Finding, Funding and Closing Commercial Real Estate Investments

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Housekeeping

Please help yourself to food and drinks.

Please let us know if the room temperature is too hot or cold.

Bathrooms are located past the reception desk on the right.

Please turn OFF your cell phones.

Please complete and return surveys at the end of the seminar.

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Agenda

I. Choosing and Finding Commercial Real Estate Investments

II. Commercial Nuts and Bolts

III. How the Deal Gets Closed!

908-231-9100810 Old York Rd, Raritan, NJ 08869

www.somersetfinancial.com- website

info@somersetloans.com- e-mailLicensed NJ Dept. of Banking and Insurance

Paul Quinn, Vice-President

Commercial Nuts and Bolts- Commercial Nuts and Bolts- WHAT LENDERS LOOK FOR:WHAT LENDERS LOOK FOR:

Debt Service Coverage Ratio (DSCR)Debt Service Coverage Ratio (DSCR) * 1.2-1.3 ratio (property monthly net operating income * 1.2-1.3 ratio (property monthly net operating income vs. vs. financing expenses). financing expenses).

AppraisalAppraisal * much more expensive and in-depth than residential * much more expensive and in-depth than residential appraisal.appraisal. * can take as long as 4 weeks to complete.* can take as long as 4 weeks to complete.

Environmental ReportsEnvironmental Reports * In-depth report on property based on type of business * In-depth report on property based on type of business and it’sand it’s potential impact on the surrounding area/site. Needed potential impact on the surrounding area/site. Needed for for property types such as restaurants, gas stations, bars, property types such as restaurants, gas stations, bars, manufacturing, warehouse, etc. Ordered by Lender.manufacturing, warehouse, etc. Ordered by Lender.

Lender SecuritizationLender Securitization * Affects which lender application will be submitted to.* Affects which lender application will be submitted to. Portfolio lender or sells mortgage to investment firm Portfolio lender or sells mortgage to investment firm (Wall Street, etc.) - Can affect time to close, (Wall Street, etc.) - Can affect time to close, exception allowances, risk tolerance, rate, etc. exception allowances, risk tolerance, rate, etc.

Somerset Financial Inc. 908-231-9100 www.somersetloans.com licensed NJ DOBI

Debt Service Coverage Ratio - DSCRDebt Service Coverage Ratio - DSCR Rental Income/Property IncomeRental Income/Property Income

-Vacancy & Collection Losses (5%)-Vacancy & Collection Losses (5%)

-Operating Expenses (utilities, taxes, -Operating Expenses (utilities, taxes, etc.)etc.)= Net Operating Income= Net Operating Income

DSCR = Net Operating Income minus DSCR = Net Operating Income minus

Principal & Interest PaymentPrincipal & Interest Payment

Property’s Ability to repay it’s debtProperty’s Ability to repay it’s debt

Let’s look at an example:Let’s look at an example:Somerset Financial Inc. 908-231-9100 www.somersetloans.com licensed NJ DOBI

Debt Service Coverage Ratio - Debt Service Coverage Ratio - ScenarioScenario

6 Unit Retail Bldg - Sale Price 6 Unit Retail Bldg - Sale Price $375,000$375,000

Income-$600/Month Per UnitIncome-$600/Month Per Unit Less Vacancy 5% (-$180)Less Vacancy 5% (-$180) Less Expenses Paid by Owner 30% Less Expenses Paid by Owner 30% (-$1,080)(-$1,080) Remember: NOI = Income -Vcy loss –Remember: NOI = Income -Vcy loss –

ExpensesExpenses $3600 -$1260 = $3600 -$1260 = $2340 (NOI)$2340 (NOI) Debt Service- $275,000 @ 7.125% for Debt Service- $275,000 @ 7.125% for

25 years= 25 years= $1965 P/I$1965 P/I DSCR = NOI / P&I pmtDSCR = NOI / P&I pmt $2340 / $1965 = 1$2340 / $1965 = 1.21 DSCR.21 DSCR Qualifies!!Qualifies!!

