Monthly Archives: December 2016

Smart Strategies For Real Estate

If you’re deterred by the roller coaster rides of the stock market, then real estate is the best place to invest your hard earned money.

But real estate business is not an easy one. It calls upon concrete strategies to realize your goals and turn your business into a lucrative venture. If you’re an aspiring real estate entrepreneur, then have a look at the five strategies given below that will help you in having a successful real estate investment.

Buy and Hold strategy

Under this strategy, you buy a property and lend it on rent. Hence, this strategy is usually known as rental properties. Buy and hold strategy of real estate investment opens three paths of income for you:

amortization–you lower the amount of debt while paying your mortgage,

appreciation–you increase the value of your property over the years, and tax incentive–as a landlord you’ll get a chance to cover up your investment costs within a few years. Even if the rent doesn’t break even your entire mortgage payment, it’s not disheartening, as you still have a positive cash inflow.

But before entering into a contract with your tenant, you should make yourself aware of your rights and duties to avoid trouble later.

Flipping strategy

Flipping involves buying and selling real estate property without taking its ownership. You sign a contract with the buyer of your property and earn a commission for your services. There are no credit checks or down payments involved in flipping. And the bright side is that you don’t need to go for a mortgage, as you’re not the actual owner of the property that you are selling.

However, there are two conditions for successful flipping of a real estate property: the property should be able to attract buyers within no time and you shouldn’t keep hold of the property for a long time, i.e., not more than 15-20 days. Under this strategy, you simply buy the real estate property, flip it to a buyer, and collect your money as commission.

The strategy of Rehabs

Here, you buy a ramshackle property at a cheap rate with the expectation that your rehabilitation cost estimates will be highly rewarding at the end. This strategy looks good only on paper. The truth is that such kind of real estate investment involves a high amount of risk and usually end up in loss. This happens because you either fail to find a worn-out property that is cheap enough to give you a profit, or worse–the rehabilitation costs end up being higher than the cost of purchase.

Commercial Real Estate Investment strategy

Commercial real estate doesn’t always mean magnificent shopping malls or office complexes. Any building larger than a 4-unit apartment is regarded as a commercial one. The big advantage of commercial real estate investment is that your property value is calculated in terms of the income it generates through rent and not in terms of bidding on residential real estate.

New Construction strategy

This strategy involves selling your new home during its construction phase. Most of the investors find this strategy to be the most affordable and the easiest one. The important thing here is to keep yourself updated with the market trends. However, there’s a limit imposed by the construction companies on the number of homes you can buy.

A smart way to make an optimal use of this strategy is to have one or two homes under construction continuously. But this strategy brings profit only in a sellers’ market. If you find the local real estate market to be highly fluctuating or to be on the buyers’ side, then it’s better to avoid this strategy.

Commercial Real Estate Transactions

Planning to purchase or finance Commercial or Industrial Real Estate? Shopping Center? Office Building? Restaurant/Banquet property? Parking Lot? Storefront? Gas Station? Manufacturing facility? Warehouse? Logistics Terminal? Medical Building? Nursing Home? Hotel/Motel? Pharmacy? Bank facility? Sports and Entertainment Arena? Other?

A KEY to investing in commercial real estate is performing an adequate Due Diligence Investigation to assure you know all material facts to make a wise investment decision and to calculate your expected investment yield.

The following checklists are designed to help you conduct a focused and meaningful Due Diligence Investigation.

Basic Due Diligence Concepts:

Commercial Real Estate transactions are NOT similar to large home purchases.

Caveat Emptor: Let the Buyer beware.

Consumer protection laws applicable to home purchases seldom apply to commercial real estate transactions. The rule that a Buyer must examine, judge, and test for himself, applies to the purchase of commercial real estate.

Due Diligence: “Such a measure of prudence, activity, or assiduity, as is proper to be expected from, and ordinarily exercised by, a reasonable and prudent [person] under the particular circumstances; not measured by any absolute standard, but depending upon the relative facts of the special case.” Black’s Law Dictionary; West Publishing Company.

Contractual representations and warranties are NOT a substitute for Due Diligence.

Breach of representations and warranties = Litigation, time and money.

WHAT DILIGENCE IS DUE?

