintenance of rental property, rent to suitable tenants, collect rent and account to the owner.

Management Qualifications
Qualifications a property manager should have:
• Prior experience handling and reporting trust account activities;
• An adequate computer system to record and track activities on properties
• A competent staff to perform office and field duties and to quickly respond to both the landlord’s and the tenants’ needs.

Management Duties
• Handling and accounting for all income and expenses produced by the property
• Contracting for services, repairs and maintenance on the property
• Monitoring utility services provided by the landlord
• Responding in a timely manner to the needs of the tenants
• Evaluating rental and lease agreements periodically
• Serving notices on tenants and filing unlawful detainer (UD) actions as needed
• Performing regular periodic property inspections
• Keeping secure any personal property

In addition, the property manager must also:

• Confirm or obtain general liability and workers’ compensation insurance sufficient to protect the landlord, naming himself as an additionally insured
• Obligate the landlord to only authorized agreements
• Maintain the property’s earning power, called goodwill
• Hire and fire on-site employees as needed
• Comply with all applicable codes affecting the property
• Notify the landlord of any potentially hazardous conditions or criminal activities affecting the health and safety of individuals on or about the property

The “Prudent Investor” Standard
A property manager must employ a higher standard of conduct regarding the operation of a property than a typical investor might apply. This standard in commercial real estate management is called the prudent investor standard. A prudent investor is a person who has the knowledge and expertise to determine the wisest conduct for reasonably managing his property. The prudent investor standard of conduct is the minimum level of competency which can be expected of a property manager by a landlord, whether or not the landlord would apply the standard or even know about it.

A landlord’s primary business reason for hiring a commercial real estate management company is to have the property manager maintain the condition of his investment and income.

Decisions regarding the care of a property should be made by the property manager based on the need to generate a reasonable income from the property and incur expenses necessary to preserve the habitability of the property, provide a safe and secure environment for persons on the property and maintain the property’s condition so it will support the rent charged.

Management Fee
Commercial real estate management companies structure management fee schedules in several different ways:

1. A percentage of the rents collected.
The property manager is entitled to charge a set percentage of the rents collected as a fee (customarily between 5% to 10%), usually payable monthly. The percentage fee is not paid on security deposits since deposits are not rents.
2. Fixed fee
The property manager and landlord agree in advance to a set dollar amount to be charged monthly for the management services.
The amount stays constant whether or not the units are rented. This method, however, lacks the motivational incentive to induce the property manager to generate maximum rental income.
3. A percentage of the first month’s rent.
4. A front-end fee paid to the property manager is called a leasing or origination fee. If the landlord agrees, a fee can be charged for exercise of an option to renew or extend, or when a new lease is entered into with an existing tenant.

Accounting to the Landlord
All landlords are entitled to a statement of accounting no less than at the end of each calendar quarter. Most landlords will require monthly accounting in their commercial real estate management agreements.

Property Inspections by the Manager
Inspections determine the physical condition of the property, availability of habitable units or commercials spaces and the use of the leased premises by existing tenants.

Several key moments when a property manager should make an inspection include:

1. When the property manager and landlord enter into a property management agreement.
Any deferred maintenance or defects which would interfere with the renting of the property should be discussed with the landlord.
2. When space is leased to a new tenant.
A walk-through should be conducted with a new tenant prior to giving them occupancy. The property’s condition should be noted on a condition of premises addendum form and signed by the tenant.
3. During the term of the lease.
While the tenant is in possession, the property should be periodically inspected by the property manager to make sure it is being properly maintained.
4. When the tenant vacates.
The property’s condition should be compared against its condition when first occupied by the tenant. Based on differences in the property’s condition as documented by the property manager, the reasonable amount of deductions from the tenant’s security deposit for corrective repairs can be documented when accounting for the return of the deposit.
5. When the property manager returns management of the property back to the landlord or over to another management firm.
This inspection helps to avoid disputes with the landlord or tenants regarding just what the condition of the property was when management was transferred to and from the property owner.

