capital placement

CAPITAL PLACEMENT:STABILIZED TRANSACTIONS

User’s manual

Capital Placement I Stabilized Transactions.indd 1 22.07.2016 17:32:05

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TABLE OF CONTENTS

Lesson One: Start Here ........................................................................................................................................5

1.1 Orientation ................................................................................................................................................5

1.2 Here’s What To Expect .............................................................................................................................5

1.3 Asset Types ..............................................................................................................................................5

Retail ........................................................................................................................................................5

Multifamily.................................................................................................................................................6

Office ........................................................................................................................................................7

Industrial ...................................................................................................................................................7

1.4 The Total Real Estate Capital Strategy .....................................................................................................7

Capital Placement ....................................................................................................................................8

Asset Arbitrage .........................................................................................................................................11

Capital Formation .....................................................................................................................................12

1.5 Stabilized Properties: The What And Why ................................................................................................15

1.6 Rules of Investing .....................................................................................................................................17

1.7 Sample Transaction: Stabilized Property Example #1 .............................................................................17

1.8 Sample Transaction: Stabilized Property Example #2 .............................................................................18

Lesson Two: Real Estate “Whole Loan” Financing Continuum: The Lenders ......................................................19

1.1 Real Estate Risk .......................................................................................................................................19

Lesson Three: The Different Types of Real Estate Properties: The Assets ..........................................................20

1.1 Stabilized Properties ................................................................................................................................20

1.2 Unstabilized or Value Added Properties ...................................................................................................20

1.3 Opportunistic Properties ...........................................................................................................................20

Lesson Four: What is Permanent Financing?.......................................................................................................21

1.1 Definition ..................................................................................................................................................21

1.2 Typical Permanent Financing Structure ...................................................................................................21

1.3 Repaying The Permanent Loan ................................................................................................................21

Lesson Five: Types of Permanent Financing ........................................................................................................22

1.1 Life Company or Portfolio Loans ..............................................................................................................22

1.2 Bank Loans ..............................................................................................................................................22

1.3 Commercial Mortgage Backed Securities (CMBS) or Conduit Loans ......................................................22

The CMBS Process: ................................................................................................................................22

CMBS Loan Overview: .............................................................................................................................23

1.4 Agency Lenders: Freddie Mac (FHLMC), Fannie Mae (FNMA), & FHA/HUD ..........................................24

The Agency Lenders: ...............................................................................................................................24


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Lesson Six: Analyzing Stabilized Properties .........................................................................................................25

1.1 From the Owner’s Perspective .................................................................................................................25

Lesson Seven: Property Profitability ....................................................................................................................29

1.1 Cash-On-Cash Return ..............................................................................................................................29

1.2 Leveraged Cash-On-Cash Return ...........................................................................................................29

1.3 Positive Leverage ....................................................................................................................................30

Lesson Eight: How Much Leverage Will this Building Support? ...........................................................................31

1.1 Cap Rates: The Key to Income Property Value ........................................................................................31

1.2 Loan to Value: The Lender’s Key Metric ...................................................................................................32

1.3 Debt Service Coverage Ratio (DSCR): Another Key Lender Metric .........................................................32

1.4 Amortization or Loan Constant .................................................................................................................33

1.5 Solving for the Loan Constant ..................................................................................................................33

Lesson Nine: Permanent Loan Underwriting: Deep Dive on How the Numbers Work .........................................34

1.1 Underwriting the Stabilized Loan ..............................................................................................................34

1.2 Tenant Assumptions .................................................................................................................................35

Lesson Ten: Solving for the “Underwritten NOI” ...................................................................................................36

1.1 Deductions ...............................................................................................................................................36

Lesson Eleven: Asset Class Review: All Commercial Properties Were Not Created Equal .................................37

1.1 Office Properties .......................................................................................................................................37

1.2 Retail Properties .......................................................................................................................................38

1.3 Industrial ..................................................................................................................................................39

1.4 Multifamily.................................................................................................................................................39

Lesson Twelve: Conclusion & Looking Ahead ......................................................................................................41

1.1 Conclusion ................................................................................................................................................41

Glossary of Terms You Should Know .................................................................................................................43

Formulas ...............................................................................................................................................................44

Formula Reference ..............................................................................................................................................47

Rules of Investing .................................................................................................................................................48

Exhibit A: Solving for the Loan Amount by Hand ..................................................................................................49

Exhibit B: $100 Million Loan Pool .........................................................................................................................50

Exhibit C: Example Rent Roll ................................................................................................................................51

Exhibit D: Investment Checklist for Obtaining a Loan ...........................................................................................52

Exhibit E: Understanding the Transaction & Sales Strategies ..............................................................................53

Exhibit F: Funding Lifecycle of a Commercial Real Estate Deal ...........................................................................54


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LESSON ONE: START HERELesson One: Start Here

1.1 ORIENTATION

Before you get started in this course, please read the orientation blog to help you understand the key points of real estate investing. Use the following link to view the orientation: http://thecommercialinvestor.com/total-commercial-real-estate-strategy/

1.2 HERE’S WHAT TO EXPECT

This course is designed to help learners learn about stabilized properties, type of these properties, and how to analyze these deals and obtain financing. This course will provide you with industry knowledge, sample deals, and quizzes to test your knowledge at the end of each Chapter. By taking this course, you will receive an easy-to-use practical guide that will provide key formulas, guideposts, and metrics for real-world deal situations that you will be involved in.

Course Objectives:

1. Define the four asset types: Retail, Multi-family, Office, and Industrial.2. Explain the different types of real estate properties3. Compare and contrast the different types of permanent financing4. Discuss the underwriting process for stabilized properties

1.3 ASSET TYPES

These are the first things you should concern yourself with — The “Four Food Groups.” And remember we’re looking at income-producing commercial real estate.

RETAIL

There are 5 types of retail properties. First are the grocery anchored retailers. They are the most stable, as everyone has to eat. These are Safeway, Winn Dixie, Publix, Ralphs, Whole Food, ShopKo’s, and ShopRite and Pathmark in the northeast. We like these a lot and we are currently raising funds to buy a chunk of these from a REIT selling these in a separate fund.

Second are the unanchored retail. These are small centers, local tenants, least stable, trade at high cap rates. These are your mom and pop pizza chains, nail salons, and cafes.

Next are the neighborhood centers. These are local, and services surrounding residential areas; may have a grocery store and if so it’s probably a mom and


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pop business.

Then we have the power centers. These are also called destination centers. They are a combination of “big box” and local inline space: Walmart, Home Depot, Lowes, Ross, Staples, Marshalls, etc.

And lastly, we have the regional malls. These are large restaurant centers, which have multiple anchors being department stores.

MULTIFAMILY

Multi-family residential buildings vary by location (urban or suburban) and size of structure (high-rise or garden apartments). High rises are defined as four stories or greater. Generally they are seen as being the most stable as people need a place to live; however, multifamily is seen as the gateway from those residential investors making the leap into commercial. As a result, they are also the first to get bid up in heated markets

Multifamily also comes in 4 classes:

CLASS A: These are generally, garden product built within the last 10 years. Or they can be properties with a physical age greater than 10 years but have been substantially renovated. Additionally, the high-rise product in select Central Business District may be over 20-years-old and commands rent within the range of Class “A” rent in the submarket. These assets offer amenities such as a concierge, attractive rental office and/or club building.

From the outside, they look like other Class “A” products in the market with a high-end looking exterior and are usually built with high quality construction with highest quality materials.

CLASS B: This is product that has been built within the last 20 years, and the exterior and interior amenity package is dated and less than what is offered by properties in the high end of the market. Although dated, this product is usually of good quality construction with little deferred maintenance.

CLASS C: This describes older product built within the last 30 years as evidenced by limited, dated exterior and interior amenity package. These are more of a 1970’s – 1980’s vintage product. Any improvements show some age and there is noticeable deferred maintenance. It’s not uncommon for any appliances and baths to be original from the time of construction.

CLASS D: Often forgot about, this is product that is over 30 years old. These are worn properties, operationally not stable, and are situated in fringe or mediocre locations in a market. Tenants usually pay cash each month.

This product also has higher churn and burn; any system components have considerable wear and tear. There are no amenity packages offered (such as


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a concierge or front desk), and most garden-style product will be “walk-ups,” having no elevator.

OFFICE

Not all office properties are of course the same. Office properties generally come in 3 flavors or 3 classes: A, B, and C. Generally speaking, office buildings are viewed in three classes that relate to building quality, and not location:

CLASS A: The newest, nicest, slickest and the best on the market

CLASS B: These are more of a 1970s vintage. Theses don’t have ‘modern’ features.

CLASS C: These are older properties, and frequently the most unkempt ones.

Office also have 3 distinctive categories too. They are listed below:

1. Urban2. Suburban3. Flex Space

Urban offices are downtown locations, typically higher barriers to entry. Very expensive, trophy assets.

The suburban offices are close employment bases and have fewer barriers to entry.

Lastly you have flex space. These are typically suburban, typically one story; part office, part warehouse, part light manufacturing; usually have drive-in doors and some warehouse space.

INDUSTRIAL

Industrial is categorized as a “safe” asset class as it is very homogeneous. Would you rather have Amazon.com paying you rent each month or a bunch of angry tenants having problems making ends meet? Unlike office space and multifamily where the quality of the asset and space drives the price, this is not so much the case with industrial and warehouses.

Now these asset classes come in different shapes and sizes --- Not all office buildings are the same any more than any multifamily properties are the same.

1.4 THE TOTAL REAL ESTATE CAPITAL STRATEGYWithin the capital strategy, is structuring the deals. This is where the fun comes in. And after you’ve gone through this, you’ll understand why vetting your deal is so important. This is where you add value and where the paydays come in. If you’re planning on doing consulting, you’re going to want to pay close attention here.There are generally three ways to make money structuring your deals. And


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you’ll want to have these in the back of your mind when you’re pre-qualifying these deals.

CAPITAL PLACEMENT

This is placing capital from one institution to buyer looking to purchase or refinance a property. We call these folks “sponsors” or “owner/operators.” These institutions are usually real estate private equity funds, otherwise called discretionary lenders, family offices, pension funds, life and reinsurance companies, endowments or hedge funds.These same institutions generally provide capital across the entire capital structure. Meaning sometimes their debt, sometimes their equity, sometimes both. What you need to know is that the capital structure comprises of the total debt and equity at the asset level.Sponsors are important because a sponsor with equity is more valuable than someone with no money down.


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9 COPYRIGHT AND TRADEMARK INFORMATIONTHIS PRODUCT AND ASSOCIATED MATERIALS (COLLECTIVELY REFERRED TO IN THIS AGREEMENT AS “PRODUCT”) IS COPYRIGHTED BY THE COMMERCIAL INVESTOR AND DANDREW PARTNERS, LLC. ALL RIGHTS RESERVED. WARNING: FEDERAL LAW PROVIDES SEVERE CIVIL AND CRIMINAL PENALTIES FOR THE UNAUTHORIZED REPRODUCTION OR PUBLIC DISTRIBUTION OR EXHIBITION OF COPYRIGHTED MOTION PICTURES, VIDEO TAPES, OR VIDEO DISCS AND OTHER CREATIVE CONTENT. THIS PRODUCT IS PROTECTED BY TITLE 17, UNITED STATES CODE, INCLUDING BUT NOT LIMITED TO, SECTIONS 501, 504, AND 506, “SPONSORSHIP AND SPONSOR EQUITY”, THE NAME OF THIS PRODUCT, THE STYLIZED VERSIONS OF THESE, AND ”THE COMMERCIAL INVESTOR”, “DANDREW PARTNERS” LOGO ARE ALL TRADEMARKS OF THE COMMERCIAL INVESTOR AND DANDREW PARTNERS, LLC, RESPECTIVELY.