The scope, intensity and focus of any due diligence investigation of commercial or industrial real estate depends upon the objectives of the party for whom the investigation is conducted. These objectives may vary depending upon whether the investigation is conducted for the benefit of (i) a Strategic Buyer (or long-term lessee); (ii) a Financial Buyer; (iii) a Developer; or (iv) a Lender.

If you are a Seller, understand that to close the transaction your Buyer (and its Lender) must address all issues material to its objective – some of which require information only you, as Owner, can adequately provide.

GENERAL OBJECTIVES:

(i) A “Strategic Buyer” (or long-term lessee) is acquiring the property for its own use and must verify that the property is suitable for that intended use.

(ii) A “Financial Buyer” is acquiring the property for the expected return on investment generated by the property’s income stream, and must determine the amount, velocity and durability of the revenue stream. A sophisticated Financial Buyer will likely calculate its yield based upon discounted cash-flows rather than the must less precise capitalization rate (“cap rate”), and will need adequate financial information to do so.

(iii) A “Developer” is seeking to add value by changing the character or use of the property – usually with a short-term to intermediate-term exit strategy to dispose of the property; although, a Developer might plan to hold the property long term as Financial Buyer after development or redevelopment. The Developer must focus on whether the planned change is character or use can be accomplished in a cost-effective manner. A developer conducting due diligence will focus on issues involving market demand, access, use and finances.

(iv) A “Lender” is seeking to establish two basic lending criteria:

1. “Ability to Repay” – The ability of the property to generate sufficient revenue to repay the loan on a timely basis; and

2. “Sufficiency of Collateral” – The objective disposal value of the collateral in the event of a loan default, to assure adequate funds to repay the loan, carrying costs and costs of collection in the event forced collection becomes necessary.

The amount of diligent inquiry due to be expended (i.e. “Due Diligence”) to investigate any particular commercial or industrial real estate project is the amount of inquiry required to answer each of the following questions to the extent relevant to the objectives of the party conducting the investigation:

I. THE PROPERTY:

1. Exactly what PROPERTY does Purchaser believe it is acquiring?

(a) Land?

(b) Building?

(c) Fixtures?

(d) Other Improvements?

(e) Other Rights?

(f) The entire fee title interest including all air rights and subterranean rights?

(g) All development rights?

2. What is Purchaser’s planned use of the Property?

3. Does the physical condition of the Property permit use as planned?

(a) Commercially adequate access to public streets and ways?

(b) Sufficient parking?

(c) Structural condition of improvements?

(d) Environmental contamination?

(i) Innocent Purchaser defense vs. exemption from liability

(ii) All Appropriate Inquiry

4. Is there any legal restriction to Purchaser’s use of the Property as planned?

(a) Zoning?

(b) Private land use controls?

(c) Americans with Disabilities Act?

(d) Availability of licenses?

(i) Liquor license?

(ii) Entertainment license?

(iii) Outdoor dining license?

(iv) Drive through windows permitted?

(e) Other impediments?

5. How much does Purchaser expect to pay for the property?

6. Is there any condition on or within the Property that is likely to increase Purchaser’s effective cost to acquire or use the Property?

(a) Property owner’s assessments?

(b) Real estate tax in line with value?

(c) Special Assessment?

(d) Required user fees for necessary amenities?

(i) Drainage?

(ii) Access?

(iii) Parking?

(iv) Other?

7. Any encroachments onto the Property, or from the Property onto other lands?

8. Are there any encumbrances on the Property that will not be cleared at Closing?

(a) Easements?

(b) Covenants Running with the Land?

(c) Liens or other financial servitudes?

(d) Leases?

9. Leases?

(a) Security Deposits?

(b) Options to Extend Term?

(c) Options to Purchase?

(d) Rights of First Refusal?

(e) Rights of First Offer?

(f) Maintenance Obligations?

(g) Duty on Landlord to provide utilities?

(h) Real estate tax or CAM escrows?

(i) Delinquent rent?

(j) Pre-Paid rent?

(k) Tenant mix/use controls?

(l) Tenant exclusives?

(m) Tenant parking requirements?

(n) Automatic subordination of Lease to future mortgages?

(o) Other material Lease terms?

10. New Construction?

(a) Availability of construction permits?

(b) Utilities?

(c) NPDES (National Pollutant Discharge Elimination System) Permit?