Maintenance and Repairs
Obtaining the highest rents available requires constant maintenance and repair of the property. The property manager is responsible for all the maintenance and repairs on the property.

The property manager’s knowledge of the property’s condition prior to entering into a commercial real estate management agreement is a must in order to properly ascertain what maintenance and repairs need to be made or will be deferred.

The responsibility for maintenance includes:
• Determining necessary repairs and replacements
• Contracting for repairs and replacements
• Confirming completion of repairs and replacements
• Paying for completed repairs and replacements
• Advising the landlord about the status of repairs and replacements in the monthly report.

Usually, landlord set a ceiling on the dollar amount of repairs and maintenance the property manager has authority to incur on behalf of the landlord. If maintenance or repair work is done by the property manager’s staff or he stands to additionally benefit financially by the materials purchased or services performed, the property manager must disclose his financial involvement to the landlord.

As I have said before, if I may be of assistance with your real estate questions please contact me. My way of giving back is to give away my knowledge. Thank you for reviewing this article.

14 Tips to Leasing Your Commercial Property

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Getting your commercial property leased is the most important thing that you can do if you own commercial real estate.  Here are the things you need to do to get your property leased:

1.    Make sure the space is ready to show and that it shows effectively.  Clean up the space itself as well as the overall property to show it in its best light.  Stage the vacant unit if needed. Staging the vacant unit can mean putting in office furniture if it is an office space or if it is a retail space you might go ahead and put a neutral color carpet into the space and and fix up the front windows as well as have some of the other tenants put some merchandise in the window along with a sign about their store and where they are located in the Center, especially if the vacant unit is a highly visible space. Help your other tenants by getting them some good exposure.

2.      If it is unlikely that you will find a tenant that can utilize the existing improvements, then take them out and put the space in a “vanilla shell” condition. (Definition of “Vanilla Shell”: Landlord provides the space with walls ready for paint, concrete slab floors, drop ceilings, lighting, air conditioning and heating, electrical panels, bathroom and electrical outlets per code in the walls. Does not include floor covering, wall covering, or any additional interior walls or improvements.)

3.    Put a professional leasing sign in the space and on the property. The leasing sign in or on the space should include your companies name, phone number, website and email address at a minimum. The property leasing sign should have the company name and phone number highly visible and should be a wood or weather proofed sign. Check with the local authorities to find out the maximum exterior sign that you can put on the property. Also, you might check to see if you can put a sign on the exterior of the building with the company name and phone number.

4.    Put a professional flyer together outlining the merits of the space and the property. The flyers should be on good stock paper with a picture of the asset and vacant space, a description of the real estate outlining the other tenants in the property, a map showing the location of the asset as well as the address of the property, a brief description of the vacancy, demographic information on the area surrounding the real estate, all of your contact information, traffic counts if a retail center, other tenants in the area around the premises as well as the highlights of the area and I always suggest putting in the asking rents and other charges, because I want the potential client to know what to expect before contacting me.

5.    Distribute the flyer to potential tenants and to the brokerage community.  You may want to put some of the flyers in a folder at the front of the property and/or by the front door of the vacant unit(s). Distribution can include email, direct mail, as well as direct contact by dropping a flyer off at a potential tenants current location or stopping by a brokers office and dropping off flyers.

6.    Advertise the vacancy on the internet through LoopNet, CoStar, Catalyst, eProperty, Craigslist or any one of the other many internet sites as well as local and regional publications.

7.    Attend local and national trade shows where you can talk to potential tenants and brokers in the area.

8.    Put a lock box on the property for ease of showings.

9.    Prepare a “Financial and Credit” form that potential tenants must fill out and return to you. Be sure that if you are going to run a credit check that you get their written permission. Do not be afraid to ask for this information upfront as you to have a good idea of your risk. Bad or no credit does not mean that you won’t lease space to them, but it lets you know about the risk you are taking.

