Five Key Condsiderations for Choosing The Right Commercial Real Estate Broker

Commercial Real Estate investing requires working with the right Commercial Broker to reach your investment goals. The following Five Key considerations will determine if a broker will bring you a stream of quality properties you are looking for and makes your business their priority.

Key consideration number one: Do your due diligence.

Start by doing the same kind of Due Diligence on your Broker Candidates as you would on properties themselves. This will increase the probability that the broker you choose will be the right broker. Make sure you create a guideline containing your specific goals and needs to qualify your broker candidates. I research the agents that I will potentially be working with. I read their brochures, promotional literature, websites, past closings, etc so I can cross reference credentials and history with other brokers in the marketplace. Remember, choosing the right Commercial Real Estate broker can potentially net you millions of dollars worth of time and money.

Key consideration number two: How long has the broker been in the business?

There are many brokers who cross over from Residential Real Estate into Commercial Real Estate in an effort to “make big money”. What they fail to realize is that Commercial Real Estate is more than just selling or buying real estate. It requires an ability to understand and interpret profit and loss statements, rent rolls, third party contracts, and many more specific documents that are involved with each transaction. It’s more than just writing up a contract. If your potential broker can not figure out the Net Operating Income of a building or can not tell you what the debt service coverage ratio is, then you need to keep looking.

Key consideration number three: Have they kept current with changes in their profession along with market changes?

Ask the commercial real estate broker about his or her credentials, certification and education in terms of selling commercial properties. Your Commercial Real Estate broker may have years of experience but they also need to be able to adjust to new selling or buying methods. If your broker is not in the loop about the newest trends of investors buying pools or how new technology is affecting the market trends, you may potentially lose out on a property. I never deal with brokers who have some commercial experience, it is important to know who you are working with in terms of their familiarity with the type of investment you are considering.

Key consideration number four: Make it a point to get to know the broker’s staff.

It is important to ascertain the competency of their staff to see if your deal will be handled with professionalism and efficiency. The right broker will have key employees that have a wealth of knowledge about an area and the ability to make a transaction smooth. Things to consider are: Who do they know that will help me build my team? What type of relationships do they have in the industry? Do they maintain broad relationships that can assist me in developing market contacts?

Key consideration number five: Most of all, make sure the broker is loyal to your needs as an investor and is not in a conflict of interest.

A broker with a fiduciary interest in a property is incapable of putting my needs first. I am very careful to deal with business ambiguity up front in all contractual relationships and will work with someone based on their their loyalty to me being their first priority. Pay particular attention to how fast they return telephone calls after meeting. This may sound insignificant, but it says something about their professionalism and the way they do business. First, a broker will have information about the market that you will not, especially if they have worked in the area for an extended period of time. I have worked with brokers that have sold the exact same properties a number of times. They were able to give me history about building conditions and ownership that I was unable to get from other sources.

Interview as many brokers as needed to make sure they are a good match to do business. The right broker will find commercial properties that meet your investment and business criteria. In the long run this is a business relationship that grows over time, so make it a point to nurture this relationship. Clarity about your investment criteria will help reduce problems finding the right broker. Some resources that can help you begin your process would be The National Association of Realtors, recommendations from other investors, checking professional periodicals online and off, investment associations, and word of mouth from trusted allies.

SUMMARY:

-Choose your Broker carefully – do your due diligence here too

-Make sure they have specific Commercial education and experience

-Know the way they work and the times needed from contract to close

-Be clear on the properties you are looking for

-Make sure the Broker is always working in your best interest

-Evaluate their staff in the same way you do the Broker

-Close when you say you will – so they get paid

-Take good care of your relationship – it will get more and more valuable over time

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Investor Tours University is a dedicated resource helping investors build wealth and achieve their defined level of success. We offer state-of-the-art commercial real estate investing education, tailored to meet the needs of investors with varied backgrounds and experience levels. Our faculty consists of a network of national experts in legal, tax, investment strategy, property management, acquisition and sales professionals who practice what they teach investors, which is how to achieve generational wealth using commercial real estate.