(i) Phase 2 effective March 2003 – Permit required if earth is disturbed on one acre or more of land.

(ii) If applicable, Storm Water Pollution Prevention Plan (SWPPP) is required.

II. THE SELLER:

1. Who is the Seller?

(a) Individual?

(b) Trust?

(c) Partnership?

(d) Corporation?

(e) Limited Liability Company?

(f) Other legally existing entity?

2. If other than natural person, does Seller validly exist and is Seller in good standing?

3. Does the Seller own the Property?

4. Does Seller have authority to convey the Property?

(a) Board of Director Approvals?

(b) Shareholder or Member approval?

(c) Other consents?

(d) If foreign individual or entity, are any special requirements applicable?

(i) Qualification to do business in jurisdiction of Property?

(ii) Federal Tax Withholding?

(iii) US Patriot Act compliance?

5. Who has authority to bind Seller?

6. Are sale proceeds sufficient to pay off all liens?

III. THE PURCHASER:

1. Who is the Purchaser?

2. What is the Purchaser/Grantee’s exact legal name?

3. If Purchaser/Grantee is an entity, has it been validly created and is it in good standing?

(a) Articles or Incorporation – Articles of Organization

(b) Certificate of Good Standing

4. Is Purchaser/Grantee authorized to own and operate the Property and, if applicable, finance acquisition of the Property?

(a) Board of Director Approvals?

(b) Shareholder or Member approval?

(c) If foreign individual or entity, are any special requirements applicable?

(i) Qualification to do business in jurisdiction of the Property?

(ii) US Patriot Act compliance?

(iii) Bank Secrecy Act/Anti-Money Laundering compliance?

5. Who is authorized to bind the Purchaser/Grantee?

IV. PURCHASER FINANCING:

A. BUSINESS TERMS OF THE LOAN:

What loan terms have the Purchaser, as Borrower, and its Lender agreed to?

(a) What is the amount of the loan?

(b) What is the interest rate?

(c) What are the repayment terms?

(d) What is the collateral?

(i) Commercial real estate only?

(ii) Real estate and personal property together?

(e) First lien? A junior lien?

(f) Is it a single advance loan?

(g) A multiple advance loan?

(h) A construction loan?

(i) If it is a multiple advance loan, can the principal be re-borrowed once repaid prior to maturity of the loan; making it, in effect, a revolving line of credit?

(j) Are there reserve requirements?

(i) Interest reserves?

(ii) Repair reserves?

(iii) Real estate tax reserves?

(iv) Insurance reserves?

(v) Environmental remediation reserves?

(vi) Other reserves?

(k) Are there requirements for Borrower to open business operating accounts with the Lender? If so, is the Borrower obligated to maintain minimum compensating balances?

(l) Is the Borrower required to pledge business accounts as additional collateral?

(m) Are there early repayment fees or yield maintenance requirements (each sometimes referred to as “pre-payment penalties”)?

(n) Are there repayment blackout periods during which Borrower is not permitted to repay the loan?

(o) Is there a Loan Commitment fee or “good faith deposit” due upon Borrower’s acceptance of the Loan Commitment?

(p) Is there a loan funding fee or loan brokerage fee or other loan fee due Lender or a loan broker at closing?

(q) What are the Borrower’s expense reimbursement obligations to Lender? When are they due? What is the Borrower’s obligation to pay Lender’s expenses if the loan does not close?

B. DOCUMENTING THE COMMERCIAL REAL ESTATE LOAN

Does Purchaser have all information necessary to comply with the Lender’s loan closing requirements?

Not all loan documentation requirements may be known at the outset of a transaction, although most commercial real estate loan documentation requirements are fairly typical. Some required information can be obtained only from the Seller. Production of that information to Purchaser for delivery to its lender must be required in the purchase contract.

As guidance to what a commercial real estate lender may require, the following sets forth a typical Closing Checklist for a loan secured by commercial real estate.

Commercial Real Estate Loan Closing Checklist

1. Promissory Note

2. Personal Guaranties (which may be full, partial, secured, unsecured, payment guaranties, collection guaranties or a variety of other types of guarantees as may be required by Lender).