Somerset Financial Inc. 908-231-9100 www.somersetloans.com licensed NJ DOBI

Somerset Financial Inc. 908-231-9100 www.somersetloans.com licensed NJ DOBI

Some Examples of Property TypesSome Examples of Property Types

Truck Stop

Apartment Complexes

Self-Storage

Mixed-Use

Condo-Hotels

Somerset Financial Inc. 908-231-9100 www.somersetloans.com licensed NJ DOBI

Tier Properties - Tier Properties - Risk/FinancingRisk/Financing• Tier OneTier One

• Multi-family and mixed Multi-family and mixed useuse (>50% residential (>50% residential component)component)

• Up to 97% LTV (O/O)Up to 97% LTV (O/O)• 6% - 12% depending on LTV, 6% - 12% depending on LTV,

loan product and strength loan product and strength of dealof deal

• Tier TwoTier Two• Mixed use (<50% Mixed use (<50%

residential), office, retail, residential), office, retail, warehouse, light industrial, warehouse, light industrial, self storage, bed and self storage, bed and breakfastbreakfast

• Up to 97% LTV (O/O)Up to 97% LTV (O/O)• 6.5% - 13% depending on LTV, 6.5% - 13% depending on LTV,

loan product and strength of loan product and strength of dealdeal

• Tier ThreeTier Three• Industrial, automotive, Industrial, automotive,

funeral home, rooming funeral home, rooming home, flagged home, flagged hospitalityhospitality

• Up to 90% LTVUp to 90% LTV• 7% - 13% depending on 7% - 13% depending on

LTV, loan product and LTV, loan product and strength of dealstrength of deal

• Tier FourTier Four• Health care, day care, Health care, day care,

RV park, un-flagged RV park, un-flagged hospitality, restaurant, hospitality, restaurant, special purposespecial purpose

• Up to 90% LTVUp to 90% LTV• 7.5% - 13% depending on 7.5% - 13% depending on

LTV, loan product and LTV, loan product and strength of dealstrength of dealSomerset Financial Inc. 908-231-9100 www.somersetloans.com licensed

NJ DOBI

Financing OptionsFinancing Options ••Credit ScoringCredit Scoring ••A: 680+A: 680+ ••A-: 640+A-: 640+ ••B: 580+B: 580+ ••Terms:Terms: ••15, 20 & 30 Years15, 20 & 30 Years ••Fully Amortizing, interest-onlyFully Amortizing, interest-only ••Loan Types:Loan Types: ••6-Month Adjustable6-Month Adjustable ••2, 3, 5 & 7 and 10-year Fixed2, 3, 5 & 7 and 10-year Fixed ••30-Year Declining Fixed Rate30-Year Declining Fixed Rate

No-prepay penalties on some programs, up to 5-No-prepay penalties on some programs, up to 5-10 years on others.10 years on others.

Somerset Financial Inc. 908-231-9100 www.somersetloans.com licensed NJ DOBI

How the Deal Gets Closed!

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New Jersey:

721 Route 202-206

Bridgewater, NJ 08807

Phone: (908) 722-0700

Fax: (908) 722-0755

New York:

875 Third Avenue

18th Floor

New York, NY 10022

Phone: (212) 808-0700

Fax: (212) 808-0844

Areas of Practice:Real Estate, Finance, Corporate

Admitted to Practice in: New Jersey, New York

Education:Seton Hall University School of Law, J.D., 2003

Liberty University, B.S

Jesse P. Nash

Picture

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Investment Considerations: Investment Considerations:

Same Issues as with Most Other Investments:

Return on Investment

Risk Tolerance

Importance of Developing Bargaining Strategy Early in the Process

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Assembling and Managing Your Team:Assembling and Managing Your Team:The Roles of Your ProfessionalsThe Roles of Your Professionals

Getting The Right Person for the Job

Reputation Making Sure Work is in Professional’s Field

Understanding the Roles of your Professionals

Responsiveness

Cost Control

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Investment Vehicle - Choice of Entity Investment Vehicle - Choice of Entity and Entity Management and Entity Management

Tax Treatment

Liability Protection

Flexibility/Ease of Use

Management Structure Alternatives Management Whether Investors Should Have

Management Prerogatives Transfer Restrictions Distribution of Profit and Losses

Avoiding Sales of “Securities”