Finding the Best Deals in Commercial Real Estate

If you want to be successful and profitable in the commercial real estate market, it will depend heavily on your ability to find the best deals on the commercial real estate market. You can lower your burden and maximize your net income if you only invest in commercial real estate transactions that have great potential. As an investor, it is important that you find a good offer to make money, but you must remember that it takes some work on your part as an investor to find the best offer. Here are some tips that can help you find the best deals in commercial real estate so you can make a profit and get success as an investor.

Tip # 1 – Know the Area and Market – The most important thing you need to know if you want to find the best deals in commercial real estate is the area and the market. You must be very familiar with the area that you plan to invest and you also need to be informed about the market in that specific area. If you are not familiar with the area you plan to invest, then you have to make it your business to learn about market areas and trends. You cannot determine whether an investment opportunity is a big thing unless you have a good understanding of the commercial real estate market in that specific area. Take the time to find out the area and market in the area, and you will definitely get the best commercial real estate offers.

Tip # 2 – Utilizing a Pocket List – Another tip that can help you find the best deals in commercial real estate is to use the pocket list you might have access to. This listing can help you find and track extraordinary investment opportunities. Often you can get this list from brokers to help you pursue excellent real estate investment opportunities. Pocket lists are commercial real estate opportunities that have not yet entered the market. So, you basically get a jump on property before someone else does it. If you want to find many things, don’t forget to use your pocket list.

Tip # 3 – Use Online Resources – Many real estate investors today really utilize their online resources when searching for the best commercial real estate offers. Using online resources can save a lot of time; however, you still need to make sure that you take the time to do the investigation that you need to do. There are many online websites that are directed to investors in the commercial real estate market. Quite a number of investors are using online resources to find the best deals, and you can use this easy access resource to help find great deals too.

Tip # 4 – Use Business Contacts to Find Deals – If you have great business contacts in the commercial real estate market, you can use them. This business contact can help you find some great commercial real estate offers. It is important that you take the time to build good relationships with these business contacts so that you are the person they tell when they hear about a great commercial real estate deal. Fostering business contacts can take several jobs; However, it is very valuable if you can get a great business deal from him.

Tip # 5 – Get to know your Financial Capacity and Strategy – Know your financial capacities and strategies are also important if you want to find the best deals in commercial real estate. You will never want to push yourself too financially, so you need to know your financial capacity. It is also important that you have a good strategy for investing as well as for success by looking for great deals on the commercial real estate market.

Tip # 6 – Make Sure to Practice Due Diligence – It is very important that you carry out due diligence if you want to find the best commercial real estate offers. Due diligence is one of the most important steps in finding many things. Some things you need to consider when practicing due diligence are the condition of the existing property, the actual property value, how much you can generate from the property, title issues, zoning issues, and many other important aspects. Make sure that you take the time to do an adequate due diligence to ensure that you really get the most commercial real estate that you plan to invest.

Using all these tips together can help you find great commercial real estate offers. If you want to be on the road to success, great deals are important, and these tips will allow you to find the best deals in commercial real estate that

The Best Commercial Real Estate in New Jersey

For example, there are three major commercial centers in the following locations:

1) Northern New Jersey: Right across the George Washington Bridge and the Lincoln Tunnel from Manhattan as well as the Tappan Zee Bridge making it a great location for proximity to New York but at a less expensive price.

2) Southern New Jersey: Right across the bridge from Philadelphia giving it a fabulous overflow from that city and state, again, at a more affordable price.

3) Atlantic City: A huge gambling and entertainment city on the Atlantic Ocean with casinos, hotels, restaurants and more all within walking distance of the center and connected by the Boardwalk.

Each location is near neighborhoods with good schools, clubs, shopping and everything else employees would need. Once you select your favored location, what amenities make any commercial real estate the best? The best commercial real estate buildings must set themselves apart from the other buildings nearby and make prospective employees attracted to the building as well as the business.