DISCLAIMER AND RELEASE FROM LIABILITYYOU UNDERSTAND AND AGREE THAT THE INFORMATION CONTAINED IN THIS PRODUCT IS FOR YOUR PERSONAL PURPOSES ONLY. STATEMENTS MADE AND CONCEPTS CONVEYED THROUGHOUT THIS PRODUCT ARE PERSONAL OPINIONS ONLY. THE COMMERCIAL INVESTOR AND DANDREW PARTNERS, LLC, AND THE AUTHOR MAKE NO REPRESENTATION OTHERWISE. YOU ARE RESPONSIBLE FOR YOUR OWN BEHAVIOR AND CONDUCT. NONE OF THE MATERIAL CONTAINED HEREIN IS TO BE CONSIDERED LEGAL OR PERSONAL ADVICE. THIS PRODUCT IS PROVIDED “AS-IS” WITHOUT ANY WARRANTIES OF ANY KIND WHATSOEVER (EITHER EXPRESSED OR IMPLIED) AND YOU ALONE ASSUME ANY AND ALL RISK ASSOCIATED WITH USE OF THIS PRODUCT. BY PURCHASE AND/OR USE OF THIS PRODUCT YOU WAIVE ANY CLAIM WHATSOEVER AGAINST AND HOLD HARMLESS THE COMMERCIAL INVESTOR AND DANDREW PARTNERS, LLC, AND ANY OF ITS OFFICERS, STAFF, ADVISORS, REPRESENTATIVES, OR DESIGNEES THAT MAY ARISE FROM SUCH USE. THIS WAIVER SPECIFICALLY ALSO INCLUDES BUT IS NOT LIMITED TO ANY CLAIM ARISING FROM A PRODUCT AND/OR SERVICE WHICH YOU PURCHASE FROM THE COMMERCIAL INVESTOR AND DANDREW PARTNERS, LLC, OR ANY INFORMATION YOU RECEIVE VIA POSTAL MAIL, E-MAIL, FAX, OR OTHERWISE. THIS INCLUDES BUT IS NOT LIMITED TO RESPONSIBILITY FOR THE ACCURACY OR COMPLIANCE WITH ANY APPLICABLE LOCAL LAWS. NEITHER THE COMMERCIAL INVESTOR AND DANDREW PARTNERS, LLC, NOR ANY OF ITS OFFICERS, STAFF, ADVISORS, REPRESENTATIVES, OR DESIGNEES SHALL BE LIABLE IN ANY WAY WHATSOEVER (INCLUDING, BUT NOT LIMITED TO, NEGLIGENCE) FOR ANY DIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES RESULTING FROM EITHER YOUR USE OF THIS PRODUCT OR YOUR INABILITY TO USE IT EVEN UNDER ANY CIRCUMSTANCE IN WHICH THE COMMERCIAL INVESTOR AND DANDREW PARTNERS, LLC, OR ANY OF ITS REPRESENTATIVE(S) HAVE BEEN ADVISED OF POTENTIAL LIABILITY, DAMAGES, OR INJURY. CERTAIN APPLICABLE LAWS MAY NOT ALLOW ALL THE LIMITATIONS OF LIABILITY DESCRIBED HEREIN. TO THE EXTENT THAT ANY OF THE ABOVE REMEDIES AND/OR LIMITATIONS SHOULD BE DEEMED TO FAIL OF THEIR ESSENTIAL PURPOSES, YOU AGREE THAT THE COMMERCIAL INVESTOR AND DANDREW PARTNERS, LLC TOTAL LIABILITY TO YOU UNDER ANY CIRCUMSTANCES WHATSOEVER, INCLUDING BUT NOT LIMITED TO LOSSES, DAMAGES, CAUSES OF ACTION, AND/OR NEGLIGENCE SHALL NOT EXCEED THE TOTAL MANUFACTURER’S SUGGESTED RETAIL PRICE OF THIS PRODUCT AT THE TIME OF PURCHASE.

© The Commercial Investor and Dandrew Partners, LLC. All Rights Reserved.

www.TheCommercialinvestor.com

SPONSORSHIP and SPONSOR EQUITY

THE KEYS TO SELECTINGTHE RIGHT SPONSOR

GUIDELINES FOR SPONSORCO-INVESTMENT AMOUNTS

The sponsor, or owner / operator,in a commercial real estate transactionneeds to be suitably qualifiedin the following areas:

INFRASTRUCTURE:Have the appropriateorganization to take on the project

CO-INVESTMENT:Marginal; must have “going-in” merits that make the probabilityof success high.

CO-INVESTMENT:Normal andacceptable; a good starting point.

CONSTRUCTION:Be qualified to managethe contruction needed to rehabilitatethe property

MANAGEMENT:Be qualfied to manage oroversee the day-to-day operations ofthe property and tenant marketing plan

LEASING:Be qualified to overseethe leasing effort

STAYING POWER:Having sufficient net worthto support the property if unexpected costsoverrun the budget or delays occur.

CO-INVESTMENT:Not very desirable,as it creates an “option value” for the sponsor. Any investor who accepts a 5-percent co-investments would be well advised to make up for this low investment amount with additional structure.

or MORE CO-INVESTMENT:Indicates a sponsor whotruly believes in the asset and business plan.


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HOW YOU MAKE MONEY

In any deal where you’re placing capital, you as the Intermediary are usually incentivized in the form of points or a percentage of the total loan amount.

For example: if you arrange and place $5,000,000 from a capital provider, such as a bridge lender, you’ll usually get paid between 1-1.5% of the total loan amount, or $50,000 to $75,000.

Depending on the deal – and the market – it’s not uncommon for you as the Intermediary to get a percentage of the deal after all improvements have been made.

So if that same $5,000,000 loan is placed on a property that will be worth $10,000,000 after all improvements are made (we call this the “terminal value” of the property) then if you are good at negotiation, and are able to score a 10% equity stake (otherwise known in the industry as “hope certificates”), than that is another $1,000,000 in equity.

Lastly, depending on how plentiful capital is, you may also be able to make a yield spread on this.

Let’s put this into context: When you deposit your money into a savings account at the bank, you expect to make somewhere between 1-2% in interest. What the bank does with that money is that they lend it out at 7% interest, then pay you the paltry 1% interest (with a straight face) and pocket the 6% interest rate spread.

You can do this too. Let’s see how.

If the capital provider is charging say 8% on a bridge loan, and you operator is looking for 9-10%, tell him 9% and then tell the servicer to pay you the net difference to you. To put this into perspective, on that $5,000,000 loan with a 1% simple interest spread, that could amount to $50,000 per year or $4,166.67 per month – to you.

When capital is plentiful and cheap, it becomes competitive and every percentage point matters to your borrower. Someone will always undercut the other shop to get the deal done. However, when capital is scarce (think of 2008-2010), then it’s going to be much easier for you to get what you ask for. (Right now it should be clicking that it’s far easier for you to think like a bank, rather than a landlord.)

Debt vs. Mezzanine vs. Equity: Not All Capital Is the Same

The parts within the capital structure comprise of what are called structured products that all have different levels of risk. This is something you must absolutely understand if you’re going to swim in the deep end with these institutional capital providers.

Want to solidify your credibility instantly? Always ask your sponsor or operator


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who is looking for capital this question: “What kind of capital do you want? Where do you want your capital provider to be in the capital stack?” This will allow you to really effectively communicate to institutions.

ASSET ARBITRAGE

In residential real estate, it’s called “wholesaling.” That’s what the little investors call it. In commercial is called “crossing a trade” or arbitrage. Now that we’re grown up and we’ll be facing off with grown up men and women in the industry we’ll want to use these cocktail terms.

This is simply identifying an asset that is undervalued, locking it up under a contract or an option, then either selling it or assigning it to an end buyer. You are “arbing” the asset. You are buying at a low and selling slightly higher. Not at retail or full market value because you want to leave enough meat on the bone to make your buyer truly interested and activate his or her greed glands. Got it? Good.

Remember that you need to be careful of Real Estate Commission rules of getting paid a commission on the sale of real estate without a real estate license. Get the property under contract and then sell or assign your contract for a fee since the contract is personal property and not real estate.

Now that we got that out of the way, here's what you need to do to make sure your deal is legitimate.

• Lock Up The Property at a Low Basis.

This means that there is strong market equity in the deal today. We call this imputed equity. It's being sold for a number of reasons such as a partnership has blown up and everyone wants out, or the bank has taken it back through foreclosure or has filed foreclosure and time is of the essence to get the property sold.

In other words, if I were to offer you a house for $60,000 that is worth $100,000 today, that's a strong basis. Meaning you're getting $40,000 worth of imputed equity today for that $60,000. But if I were to offer you that same $100,000 house for $95,000, that doesn't sound as strong, does it?

• You Need To Have Your End Buyers Identified and Pre-Qualified.

This is where everyone fails. They find an opportunity and then scramble to find a buyer. This rarely works out and what usually happens is that the deal, your credibility or both is lost because someone who tells you they were a buyer isn't really one, and they don't perform and go radio silent. It's extremely frustrating and if it's your first deal, you will get easily discouraged.

The best use of time during the day is to spend about 30 minutes with yourself or someone else in your office – such as an intern or a domestic VA – finding and calling Qualified Institutional Buyers ("QIBs"). You'll want to reference this blueprint below when speaking to them.


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There are several types of QIBs out there and all of them have different motives. A publically traded REIT for example will pay close to retail for most assets as it's easier for them to raise more capital by issuing more shares of stock that is publically traded.

Smaller private partnerships, comparatively speaking, have a higher cost of capital therefore they are more concerned about the basis at which they are buying an asset.

Of course, it's far easier to cross a deal when you can get terms. If the buyer can assume the existing financing, then that makes the deal as a whole look way more compelling. Your retail investors, such as mom and pop investors; like doctors, dentists and accountants will almost always be more inclined to purchase these types of deals that are structured with existing financing.

CAPITAL FORMATION

The third strategy is to raise capital yourself to take the asset down to place into your portfolio. These deals are usually structured one of two ways: usually using a fund or a joint venture structure. Those who are proficient at raising capital have the appropriate tools do so and are able to effortlessly raise capital on demand. They've lined up prospective investors, retail or institutional, and know how to approach each.

They have an ever greened pitch book (a PowerPoint presentation) that they can use over and over again. They are prepared and they have planned to be nimble whenever an opportunity comes. They simply “call the capital" when they need to. They leveraged other people's proven systems to pull down the right tools from the shelf when they see opportunity.

Now, after reading this, you probably now can come to the conclusion why most people who look to raise money around real estate deals fail immediately: it's simply because first, they fail to pre-qualify their opportunities. They can't seem to look at these numbers dispassionately. Usually because they are desperate to close a deal, or they are being strong-armed by a seller or investment professional who has a stronger personality than they do. Then, they merely can't communicate the deal in a convincing, persuasive, and logical format.

And if you've even been pitched by someone who doesn't know what they are doing, this scenario will likely be very familiar to you:

They send you a 20MB Investment Offering via email from a broker. It clogs your email.

They can't explain the deal, so they tell you to read the whole 200 page Investment Offering.

The only thing they know about this deal that they are asking you to put your hard earned savings into is that it's “great,” and “a sure bet.”


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You have to do all your own research. There is a tremendous amount of pressure and sense of urgency to get you to invest. They have to close immediately – if not sooner.

No documents are drawn up, and you come to the conclusion that your operator or sponsor has no experience. You wasted all this time for nothing, or

You implicitly trust this operator to make the right decisions, and pray you don't lose your hard earned money.

Incidentally, there is a blueprint you'll want to review that we created for some larger news publications which discusses why you should run from any crowdfunded real estate deals – as a passive investor.

Crowdfunding is seen as being the next “big thing" in real estate. History has yet to be written on the effectiveness of this approach however, here's a blueprint you will want to download and quiz your brother-in-law who is bragging about the $10,000 he dropped in a “very significant real estate deal.” The point here is that if you truly desire to be successful, you need to wear the right clothes to this party.

And quite frankly, it’s not that difficult. Those who aspire to become Real Estate Private Equity Fund Managers need to focus on using proven system to do only two things. Find deals. And fund them.


14


14

INS

IDE

BA

SE

BA

LL

CA

PIT

AL

FO

RM

AT

ION

Rai

sing

deb

t or e

quity

to b

uy c

omm

erci

al re

al

esta

te a

sset

s - i

deal

ly a

sset

s w

ith a

ssum

able

loan

s (“

cond

uit l

oans

”).

Adv

isin

g ot

hers

to ra

ise

equi

ty c

apita

l and

cre

atin

g th

eir p

itchb

ooks

for y

ou to

inve

st a

long

side

them

(”

real

est

ate

inve

stm

ent b

anki

ng”)

.

CA

PIT

AL

PLA

CE

ME

NT

You

will

not

kno

w o

r re

ally

be

able

to c

ontro

l the

ty

pes

of d

eals

bei

ng t

hrow

n at

you

due

to

the

natu

re o

f the

real

est

ate

busi

ness

. Yo

ur jo

b - a

nd w

here

you

add

the

mos

t val

ue -

is d

eter

min

ing

if yo

u’re

goi

ng t

o hi

t a

“sin

gle”

, “d

oubl

e”, o

r “tri

ple”

.

DE

AL

FLO

W

TH

E T

OT

AL

RE

AL

ES

TA

TE

CA

PIT

AL

ST

RA

TE

GY

(”Prin

cipal

ling”

or Syn

dic

atio

n)

(Fin

anci

ng D

eals)

AS

SE

TA

RB

ITR

AG

E

Mak

ing

ince

ntiv

es a

nd fe

es n

et o

f the

bid

.M

ost c

omm

only

sin

gle

com

mer

cial

ass

ets

and

Bul

k R

EO/N

on-P

erfo

rmin

g R

esid

entia

l Loa

n Po

rtfo

lios.

“Bui

ldin

g th

e B

ook”

: Fi

nd o

ut t

he a

xe o

f yo

ur B

ulk

REO

/NPL

buy

ers

and

cros

s sm

alle

r tra

des

from

a

larg

er

inst

itutio

nal

selle

r or

ba

nk

to

smal

ler

but

qual

ified

buy

ers.

