Wealth Opportunities in Commercial Real Estate E-Book

Gary Grabel

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 718

Veröffentlichungsjahr: 2011

Beschreibung

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.

Leseprobe

Contents

Cover

Content

Title page

Copyright

Dedication

List of Abbreviations

Introduction

Chapter 1: An Overview of the Problem, a Solution, and a Game Plan

The Problem

The Solution

Four Key Elements in the Solution

Concerns about the Solution

Acquiring the Skill Set to End the Cycle

A Game Plan to Achieve the Solution

This Book Is about Center B Properties

Chapter 2: The Basics

Gross Income: The Starting Point

Vacancy and Collection Loss: Gross Income Reducers

Operating Expenses and Net Operating Income

Fair Market Value and Capitalization Rate: What’s It Worth?

Gross Rent Multiplier

Value per Square Foot versus Reproduction Cost per Square Foot

Inverse Relationship between Cap Rate and FMV

Initial Determination of Value

Leveraged Return and Return on Equity

Cash Flow before Taxes (CFBT)

Reserves/Impound Accounts

Taxes and Insurance Impounds

Cap X, TIs, and Leasing Commissions

Devil in the Details: Over Simplified Analysis

Chapter 3: Detailed Financial Analysis

Gross Income

Vacancy and Collection Loss

Operating Expenses

Four Basic Types of Leases

Nonrecoverable Expenses

Time-Frame Assumptions

Static versus Active Analysis

Compounding

Rent Roll

Argus Ten-Year Discounted Cash Flow Model

Analysis Reflecting 100 Percent Occupancy

Reversion

Disposition Costs

The Time Value of Money: Present Value and Discounted Cash Flow

Net Present Value (NPV)

Internal Rate of Return (IRR)

Conclusions from Argus Analysis and the Hypothetical Facts

Analysis Reflecting a Large Vacancy after Purchase

Analysis Reflecting a Large Vacancy with a Tenant in Tow

Chapter 4: Lease Analysis

The Importance of Basic Lease Provisions

Twelve Key Economic Ingredients in a Lease

Frequently Negotiated Lease Provisions

Chapter 5: Real Estate Financing

Sixty to Eighty Percent of the Game

Types of Financing

What Is the Right Answer to Debt Structuring?

Seven Key Factors to Consider in a Real Estate Loan

Loan Underwriting

Cash-on-Cash Return

The Mortgage Loan Application

The Pitfalls of Mortgage Lending

Negotiable Points of a Loan

Chapter 6: Real Estate Taxation

Income Taxation

Real Property Taxation

Taxation in the Event of a Refinance

Taxation in the Event of a Sale

Installment Sale

Section 1031 Exchange

Chapter 7: Acquisitions and Dispositions

Focus on Specific Property Types in Specific Geographic Locations

Establish Buying Criteria

Acquisition Philosophy

Governmental Impact

Initial Screening

The Purchase and Sale Agreement

Building a Team

Due Diligence

Dispositions

Chapter 8: Case Studies

Problem Number 1

Problem Number 2

Problem Number 3

Problem Number 4

Problem Number 5

Problem Number 6

Problem Number 7

Chapter 9: Development or Rehabilitation (Build to a 12 Percent Yield)

The 10 Phases of a Construction or Rehab Project

Assessing a Construction Project

Developer as Conductor

Does the Project Hit Your Minimum Yield?

Argus Developer

Feasibility or Market Study

The Composition of a Feasibility Study

Residual Land Value

Preleasing

Equity and Financing

Mechanics’ Liens

Liability under the Construction Loan

Design and Construction Drawings

Governmental Approvals

Covenants, Conditions, and Restrictions (CC&Rs)