3. Loan Agreement (often incorporated into the Promissory Note and/or Mortgage in lieu of being a separate document)

4. Mortgage [sometimes expanded to be a Mortgage, Security Agreement and Fixture Filing]

5. Assignment of Rents and Leases

6. Security Agreement

7. Financing Statement (sometimes referred to as a “UCC-1”, or “Initial Filing”)

8. Evidence of Borrower’s Existence In Good Standing; including

(a) Certified copy of organizational documents of borrowing entity (including Articles of Incorporation, if Borrower is a corporation; Articles of Organization and written Operating Agreement, if Borrower is a limited liability company; Certified copy of trust agreement with all amendments, if Borrower is a land trust or other trust; etc.)

(b) Certificate of Good Standing (if a corporation or LLC) or Certificate of Existence (if a limited partnership) or Certificate of Qualification to Transact Business (if Borrower is an entity doing business in a State other than its State of formation)

9. Evidence of Borrower’s Authority to Borrow; including

(a) a Borrower’s Certificate;

(b) Certified Resolutions

(c) Incumbency Certificate

10. Satisfactory Commitment for Title Insurance (which will typically require, for analysis by the Lender, copies of all documents of record appearing on Schedule B of the title commitment which are to remain after closing), with required commercial title insurance endorsements, often including:

(a) When available, Affirmative Creditors Rights Endorsement (extending coverage over policy exclusion 7 and policy exclusions 3(a) and 3(d) as they relate to creditor’s rights matters)

(b) ALTA 3.1 Zoning Endorsement modified to include parking

(c) ALTA Comprehensive Endorsement 1

(d) Location Endorsement (street address)

(e) Access Endorsement (vehicular access to public streets and ways)

(f) Contiguity Endorsement (the insured land comprises a single parcel with no gaps or gores)

(g) PIN Endorsement (insuring that the identified real estate tax permanent index numbers are the only applicable PIN numbers affecting the collateral and that they relate solely to the real property comprising the collateral)

(h) Usury Endorsement (insuring that the loan does not violate any prohibitions against excessive interest charges)

(i) other title insurance endorsements applicable to protect the intended use and value of the collateral, as may be determined upon review of the Commitment for Title Insurance and Survey or arising from the existence of special issues pertaining to the transaction or the Borrower.

11. Current ALTA Survey (3 sets), [typically prepared in accordance with 2011 Minimum Standard Detail for ALTA/ACSM Land Title Surveys, certified to the lender, Buyer and the title insurer.

12. Current Rent Roll

13. Certified copy of all Leases (3 sets)

14. Lessee Estoppel Certificates

15. Lessee Subordination, Non-Disturbance and Attornment Agreements [sometimes referred to simply as “SNDAs”].

16. UCC, Judgment, Pending Litigation, Bankruptcy and Tax Lien Search Report

17. Appraisal (must comply with Title XI of FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended)

18. Environmental Site Assessment Report (sometimes referred to as Environmental Phase I and/or Phase 2 Audit Reports)

19. Environmental Indemnity Agreement (signed by Borrower and guarantors)

20. Site Improvements Inspection Report

21. Evidence of Hazard Insurance naming Lender as the Mortgagee/Lender Loss Payee; and Liability Insurance naming Lender as an “additional insured” (sometimes listed as simply “Acord 27 and Acord 25, respectively)

22. Legal Opinion of Borrower’s Attorney

23. Credit Underwriting documents, such as signed tax returns, property operating statements, etc. as may be specified by Lender

24. Compliance Agreement (sometimes also called an Errors and Omissions Agreement), whereby the Borrower agrees to correct, after closing, errors or omissions in loan documentation.

It is useful to become familiar with the Lender’s loan documentation requirements as early in the transaction as practical. The requirements will likely be set forth with some detail in the lender’s Loan Commitment – which is typically much more detailed than most loan commitments issued in residential transactions.

Conducting the Due Diligence Investigation in a commercial real estate transaction can be time consuming and expensive in all events.

If the loan requirements cannot be satisfied, it is better to make that determination during the contractual “due diligence period” – which typically provides for a so-called “free out” – rather than at a later date when the earnest money may be at risk of forfeiture or when other liability for failure to close may attach.

CONCLUSION

Conducting an effective due diligence investigation in a commercial real estate transaction to discover all material facts and conditions affecting the Property and the transaction is of critical importance.