3(”C

ross

ing T

rades

”, W

hole

salin

g)

Any

dea

l req

uire

s yo

u, y

our

inve

stor

s or

you

r bu

yers

to g

et in

at

a st

rong

bas

is (

low

pur

chas

e pr

ice

as c

ompa

red

to v

alue

of

asse

t tod

ay).

The

basi

s w

ill

eith

er

mak

e or

br

eak

the

deal

, an

d yo

ur

repu

tatio

n as

a d

eal m

aker

. D

eals

with

the

low

est p

ossi

ble

basi

s ar

e te

chni

cally

hom

e ru

ns.

For

Com

mer

cial

: Use

the

“5 D

ata

Poin

ts”

to q

ualif

y th

ese

deal

s an

d de

term

ine

your

bas

is a

t bid

. Fo

r B

ulk

RE

O/N

PL:

Use

pric

ing

expe

ctat

ions

from

you

r sel

ler.

TH

E B

ASIS

HO

ME

Pro

vidi

ng D

ebt,

Mez

zani

ne (

“Mez

z”,

“Pre

f”)

or P

refe

rred

E

quity

(“Pr

ef”)

Cap

ital

Cre

dit F

acili

ties

(Bul

k R

EO B

uyer

s, H

ard

Mon

ey L

ende

rs)

Deb

tor-

In-P

osse

ssio

n Fi

nanc

ing

THE

SE

W

ILL

US

UA

LLY

FA

LL

INTO

TW

O

BU

CK

ETS

:1.

R

eal

esta

te

inve

stor

s w

ho

have

fo

und

som

ethi

ng

inte

rest

ing

to b

uy b

ut d

on’t

have

all

the

capi

tal t

hey

need

2. C

omm

erci

al o

wne

rs w

ho h

ave

been

ask

ed “

buy

thei

r no

te b

ack

at a

dis

coun

t”;

mea

ning

tha

t th

ey h

ave

the

oppo

rtun

ity to

refin

ance

thei

r not

e fo

r low

er th

an th

e cu

rren

t un

paid

prin

cipa

l bal

ance

(“U

PB”)

.


15


15

1.5 STABILIZED PROPERTIES: THE WHAT AND WHY

This course begins with the simplest form of transaction; stabilized properties. We begin the series of courses with stabilized properties because such property is generally purchased for its predictable cash-flow stream, much like a bond or dividend payment. The investor might believe that there is upside potential in rent growth, but the primary goal is a stable income stream. For a property to be considered stabilized, it must have the following characteristics:

• The property is fully leased or leased to market occupancy.

• Property rents are at market rates.

• Tenant turnover is minimal in the short term and is staggered over the long-term.

• The property requires no minimal or major capital improvements.

Stabilized real estate properties are an accepted asset class for institutional investment diversification. The safest assets have the following characteristics:

• Macro location: A large, dynamic market (e.g., New York, Washington, D.C., San Francisco, Chicago

• Micro location: Well located within the submarket

• Newer construction: Constructed in the past 5 to 10 years

• Tenants: Excellent tenant credit quality, with long-term leases

This course will focus on stabilized properties; however, the graphic below is provide you with a brief overview of the other types of properties: Unstabilized or Value Added Properties and Opportunistic Properties. We will cover these properties in an upcoming course.


16


16

RISK/REWARD

So

met

hin

g "

go

od

" n

eed

s to

hap

pen

to

pro

per

ty c

ash

fl

ow

in o

rder

to

sta

bili

ze t

he

pro

per

ty a

nd

ach

ieve

its

bu

sin

ess

pla

n. T

his

is a

lso

kn

ow

n a

s th

e “k

ey e

ven

t”.

Nu

mer

ou

s g

oo

d t

hin

gs

nee

d t

o h

app

en.

Th

e le

nd

er o

r yo

ur

inve

sto

r is

bet

tin

g t

hat

n

oth

ing

"b

ad"

will

hap

pen

to

th

e p

roje

ct c

ash

fl

ow

s in

th

e fu

ture

.

CO

MM

ER

CIA

L R

EA

L E

ST

AT

E T

RIA

GE

FIN

AN

CIE

RD

IFF

ER

EN

T T

YP

ES O

F C

OM

ME

RC

IAL R

EA

L E

STA

TE

TR

AN

SA

CTIO

N T

YP

ES

OP

PO

RT

UN

IST

ICP

RO

PE

RT

IES

ST

AB

ILIZ

ED

PR

OP

ER

TIE

SU

NS

TA

BIL

IZE

D O

RV

ALU

E-A

DD

ED

PR

OP

ER

TIE

S

Per

man

ent f

inan

cing

is fo

r st

abili

zed

pro

per

ties.

Com

mon

cha

ract

eris

tics

of s

tab

ilize

d

pro

per

ties

are:

The

pro

per

ty is

fully

leas

ed, r

ents

are

at m

arke

t, an

d th

ere

is c

urre

nt c

ash

flow

.Th

e p

rop

ertie

s ar

e no

t ful

ly le

ased

, and

/or

rent

s ar

e no

t at m

arke

t.

Typ

ical

ly s

hort

er te

rm o

r flo

atin

g r

ate

finan

cing

is

mor

e ap

pro

pria

te fo

r va

lue

add

ed p

rop

ertie

s. C

omm

on c

hara

cter

istic

s of

val

ue a

dd

ed

pro

per

ties

are:

Thes

e p

rop

ertie

s ty

pic

ally

req

uire

"sp

ecia

lized

" fin

anci

ng.

The

exit

stra

teg

ies

for

thes

e p

rop

ertie

s re

qui

re

one

of th

e fo

llow

ing

key

eve

nts

to h

app

en:

Typ

ical

ly re

late

s b

ack

to th

e st

reng

th

of th

e co

nsum

er (

i.e. r

esid

entia

l lan

d

and

con

dom

iniu

ms)

.

Typ

ical

ly re

late

s to

com

mer

cial

land

th

at h

as a

n ex

it st

rate

gy

of s

ales

to

com

mer

cial

dev

elop

ers.

The

pro

per

ty n

eed

s to

be

bui

lt an

d

leas

ed (

whi

ch c

reat

es c

onst

ruct

ion

risk

and

leas

e-up

ris

k).

The

pro

per

ty h

as n

o ca

sh fl

ow in

the

beg

inni

ng a

nd m

ay n

eed

to g

o th

roug

h a

chan

ge

of u

se (

i.e. o

ffice

to

apar

tmen

ts).

Res

iden

tial

Sal

eE

xits

Dev

elo

pm

ent

or

Co

nst

ruct

ion

Ext

ensi

ve

Ren

ova

tio

no

r C

han

ge

of

Use

Co

mm

erci

al S

ale

Exi

ts

Ther

e is

no

mor

e w

ork

to b

e d

one

on th

e p

rop

erty

to "g

row

or

gro

om" t

he N

OI.

Ther

e is

wor

k to

be

don

e b

efor

e th

e p

rop

erty

bec

omes

sta

bili

zed

.


17


17

1.6 RULES OF INVESTING

Stabilized Properties: Investors buy stabilized properties under the assumption that the risk is substantially removed from the transaction and that nothing negative will happen to reduce future cash flow.

Value-Added Properties: Investors are betting that something positive will happen to increase the Net Operating Income (NOI) and in turn transform the value-added property into a more valuable stabilized property.

Stabilized investors do not want surprises or uncertainty. They want stable cash flow. When underwritten correctly, these investments can outperform stocks and bonds. Yet, the intelligent investor must understand the key components in stabilized investing:

• Operating history

• Rent roll

• Cash-on-cash return (the capitalization [cap] rate)

• Leveraged cash-on return

• Operating expense structure (pass-throughs and stops)

• Leverage structure (underwritten net operating income [NOI[)

• Market and demand drivers

• Leasing and exit strategy

1.7 SAMPLE TRANSACTION: STABILIZED PROPERTY EXAMPLE #1

ACQUISITION ASSUMPTIONS

Purchase price

(including closing costs): $10,000,000

Stabilized NOI: $950,000

SOURCES AND USES OF FUNDS

Sources of cash:

Borrower cash equity: $2,000,000

Loan request: $8,000,000

Total: $10,000,000

Uses of cash:

Property acquisition: $10,000,000

Total: $10,000,000


18


18

DEBT ASSUMPTIONS

Permanent loan: 6.75% rate 30-year amortization (Constant 7.78%)

1.8 SAMPLE TRANSACTION: STABILIZED PROPERTY EXAMPLE #2

The following example will also be used during this course. In this example, the investor is buying a 70,000 square foot stabilized retail center.

ACQUISITION ASSUMPTIONS

Loan Request: $8,000,000

Sponsor Equity: $2,000,000

Total Capital Structure: $10,000,000


SOURCES AND USES OF FUNDS

Sources of cash:

Borrower cash equity: $2,000,000

Permanent Loan request: $8,000,000

Total: $10,000,000

Uses of cash:

First Trust Loan: $8,000,000

Remaining Equity: $2,000,000

Total: $10,000,000

DEBT ASSUMPTIONS

Permanent loan: 6.75% rate 30-year amortization (Constant 7.78%)


19


19

LESSON TWO: REAL ESTATE “WHOLE LOAN” FINANCING CONTINUUM: THE LENDERS

1.1 REAL ESTATE RISK

Real estate risk can be viewed on a continuum, going from left (least risky) to right (most risk).

1. Life insurance companies: Generally the most conservative underwriters.

2. Banks: Includes local banks (community banks), regional banks and money center banks. Note: most banks will no longer portfolio 10 year loans.

3. Conduit lenders: Also known as securitized lenders. These lenders aggregate loans and then repackage them as rated bonds or securities.

4. Opportunistic lenders: Typically lenders who hold whole loans on a balance sheet. Can include opportunity funds, finance companies, mezzanine lenders and mortgage REITs.

5. Equity investors: Has the “first loss piece” of the transaction, but also has an uncapped upside.

LEAST RISK=

LEASTRETURN

MOST RISK=

MOSTRETURN

Life InsuranceCompanies60-70% LTV

Conduit Lenders

75-80% LTV

Private EquityInvestors

Over 95% LTV

Banks70-75% LTV

OpportunisticLenders/Private

Finance80-95% LTV


20


20

LESSON THREE: THE DIFFERENT TYPES OF REAL ESTATE PROPERTIES: THE ASSETS

1.1 STABILIZED PROPERTIES

Permanent financing is for stabilized properties. Stabilized properties are fully leased with rents at market rate and current cash flow within the properties. With these properties, there is no more work to be done on the property to “grow or groom” the NOI. Finally, in regards to risk, the lenders are betting that nothing “bad” will happen to the project cash flows in the future.

1.2 UNSTABILIZED OR VALUE ADDED PROPERTIES

Typically shorter term or floating rate financing is more appropriate for value added properties. These properties are not fully leased, and/or rents are not at market. In addition, there is usually substantial work to be done before the property becomes stabilized. Finally, in terms of risk, something “good” needs to happen to the property cash flow in order to stabilize the property and achieve the business plan objectives.

1.3 OPPORTUNISTIC PROPERTIES

These properties typically require “specialized” financing. With these properties, there are several exit strategies to consider:

• The exit strategies for these properties require one of the following:

◦ Residential sale exits: Typically relates back to the strength of the consumer (i.e. residential land and condominiums).

◦ Commercial sale exits: Typically relates to commercial land that has an exit strategy of sales to commercial developers.

◦ Development/construction: The property needs to be built and leased (which creates construction risk and lease-up risk).

◦ Extensive renovation or change of use: The property has no cash flow in the beginning and any need to go through a change of use (i.e. office to apartments).

• The risk: Numerous good things need to happen.


21


21

LESSON FOUR: WHAT IS PERMANENT FINANCING?

1.1 DEFINITION

Permanent financing relates only to stabilized properties. Only stabilized properties can qualify for permanent financing.

1.2 TYPICAL PERMANENT FINANCING STRUCTURE

Term: 10 years

Loan to Value: 65-80%

Rate: A “spread” over the 10 year Treasury, typically a fixed rate.

Debt Service Coverage: The difference between the property cash flow (NOI) and debt service payments. Typically 1.20-1.40x.

Amortization: Typically 30 years, but is negotiable. In recent years, amortization has been dropped and loans have become interest only.

Recourse: Typically not required

Loan Constant: This is the true rate of interest. This rate includes the loan spread and the amortization.

Bells & Whistles: Look out periods, reserve requirements, prepayment options

1.3 REPAYING THE PERMANENT LOAN

Permanent loans are repaid by another permanent loan or by a sale, in which case another permanent loan is obtained. The permanent lender that is underwriting the property will underwrite the loan to make sure it qualifies for another permanent loan at the end of the term.


22


22

LESSON FIVE: TYPES OF PERMANENT FINANCING

1.1 LIFE COMPANY OR PORTFOLIO LOANS

Life companies are large providers of permanent loans. They view stabilized real estate assets as an “investment class” for their portfolio, such as stocks and bonds. Life companies are generally the most conservative lenders. Typically life companies provide the lowest interest rates. Typically life companies provide the lowest loan proceeds. Typically life companies are the most “picky” about the asset quality and the market. In general, life companies hold their loans on their balance sheet and make profit on the spread between the rate and their cost of funds.