Exterior Features

When searching for excellent commercial real estate in New Jersey you should keep an eye out for the following factors:

• Attractive design
• Enough parking and access to public transportation to attract tenants with employees that need to get there
• Aesthetically pleasing landscaping to give the building curb appeal
• On the interior the best commercial real estate properties must have amenities like:

Interior Features

Some of the features that can be found in top-of-the-line New Jersey commercial real estate:

• Attractive lobby with plants and excellent building materials like marble
• Enough elevators that hold everyone during rush hour and get employees to their offices fast
• State of the art operational systems including, heat, air conditioning, water, and wireless Internet access
• Attractive, clean bath rooms
• At least one restaurant or café that can serve employees meals
• A bank on-site, or at least an ATM machine
• Workout room with TVs that employees can use to keep in shape.
• If it is a large building, day care facilities can be particularly attractive.

Neighborhood Features

Things to look for in the surrounding area:

• Off-site shopping and restaurants for employees or entertaining executives
• Convenient entrances and exits from major commute routes
• Nearby corporate parks to find a pool of employees

An example of a building with an excellent interior, attractive grounds, and excellent nearby amenities is the Mack-Cali Bridgewater I in Bridgewater, New Jersey. Attractive from the exterior with beautiful landscaping, it has won awards for its energy reduction efficiencies. The building is near several major routes for commuting, and other buildings in the nearby business corridor make it easy to attract employees and clients to this building.

If you have a great location with all the building amenities and services that can be provided, then you have found a perfect building for your company. New Jersey has so much to offer that whether you are near Manhattan, Philadelphia or Atlantic City – they all have the potential to be great locations for you business in New Jersey.

How to Invest in Commercial Real Estate

Commercial real estate investing is done by business people for profit. There is a lot of difference between the commercial business real estate investing and the other investment properties like agriculture, residential and industrial. Commercial real estate gives a long and stable income which makes it the most lucrative option. The initial investment in the real estate property is very low compared to the returns. Examples of these properties include retail outlets, office buildings, strip malls, restaurants, hotels, apartments, multi-family apartments and many others. There are wide varieties of options available for a person to invest in commercial real estate properties.

Commercial real estate purchases are similar to other properties. The system of the investment is same which is based on selling, buying and all other legal transfer procedures. However, before investing a person should see that how much percentage of return a commercial estate property can give. A person should always research in the market before investing in any property.

First of all, check out the location of the commercial property you are interested in. Then look at the nearby areas that may develop in the future. Also make sure that the commercial property you are interested is free of any legal action and that the title is clear. Do not rush to get any property – otherwise there is a good chance that you’ll end up in a deal that you regret.

For the people who are beginners commercial real estate, you should proceed with due care. It is always advisable to take suggestions from the experts who have experience. If you are low in your budget or choose not to hire a professional for advice, you have to spend the time necessary to collect information from all the sources available in the market.

Commercial real estate investing can be challenging and interesting, but profitable as well. More information on commercial real estate investing can be found in magazines, newspapers, and online. The Internet can be a good source to get information and other things related to commercial real estate investing. There are many websites which can provide you detailed and updated information on commercial real estate investing. Good luck!

Due Diligence Checklists – For 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 – What’s the Optimum Acquisition Strategy?

In our line of work, doing consulting for different high net worth real estate investors, we come across all types all types of commercial real estate acquisition strategies.

Some commercial real estate investors want to invest in only apartment buildings. Some investors wouldn’t touch apartment building if their life depended upon it because they think, as a whole, apartment buildings are over priced at this point in time.

Some commercial real estate investors want to invest in low-income housing. Others wouldn’t touch low income housing with a ten-foot pole, because they don’t want the headaches of collecting the rent and the abuse the property receives.

Some commercial real estate investors want to invest only in real estate where there’s an existing tenant to create cashflow. Others would prefer not have an existing tenant because they don’t want to pay the premium for the property.