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An Agreement of Sale and A Typical Commercial An Agreement of Sale and A Typical Commercial Real Estate Purchase Transaction TimelineReal Estate Purchase Transaction Timeline

The Parties

The Property

Confirm that property interests to be acquired are adequately described in the contract, including, to the extent applicable:

Real property, including land, improvements, fixtures and appurtenances

Personal property (equipment, spare parts, tools and other items used in the operation of the property)

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An Agreement of Sale and A Typical Commercial An Agreement of Sale and A Typical Commercial Real Estate Purchase Transaction Timeline Real Estate Purchase Transaction Timeline (cont’d)(cont’d)

Leases and Related Agreements Other Contracts (commission agreements,

management contracts, service contracts, etc.)

Permits, Approvals, Licenses, Warranties, Guaranties, etc.

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The Purchase PriceThe Purchase Price

The Deposit

When does the deposit “go hard”?

Escrow Issues

Who should act as Escrow Agent? When should monies be released from

Escrow?

Balance of Purchase Price

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Closing ContingenciesClosing Contingencies

No Attorney Review in Commercial Deals!

Financing Contingency

Approvals Contingency

Representations and Warranties Contingency

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Title ConsiderationsTitle Considerations

Marketable Title

“Good and marketable title, insurable by a reputable title insurance company at regular rates, and subject only to exceptions to title that will not impair Buyer’s intended operations on the Property.”

Title Review

Right to Raise Title Objections Right to Terminate if Objections are not Eliminated Judgment Searches The Lender’s Position on Title Issues

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Due DiligenceDue Diligence

Reserve Right to Investigate All Aspects of the Property

Types of Due Diligence Review:

Property Condition Approvals/Permitting Environmental Lease Review

Hiring Right Due Diligence Professionals

The Lender’s Stake in the Due Diligence Process

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Representations and WarrantiesRepresentations and Warranties

Make Sure All Necessary Representations and Warranties are Obtained

Authority Physical Condition of the Property Leases and Other Contracts Title Matters Compliance with Laws Environmental Matters Litigation Anti-terrorism Laws

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Pre-Closing ObligationsPre-Closing Obligations

Seller Obligated to Deliver the Property in “Broom Clean” Condition

Seller Obligated to Correct Code or Other Violations

Seller’s Obligations Under Existing Leases

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Closing Closing

Date/Time/Place

The Mechanics of Closing

“Time of the Essence” Issues

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Default and Remedies Default and Remedies

Notice and Cure Periods

Limitation on Seller’s Pre-Closing Remedies – ideally, terminate the contract and damages limited to keeping the deposit

Buyer’s Remedies – Specific performance, terminate and receive damages

Prevailing Party Entitled to Attorney’s Fees (disincentive to litigate)

Indemnification

Generally, the obligation to defend and hold harmless another from liabilities incurred

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Closing AdjustmentsClosing Adjustments

Real Estate Taxes

Assessments

Rents

Association Fees

Utility, Sewer and Water Charges

Payments Under Service Contracts or Other Agreements

Realty Transfer Tax/Mansion Tax

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Specialized Legal Considerations that Arise with Specialized Legal Considerations that Arise with Different Types of Real Estate InvestmentDifferent Types of Real Estate Investment

Purchasing Leased Properties

Lease Review Estoppels/SNDA’s

Purchasing Property to Develop/Redevelop

Approval Review Surveys and Site Plans Brief Comment on Land Use Approval

Process

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Specialized Legal Considerations that Arise with Specialized Legal Considerations that Arise with Different Types of Real Estate Investment Different Types of Real Estate Investment (cont’d)(cont’d)

Environmental Contamination Issues

Proper Environmental Due Diligence• Goal is to undertake site assessment and

investigation as necessary to take advantage of available statutory defenses

Proper Contract Provisions • Who is responsible for cleanup obligations

and costs• Representations• Indemnification

ISRA• Compliance is Seller’s obligation• Is Property ISRA subject?• If so, must have DEP approval to close

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Questions

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Answers