Ground Lease Restrictions

Construction of Improvements in a Ground-Up Development

Inspections

Insurance

Decisions, Decisions, Decisions

Communication, Communication, Communication

Graphic Time Line

Project Operating Costs

Lender’s Disbursement Form

Change Orders

Rehabilitation Project

Construction of Improvements in a Rehab Project: Decisions, Decisions, Decisions

Rehab Project: Communication, Communication, Communication

Summary

Chapter 10: Marketing, Leasing, and Management

Definition of Marketing, Leasing, and Management

Marketing

Leasing

Strategy

Management

Management as a Business

Conclusion

Chapter 11: Partnership Structuring and Deal Restructuring

Partnership Structuring

Securities Issues

Fifteen Key Structuring Issues

Debt Restructuring

Borrower’s Proposed Terms

Lender’s Counterproposal

Chapter 12: Keeping the Money

Planning

Fractional Interests

Estate Planning Checklist

Acknowledgments

About the Website

About the Author

Index

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List of Illustrations

Chapter 1: An Overview of the Problem, a Solution, and a Game Plan

Exhibit 1.1 The Game Plan

Chapter 3: Detailed Financial Analysis

Exhibit 3.1 Lease Expiration Schedule

Exhibit 3.2 Lease Expiration in Graph Form

Chapter 5: Real Estate Financing

Exhibit 5.1 Graphic Illustration of How Principal and Interest Portions of the Mortgage Payments Relate to Each Other over Time

Exhibit 5.2 Trailing 12-Months’ Income and Expenses

Chapter 8: Case Studies

Exhibit 8.1 Problem Number 1

Exhibit 8.2 Closing Costs

Exhibit 8.3 Problems Number 2 and Number 3

Exhibit 8.4 Problem Number 4

Exhibit 8.5 Aged Receivables Report

Exhibit 8.6 Problems Number 5 through Number 7

Chapter 9: Development or Rehabilitation (Build to a 12 Percent Yield)

Exhibit 9.1 Argus Developer: Pro Forma

Exhibit 9.2 Construction Time Table Graph

Exhibit 9.3 Lender’s Disbursement Form

Exhibit 9.4 Metro Plaza Income and Expense Analysis

Chapter 10: Marketing, Leasing, and Management

Exhibit 10.1 Lease Terms Comparison Analysis

Wealth Opportunities in Commercial Real Estate

MANAGEMENT, FINANCING, AND MARKETING OF INVESTMENT PROPERTIES

Gary Grabel

Copyright © 2012 by Gary Grabel. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

Argus spreadsheets courtesy of ARGUS software. © 2011 ARGUS Software, Inc. All Rights Reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our website at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Grabel, Gary.        Wealth opportunities in commercial real estate : management, financing and marketing of investment properties / Gary Grabel.            p. cm.        Includes index.        ISBN 978-1-118-11574-9 (cloth); ISBN 978-1-118-19722-6 (ebk);        ISBN 978-1-118-19723-3 (ebk); ISBN 978-1-118-19724-0 (ebk)            1. Commercial real estate. 2. Real estate investment. I. Title.    HD1393.55.G73 2011    332.63'24–dc23

2011028238

This book is dedicated toMark Hamermesh and Aric Browne:Without their efforts and drive,this book would not have been possible.By taking on their shouldersmany of the day-to-day problems and concernsassociated with running a real estate company,which owns and operatesseveral million square feet of shopping centers,medical office buildings, and apartment units,they made it possible for the authorto focus on writing these pages.

This book is also dedicated to my wife, Rosanna,who has put up with my quirksand idiosyncrasies for over 30 years,especially when I wanted to workon this book rather than spend timein some more enjoyable pastime.

List of Abbreviations

Act

The Securities Act of 1933

Cap X

Capital Expenditures

CFBT

Cash Flow before Taxes

Code

Internal Revenue Code

DCR

Debt Coverage Ratio

FMV

Fair Market Value

IRR

Internal Rate of Return

LLC

Limited Liability Company

LP

Limited Partnership

LTV

Loan to Value

NOI

Net Operating Income

NPV

Net Present Value

NRSF

Net Rentable Square Foot

PSA

Purchase and Sale Agreement

PSF

Per Square Foot

PV

Present Value

ROA

Return on Assets

ROE

Return on Equity

SEC

Securities and Exchange Commission

1031

Section 1031 of the Internal Revenue Code

Introduction

This book is the result of many people asking me “How can I buy income-producing property? How can I get into the game?” The underlying purpose in this book is to set forth a practical step-by-step process on how to acquire commercial real estate and through a real estate vehicle build significant wealth over time. The discussion runs from sourcing a real estate transaction to analyzing the deal to acquiring the sticks and stones to managing real property to improving its value and finally to taking steps to preserve the value created and hopefully passing a good part of it on to your children and your children’s children.