Active life company lenders include: Metlife, Prudential, and New York Life.

1.2 BANK LOANS

Banks have been traditional providers of real estate loans, but they have not been prolific in the long-term, fixed rate market. Many banks have started “conduit desks” or syndication desks, where the banks originates and holds the loan for a short period of time, then sells the loan to other lenders while keeping a fee. Banks will generally write loans for 3-5 years, but not 10 years.

1.3 COMMERCIAL MORTGAGE BACKED SECURITIES (CMBS) OR CONDUIT LOANS

This market came of age in the early 1990s out of the Resolution Trust Corporation (RTC) and the Savings and Loan crisis. This has been the most prolific advances in commercial real estate finance. Below is the summary of the CMBS process.

THE CMBS PROCESS:

• A fixed rate stabilized loan is originated by a CMBS lender, also known as a “Conduit Lender.”

• Loans are “pooled” or put together with many other loans.

• The loans are diversified by:

◦ Size

◦ Market

◦ Sponsor

◦ Asset type


23


23

• In theory, the risk of loss in a “diversified pool” is less than one loan or a “non-diversified pool.”

• The loans are then “packaged” into a securitization or bonds. These are known as commercial mortgage backed securities.

• The bonds are then “tranched” and rated by the rating agencies (S&P, Moody’s, & Finch).

• The loans are separated into different risk tranches or bonds (see Exhibit A for CMBS Chart). These are:

◦ AAA: highest rating – investment grade

◦ AA: second highest – investment grade

◦ A: third highest – investment grade

◦ BBB: fourth highest – non investment grade

◦ BB: fifth highest – non investment grade

◦ B: rated piece – non investment grade

• After the tranching takes place, the investment bank sells the bonds to investors.

• The investment bank may not hold or keep any of the bonds, and they make a fee by selling the bonds.

• The profit is made because the “parts” are worth more than the “whole.” In the beginning, (early 1990s) this was 6-7 points. Today, it is about 1 point.

• The “easiest” bonds to sell are those known as AAA. These also have the lowest mount of yield.

CMBS LOAN OVERVIEW:

• Conduit lenders are typically the most “aggressive” lender in terms of proceeds and asset quality. Typically, conduits charge the highest interest rate and provide the most proceeds.

• Conduit lenders will typically accept lower quality assets (C-buildings) because they will be part of a diversified pool and then sold.

• It is important to note that most CMBS or conduit lenders are sellers of paper, and do not hold risk. The risk of the transaction is “rated” (or predicted) by the rating agencies.

• Investors take comfort in these ratings (similar to corporate bond ratings) and buy the paper once they are transformed into bonds/securities.

• Thus, the true holder of risk are the bond buyers who own the non-investment grade tranches: B, BB, and BBB.


24


24

1.4 AGENCY LENDERS: FREDDIE MAC (FHLMC), FANNIE MAE (FNMA), & FHA/HUD

Agency lenders are quasi-government entities that provide permanent financing on stabilized multifamily properties. Agency lenders are excellent alternatives to life company and conduit lenders. Agency lenders must be accessed by approved mortgage companies that represent the agency lenders. Below are a few examples of agency lenders.

THE AGENCY LENDERS:

FREDDIE MAC: Some mortgage firms have Freddie Mac licenses. These mortgage banks originate loans for Freddie Mac directly.

FANNIE MAE: Mortgage companies aligned with Fannie Mae are known as DUS lenders (Delegated Underwriting and Servicing). In this model, the mortgage lender shares some of the first loss risk.

FHA: Also known as HUD. They provide the most proceeds, 40 year amortization, and will do business with all levels of sponsorship. This is a government subsidized lending program. FHA deals typically take a long time to close. (Note: HUD will finance nursing homes and assisted living facilities).


25


25

LESSON SIX: ANALYZING STABILIZED PROPERTIES

1.1 FROM THE OWNER’S PERSPECTIVE

Owners are concerned with several factors when it comes to analyzing stabilized properties. These factors include the NOI, Cash Flow, Net Cash Flow, Rent Roll, Types of Leases, and Operating Statements. Each of these factors are examined below:

1. NOI

The first step in underwriting any stabilized transaction is to understand the project’s NOI. The NOI is calculated as follows:

Revenues LESS: (Operating Expenses) Equals: NOI

2. UNDERSTANDING THE NOI – IS IT STABILIZED?

For the NOI to be stabilized, it must have the following characteristics:

• Building occupancy: needs to be at market, typically 90% leased.

• Building lease: rates need to be at current market rates (not below or above).

• Tenant rollover: the property should not have a significant amount of tenant rollover (expiring leases) in the short term, or at the same time.

3. CASH FLOW

Once the NOI is established, the investor will look at the project’s “unleveraged cash flow.” The unleveraged cash flow is the money available after the loan principal is paid.

4. NET CASH FLOW

Net cash flow is the real money that can be distributed to the owners. The investor should always understand the project net cash flow.


26


26

Mos

t bro

kers

will

do

an a

cros

s th

e lin

e in

crea

se in

ren

ts (

esp

ecia

lly fo

r m

ulti-

fam

ily)

of 1

0%.

In th

e re

al w

orld

, it’

s si

mp

ly n

ot p

ossi

ble

to d

o th

is, e

spec

ially

dur

ing

har

d e

cono

mic

tim

es.

Look

at t

he O

CC

UP

AN

CY

. Thi

s is

the

easy

test

to te

ll if

the

asse

t will

hav

e a

chan

ce o

f eve

n ap

pro

achi

ng it

s P

ro F

orm

a fo

rm a

bac

k-of

-the

-env

elop

e st

and

poi

nt.

EX

AM

PLE

:If

we

look

at t

he e

xam

ple

bel

ow, e

ven

in a

per

fect

wor

ld if

we

coul

d g

et 1

00%

occ

upan

cy, t

he P

ro F

orm

a N

OI

coul

d n

ever

be

mor

e th

an $

200,

000.

On

any

inco

me

pro

duc

ing

pro

per

ty,

it’s

the

inco

me

whi

ch d

rives

the

val

ue o

f th

e p

rop

erty

. S

ome

selle

rs o

r b

roke

rs w

ill

valu

e th

e p

rop

erty

off

of th

e P

ro F

orm

a. T

he r

easo

ns fo

r th

is a

re n

ot a

s ob

viou

s as

they

see

m a

t firs

t.

Mos

t of t

he ti

me,

the

Pro

For

ma

will

be

man

ufac

ture

d to

mas

k th

e fa

ct th

at th

e p

rop

erty

may

be

over

leve

rage

d.

EX

AM

PLE

:D

epen

din

g o

n th

e m

arke

t th

at t

he a

sset

is

loca

ted

in,

a C

AP

RA

TE w

ill b

e ap

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27


27

5. THE RENT ROLL: A KEY BUT OFTEN OVERLOOKED DOCUMENT

Stabilized properties are driven by their rent rolls. All rent rolls are not created equal. The rent roll is the summary of the tenants in the building and their rental terms. This is important, as the rents paid by the tenants drive the cash flow of the property.

• Rent roll analysis will include:

◦ Percentage of the building currently leased

◦ Rate of lease (monthly payments)

◦ Lease terms: how long is the lease

◦ Lease expiration date

◦ Renewal clauses

□ Extension options

□ Contract rate increases

□ Owner requirements over the lease term (i.e. improvements to space, building, storage, etc.)

◦ Credit quality of tenants

□ Credit tenant: “A rated” company by Moody’s or S&P

□ Strong credit: A company with a good balance sheet and income statement

□ Poor credit: A “Mom & Pop” business

◦ Roll schedule: The investor/underwriter will spend significant time in order to understand the “project roll schedule” which means knowing which tenants’ leases mature and when.

Lenders and investors seek out properties that have a “balanced” roll schedule. They don’t want the risk of all the tenant’s leases expiring at the same time. See Exhibit b for Rent Roll example.

6. TYPES OF LEASES

There are two basic types of leases: a) full service and b) triple net leases. Most office buildings are full service, while most retail and industrial buildings are leased triple net. Details for each lease type follow:

• Full Service: Landlord pays all expenses, such as maintenance, taxes, and insurance.

• Triple Net: Typical charges in triple net include:

◦ Taxes: Paid by tenant

◦ Insurance: Paid by tenant

◦ Maintenance: Paid by tenant


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28

7. OPERATING STATEMENTS: THE WINDOW TO THE PROPERTY’S PERFORMANCE

Operating statements are the profit and loss statements of the commercial real estate asset (i.e. the building). Operating statements show if the building is operating at a profit or a loss. These statements are the detail behind the cash flow formulas. This is the single most important piece of documentation when analyzing a stabilized real estate investment. Annual operating statements show the following information:

◦ Historical revenues

◦ Historical expenses

◦ Historical net operating income (NOI)


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29

LESSON SEVEN: PROPERTY PROFITABILITY

1.1 CASH-ON-CASH RETURN

The cash on cash return measures the unleveraged return on the property. This return can be compared to other investments, such as stocks, bonds, and treasuries. The formula for calculating cash-on-cash returns is listed below:

1.2 LEVERAGED CASH-ON-CASH RETURN

Leveraged cash-on-cash return is a key measurement that focuses on the sponsor’s equity return. This measurement takes into account the leverage or debt used on the property. The use of the debt can greatly increase returns. There are three primary components of debt:

◦ Amount or leverage: For example, 50%, 60%, 75%, 80% of value or cost.

◦ The cost of debt: The interest rate or spread.

◦ Amortization: The repayment of debt via monthly payment (i.e. the principal part of the P&I payments).

Equity returns are more affected by the amount of leverage versus the interest rate or amortization. Leverage also increases project risk. If cash flow is interrupted and debt service cannot be paid, the project will default. The formula for calculating leveraged cash-on-cash return is listed below:

QUICK FORMULA:Stabilized Leveraged Cash-on-Cash Return = Stabilized Cash Flow / Sponsor Equity Contribution

Example: $190,000 / $2,000,000 = 9.5%

QUICK FORMULA:Stabilized Cash-on-Cash Return = Stabilized NOI / Total Project Cost

Example: $950,000 / $10,000,000 = 9.5%


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30

1.3 POSITIVE LEVERAGE

Positive leverage occurs when the cost of debt (leverage) is less than the project cash on cash return. In these cases, the leverage is “accretive,” as the property is producing a greater amount of cash flow than its debt service. In cases where there is negative leverage, the sponsor must pay interest current from other sources. This is a bad situation and typically deals do not get done at this level. Thus, in cases where low rate fixed financing is on a property and is assumable, the building may have additional value because of the “positive leverage” of the financing in place.


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31

LESSON EIGHT: HOW MUCH LEVERAGE WILL THIS BUILDING SUPPORT?

1.1 CAP RATES: THE KEY TO INCOME PROPERTY VALUE

The formal term for cap rate is capitalization rate. This is the key factor in determining the value of a commercial real estate project. Cap rates are set by the market, and is the rate or yield that the buyers and sellers will accept on an unleveraged basis, to own the building. Cap rates are influenced by:

◦ The rate of return on the 10 year Treasury Bill

◦ The availability of debt in the market (the more debt, the lower the cap rates)

◦ The overall health of the real estate market

◦ The rent roll of the property (tenant quality, lease terms, etc.)

◦ Local market factors

Different asset classes typically have different cap rates:

◦ Multifamily: lowest cap rate – lowest perceived risk

◦ Anchored retail: low cap rate, generally has credit tenant

◦ Class A Office: low cap rate, location and market driven

◦ Hotel: higher cap rate, leases roll every night

◦ Unanchored retail: high cap rate, credit of tenants is the weakest

The formula for calculating the cap rate is listed below:

QUICK FORMULAS:

Asset Value = Stabilized NOI / Market Cap Rate

Example: $950,000 / 9.5% = $10,000,000

Cash-on-Cash Return or Cap Rate:Cap Rate Analysis = Stabilized NOI / Acquisition Price

Example: $950,000 / $10,000,000 = 9.5%


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1.2 LOAN TO VALUE: THE LENDER’S KEY METRIC

Loan to Value is one of the key formulas that drives the loan size. This percentage represents the amount of equity in the property and is the measurement of risk. The lower the loan to value, the greater the implied safety of the loan. The lower the better:

◦ 70% and below = good

◦ 80% and below = market

◦ 90% and below = high

◦ 95% and below = very high

Below is the formula for calculating loan to value:

QUICK FORMULA:

LTV = Loan Amount / Asset Value (or Purchase Price)

Example: $8,000,000 / $10,000,000 = 80.0% Loan to Value

1.3 DEBT SERVICE COVERAGE RATIO (DSCR): ANOTHER KEY LENDER METRIC

Debt Service Coverage ratio is one of the key formulas that drives loan size. Debt Service Coverage Ratio is also known as the “coverage ratio.” If the debt service coverage ratio is a 1.0x, it means that monthly property cash flow is equal to the principal and interest payments. Permanent lenders typically look for a 1.20 to 1.25x coverage ratio as the benchmark for a safe loan.