10.    Always immediately return phone calls about the property. It is hard enough for a potential client to pick up the phone and call you, however making them wait a day or two for you to return their call makes them think that you don’t care or respect them.

11.    Qualify prospects over the phone prior to setting appointments to show the property.  Asking questions about their experience, the business that they want to put into the space, their financing and when they want to open their business will help you determine if they are, in fact, a prospective tenant for your property.

12.    Be on time for showings and ask qualifying questions as you tour a potential client through the space.

13.    Have a lease agreement that is acceptable in the community and know how to negotiate the points in the lease.

14.    Saying the right things and following up with prospects is key to leasing your property.

If you feel that you can’t do the above, contact a local commercial real estate broker who can provide you with these services.

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me.  My way of giving back is to give away my knowledge.  Thank you for reviewing this blog.

Property Management|Hire Out or Do It Yourself

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As the owner of investment property, you have the choice of hiring a professional property management company or managing the property yourself.

As an investor, you can do retail property management yourself; however, your property’s success will never go beyond your own personal development. So, educate yourself on how to successfully manage a property and improve your knowledge and skills.

When managing your own property, keep the following things in mind:

1. Don’t be friends with your Tenants – Establish a friendly business relationship with them, but don’t become best of friends. It’s difficult to evict your best friend.
2. Understand that people, not your property, cause problems – People pay late, damage properties and vacate properties, so make it a point to lease to good tenants and good companies.
3. Make sure everything is in writing – A good lease agreement is worth its weight in gold. If you’re to do something for the tenant, write it down and vice versa, if the tenant is supposed to do something, write it down and give them notices.
4. Have an in-depth understanding of your market – Knowing what your competitors are doing is a must in retail property management to make sure that your rents and your property overall meet the standards in the market or exceed the standards.
5. Don’t put anything in your name – Protect yourself and your personal assets from lawsuits by having your properties and businesses legally detached from you personally. You should form an LLC or another type of legal entity to hold your property, based on conversations with your attorney and tax advisor. Do not commingle your personal funds and the property funds.
Also, by having the property in an LLC, it allows you to tell your tenants that you’re only the property manager or managing partner and that decisions are made based on what is best for the ownership.
6. People handling skills are a must if you’re going to do retail property management youself – You not only have to manage your tenants, but you also need to handle vendors, contractors, employees, city or county government people, etc. You need to have tact and patience to succeed.
7. Understand your lease(s) inside and out – When you buy a property you’re really buying the lease(s) and getting the buildings for free. In other words, if your lease(s) is weak, then your investment is weak.
8. Always write a business plan for the property – Setting goals and understanding what needs to be done to keep the property on track is a must. A good and well thought out business plan helps you when making everyday decisions on the property. A business plan should include a property summary, a market analysis, a sales and marketing plan, a management summary and a financial plan.
9. Understand your own strengths and weaknesses – Take on those tasks that you do well and that give you joy, and hire out those functions that you don’t do well or don’t like to do.
10. Do things right the first time – Hire good help, and focus on quality, thoroughness and attention to detail.
11. In order to manage a property yourself, you need to have a basic business system that includes an accounting system, a sales and marketing system, an operations system and a maintenance system.

If you’re considering hiring a professional, there are several things you’ll want to evaluate including qualifications, duties they’ll be expected to perform, and management fees.

Here’s some additional information from the REI Club about whether you should or shouldn’t manage your own property.

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Here are some reasons why you may make the decision to hire a property management company instead of doing it yourself:
1. The property is too far away – If the property is too far away it can be difficult to oversee maintenance and repairs, handle evictions, take care of emergencies and pick up rent checks.
2. The property is too big – A large property has a large amount of decisions to be made on a daily basis.
3. You want to have a life of your own – Managing property profitably takes time. Is this the best utilization of your time? Do you spend enough time on the other parts of your life?  Your management company can do your business plan, then you only have to review and approve it.
4. You simply aren’t good at managing your property – Due to your lack of skills, you may be leaving money on the table each month.
5. You don’t have any systems in place to properly manage your property – Without an accounting system, a sales and marketing system, an operations system and a maintenance system, managing properties can be a nightmare.