Unfortunately, there is a wealth of books on real estate that in essence say, “You can’t lose. Go out and buy real estate!” You can lose in real estate just as in any other business. I usually buy from someone who has “lost”; that is, the value of the property and their equity therein has decreased from the date of their purchase. It is therefore essential to understand the fundamentals of the real estate game, including how to evaluate a real estate transaction and how to create value before you take the plunge and start to buy.

The text is geared to the novice who wants to understand commercial real estate as well as the seasoned professional who desires to enhance his knowledge. One of the key teaching tools revolves around setting forth a hypothetical that starts with the basics and then continually builds on the fact pattern to demonstrate real estate principles and theory and enhance the project analysis.

Although the concepts herein can be applied to all types of real estate, the focus is directed toward a project size of 30,000 to 150,000 square feet as is typically found in a neighborhood shopping center rather than a huge office building or a complex of over 500,000 square feet that might be found in a downtown high rise tower or a regional shopping mall.

Many individuals in the real estate field specialize in one area and therefore have a difficult time understanding and learning practical knowledge about other areas of real estate ownership. This text attempts, to some extent, to fill this gap. By covering a broad range of real estate topics from basic terminology and analysis to leasing, financing, marketing, management, structuring a partnership, real estate tax consequences, buying and selling real property, and the steps to take to preserve wealth, hopefully the reader can focus on the areas of his or her deficiencies.

Although I am an attorney by background, Wealth Opportunities in Commercial Real Estate is not intended as a legal treatise; rather, its focus is directed to the practical, day-to-day business aspects of acquiring, owning, and managing commercial real estate. I strongly recommend consulting with an attorney, accountant, and other professionals when entering into a lease, a purchase and sale agreement, or when any technical issues arise.

A thank you to ARGUS Software, who graciously supplied their proprietary software for use in connection with the Cash Flow spreadsheets for this book. These, among other Appendices, can be found at the companion website, www.wiley.com/go/wealthopportunities. This supplementary material will surely provide you with a wealth of examples to review as you read through the book.

CHAPTER 1An Overview of the Problem, a Solution, and a Game Plan

The Problem

If you are like 99 percent of the people on this planet, you have a problem: Namely, you must work to make money to eat and live.

It is a vicious cycle. You get up at 7:00 a.m., get out the door by 8:00 a.m., arrive at work at 9:00 a.m., push paper around all day, and leave at 5:00 or 6:00 p.m. You follow the same routine day after day. Your net pay is, say, $70,000 per year, you give 20 to 25 percent away to Uncle Sam, and your annual living expenses eat up the remaining money. The net result at the end of the year is no savings—zero, a goose egg, nada.

The next year you get a big promotion and an accompanying raise of 5 to 10 percent (if you are lucky). You have been waiting all year for this big raise. Your family has grown from husband and wife to husband, wife, and baby, and now you are expecting your second child. All year you have been putting off buying the new, latest and greatest big-screen television system and the much-needed trip to Hawaii, not to mention replacing that overused, tired Acura with a new Mercedes. What do you do to satisfy these pent-up demands? How do you satisfy these desires that have driven you for the past couple of years? The answer is that you move out of that cramped 1,500- to 2,000-square-foot apartment into a “decent” 3,000- to 4,000-square-foot home with a real backyard, you buy on credit the big screen “deal,” you take the family on the long-delayed vacation to Hawaii, you lease a new car, and so on. The point is that you find a way to spend your increased wages and, with inflation, you are back in the same breakeven position you were in when you started a year ago, or even worse, since you have significantly increased your debt position.