As you can imagine, we could go on and on.

What’s fascinating is the seeming contradiction between the different strategies.

One investor’s ceiling is another investor’s floor.

But after reviewing the detailed business plans of literally hundreds of commercial real estate investors, there IS a common denominator to the strategy for their real estate ambitions.

Here it is in a nutshell:

First, they have a long-term plan. They are NOT opportunistic, looking at every single deal that crosses their path. They know their exact acquisition strategy. Whatever acquisition strategy they have, it fits into their overall wealth building strategy.

Yes, that may be common sense on paper, but in reality most commercial real estate investors, especially new ones, tend to shoe horn in whatever deal they are contemplating into their long-term plans.

They first key is that the strategy must drive the acquisitions, not the other way around.

That’s why you see some people sell off their entire portfolios of hodge podge properties. It’s a pain in the neck to corral them and so they try to get an unsuspecting person to take the winners and with the losers.

The second key strategy is they do their market research. Stated differently, they know the market or area they want to make an acquisition in.

It’s common knowledge for instance, that the major retailers know where the best locations are in the country. They just don’t put a store where think it will do well.

They put it up where they KNOW it will do well.

How do they know? They do their own research. They understand what PRIME retail space is to them based upon their needs down to the traffic patterns, congestion, local merchants and the specific growth areas within a community.

Now, some people think market research is ONLY for big companies; that it doesn’t apply to them.

If market research is one of the things you have a challenge doing, then you should look at it this way:

· Do you want to get the best deal on a piece of real estate?

· Do you want to be able to charge the highest amounts for rent or get the best price when it comes time to sell?

· Do you want to eliminate the risk of making an inappropriate acquisition?

Well, then you should become an expert at doing your research.

The third key strategy we’ve noticed is that commercial real estate investors rarely make an outright offer, unless it is a sweetheart deal. They prefer to submit to the seller a document called a Letter of Intent. It’s an informal offer. It’s an offer, which usually carries no penalty to either party if the deal doesn’t go through.

The purpose of the letter of intent is to allow the seller time to do specific due diligence on the property in regards to zoning, entitlement, infrastructure, etc. Unlike residential real estate, the commercial real estate market is “buyer beware”.

The due diligence process is performed so that the acquisition will allow the buyer to submit a formal offer with full knowledge of what he or she is buying.

The fourth key strategy is that they want to understand the math of a deal. Does the deal make sense? Is it doable?

You can execute the other three strategies flawlessly, but if the math won’t work, you’ll make a huge blunder.

There are dozens of different strategies for commercial real estate. Obviously, one size does not fit all. But hopefully, implementing these four acquisition strategies can make a profound difference in your commercial real estate wealth building success.

Commercial Real Estate – Valuing The Cash Flow

Many investors don’t understand the power of commercial real estate. I too had reservations until I understood the power and safety commercial real estate can provide. Commercial real estate is similar to trucks. Trucks come in all sizes and all shapes – a Ford Ranger to an 18 wheeler. Commercial properties come in all sizes and shapes – a standalone building that houses a small restaurant to the Empire State Building. People read in the newspapers that commercial property prices are crashing. People notice the strip malls have a lot of vacancies and it scares them away. Let’s take a look at the power of commercial real estate and a quick note about market cycles. Commercial real estate is a business and is priced based on current cash flows. For simplicity sake, commercial property pricing is based on 10 x annual cash flow, not including debt service (loan). So a property that yields $10,000 in cash flow is worth $100,000. Regardless of the type of property, if you increase rents by 1% ($100) the value goes up a $1000. Decrease expenses by $100 and the value goes up $1000. So what? Let’s look at a simple apartment example.