As I have said before, if you have any questions or I may be of assistance with your real estate questions please contact me.  My way of giving back is to give away my knowledge. Thank you for reviewing this blog.

Conventional Loans to Buy Commercial Real Estate

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A conventional loan is a loan obtained from a conventional lender. Conventional lenders include commercial banks, savings and loan banks, mortgage brokers, mortgage bankers, insurance companies and pension funds.

Commercial Banks – They tend to lend locally and are usually very conservative in their lending practices. Very often they ask for higher down payments, give shorter loan terms and have stricter guidelines.

Savings & Loan Banks – They also tend to lend locally, but are usually a little more aggressive than a commercial bank. The items that they can most often do for you is less down payment, lower out of pocket costs because they do everything in-house, lower interest rates because they lend from customer deposits and they tend to be a little more flexible and make exceptions to get a deal done.

Mortgage Brokers – They act as middlemen and shop your loan to their many financing sources which include banks, insurance companies, pension funds and mortgage bankers. They can generally save you time and money and expose you to the most flexible programs such as interest only loans, no document loans and low debt coverage ratio loans. They also work on a commission only basis, meaning they only get paid if you close the loan, whereas other lenders get paid whether you close a loan with them or not.

Mortgage Bankers – They are usually a part of a large financial institution and loan on a national basis using favorable interest rates and sell wholesale to mortgage brokers.

Insurance Companies and Pension Funds – They tend to lend on larger projects requiring bigger loans at very low rates. These lenders typically take a long time to approve and close the loan. If you have a large requirement they can be your best source of funding.

There are many types of conventional loans for commercial properties that are available. Here are the most common types:

Long Term Loans – These loans are up to 10 years in length, are fixed rate loans, usually have a prepayment penalty and are typically amortized over 30 years.

Short Term Loans – These loans are typically up to 3 years in length, have lower interest rates than long term loans and are typically amortized for less than 30 years. This loan may suit you if you plan on selling the property within a short period of time and overall would cost you less because it doesn’t have a prepayment penalty.

Conduit Loans – These loans usually have low interest rates, with long amortization periods and can be nonrecourse loans. Nonrecourse means that you are not personally liable for the loan. These are good for properties that are stable with credit tenants.

Small Business Administration (SBA) Loans – These loans are insured by the SBA, given through SBA approved lenders and they have some of the most favorable terms such as low down payments, lengthier loan terms, as much as 40 year amortizations and low interest rates. Most of these loans are given to owners who occupy at least 51% of the property and can be used as a construction loan if you occupy at least 60% of the building.

Construction Loans – These loans are taken out to fund the construction of a project to completion or leasing to a certain percentage. These loans are usually done on a draw basis where the lender funds as the project is being built, have interest only payments and are usually for one to three years in length. Usually, they require a take-out loan commitment at the end of the term.

Mezzanine Loans – Most of these loans go with a permanent or construction loan, as lenders won’t exceed 80 percent loan-to-value. These loans stack on top of the other loan to get you up to a 90 percent loan-to-value. These are usually done on larger projects and they are typically not secured by a mortgage or deed of trust, but they are secured by a security agreement against the ownership’s stock in the LLC.

This will give you a clear understanding of a mezzanine loan:

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Bridge Loans – These loans are short term financing used to bridge the gap between finding a permanent loan and closing the permanent financing. They help to fund deals quickly.

Stated Income/No Documentation Loans – This type of loan doesn’t require borrowers to show proof of monthly income or income tax returns. This typically requires that you have good credit, the property must have solid cash flow and the property must be in excellent shape.