Below is the formula for calculating the DSCR:

QUICK FORMULA:

Stabilized DSC Ratio = Conduit Underwritten NOI / Debt Service

Example: $779,375 / $622,400 = 1.25x

DEBT SERVICE COVERAGE RATIO CHART Less than 1.0: The property does not cover interest payments 1.0-1.05: Poor 1.05-1.10: Weak 1.10-1.15: Fair 1.15-1.20: Improving 1.25 & above: Acceptable for permanent lenders


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33

GENERAL STABILIZED PROPERTY DSC RATIO GUIDELINES: Multifamily: 1.20x Office: 1.25x Retail (anchored): 1.30x Retail (unanchored): 1.25x Industrial: 1.25x Hotel: 1.40x

1.4 AMORTIZATION OR LOAN CONSTANT

Simply put, the constant is the loan “pay rate” when amortization is included. The loan contract (“K”) is the implied interest rate when amortization is considered. For example, a loan with an 8% rate, with a 30-year amortization has a loan constant of 8.81%. This means that constant or continuous rate the property must service to meet its debt obligation. Interest only loans have the same constant as the rate. The interest rate (pay rate) and the constant are the same. Amortizing loans have a constant difference from the pay rate. It is the “constant” rate of interest when amortization is taken into account.

1.5 SOLVING FOR THE LOAN CONSTANT

Using MS Excel, you can calculate a loan constant by entering the following formula:

= PMT (Interest Rate/12, Amortization * 12, -1) *12= PMT (0.08/12, 30*12, -1) * 12= 8.81%

With a financial calculator, you can calculate a loan constant using the following assumptions:

Interest Rate (i) = Annual Interest Rate / 12 i = 8.00% / 12Number of Payments (n) = Years * 12n = 30 x 12PV = -1FV = 0PMT = Calculate PMT and multiply by 12 to find the annual loan constant = 8.81%


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34

LESSON NINE: PERMANENT LOAN UNDERWRITING: DEEP DIVE ON HOW THE NUMBERS WORK

1.1 UNDERWRITING THE STABILIZED LOAN

The following factors are used when lenders underwrite the stabilized loan. An explanation of each factor is also provided below:

• Loan rate: This is the total rate, without amortization (6.75% in the example).

• Loan spread: Spread + index = rate (T Bill @ 5% + 175 bps = 6.75 in the example).

• Amortization: Typically 30 years but some loans will have an interest only portion (30 years in the example).

• Loan Constant: The real or actual rate that the property pays the lender. Combines both interest and debt amortization (7.78% in the example).

• Reserve deductions: Lender decreases NOI for future uses of cash flow.

• LTV constraint: Maximum loan based on underwritten value and maximum loan to value (typically 75-80%; $8,045,161 in the example)

• DSC coverage constraint: Minimum debt service coverage of the property based on “selected constant,” typically 1.20-1.25x ($8,010,867 in the example).

• Holdbacks and Reserves: Lenders require holdbacks or escrows from the NOI, held in case the property needs cash in the future. The following are a few examples of reserves:

◦ Tenant improvements: Future tenant build out for new tenants

◦ Leasing commissions: Future broker commissions for leasing rollover

◦ Capital reserves: For future maintenance over the loan term

• Repayment lock-outs: Typically these loans cannot be repaid for 9.5 years. Typically, they can be assumed.


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1.2 TENANT ASSUMPTIONS

There are two tenant assumptions that are considered. The first is the future lease rate increases. “Contract” bumps on existing leases that take effect in year one; can generally be counted as income. The second is tenant retention. At the tenant roll date, the lender applies a “stay vs. go” assumption. Typically, it is assumed that each rolling tenant:

◦ 75% stay

◦ 25% leave

• For rolling tenants, an NOI deduction is taken into account for:

◦ Downtime

◦ New tenant improvements

◦ Leasing commissions


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LESSON TEN: SOLVING FOR THE “UNDERWRITTEN NOI”

The permanent lender will start with the stabilized NOI and then make a series of deductions from the NOI, to get to the magical “Underwritten NOI” figure. It is from this number that the loan is sized.

1.1 DEDUCTIONS

Deductions are shown in the example transaction and may include the following:

1. Vacancy: Even if the building is fully leased, the lender will make deductions to the NOI for vacancy. The maximum occupancy is 95%. The lender will use the lesser of 95% or the market occupancy.

2. Tenant rollover assumptions: This is a prediction of what will happen with rolling tenants. Typical rates are 75% renewal, 25% departure. The impact is felt in the T/I and leasing commissions.

3. Average lease term: Typically 3, 5, or 10 years: depends on the asset and market (the shorter the lease term, the more roll, the more roll, the more escrow required). Positives and Negatives of long leases

4. Tenant improvements: Typically broken into:

◦ Renewal tenants: less dollars needed to renew tenants office is typically $5.

◦ New tenants: more dollars needed to get a tenant into the space. Can be up to $30 for office.

5. Leasing commissions: Commissions are paid on both new and renewal leases. New leases are typically 6-7% of total “economic value.” Renewal leases are typically 2-3% of total economic value

6. Capital reserves: The lender will want to build an escrow account for annual maintenance. Typical structural reserves are $.10-.50 per square foot, per year, depending on the age and condition of the building.

7. Releasing down time: The space will be “dark” during the releasing. Investors will forecast 1-6 months of downtime.


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LESSON ELEVEN: ASSET CLASS REVIEW: ALL COMMERCIAL PROPERTIES WERE NOT CREATED EQUAL

1.1 OFFICE PROPERTIES

In general, office buildings are viewed in three classes that relate to the building quality, not location:

◦ Class A: The newest, nicest, beset in the market.

◦ Class B: Might be 1970s vintage. Does not have “modern” features.

◦ Class C: The older, “unkempt” properties.

Office buildings are also viewed in the following categories:

◦ Urban: Downtown locations, typically with higher barriers to entry.

◦ Suburban: Fewer barriers to entry, but closer to new employment bases.

◦ Flex Space: Typically suburban; typically one story and used as part warehouse, part light manufacturing. Typically have driven in doors and some warehouse space.

Factors to consider when Underwriting an office loan:

◦ Lease-Up Period

□ What will be the absorption pace on new leases?

□ This needs to be calculated by looking at historic absorption levels, the strength of the local economy (job growth), and the supply of office space in the market.

◦ Occupancy Level: How well leased is the market? Will the subject property under or over perform in the market? Underwriting to the lesser of 95% or actual market vacancy.

◦ Rent Concessions: If the market is offering concessions, this deduction from revenue must be factored into the pro forma underwriting. Concessions are typically:

□ Free rent

□ Large tenant improvement packages


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38

◦ Tenant Improvements: The investor must understand the quality of the existing buildout/finishes of the building. Tenant improvements are expensive, and office buildings require the most tenant improvements. Typical improvements are:

□ New leases: Typically the space is re-done at $25-$35 per square foot.

□ Renewal leases: Typically the tenant will ask for new paint or carpet at $5 per square foot.

◦ Operating expenses

□ The investor must understand the normal expenses required to operate the building in the market.

□ This is described in cost per square foot terms.

□ The investor will need to understand what expenses are “passed through” to the tenant and which are not.

□ Also, leases may contain “expense stops” which limit the amount of expenses that can be passed through to a tenant.

□ Typical office operating expenses are from $9.00-$14.00/square foot.

1.2 RETAIL PROPERTIES

In general, there are five basic types of retail centers. These retail types are discussed below:

Retail Underwritings:

◦ Grocery anchor: Viewed as the most stable-everyone has to eat.

◦ Unanchored retail: Small centers of local tenants – these are the least stable, and trade at the highest cap rate.

◦ Neighborhood center: Local center, servicing surrounding residential areas, may have a grocery store.

◦ Power center: A destination center, typically with a combination of “big box” and local inline space.

◦ Regional malls: Large restaurants centers, typically with multiple anchors being department stores.

Retail Underwritings: Retail specific issues include the following:

◦ Tenant credit: Tenants have different financial strengths. The better tenants are “credit tenants.” The more credit tenants a property has, the more valuable the property.

◦ Co-tenanting provisions: Retail revolves around consumer sales. Thus, many tenants want to be next or in the same center as large, well known tenants that produce a lot of traffic, such as Target. Smaller tenants will have “go dark” provisions that allow


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39

them out of their leases if the anchor tenant leaves.

◦ Go dark/recapture provisions: If a tenant goes dark, the landlord will want the ability to “reclaim” or release that space. Some retailers will go dark as a defensive move and purposely not allow competition in the trade area.

◦ Percentage rents: The landlord collects a portion of the rent based on tenant sales.

1.3 INDUSTRIAL

Industrial properties are viewed as a “safe” asset class because it is very homogeneous. The differentiating factors in industrial properties are:

◦ Location to major transportation routes

◦ Ceiling heights: the higher, the better for more storage

◦ Docks/bays: two types:

□ Bays for tractor trailers

□ Docs for delivery trucks

Rents on industrial properties are mostly driven by supply and demand. It is difficult to drive price via asset quality like in office and multifamily.

1.4 MULTIFAMILY

Multifamily property is viewed as the safest asset class. This is due to the following factors:

◦ Everyone needs a place to live.

◦ At some level, the sponsor can drive occupancy by lowering rent.

Multifamily drivers include the following:

◦ Vacancy factor

◦ Rent levels (prices)

◦ Concessions (i.e. free month’s rent, giveaways)

◦ Actual Vacancy: The amount of unoccupied space or square feet.

◦ Economic Vacancy: Economic vacancy is defined as the total vacancy when dark or vacant units and concessions are taken into account.

Example: Total Potential Rent (Full rent at 100% occupancy) Less: Total Rent Collected Equals: Total Economic Collections

Total Economic Collections Divided by: Total Potential Rent Equals: Total Vacancy Cost

Economic vacancy cost/total potential rent = Economic vacancy


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40

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bin

atio

n of

"big

box

" and

loca

l in

line

spac

e.

LEA

SE

-UP

PE

RIO

D

OC

CU

PAN

CY

LEV

EL

RE

NT

CO

NC

ES

SIO

NS

TEN

AN

TIM

PR

OV

EM

EN

TS

OP

ER

ATIN

GE

XP

EN

SE

S

How

wel

l lea

sed

is th

e m

arke

t?

Will

the

sub

ject

pro

per

ty u

nder

or

over

per

form

the

mar

ket?

U

nder

writ

ing

to th

e le

sser

of 9

5% o

r ac

tual

mar

ket v

acan

cy.

If th

e m

arke

t is

offe

ring

con

cess

ions

, thi

s de

duct

ion

from

rev

enue

m

ust b

e fa

ctor

ed in

to th

e pr

o fo

rma

unde

rwri

ting.

Con

cess

ions

are

ty

pica

lly:

• Fr

ee R

ent.

• La

rge

tena

nt im

pro

vem

ent p

acka

ges

.

The

inve

stor

mus

t und

erst

and

the

qual

ity o

f the

exi

stin

g bu

ild-

out/f

inis

hes

of th

e bu

ildin

g. T

enan

t im

pro

vem

ents

are

exp

ensi

ve, a

nd

offic

e b

uild

ing

s re

qui

re th

e m

ost t

enan

t im

pro

vem

ents

.

The

inve

stor

mus

t und

erst

and

the

norm

al e

xpen

ses

requ

ired

to

oper

ate

the

build

ing

in th

at m

arke

t.

- Th

is is

des

crib

ed in

cos

t per

sq

uare

foot

term

s.-

The

inve

stor

will

nee

d to

und

erst

and

wha

t exp

ense

s ar

e "p

asse

d

thro

ugh"

to th

e te

nant

and

whi

ch a

re n

ot.

- A

lso,

leas

es m

ay c

onta

in "e

xpen

se s

top

s" w

hich

lim

it th

e am

ount

of

exp

ense

s th

at c

an b

e p

asse

d th

roug

h to

a te

nant

.-

Typ

ical

offi

ce o

per

atin

g e

xpen

ses

are

from

$9.

00-$

14.0

0/sq

uare

foot

.

Cla

ss A

Cla

ss B

Cla

ss C

The

new

est,

nice

st,

bes

t in

the

mar

ket.

Mig

ht b

e 19

70's

vi

ntag

e. D

oes

not

have

"mod

ern"

fe

atur

es.

The

old

er,

"unk

emp

t" p

rop

ertie

s.

Urb

anS

ubur

ban

Flex

Spa

ce

Dow

ntow

n lo

catio

ns,

typ

ical

ly w

ith h

ighe

r b

arrie

rs to

ent

ry.

Few

er b

arrie

rs to

en

try,

but

clo

ser

to

emp

loym

ent b

ases

.