A small apartment complex (10 units) has an annual cash flow of $50,000 and is for sale for $500,000. It has a lot of long-term tenants paying below market rents. You put down 20% or $100,000 (there are ways to make it someone else’s money). We’ll assume it is a positive cash flow property even with the debt service (loan payments). First a storage area is made into a laundry facility that provides $5000 on annual basis. You just increased the value $50,000. Next rents are raised the first year to market rents. Raising rents $50 per unit increases cash flow $6000. You just increased the value $60,000. That means you have doubled your original $100,000 in the first year and you get to keep the $11,000 cash flow. There are many more ways to increase the cash flow including: separate utilities and have tenants pay utilities, decrease vacancy, work out a deal with dish network and get paid, reduce maintenance costs, and more. Just by raising the rent $10 a year increases cash flow $1200 a year and increases the value $12,000. In three to five years you’ll have cash flows of $70,000 to $100,000 (less debt service which remains constant) and you can sell the property for $700,000 to $1,000,000. Now you see the power of commercial real estate.

Just like single family homes, not every property is a good deal. First you look for commercial properties in areas that have improving rents, increasing employment, and areas where the entire area is going through gentrification. Next you look for properties that have a value proposition – rents too low, poor management, ability to install laundry or some other measure to increase cash flow. You would be surprised how many buildings are poorly managed or have below market rents.

I’ve used an apartment as the example; however this same model works for office buildings, mobile home parks, strip malls and more. All types of real estate (all types of investment) go through cycles. When the economy is booming for example, the vacancy in office buildings goes down significantly (prices go up). Of course the opposite is true during an economic downturn. During economic downturns more people move to apartments, mobile homes and need storage facilities. By observing these cycles one can move in and out of various positions to minimize risk and increase portfolio value.

Diversifying Commercial Market Ruling Pune Real Estate

Pune real estate market is rapidly growing following the Indian real estate trend. The real estate activities are happening at extensive rate in commercial sector of the city. Pune commercial real-estate is developing at a breakneck speed. Retail outlets and malls are mushrooming everywhere to meet the rapid retail boom and the increasing purchase power parity of the middle class. With multiplexes and malls and retail outlets being the popular category, the values of commercial properties in Pune have shot through the roof. Pune developers are increasingly constructing commercial property to meet specific themes in mind.

For instance road-facing commercial complexes with large open area and floor area to accommodate number of commercial ventures is the latest trend in Pune. These real estate buildings are occupied by automobile showrooms as well as theme restaurants. The CBD areas of the city such as Deccan, MG Road are seeing a transition as old real estate buildings are being sold to the commercial owners and for constructing high-rise commercial projects. Large floor plates make these projects flexible in nature to house different commercial organizations.

Pune commercial real estate values are increasing and the current value at Central Business District is approximately Rs 4,000-6,000 per sq ft. Pune Real Estate Builders have started building residential complexes adjoining commercial building to provide an integrated solution to both residential as well as commercial patrons.

Commercial real estate activities in the city are covering the areas such as Bund Garden Road, Dhole Patil Road, Station Road and RTO and has given way to multiple emerging micro-markets like Kalyani Nagar, Senapati Bapat Road, Mundhwa, Aundh, Baner and Yerwada. Even the peripheral locations such as Hinjewadi and Wakad in the west and Nagar Road, Hadapsar Road, Kharadi and Sholapur Road in the east, offer real estate buildings for new offices and expansion plans, thereby making Pune a diverse growth market.

Commercial Real Estate Agents – Why Property Owners Should Hire Them

Industrial or commercial property owners considering leasing or selling their property might be asking themselves about the benefits of hiring a real estate agent. Below are a few key points to mull over:

Presentation – The agent can be the one who goes out to the property before tours to make sure the building and grounds show well. If the landscaping needs attention or if someone has abandoned a car in front of the building, a real estate agent can handle those calls for you. They can alert the building manager or you to any minor repairs that could make a big impact during a property showing such as a broken light fixture. Most agents know what potential tenants/buyers notice when a property is viewed. They can give you advice about getting the carpet cleaned, adding some lighting or a fresh coat of paint. Small modifications can be the difference between getting the space leased and letting it sit vacant for another 6 months.