Unlike owner occupied residential real estate, when a house can nearly always be occupied as the purchaser’s home, commercial real estate acquired for business use or for investment is impacted by numerous factors that may affect its use and value.

The existence of these factors and their affect on a Purchaser’s ability to use the Property for its intended use and on the Purchaser’s projected investment yield can only be discovered through diligent investigation and attention to detail.

The circumstances of each transaction will determine what degree of diligence is required. The level of diligence required under the circumstances is the diligence that is due.

Commercial Real Estate

Because the bottom has fallen out of the residential real estate market, real estate investors have now turned to commercial real estate investing. Commercial real estate investing has many different options for the savvy investor. Some of them are as follows:

1. Investing in a retail shopping center as part of a joint venture with several other investors. This enables you to take less of a risk and get some experience in investing in commercial real estate without it costing you a lot of money. Make sure you know plenty about your partners as well as the property that you will be purchasing;

2. New construction. If you have been a project manager or general contractor, you may be able to swing commercial real estate new construction as long as you are aware of the different codes. Commercial real estate new construction is much different than residential new construction. There are different building codes for commercial buildings that vary from different municipalities. You have to be familiar with the codes when building commercial property;

3. Rehabbing or refurbishing older buildings and preparing them for business use. Again, you need to have some knowledge of building codes and requirements;

4. Buying a storefront property or free standing store and leasing it to a business. You need to know about the location, make sure you have a solid lease with a reliable and stable renter and proceed to reap a profit on the rental income while paying off the property at the same time.

Those are just four examples of commercial real estate investing. No matter what you decide to do, remember the three most important aspects of real estate investment:

1. Location;

2. Location;

3. Location.

This is an old and well worn saying, but bears repeating because it is so integral to any type of real estate investment, commercial or residential. If you purchase a storefront in a blighted area it may be cheap, but unless you plan on working in the store all day and every day and worrying about getting robbed or murdered on a daily basis, stay away from blighted areas.

You want to make sure that there is a need for the commercial real estate you plan to develop or in which you wish to invest. Office buildings and complexes are usually always in demand as professionals and others are usually looking for cheap office space.

In older towns and cities, there are areas in which older homes are being turned into office buildings and stores. In “historic districts” in towns, there is an effort to refurbish older homes and increase the value of the property in the area. These are also an ideal option for those who are thinking of commercial real estate investing.

Use any knowledge you have regarding real estate when deciding on commercial real estate investing and make any skills you have work for you. By doing as much as you can with regard to construction, rehabbing or even property management, you can add income to your investment. Always remember to purchase property in a good location or up and coming location so that it will appreciate in value.

The Next Big Crisis in Real Estate

In our hard-hit economy we’ve all seen the results of the housing crisis on neighbourhoods, homes emptied of residents and belongings, yards overgrown, and for sale signs peeking out of the knee high grass. We are reportedly on the verge of recovering from the residential real estate crash now and in the months to come, but the next crisis is apparently about to transpire.

Because of the struggling economy, many businesses are declaring bankruptcy or downsizing their operations. In every city in the country you can see evidence of this occurrence; closed store fronts and empty retail spaces at malls are commonplace pretty much everywhere and the problem is going to increase over the next year it is predicted. Many of the businesses that are having problems and either closing stores or filing for bankruptcy are well known retailers and businesses. Even some malls are reportedly on the verge of closing.

As these companies downsize to save money and close the doors on shops or office locations, there will be as a result an increase in office and store vacancies. Many of the remaining commercial tenants who are renting spaces from building owners have already been negotiating for lower rents as the economy has progressed through this current crisis. Because the public is earning less, they’re also spending less; it is much harder for retailers to make their bottom line and afford the inflated rents that they were able to pay for when the country was still enjoying the boom.

Unfortunately, what this also means is that anyone who took out loans to finance or buy a commercial building will be bringing in less income to pay the loans to their lenders. It is forecasted that over the next year or so some of these business loans are going to be heading to delinquency or defaulting. This in turn may end up causing the banks even more problems than they’re in now.

The big question on the mind of so many people is if this is going to cause even more problems than the residential real estate crash has. Very often the transition back to having construction helps with getting an economy rolling again after a recession, but if there is going to be this much empty commercial and residential space left empty the country is not going to be able to bank on that happening in this case.