Typ

ical

ly s

ubur

ban

; ty

pic

ally

one

sto

ry a

nd

used

as

par

t war

ehou

se,

par

t lig

ht m

anuf

actu

ring

. Ty

pic

ally

hav

e d

rive

in

doo

rs a

nd s

ome

war

ehou

se s

pac

e.

THE

DIF

FER

EN

TIA

TIN

G F

AC

TOR

S IN

IN

DU

STR

IAL

PR

OP

ER

TIE

S A

RE

OF

FIC

E P

RO

PE

RTIE

S

MU

LTIF

AM

ILY

EC

ON

OM

ICVA

CA

NC

YM

ULT

IFA

MIL

YD

RIV

ER

SVA

CA

NC

YA

CTU

AL

VAC

AN

CY

Wha

t will

be

the

abso

rptio

n pa

ce o

n ne

w le

ases

?Th

is n

eed

s to

be

calc

ulat

ed b

y lo

okin

g a

t his

toric

ab

sorp

tion

leve

ls, t

he

stre

ngth

of t

he lo

cal e

cono

my

(job

gro

wth

), a

nd th

e su

pp

ly o

f offi

ce

spac

e in

the

mar

ket.

TYP

ICA

LIM

PR

OV

EM

EN

TSA

RE

:

NE

WLE

AS

ES

RE

NE

WA

LLE

AS

ES

Typ

ical

ly th

e sp

ace

is

re-d

one

at

$25-

$35

per

sq

uare

foot

Typ

ical

ly th

e te

nant

will

ask

fo

r ne

w p

aint

or

carp

et a

t $5

per

sq

uare

foot

.

FORMULA

1. E

very

one

need

s a

pla

ce to

live

. 2. A

t som

e le

vel,

the

spon

sor

can

driv

e oc

cup

ancy

by

low

erin

g r

ent.

In G

ener

al, O

ffic

e B

uild

ings

are

Vie

wed

in

Thre

e C

lass

es th

at R

elat

e to

Bui

ldin

g Q

ualit

y,

Not

Loc

atio

n.

Off

ice

Bui

ldin

gs A

re A

lso

Vie

wed

in th

e Fo

llow

ing

Cat

egor

ies.

GR

OC

ER

Y A

NC

HO

RU

NA

NC

HO

RE

DR

ETA

ILN

EIG

HB

OR

HO

OD

CE

NTE

R

PO

WE

R C

EN

TER

RE

GIO

NA

L M

ALL

S


41


41

LESSON TWELVE: CONCLUSION & LOOKING AHEAD

1.1 CONCLUSION

Stabilized real estate properties are an accepted asset class for investment diversification. The safest assets are those with the following characteristics:

1. Macrolocation: A large, dynamic market (New York, Washington, D.C., San Francisco, Chicago)

2. Microlocation: Well located in the submarket3. Newer construction4. Excellent tenant credit quality, with long-term leases

Stabilized investors are not bargaining on surprises. With knowledge, these investments can outperform stocks and bonds. Yet, the intelligent investor must understand the key components in value added investing:

• Operating history

• Rent roll

• Cash on cash return (the cap rate)

• Leveraged cash on cash return

• Operating expense structure (pass through & stops)

• Leverage structure (underwritten NOI)

• Market/demand drivers

So, do we have a deal or no deal? Below is a review of how to determine if you have the right deal to move forward with.


42


42

D

eal

Qo

Qs

Qua

lifie

d Sp

onso

r.

He

or s

he h

as e

xper

ienc

e an

d a

verif

iabl

e Tr

ansa

ctio

nal R

esum

e (a

ka a

“D

eal S

heet

”).

Has

a n

et w

orth

, or s

trong

exp

erie

nce.

Is m

akin

g a

mea

ning

ful e

quity

co

ntrib

utio

n.

Spon

sor /

Ope

rato

r is

loca

l to

the

asse

t.

Stro

ng b

asis

at b

uy.

The

num

bers

mak

e se

nse.

Goo

d ge

ogra

phic

mar

ket.

Ass

et

is

desi

rabl

e an

d ba

nkab

le

(One

of t

he “

Four

Foo

d G

roup

s”).

Nar

rativ

e is

cle

ar a

nd u

nder

stoo

d.

Exit

stra

tegy

is t

houg

htfu

lly d

efin

ed a

nd

clea

r.

Ther

e ar

e m

ultip

le p

lans

to

exec

ute

the

key

even

t(s).

Ther

e is

a b

usin

ess

plan

tha

t ou

tline

s w

hat

need

s to

be

do

ne,

whe

n an

d w

here

.

+=

DE

AL

CA

LC

UL

US

HO

W T

O T

ELL

IF Y

OU

HA

VE A

DEA

L O

R N

O D

EA

L


43


43

GLOSSARY OF TERMS YOU SHOULD KNOW

Capital Stack: Debt Equity Amounts: The different layers of financing on one transaction. It typically includes debt, investor equity, and sponsor equity.

Cash-on-Cash Return: The unleveraged (all cash) rate of return that a property produces. Often used to compare real estate investments with other investment returns, such as bonds, treasury notes, etc. (Formula #7)

Debt Service Coverage (DSC): A ratio that measures the difference between the property cash flow (NOI) and the debt service payments. The DSC is a measure of a loan’s safety, and is typically expressed as a multiple over breakeven, such as 1.10x, 1.20x or 1.50x.

Leverage Cash-on-Cash Return: The leveraged (use of debt) rate of return that a property produces after debt service, relative to the equity investment.

Loan Constant: The “all-in” true cost of borrowing money which takes into account both the interest and the amortization of the principal balance.

Loan-to-Value (LTV): The total loan amount divided by the asset value. The LTV is the key metric of risk for lenders.

Negative Leverage: When a property does not produce enough cash flow to cover the debt service obligations.

Net Operating Income: The income stream operated by a property after operating expenses are deducted, but before debt service payments and taxes are deducted (Formula #1)

Positive Leverage: When the cost of debt is less than the property’s cash-on-cash return

Rent Roll: Roll Schedule: A summary of the tenants that occupy a property, which displays the tenant’s rental terms and concessions.

Stabilized Property: A property that is leased to market occupancy at market rates, tenant turnover is minimal in the short term and is staggered in the long term, and there are no major capital improvements necessary.

Unstabilized Property: A property that is not operating at its full potential (i.e. below market rents, below market occupancy, poor location, bad property conditions, etc.)


44


44

FORMULAS

FORMULA #1Key Formula: NOIRevenues – Operating Expenses = NOINote: The NOI calculation is performed before any deduction for debt ser-vice.

FORMULA #2Key Formula: Unleveraged Cash Flow 1Revenues – Operating Expenses = Unleveraged Cash Flow (NOI)Note: This is the same formula for NOI

FORMULA #3Key Formula: Net Cash FlowUnleveraged Cash Flow (NOI) – Principal/Interest Payments = Net Cash Flow

FORMULA #4Key Formula: Underwritten NOIRevenues – Operating Expenses – Reserves = Underwritten NOI

FORMULA #5Key Formula: Calculating Economic Vacancy100% Occupancy * Monthly Rent = Total Potential RentLeased Units at Full Rent + Leased Units at Discount Rent = Actual RentTotal Available Units / Vacant Units = Actual VacancyPotential Rent – Actual Rent = Economic Vacancy

FORMULA #6Key Formula: Calculating Economic Vacancy for Multifamily Properties100% Occupancy * Monthly Rent = Total Potential RentTotal Potential Rent – Actual Rent Collected = Total Economic CollectionsTotal Economic Collections / Total Potential Rent = Economic Vacancy CostEconomic Vacancy Cost / Total Potential Rent = Economic Vacancy


45


45

FORMULA #7Key Formula: Stabilized Cash-on-Cash ReturnStabilized Net Operating Income (NOI) / Total Project Cost = Stabilized Cash-on-Cash Return

Example: $950,000 / $10,000,000 = 9.5%

FORMULA #8Key Formula: Leveraged Cash-on-Cash ReturnStabilized Cash Flow / Sponsor Equity Contribution = Stabilized Leveraged Cash-on-Cash Return

Example: $190,000 / $2,000,000 = 9.5%

FORMULA #9Key Formula: Property ValueStabilized NOI / Market Cap Rate = Property Value

Example: $950,000 / 9.5% = $10,000,000

FORMULA #10Key Formula: Solving the LTV RatioLoan Amount / Asset Value (or Purchase Price) = LTV

Example: $8,000,000 / $10,000,000 = 80% LTV

FORMULA #11Key Formula: Solving for DSCConduit Underwritten Net Operating Income (NOI) / Debt Service = Stabilized DSC

Example: $779,375 / $622,400 = 1.25x

FORMULA #12Key Formula: Solving for Debt YieldNOI / Loan Amount = Debt Yield


46


46

FORMULA #13

Key Formula: “Quick & Dirty” Interest Calculator

The keys to interest costs are:

• Loan amount

• Interest rate

• Time to first pay down

• Time to last pay down

Example

Total costs: $1,000,000 (fact)

Total Loan: 65% of total costs (fact or estimate)

Average loan outstanding: 50% (estimate)

Interest rate: 10% (fact or estimate)

Term of loan: 3 years (estimate)

$1,000,000 * 65% * 50% * .10 * 3 = $97,500


47


47

FORMULA REFERENCE

Rev

enue

s - O

pera

ting

Expe

nses

= N

OI

Not

e: T

he N

OI c

alcu

latio

n is

per

form

ed

befo

re a

ny d

educ

tion

for d

ebt s

ervi

ce.

NO

I

Rev

enue

s - O

pera

ting

Expe

nses

= U

nle

rag

ed C

ash

Flo

w (

NO

I)

Not

e: T

his

is th

e sa

me

form

ula

as N

OI.

Unl

ever

aged

Cas

h Fl

ow (N

OI)

-Pr

inci

pal &

Inte

rest

Pay

men

ts =

Net

Cas

h F

low

Rev

enue

s - O

pera

ting

Expe

nses

-R

eser

ves

= U

nd

erw

ritt

en N

OI

Stab

ilize

d N

et O

pera

ting

Inco

me

(NO

I) /

Tota

l Pro

ject

Cos

t = S

tab

ilize

d C

ash

-on

-Cas

h R

etu

rn

Exam

ple:

$95

0,00

0 / $

10,0

00,0

00 =

9.5

%

Cur

rent

NO

I / D

ebt S

ervi

ce =

Cu

rren

t D

SC

Exam

ple

: $60

0,00

0 /

($11

,700

,000

*8.

77%

) = 0

.58x

Stab

ilize

d N

OI /

Deb

t Ser

vice

= S

tab

ilize

d D

SC

Exam

ple:

$1,

200,

000

/ ($

12,6

00,0

00 *

8.7

7%) =

1.0

9x

Unl

ever

aged

C

ash

Flow

I

Net

Cas

h Fl

ow

Und

erw

ritt

en

Cal

cula

ting

Eco

nom

icV

acan

cyC

alcu

latin

g E

cono

mic

V

acan

cy fo

r M

ultif

amily

Pro

pert

ies

NO

I:

NO

I:

NO

I:

NO

I:

NO

I:

NO

I:

NO

I:

NO

I:

NO

I:

NO

I:

NO

I:

NO

I:N

OI:

NO

I:N

OI:

NO

I:

NO

I:

NO

I:

NO

I:N

OI:

NO

I:

NO

I:

NO

I:

NO

I:

NO

I:

NO

I:

Leve

rage

d C

ash-

on-C

ash

Ret

urn

Stab

ilize

d C

ash

Flow

/ Sp

onso

r Equ

ity C

ontri

butio

n =

Sta

bili

zed

Lev

erag

ed C

ash

-on

-Cas

h R

etu

rn

Exam

ple:

$19

0,00

0 / S

2,00

0,00

0 =

9.5

%

Com

mer

cial

Rea

lE

stat

e V

alue

NO

I / C

ap R

ate

= V

alu

e

Not

e: T

he N

OI u

sed

shou

ld b

e st

abili

zed

but c

an

be h

isto

rical

, cur

rent

, or p

ro fo

rma

Beg

inni

ngC

ash-

on-C

ash

Ret

urn

End

ing

Cas

h-on

-Cas

hR

etur

n

Th

e en

din

g c

ash

-on

-cas

h r

etu

rn is

th

e sa

me

asth

e st

abili

zed

cas

h-o

n-c

ash

ret

urn

.