Hard Money Loans – These loans typically require a large down payment, have high interest rates and require you to pay three to ten points for the loan. These loans can usually close quickly and don’t require good credit. You might use this loan if you have found a really good deal and need money quickly.

As you can see there are many types of loans. It is important that you match the loan to you’re plan for the property. Using leverage or borrowing money on the property can be a good thing if used in the proper manner and matched to your goals. The wrong loan for the property can be a disaster waiting to happen.

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me.  My way of giving back is to give away my knowledge.  Thank you for reviewing this blog.

Commercial Rental Rates and Expenses|Who Pays for What?

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There are a number of factors that comprise commercial rental rates and several customary ways to quote rents, which can make it difficult to understand what people mean when they are discussing leasing rates.

Normally, the rate quoted reflects the amount of rent you pay per square foot. Generally square foot prices are quoted on a monthly basis; however, there are markets such as San Francisco that are quoted on an annual basis. For example, a $36.00 per square foot annual rate is equal to $3.00 per square foot when expressed as a monthly rate. While this is simple math, it can come as a bit of a shock when you hear a rate quoted for one space as $3.00 per square foot and another as $36.00.

Urban office leasing is generally quoted as an annual rate, while industrial and retail rates are typically stated as monthly rates.

Also important to note is that real estate brokers commonly refer to annual square footage rates while tenants frequently prefer to look at rates on a monthly basis. This difference may occur because each uses the rate differently. Tenants commonly look at their expenses from a monthly expense perspective, while agents deal in leasing agreements in annual terms.

Another thing to note is how square footage is defined. It can be quoted to you on a rentable or useable basis. If you see it on a useable basis that means that the square footage is the actual square footage in your space. If you see it on a rentable basis, it usually means that there is a load factor involved and your square footage includes your portion of the load factor.

The load factor is the multiplier applied to a tenant’s useable space that accounts for the tenant’s proportionate share of the common areas (restrooms, lobbies, stairwells, mechanical rooms, etc.). Rentable basis is useable square footage plus the load factor. You may also see the load factor referred to as the add-on factor.

Aside from different rental rate terms, there are key attributes associated with each square footage rate.

These attributes are most commonly referred to as: Full Service Gross, Industrial Gross (or Single Net), Double Net and Triple Net (or Absolute Net).

All of these except the Full Service Gross rent may have Common Area Maintenance (CAM) charges added on.

On property fact sheets you may see these written as; FSG, IG, N, NN, NNN, CAM. These traits determine who pays the utilities, janitorial and other building services (elevators, common hall lights, etc.) and are key factors in determining the true asking rate.

A Triple Net Lease (NNN) means that the tenant pays for all expenses on the property. The three nets (NNN) refer to Real Estate Taxes, Insurance and Common Area Maintenance. In addition to the NNN costs, the tenant pays for his own utilities and janitorial. The Landlord is not responsible for any costs associated with the property, except for possibly some structural and original construction issues.

A Double Net Lease (NN) means that the tenant pays for the real estate taxes and insurance on the property and the Landlord pays for the common area maintenance. Utilities and janitorial are negotiated items with the lease being your guide. The Landlord typically is responsible for structural and original construction issues.

A Net Lease (N) means that the tenant pays for the real estate taxes and the Landlord pays for the insurance and common area maintenance. The other costs are the responsibilities of the parties similar to the NN lease.

Another lease that you might run into is where the tenant pays the increase in expenses over a base year. The expenses can be all of the expenses of the property or may be some of the expenses of the property. The lease will spell out the responsibilities of the parties.

