Wealth Opportunities in Commercial Real Estate

ESSENTIAL COVERGAGE OF THE COMMERICAL REAL ESTATE MARKET AND HOW TO MAKE IT WORK FOR YOU The one-stop guide to making money from buying, managing, and owning commercial real estate, Wealth Opportunities in commercial real Estate is the comprehensive resource you need in order to take full advantage of the market, whether you're just starting out or an old hand. Including industry case studies and expert advice from real estate expert Gary Grabel, the book teaches you the fundamentals-including how to evaluate a potential property and how to create value even before you buy-that other books leave out. Commercial real estate investing is an excellent, and highly profitable, investment choice for those with the right perspective and the patience to see their decision through. But to really succeed, it is essential to have a firm grasp of the basics of the real estate game before you get started. if you think you're ready, then this book is your first step.

List of Abbreviations xiii Introduction xv Chapter 1 An Overview of the Problem, a Solution, and a Game Plan 1 The Problem 1 The Solution 2 Four Key Elements in the Solution 3 Concerns about the Solution 8 Acquiring the Skill Set to End the Cycle 9 A Game Plan to Achieve the Solution 9 This Book is about Center B Properties 18 Chapter 2 The Basics 21 Gross Income: The Starting Point 21 Vacancy and Collection Loss: Gross Income Reducers 21 Operating Expenses and Net Operating Income 23 Fair Market Value and Capitalization Rate: What’s It Worth? 24 Gross Rent Multiplier 25 Value per Square Foot versus Reproduction Cost per Square Foot 26 Inverse Relationship between Cap Rate and FMV 29 Initial Determination of Value 29 Leveraged Return and Return on Equity 30 Cash Flow before Taxes (CFBT) 32 Reserves/Impound Accounts 32 Taxes and Insurance Impounds 32 Cap X, TIs, and Leasing Commissions 33 Devil in the Details: Over Simplified Analysis 38 Chapter 3 Detailed Financial Analysis 41 Gross Income 41 Vacancy and Collection Loss 43 Operating Expenses 43 Four Basic Types of Leases 46 Nonrecoverable Expenses 55 Time-Frame Assumptions 56 Static versus Active Analysis 57 Compounding 58 Rent Roll 59 Argus Ten-Year Discounted Cash Flow Model 60 Analysis Reflecting 100 Percent Occupancy 65 Reversion 66 Disposition Costs 66 The Time Value of Money: Present Value and Discounted Cash Flow 67 Net Present Value (NPV) 68 Internal Rate of Return (IRR) 68 Conclusions from Argus Analysis and the Hypothetical Facts 69 Analysis Reflecting a Large Vacancy after Purchase 70 Analysis Reflecting a Large Vacancy with a Tenant in Tow 72 Chapter 4 Lease Analysis 75 The Importance of Basic Lease Provisions 75 Twelve Key Economic Ingredients in a Lease 77 Frequently Negotiated Lease Provisions 96 Chapter 5 Real Estate Financing 119 Sixty to Eighty Percent of the Game 119 Types of Financing 120 What is the Right Answer to Debt Structuring? 122 Seven Key Factors to Consider in a Real Estate Loan 124 Loan Underwriting 131 Cash-on-Cash Return 137 The Mortgage Loan Application 138 The Pitfalls of Mortgage Lending 138 Negotiable Points of a Loan 153 Chapter 6 Real Estate Taxation 157 Income Taxation 157 Real Property Taxation 163 Taxation in the Event of a Refinance 164 Taxation in the Event of a Sale 165 Installment Sale 166 Section 1031 Exchange 168 Chapter 7 Acquisitions and Dispositions 179 Focus on Specific Property Types in Specific Geographic Locations 179 Establish Buying Criteria 181 Acquisition Philosophy 181 Governmental Impact 182 Initial Screening 183 The Purchase and Sale Agreement 187 Building a Team 199 Due Diligence 199 Dispositions 206 Chapter 8 Case Studies 219 Problem Number 1 219 Problem Number 2 230 Problem Number 3 242 Problem Number 4 244 Problem Number 5 248 Problem Number 6 255 Problem Number 7 258 Chapter 9 Development or Rehabilitation (Build to a 12 Percent Yield) 269 The 10 Phases of a Construction or Rehab Project 269 Assessing a Construction Project 270 Developer as Conductor 272 Does the Project Hit Your Minimum Yield? 274 Argus Developer 279 Feasibility or Market Study 283 The Composition of a Feasibility Study 284 Residual Land Value 285 Preleasing 286 Equity and Financing 287 Mechanics’ Liens 287 Liability under the Construction Loan 288 Design and Construction Drawings 289 Governmental Approvals 290 Covenants, Conditions, and Restrictions (CC&Rs) 291 Ground Lease Restrictions 292 Construction of Improvements in a Ground-Up Development 292 Inspections 295 Insurance 296 Decisions, Decisions, Decisions 296 Communication, Communication, Communication 298 Graphic Time Line 299 Project Operating Costs 302 Lender’s Disbursement Form 303 Change Orders 303 Rehabilitation Project 303 Construction of Improvements in a Rehab Project: Decisions, Decisions, Decisions 311 Rehab Project: Communication, Communication, Communication 311 Summary 311 Chapter 10 Marketing, Leasing, and Management 313 Definition of Marketing, Leasing, and Management 313 Marketing 314 Leasing 319 Strategy 319 Management 345 Management as a Business 353 Conclusion 354 Chapter 11 Partnership Structuring and Deal Restructuring 355 Partnership Structuring 355 Securities Issues 357 Fifteen Key Structuring Issues 361 Debt Restructuring 371 Borrower’s Proposed Terms 383 Lender’s Counterproposal 384 Chapter 12 Keeping the Money 389 Planning 389 Fractional Interests 396 Estate Planning Checklist 400 Acknowledgments 403 About the Website 405 About the Author 407 Index 409