Exam

ple:

$1,

200,

000

/ $13

,900

,000

= 8

.63%

Beg

inni

ng L

ever

age

Cas

h-on

-Cas

h R

etur

nE

ndin

g Le

vera

ged

Cas

h-O

n-C

ash

Ret

urn

End

ing

Leve

rage

dC

ash-

on-C

ash

Ret

urn

Pro

pert

y V

alue

Stab

ilize

d N

OI /

Mar

ket C

ap R

ate

= P

rop

erty

Val

ue

Exam

ple

: $95

0,00

0 / 9

.5%

= $

10,0

00,0

00

Sol

ving

the

LTV

Rat

io

Loan

Am

ount

/ A

sset

Val

ue (o

r Pur

chas

e Pr

ice)

= L

TV

Exam

ple:

$8,

000,

000

/ $10

,000

,000

= 8

0.0%

LTV

Sol

ving

for

DS

C

Con

duit

Und

erw

ritte

n N

et O

pera

ting

Inco

me

(NO

I) / D

ebt S

ervi

ce =

Sta

bili

zed

DS

C

Exam

ple:

$77

9,37

5 / $

622,

400

= 1

.25x

“Qui

ck a

nd D

irty

”In

tere

st C

alcu

lato

r

Beg

inni

ng P

rice

per

Pou

nd

Gro

ss P

rofit

Exi

t Val

ue -

Tota

l Cap

ital S

tack

= G

ross

Pro

fit

Cur

rent

DS

CS

tabi

lized

DS

C

DS

C S

prea

d

Sta

biliz

ed D

SC

- C

urre

nt D

SC

= D

SC

Sp

read

Exa

mpl

e: 1

.09

- (0.

58) =

51b

ps

Initi

al V

alue

Initi

al N

OI /

Cur

rent

Mar

ket C

ap R

ate

= B

egin

nin

g V

alu

e

Exa

mpl

e: $

600,

000

/ 7.5

% =

$8,

000,

000

1 2 3 4 567 14

1516

1718

19

20

21

2225

26

27

28

23

24

8910

11

NO

I:

13

100%

Occ

upan

cy *

Mon

thly

Ren

t=

To

tal P

ote

nti

al R

ent

Leas

es U

nits

as

Full

Ren

t + L

ease

d U

nits

at

Dis

coun

t Ren

t =A

ctu

al R

ent

Tota

l Ava

ilabl

e U

nits

/ Va

cant

Uni

ts =

Act

ual V

acan

cyPo

tent

ial R

ent -

Act

ual R

ent =

Eco

no

mic

Vac

ancy

100%

Occ

upan

cy *

Mon

thly

Ren

t=

To

tal P

ote

nti

al R

ent

Tota

l Pot

entia

l Ren

t - A

ctua

l Ren

t Col

lect

ed =

Tota

l Eco

no

mic

Co

llect

ion

s

Tota

l Eco

nom

ic C

olle

ctio

ns /

Tota

l Pot

entia

l Ren

t =E

con

om

ic V

acan

cy C

ost

Econ

omic

Vac

ancy

Cos

t / T

otal

Pot

entia

l Ren

t =E

con

om

ic V

acan

cy

Th

e ke

ys t

o in

tere

stco

sts

are:

- Loa

n am

ount

- Int

eres

t rat

e- T

ime

to fi

rst

pa

y do

wn

- Tim

e to

last

pay

dow

n

Exam

ple:

Tota

l cos

ts: $

1,00

0,00

0 (fa

ct)

Tota

l loa

n: 6

5% o

f tot

al c

osts

(fa

ct o

r est

imat

e)A

vera

ge lo

an o

utst

andi

ng:

50%

(es

timat

e)In

tere

st ra

te: 1

0% (f

ast o

r est

imat

e)Te

rm o

f loa

n: 3

yea

rs (e

stim

ate)

$1,0

00,0

00 *

65%

9 5

0% *

.10*

3 =

$9

7,50

0

LTV

Str

engt

h

Initi

al L

oan

Req

uest

/ In

itial

Val

ue =

Init

ial L

TV

(Initi

al V

alue

: See

pre

viou

s K

ey F

orm

ula)

Tota

l Loa

n R

eque

st /

Exit

Valu

e =

Sta

bili

zed

LT

V(E

xit V

alue

= S

tabi

lized

NO

I / M

arke

t Cap

Rat

e)

Gro

ss P

rofit

Mul

tiple

Ret

urn

of P

rinci

pal +

Inte

rest

+ P

rofit

Par

ticip

atio

n(if

any

) = T

ota

l Cap

ital

Ret

urn

Tota

l Cap

ital R

etur

n / O

rigin

al In

vest

men

t=

Gro

ss P

rofi

t M

ult

iple

Deb

t Yie

ld

Cur

rent

(Day

One

) NO

I / In

itial

Loa

n R

eque

st =

Go

ing

-In

Deb

t Yie

ld

Exam

ple

: $60

0,00

0 / $

11,7

00,0

00 =

5.1

3%

Stab

ilize

d N

OI /

Tot

al L

oan

Req

uest

=

Go

ing

-Ou

t D

ebt Y

ield

Exam

ple

: $92

5,00

0 / $

12,3

56,0

00 =

7.4

8%

Sta

biliz

ed C

ash-

on-C

ash

Ret

urn

Beg

inni

ng C

ash

Flow

/ Eq

uity

Am

ount

= B

egin

nin

gL

ever

aged

Cas

h-o

n-C

ash

Ret

urn

Exam

ple:

$60

0,00

0 (B

egin

ning

NO

I) - $

960,

000

(Deb

t Ser

vice

) = -$

360,

000

(Beg

inni

ng C

ash

Flow

)-$

360,

000

/ $1,

300,

000

= (-

27.7

%)

Endi

ng C

ash

Flow

/ Eq

uity

Am

ount

= E

nd

ing

Lev

erag

edC

ash

-On

-Cas

h R

etu

rn

Exam

ple

: $1,

200,

000

(End

ing

NO

I) - $

960,

000

(Deb

tSe

rvic

e) =

$24

0,00

0 (C

ash

Flow

)$2

40,0

00 /

$1,3

00,0

00 =

18.

5%

Endi

ng C

ash

Flow

/ Eq

uity

Am

ount

=E

nd

ing

Lev

erag

ed C

ash

-on

-Cas

h R

etu

rn

Exam

ple

: $1,

200,

000

(End

ing

NO

I) - $

960,

000

(Deb

t Ser

vice

) =$2

40,0

00 (C

ash

Flow

)$2

40,0

00 /

$1,3

00,0

00 =

18.

5%

NO

I:N

OI:

Acq

uisi

tion

Pric

e / S

quar

e Fe

et o

r Uni

ts =

Beg

inn

ing

Pri

ce p

er P

ou

nd

Exam

ple:

$13

,000

,000

/ 10

0,00

0 sq

uare

feet

= $

130

psf

Exam

ple:

$13

,000

,000

/ 10

0 un

its =

$13

0,00

0 pe

r uni

t

TH

E P

ER

IOD

IC T

AB

LE

OF

CO

MM

ER

CIA

L R

EA

L E

STA

TE

FO

RM

ULA

SS

olvi

ng fo

r D

ebt Y

ield

NO

I / L

oan

Am

ount

= D

ebt Y

ield

12

Cur

rent

NO

I / A

cqui

sitio

n P

rice

= B

egin

nin

g C

ash

-on

-Cas

h R

etu

rn

Exa

mpl

e : $

600,

000

/ $13

,000

,000

= 4

.62%


48


48

RULES OF INVESTING

STABILIZED VS. VALUE-ADDED

Stabilized Properties: Investors buy stabilized properties under the assumption that the risk is substantially removed from the transaction and that nothing negative will happen to reduce future cash flow.

Value-Added Properties: Investors are betting that something positive will happen to increase the Net Operating Income (NOI), and in turn, transform the value-added property into more valuable stabilized property.

BE CAREFUL OF LEASE ROLLOVER

Rollover is any one year should not be greater than 20 percent of the entire rent roll.

IMPROVE ASSET QUALITY IN GOOD LOCATIONS

Wealth can be created by improving Class B or C buildings in Class A locations.


49


49

EXHIBIT A: SOLVING FOR THE LOAN AMOUNT BY HAND

ASSUMPTIONS:


SIZING ASSUMPTIONS:

Loan to value 80%

DSC 1.25

Interest rate 7%

Amortization 30 years

CALCULATIONS:

Cash available to support the loan: 950,000 / 1.25 = $760,000

Loan Amount:

N = 306 (360 periods to include 30 year amortization)

I = 7%

PMT: 760,000 / 12 = $63,333

RESULT:

PV = $9,519,429 = The loan amount

**KEY POINT: Excel example loan = $8,010,867 – difference is the underwritten NOI of $779,325 vs. raw NOI of $950,000.


50


50

EXHIBIT B: $100 MILLION LOAN POOL

Equity$20 Million

100% of Project CostsSubordination: 0.00% of Loan or 0% of Costs

Non-Rated$1 Million

80% of Project CostsSubordination: 0.00% of Loan or 20% of Costs

B Bond$1 MillionSpread: 950bp over 10 Year Treasury

79% of Project CostsSubordination: 1% of Loan or 21% of Costs

BB Bond$1 MillionSpread: 575bp over 10 Year Treasury


BBB Bond$3 MillionSpread: 411bp over 10 Year Treasury


A Bond$2 MillionSpread: 205bp over Swap


AA Bond$2 MillionSpread: 145bp over Swap


AAA Bond$70 MillionSpread: 68bp over Swap


Non-Investment Grade

Investment Grade


51


51

EXHIBIT C: EXAMPLE RENT ROLL

TENANT NAME

SQ. FT.LEASE

START DATELEASE END

DATEBASE RATE

ANNUAL RATE

INCREASES

EXTENSION OPTIONS

OTHER TERMS

Acme Supply 20,000 1/1/20001/1/2010 Full

Service$15.00 3% CPI Two

$10 work letter at time of extension

Jones Printing

10,000 5/20/2002 5/20/2009 $14.00 None None60 day cancellation notice

Bill Plumbing 5,000 8/2/2005 8/2/2010 $16.00 10% per year One

Has right of first offer to take Jones Printing space

John John’s 20,000 9/05/07 9/05/2010 $18 None None

Has right to cancel lease from 10/01/07-6/0/08 for a $25k break-up fee

Big Time Credit

25,000 11/1/07 11/1/2017 $15 2% CPI 2-10 yearThe tenant has AAA rating by S&P

Joe’s Books 10,000 1/1/05Month-to-

Month$20 None None

Has been in the building 15 years

Vacant Space 10,000

TOTAL 100,000


52


52

EXHIBIT D: INVESTMENT CHECKLIST FOR OBTAINING A LOAN

TRANSACTIONS SUMMARY

• Type of loan required• Loan Amount Requested• Loan Term Requested• Borrower Name• Physical Description of property• Sources and Uses of Funds

• Timing Requirements• Purpose of Financing• Narrative History of Property• Location Map• Purchase Price / Contract

PLANNED IMPROVEMENTS

• Detailed Budget of Contemplated Improvements (if any)

BORROWER INFORMATION

• Complete Description of Borrowing Entity Including GP• Current Financial Statement

• Managers and Principals• Resumes

GENERAL PROPERTY INFORMATION

• Physical Description• Number of Units / sf• Units/Space Breakdown (Stacking plan)• Current Loan Information

• Date Contsructed• Number of Parking Spaces• Exterior/Aerial Photoshraphs• Site Plan• Amenities

SPECIFIC PROPERTY INFORMATION

• Operating Statement (3 years)• Rent Roll Schedule• Detailed Borrower Pro Forma• Current Rent Roll including Tenant Names and sf Leased• Operating Expense Description/Breakdown

• Historic Vacancy/Current Vacancy• Tenant Improvement Budget• Description of Property Management and Relation to

Borrower

EXIT STRATEGY

• Refinance Assumptions• Exit Interest Rate

• Leasing Schedule• Market Cap Rate Analysis

THIRD PARTY REPORTS

• Appraisal• Engineering Reports

• Environmental Reports• Title Report

MARKET INFORMATION

• Current Occupancy of Submarket• Submarket Supply• Submarket Historical Demands• Concessions (if any)

• List of Comparable Properties• Historic Job Growth• Projected Job Growth


53


53

EXHIBIT E: UNDERSTANDING THE TRANSACTION & SALES STRATEGIES

Rent

Roll

Ow

ner's

Curr

ent

Situat

ion

Curr

ent

Fin

anci

ng

SE

LLE

R’S

RE

PR

ESE

NTA

TIV

E

Ther

e is

a g

ap to

day

betw

een

buye

r and

se

ller p

erce

ived

va

lues

.

To h

elp

brid

ge th

is

gap,

use

you

r kn

owle

dge

of c

apita

l m

arke

ts a

nd s

how

th

e se

ller t

he b

uyer

's

pro-

form

a.

• If

usin

g th

e "n

ew

unde

rwrit

ing"

met

rics

(80%

LTV

con

stra

int /

1.

25x

DSC

con

stra

int

/ 8%

loan

con

stan

t).

• If

the

buye

r's p

ro

form

a is

not

ach

ievi

ng

a m

id-te

ens

leve

rage

d R

OE,

then

yo

ur s

elle

r's p

ricin

g m

ay b

e to

o hi

gh.

• Is

It re

ady

for s

ale,

or

sho

uld

you

spen

d so

me

time

clea

ning

it

up?

• W

hy a

re th

ey s

ellin

g to

day?

• Is

the

loan

on

the

prop

erty

due

? (B

uyer

's

will

sm

ell t

roub

le).