Retail tenants may also be subject to a percentage rent that requires the tenant to pay a percentage of the gross sales after deducting the minimum rent. The formula is gross sales times percentage rate less minimum rent equals the amount of percentage rent due. Example – Gross Sales are $1,000,000, Percentage Rate is 7% and minimum rent is $60,000 per year. $1,000,000 times 7% equals $70,000, minus minimum rent of $60,000 equals percentage rent owed of $10,000 ($70,000 minus $60,000). You may also see this quoted as 7% of sales over a natural break even point. To calculate the break even point you divide the minimum rent ($60,000) by the percentage rate of 7% giving you a break even point of $857,143. This means that if you do a gross volume less than $857,143 you will not owe any percentage rent, but if you do a volume greater than $857,143 you will owe some percentage rent equal to 7% of any amount over the break even point.

Rental rates, in essence, are affected by countless elements, including:

• lease term (duration)
• size of the property
• storage
• views
• proximity to certain locations
• current market/economy.

Typically, items that will help to lower your rental rate include longer lease terms, good credit history, previous experience, larger size property, inferior location within a market or a particular property, lower level of a high rise building and a down real estate market. Typically, things that will increase a rental rate include improving market conditions, short term leases, bad credit, little or no experience, smaller properties, superior locations in the market or a particular property and higher floors of a high rise building.

Once a lease is executed, the rental rate is fixed for the lease term, however be sure to take into account the increases in the expenses that you are responsible for paying.

As you can see there are several factors you need to take into account prior to looking for a location in the market. If you have any questions or I may be of assistance in any way please feel free to contact me. Always remember that my way of giving back is to give away my knowledge. Thank you for reviewing this article.

Creative Financing to Buy Commercial Real Estate

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Creative financing is any type of financing other than getting a conventional loan with a standard down payment. Creative financing techniques and the benefits of each include the following:

Master Lease Technique – You master lease the property by paying the owner a set amount each month, and you manage the property as if you own it. You also negotiate an option to buy, usually at a price at or near the current market value of the property. Your goal is to increase the income and create cash flow as well as increasing the value over the leased period of time, usually a three to five year period. This method is used mostly when an owner doesn’t want to pay taxes on his gain at the present time, but is tired of owning and managing the property.

Seller Financed Firsts – The seller carries back a first loan on the property. The benefit to the seller is that they only have to pay taxes on their capital gain based on the principal amount paid back each month. A good thing about this financing is that you not only don’t have to qualify with a lender, but the interest rate is negotiable. You can often negotiate a very low interest rate for two to five years.

Seller Financed Seconds – This can work in a couple of ways: One way is that the seller carries back a second mortgage on the property. In this situation, you are usually assuming the first, so that you don’t have to go out and get a new loan.

In another scenario, you’re getting a new loan and the seller agrees to carry back part of the purchase price as a second mortgage. This method is especially viable if the seller doesn’t want all cash when he sells the property. By carrying a second, he can get his money at any time that the two of you can agree upon. This can be in the form of a balloon payment at some future date, principal only payments, interest only payments, low interest rates, etc.

Secondary Financing By Other Sources – A conventional lender or a private lender provides you with the funds for your second mortgage. In these transactions, you can expect to pay points, fees and generally a higher interest rate. This method is good if you need quick cash to close a good deal ahead of your competition. The negative on this financing is that you may over leverage yourself in the property and have a negative cash flow, a situation you always want to avoid.

Wraparound Mortgages – The seller gets one payment from you every month to pay the amount due on the first mortgage and to pay the second mortgage due him. This gives the seller assurances that the first mortgage is being paid if they are still named on the loan and gives them the right to foreclose or take back the property if you default on the payments.

Options – An agreement with a seller that gives you the right to buy the property at a set price for a certain period of time. Typically, sellers will give you this for an upfront payment, ongoing payments to cover certain expenses or as a throw in to another property that you bought from them.

Blanket Mortgages – You offer the seller or the lender the added security of the equity you have in other properties as collateral for this loan. You use this method when you don’t have a solid track record for a lender or seller to look at. Be careful when doing this, because you are putting the other property at risk.

Funding With IRAs – You can set up a self-directed IRA account from which you can invest in real estate. Note that there are strict rules regarding what you can and can’t do when using these funds.