Paperwork – No one likes to do paperwork, but it’s a necessary evil when it comes to real estate. An agent has access to standardized forms for all types of transactions. In Northern California, industrial real estate agents use forms from the American Industrial Real Estate Association (WinAIR Forms). While a real estate agent will be happy to go over the business points with you (length of lease term, current market rents/sale prices, tenant improvements, etc.), any questions about legal clauses should be directed to your lawyer.

Knowledge – Real estate agents read business journals, white papers, and industry articles to keep in touch with the current market trends in their areas of focus. When you hire a commercial real estate agent, they pass this knowledge along to you without your having to do the homework.

Relationships – Commercial real estate agents maintain relationships with various leaders and officials (such as economic development and planning departments) in the cities/counties of their areas of focus. Some companies do not work with local agents, but do contact various city/county officials when they are ready to explore opening new facilities in the area. Relationships such as these help real estate agents to get in front of many deals before they are brought to the market.

Marketing – Everyone has seen those signs planted in front of properties available for lease or sale, but there is much more to real estate marketing than just a sign. A successful agent will have a marketing plan that includes creating a flyer, sending out post cards to area businesses, and email blasting the local brokerage community. Real estate agents also have access to multiple listing services. Aside from cold calling, these are the true life blood of the real estate business. Searches are run on a daily basis. A good real estate agent will make sure your property is fully listed to get the best returns. When you are ready to hire an agent, don’t be afraid to ask to see a marketing plan.

Profit From Commercial Real Estate Investments

Property investors have now turned their attention towards the lucrative deals presented by the commercial properties. This sudden interest is the result of the option to diversify your property investment portfolio, along with a high income and tax breaks. However, it is advisable to conduct a research before taking the plunge.

Commercial properties include hotels, malls, medical centers, retail stores, business and industrial property. These are operated for a profit from rental income or capital gain. Some common commercial property types are:

– Apartments and multi family units: These are the first choice of investors. Apartment financing and management is very similar to that of residential properties.

– Mobile home parks: These can be a profitable investment option especially if you own the land and sell the mobile homes.

– Retail properties: More than one tenant occupies the premises and it is utilized for retail transactions.

– Offices: This category includes suburban garden offices, suburban high-rise offices, medical offices and central business district offices.

– Mixed use properties: These properties are a combination of all the above property types.

– Health care units: They include assisted living centers and congregate care centers and nursing homes.

– Hotels: The properties are categorized as either limited service or full service.

– Industrial premises: These properties can be used solely for industrial purposes.

– Self-storage units: The consumers use them for personal storage or for lease.

– Other specialties: These include oil change facilities and gas stations.

According to a reputed New York based real estate research firm, the price of apartment complexes rose by 26%, retail properties by 14%, industrial properties by 21% and office buildings by 6%, in 2004. Commercial property investment is very profitable but it is a complex business, as compared to investment in residential properties. There are number of factors that affect the property evaluation of commercial premises. It pays to study the market and tread cautiously.

Boom in commercial real estate property:

Commercial real estate includes, but is not limited to, properties used for educational, medical, commercial or industrial purpose. The properties are usable in business or trade and can be sold or bought in the real estate market. The improvement in the economy and growth in business ventures are responsible for the revival of commercial real estate. Another important reason has been the continuous flow of new investment capital. This capital is sourced from people who seek higher returns from large investments. The areas that come under the category of ‘commercially profitable’ carry a higher evaluation, as compared to other properties in developing areas. The rates for commercial real estate properties are calculated differently from the method adopted for residential properties.

The rental yields are better for commercial properties and the monthly cash flow is more than that of residential property investment, in the same area. The quoted expectation of returns depends on the kind of business that would be transacted on the premises. The profit from commercial real estate investments is definitely much higher than profit generated from investments in residential properties. Investment in commercial real estate is as lucrative as investments in stocks and bonds.