• C

an it

be

refin

ance

d in

toda

y's

mar

ket?

(If

no b

uyer

s w

ill s

mel

l tro

uble

).

• W

hat a

re th

e al

tern

ativ

es if

the

prop

erty

doe

s no

t sel

l?

(loan

rest

ruct

ure)

.

Is it

ass

umab

le?

A c

ondu

it lo

an m

ade

in 2

004-

2007

with

an

assu

mpt

ion

optio

n an

d go

od te

rms,

co

uld

incr

ease

the

valu

e of

the

asse

t to

day.

BU

YE

R'S

RE

PR

ESE

NTA

TIV

E

STR

ATE

GIE

S F

OR

INV

ESTM

EN

T S

ALE

S P

RO

FE

SSIO

NA

LS:

STR

ATE

GIE

S F

OR

LE

ASIN

G B

RO

KE

RS:

OW

NE

R'S

RE

PR

ESE

NTA

TIV

E•

You

crea

te th

e bu

ildin

g ca

sh fl

ow w

ith le

ases

. •

Don

't se

ll yo

urse

lf sh

ort -

unde

rsta

nd c

ash

flow

val

uatio

n an

d un

ders

tand

the

build

ings

curr

ent d

ebt /

equ

ity /

NO

I.

The K

ey P

oin

t: H

ow

bad

does

the b

uild

ing

need

tenan

ts?

TE

NA

NT’S

RE

PR

ESE

NTA

TIV

E•

"Rev

erse

eng

inee

r" th

e po

tent

ial b

uild

ing

your

clie

nt's

are

look

ing

at.

• Yo

u ca

n he

lp d

ive

a be

tter l

ease

for t

he c

lient

if y

ou k

now

the

situ

atio

n of

eac

h

bu

ildin

g's

owne

r.

Whe

n is

the

loan

on

the

build

ing

mat

urin

g?

Wha

t typ

e of

fina

ncin

g is

on

the

build

ing

(con

duit,

ban

k, li

fe

com

pany

, etc

.)?

Doe

s th

e bu

ildin

g ha

ve s

econ

dary

deb

t (m

ezza

nine

loan

)?

Whe

n w

as th

e lo

an m

ade

(look

for w

hen

it w

as la

st s

old)

?

CO

MM

ER

CIA

L R

EA

L E

ST

AT

E T

RIA

GE

FIN

AN

CIE

RU

ND

ER

STA

ND

ING

TH

E T

RA

NSA

CTIO

N A

ND

SA

LE

S S

TR

ATE

GIE

S

1 Focu

s on

the

traili

ng -

12 m

onth

NO

I, no

t pr

o fo

rma

NO

I.

Und

erst

and

the

tena

nt m

ix,

and

disc

ount

the

reve

nue

from

tena

nts

who

may

not

qu

alify

for u

nder

writ

ing

purp

oses

(i.e

. mon

th to

m

onth

tena

nts,

thos

e w

ith

esca

pe c

laus

es, e

tc.),

as

this

in

com

e w

ill n

ot b

e "c

ount

ed"

by th

e le

nder

s.

Brid

ge le

nder

vs.

ba

nk, v

s. li

fe

com

pany

.

Und

erst

and

buye

rs

RO

E ex

pect

atio

ns a

nd

mat

ch th

at e

xpec

tatio

n w

ith c

urre

nt d

ebt

mar

kets

.

2

If th

e lo

an is

due

soo

n, c

an it

be

easi

ly re

finan

ced

base

d on

th

e cu

rren

t rol

l, or

is th

e le

asin

g an

d cu

rren

t vac

ancy

goi

ng

to m

ater

ially

impa

ct th

e ab

ility

to re

finan

ce?

Wha

t are

the

owne

r's lo

ng te

rm o

bjec

tives

with

the

build

ing?

Whe

n is

the

loan

on

the

build

ing

due?

If th

e lo

an is

due

soo

n, h

ave

they

run

a re

finan

ce p

ro fo

rma

unde

r tod

ay's

new

stri

cter

cre

dit g

uide

lines

?

? ? ? ?N

OI

Rent

Roll

New

Deb

t

Deb

t M

ark

ets

Man

age

Exp

ect

atio

ns

Retu

rn T

hre

shold

s

Deal

s to

day

req

uir

e m

ore

eq

uit

y. M

ake s

ure

you a

re w

ork

ing

with k

now

led

geab

le,

qual

ified

buyers

who c

an b

ring

20

-25%

eq

uity t

o t

he d

eal

.


54


54

EXHIBIT F: FUNDING LIFECYCLE OF A COMMERCIAL REAL ESTATE DEAL

Deb

tor I

n Po

sses

sion

("D

IP")

CU

RR

EN

TN

OI

PR

O F

OR

MA

NO

I

CU

RR

EN

T D

EB

TSTR

UC

TU

RE

SO

UR

CE

SA

ND

USE

S

EX

ITSTR

ATE

GY

DA

Y 14

DA

Y 1

Expe

rienc

e

If B

ank

Ow

ned,

Will

Nee

d To

Loo

k A

tR

ecen

t Tra

des

To D

eter

min

e C

urre

nt V

alue

s

Wha

t Doe

s Yo

ur B

orro

wer

"T

hink

" The

y W

ant?

Ana

lyze

. Wha

t Do

They

R

eally

Nee

d?

Brid

ge L

oan,

Cre

dit F

acili

ty

Mez

zani

ne

Pref

erre

d Eq

uity

, Eq

uity

Fac

ility

Dis

coun

ted

Pay-

Offs

("DPO

s")

Doe

s B

orro

wer

Hav

e C

omm

itmen

t Let

ter

Or T

erm

She

et F

rom

The

ir Ex

istin

g Le

nder

D

etai

ling

The

Dis

coun

ted

Pay-

Off

Am

ount

?

Deb

t Pro

duct

s

Thin

k

Ask

Que

stio

nsHyb

rid

Equi

ty P

rodu

cts

Ban

krup

tcy

Mos

t Rec

ent

Ren

t Rol

l

Bor

row

ers

Pers

onal

Fin

anci

al

Stat

emen

t ("P

FS")

Bor

row

ers

Cre

dit S

core

with

Exp

lain

at-

ion

of T

heir

Cre

dit H

isto

ry if

Nec

essa

ry

Wha

t Is

Your

Sp

onso

r'sSe

nsiti

vity

?

Cap

ital P

artn

er B

egin

s Fo

rmal

Due

Dili

genc

ePr

oces

s

Bor

row

er D

ueD

ilige

nce

Beg

ins

Fina

l App

rova

l (O

r Dis

appr

oval

)

CL

OS

ING

A

ND

F

UN

DIN

G

Bor

row

er B

ackg

roun

d C

heck

Rev

iew

of B

orro

wer

's B

usin

ess

Plan

(For

How

Va

lue

Will

Be

Ach

ieve

d A

t The

Ass

et L

evel

)

ST

AG

E 4

:Te

rm S

heet

Is

Issu

ed

ST

AG

E 4

:Te

rm S

heet

Is

Issu

ed

ST

AG

E 2

: Col

lect

Add

ition

al

Info

If A

sked

To

By

Dan

drew

Sa

les

Des

k

Tim

ing?

Proc

eeds

?

Cer

tain

ty o

f Exe

cutio

n?

Prod

uct

Sizi

ng

Ban

k O

wne

dR

EO

CA

PIT

AL

PA

RTN

ER

INV

OLV

EM

EN

T

Bor

row

er

Sign

s Te

rm

Shee

t

Bor

row

er

Wire

s Le

gal

Dep

osit

DE

AL

FL

OW

ST

AG

E 1

:In

term

edia

ry

Pre-

Qua

lific

atio

n

Wha

t Is

The

Stor

y?W

hat I

s Th

e Ti

me

Fram

e?

Pric

ing?

Fill

In A

ll Th

e B

lank

s.

No

Nee

d To

For

war

d A

nyth

ing

Mor

e Th

an

This

For

m A

t Thi

s Ti

me.

Subm

it To

C

apita

l Pro

vide

rs

Exec

utiv

e Su

mm

ary

With

Sou

rces

and

Use

s of

Pro

ceed

s

Col

or P

hoto

s of

the

Subj

ect P

rope

rty

Mos

t Rec

ent P

rofit

and

Los

s St

atem

ents

(P&

L), a

nd M

ost

Rec

ent Y

ear E

nd P

&L

Stat

emen

t

Term

s?

INVOLVEMENT

INV

OLV

EMENT

BO

RRO

W

ER

Confe

renc

e

Cal

lD

eal C

lose

r To

Clo

sing

CO

MM

ER

CIA

LR

EA

L E

ST

AT

E

If N

o C

omm

itmen

t Let

ter,

Stop

Her

e U

ntil

You

Get

One

.

- Mar

ket S

tudi

es, I

f App

licab

le, I

nclu

ding

Bro

kers

' Opi

nion

of V

alue

- Cap

ital I

mpr

ovem

ent B

udge

ts- P

rope

rty C

ondi

tion

Ass

essm

ents

- Env

ironm

enta

l Rep

orts

- Titl

e R

epor

ts- S

urve

ys- C

oven

ants

, Con

ditio

ns a

nd R

estri

ctio

ns

("C

C&

R's

"), If

App

licab

le

Onl

y D

eskt

op D

ue D

ilige

nce

Has

Bee

n Pe

rform

ed S

o Fa

r

Extra

Info

rmat

ion

Cha

nce

for

Failu

re

LE

GE

ND

Path

of

Dea

l

Bor

row

er M

ay F

lake

Out

. War

n Th

em T

erm

s G

et W

orse

The

Se

cond

Tim

e A

roun

d.

If A

Bro

ker

Is In

volv

ed, Y

ou

Mu

st

Tel

l Th

em T

o S

tep

Asi

de.

Cap

ital P

artn

er W

ill N

eed

To P

erfo

rm

Due

Dili

genc

e A

fte T

erm

She

et ("

T/S"

) Is

Exec

uted

By

Bor

row

er.

Prop

erty

May

Not

App

rais

e. P

roce

eds

To B

orro

wer

May

Hav

e To

Be

Adj

uste

d, O

r Bor

row

er M

ay N

eed

To B

ring

Mor

e M

oney

(Eq

uity

) To

The

Tabl

e.

FU

ND

ING

LIF

EC

YC

LE

Hav

e Yo

u M

anag

ed T

heir

Expe

ctat

ions

Fo

r Int

eres

t Rat

e an

d Te

rms?

ST

AG

E 3

: Get

Eng

agem

ent

Lette

r / B

roke

rage

Agr

eem

ent E

xecu

ted

Mus

t Be

Exec

uted

B

y B

oth

Side

s.N

o H

and

shak

es.

Do

Not

Pro

vide

Ter

m S

heet

With

out G

ettin

g Th

is

Exec

uted

Firs

t; Yo

ur C

apita

l Par

tner

Will

Nee

d To

In

corp

orat

e Yo

ur In

cent

ives

Into

The

Ter

m S

heet

.

Doe

s Y

our S

pons

or /

Bor

row

er H

ave

Expe

rienc

e D

oing

Thi

s Ty

pe o

f Dea

l?

Bor

row

er N

eeds

to b

e En

gage

d A

nd R

espo

nsiv

e.

Failu

re T

o G

et T

his

Mea

ns B

orro

wer

May

Be

Win

dow

Sh

oppi

ng O

r Wor

se Y

et, H

idin

g So

met

hing

STUDENT / INTERMEDIARY

TH

E “

SO

UL

” O

F T

HE

AS

SE

T:

Thes

e fin

anci

als

will

tel

l yo

u if

this

ass

et h

ad b

een

poor

ly m

anag

ed o

r if

the

borr

ower

/spo

nsor

is

bein

g tru

thfu

l to

you

. A

lot

can

be

unco

vere

d w

ith o

nly

a qu

ick

glan

ce h

ere.


ACPARE… because no one else will give you the financial future you deserve.

Formed with the explicit purpose of changing the face of real estate investment, ACPARE seeks to provide each member with the education and leverage to break free of reliance of banks and lending institutions.

Times have changed. ACPARE is changing commercial real estate investment in response.

With over four decades of world-class experience in capital formation, ACPARE offers members nothing short of the most effective means and methods to build real wealth in any economic climate.

As a member, you’ll enjoy unlimited access to closely-guarded Wall Street secrets of capital formation, placement, asset arbitrage, and more…

• Comprehensive trainings and certification programs designed by qualified experts, complete with hands-on guidance and mentoring

• Unrestricted access to our deal vault so you can see every aspect of some of the most lucrative commercial investment deals ever struck

• Members-only training videos and consultation demonstrating essential strategies, common mistakes, and exactly what it takes to turn an opportunity into a legacy

And that’s just the beginning.

When the financial lending system finally lashes out in your direction, how will YOU save your business?

Stop playing games you’re not meant to win.

Wall Street makes money no matter what happens in the market. So can you.

ACPARE. A real solution for you… and your heirs.

www.ACPARE.org


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