Remember that creative financing is typically a negotiated item.  Most property owners do not typically offer this financing upfront.  Establish rapport with the broker or seller and approach them understanding their wants and needs.  Sometimes you are presenting them with a solution to a problem they didn’t realize they had or realized it, but didn’t see the solution.  Never be afraid to ask, because if you don’t ask, you don’t receive.  Life and real estate are a negotiation.  Good luck in creatively financing your deals.

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me.  My way of giving back is to give away my knowledge.  Thank you for reviewing this blog.

Commercial Real Estate Financing

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Financing sources for commercial real estate include mortgage banking firms, savings and loan institutions, regional banks, insurance companies, and private investors.

Commercial real estate financing can take on very different terms, and the way deals are structured is based on a number of factors, including:

•    Anticipated use of the property
•    Anticipated returns from the property
•    Geography
•    Type of real estate
•    Size of real estate
•    Perceived risk to lender
•    Market conditions

Each of these areas must be examined by the buyer prior to seeking commercial real estate financing.  Buyers then need to examine the type of loans offered by lenders in accordance with their needs and anticipated growth.  Unlike obtaining financing for residential real estate where the transaction is based on the value of the home at the time of the sale, commercial real estate financing will be based – in part – on the value of the business in the future.

While some lenders specialize in specific types of commercial ventures, such as retail operations, warehouses, or apartment complexes, others provide across-the-board financing to a wide variety of commercial ventures.

For the potential borrower, the key to starting the process is to have the necessary paperwork in order.  Despite the many types of financing and types of commercial real estate, lenders remain primarily concerned with the level of risk they’ll be taking.  Therefore, they must see the following documentation:

•    Income and expense statement for the property demonstrating a solid income stream
•    Financial statements on all principals involved as owners of the property
•    Profiles of the management team
•    Property appraisal
•    Financial statements on the borrowing entity
•    Plans, including construction blueprints (if available) for the use of the property.

Here is an example of submission requirements for a mid-size income-producing property (amount of loan $200,000 – $5,000,000):

•    Completed Loan Application
•    Credit Report
•    Three year historical Property Income and Expense Statements
•    Current Rent Roll.  Rent Roll should include tenant names, square feet, start and end dates of leases, reimbursements, monthly rents and vacancies
•    Current Financial Statements for each principal/guarantor
•    Purchase Contract
•    Most recent two years corporate and personal Tax Returns

As I say throughout my blogs, if I may be of assistance with your real estate questions please contact me.  My way of giving back is to give away my knowledge.  Thank you for reviewing this blog.

How To Get Started Investing In Commercial Real Estate

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If you want to invest in commercial real estate and build significant wealth, it’s going to require that you take the time to think things through. It requires planning, patience and persistence – or, in other words, it requires you to develop a strategy or business plan. Think of this as your road map.

Mission Statement

Your first step in buying commercial real estate should include a mission statement. This is where you clearly define your purpose and should include some benefits that will be derived. Don’t spend a lot of time here at first, just put together some general concepts.

Goals

Secondly, you should set some goals. This step is the why am I doing this. Do you want to quit your current job or do you want to retire early or set up a way to pay for your kids college education or do you just want some extra spending money for that new car, dream vacation, etc. Set these out and refer to them often. I like to set short and long term goals. Short goals so that I can achieve them and have some immediate gratification and long term goals so that I always have something to look forward to. Your goals should also include how many properties you are going to buy or that you want to make $5,000 per month if that is your goal. The key thing in goals is to write them down and adjust or update them as you achieve them.

Time Frames

The next thing to do is to set out time frames within which you want to achieve your goals. Be realistic in this aspect, but also stretch yourself. State when you are going to buy those properties or when you are going to be making the money that you want or when you will take that vacation.

Strategy

The next item to tackle would be to think about your strategy. There are many, many ways to make money in commercial real estate. If you want to buy a property a year, write that down. If you want to flip a property every 3 months, write that down. Your strategy is how you will be using real estate to accomplish your goals. Note that this can be an evolution over time, but you need to start somewhere. The key thing is to write down a strategy, then adjust if you need to as you go along. In the beginning you may think that you want to buy and hold apartment buildings, but you may find out that your preference is to buy apartments, fix them up, then flip them. The key thing is to work within a specific niche such as apartments or nnn properties or office buildings or shopping centers, etc. It’s best to start out in a particular niche, because you will have a learning curve to go through. It’s easier to learn about one particular type of real estate than to try to tackle all of them in the beginning.

Market Area

Your next step is to define your market area. Most beginning investors start in their own backyard, because you already have some knowledge about that area and you can easily drive it to find properties or locate brokers to call, etc. Once you have completed a couple of deals you will find that you can expand your area and look into other cities around you and then other areas of the state and so on.

Establish Criteria

To me this is the most important thing that you can do for your investing business. Sometimes the best deals are the ones that you walk away from. In this step you are establishing the return on your time and money. Setting your financial parameters as well as establishing the type of property you want to buy are the keys to setting up your success in this business. The financial items that you will want to consider are maximum purchase price, cash flow requirement, return on investment, loan to value ratio, maximum cash outlay, max rehab costs and time frames. Deviating from your criteria can be disastrous for you. By having clearly defined criteria you will be able to recognize your deal faster and let others know exactly what you are looking to buy. If you are not finding deals you can look at other markets or adjust your strategy. Always ask yourself “What is this property worth to me?”, not “What is this property worth?”. Also, remember that you want make your money when you buy the property. If you’ve bought outside of your criteria you didn’t make money when you bought the property, you have already put yourself behind.

Financing

Here is the point where you need to consider how you are going to finance your deal. You are not looking for specifics here, you are looking for concepts such as will you be using conventional financing, private money financing, seller carryback financing, hard money financing, using a lease option, using partners or some other type of creative financing. In my opinion, if you want to purchase several properties you will need to seek out private money financing so that you will have a never ending supply of cash available, however you typically need to establish yourself with a couple of deals first.

Marketing Yourself

This is where you need to state how you plan on attracting deals. How are you going to find the best sellers which are motivated sellers? Will you be using brokers or newspapers ads or direct mail or doing online searching through companies like LoopNet or just driving around or all of the above. Once you have established how you are going to find the deals, then you will want to clearly define your purchasing process. This should include submittal of the offer, acceptance of the proposal, putting up the earnest money deposit, submitting loan documents, commencing due diligence, review title, agreement to all terms and conditions and closing the deal. During this thought process you will want to define your team. Will you need an attorney, a construction or maintenance person, an accountant, an insurance agent, etc. You don’t need to know or state any particular people, but you do need to know your own strengths and weaknesses and how people on your team can help make your deals go smoothly.

Exit Strategy/Strategies

Another very important step is to define your exit strategy. Beginning investors should have more than one exit strategy. If you want to buy and hold, define the number of years that you want to hold and the return that you are seeking. While your preferred choice is to buy and hold, you may want to consider flipping the deal or wholesaling deal if you get into trouble with it. There are many ways to exit a deal other than just selling it. Some of them include 1031 exchanges, sell it on a note, sell the entity holding title or doing a lease option. Having back up plans is a must in the real estate game.

Personal Financials

Prepare a current personal financial statement and then project it into the future for five or ten years based upon the goals and strategies that you have plotted out above. You are going to want to update this as often as needed, but at least once per year. This is the fun part, projecting your wealth as you grow your portfolio.

Always remember that this business plan is a guide, not a hard and fast rule. You have set this up to guide and motivate you. If you fail to plan, you plan to fail.

As I have said before, if I may be of assistance with your real estate questions please contact me. I truly want to help.  My way of giving back is to give away my knowledge. Thank you for reviewing this blog.