Search Results for "commercial leases"
Getting Started in Commercial Real Estate on Your Own And Without the Sales Pitch
Posted by: | CommentsGreetings! My blog just got hijacked. I wonder how that happens…..well….I guess the bright side is that the “blog terrorist” felt this blog was getting enough traffic to hijack. Well….for those of you that had to endure the nonsense….I apologize. I wish I could tell you it would never happen again…but then…I am not sure how it happened in the first place.
Anyways….
One of the biggest lessons I have learned in my limited time in real estate investing is that the people to learn from are those with real experience. As with many of you, I started with books and “boot camps”….and in some cases that works well with residential investing. But with commercial real estate, the stakes are much bigger and the learning curve is much steeper. But the “gurus” don’t tell you that.
My biggest mistake was I did not research the people I was learning from. Learning how to invest from a “guru” that had limited experience with commercial real estate was a big mistake. Even more of a mistake was learning from gurus who were using other people’s experiences and successes as their own to sell their program. Yes…this happens a lot more than we think.
Luckily, I was so hardheaded and ignorant, that I took the information with confidence and pushed through. Sometimes you can push so hard that you take down a wall. Fortunately, at the time, it was the right wall. But, with that said, there were a lot of mistakes that only guidance from experience professionals could have helped me avoid.
Now…what I am NOT saying is…”it takes years of experience to start investing in commercial real estate.” That is not what I am saying at all. But….what it does take is the correct education and guidance. Honestly….this is the best way and your success can be realized much faster than you think or what others tell you.
So…you are probably expecting a sales pitch here….but on the contrary, here are some tips on how to get started on your own….that is right…. how to get started without a flashy package and a smooth talking guru….
Rob’s thoughts are ideas on getting started in commercial real estate:
1) Keep your money for now. Thinking about spending 2K, 5K, 10K on a good looking”how to invest in ……” package where the marketing says “20K in value…but for a limited time….only $4,999.00 you can have the plan to wealth…and my personal phone number.” When you hear that….tighten up…have a cup of joe….and remember my words here…KEEP YOUR MONEY.
2) Buy a good book on commercial real estate. Don’t buy a book from a “guru” where all the information in the book is to push you to a boot camp. Now…there are good books out there that are trying to sell you something, but they give you a lot of value too. One of my favorites is Investing in Commercial Real Estate for Dummies by Harris and Conti. A great book in explaining the basics. Another of my favorites but will bore you to tears is The Handbook of Commercial Real Estate Investing by John McHan. The importance of reading up on commercial real estate is to see if you even have a true interest. If the books above get you excited, you may have commercial real estate in your blood.
3) Take a Real Estate Licensing class. I recommend Kaplan based on my experience. The licensing class does not mean you have to get a license. It is a good course to get you familiar with the laws, codes, etc., in your area for not only real estate but property management as well. I learned a lot in my licensing class. More than I thought I would. But I also learned that one of my instructors had no clue about commercial real estate….just residential 
4) Take the Certified Commercial Investment Member (CCIM) courses. This is the boot camp you want to attend. Yes…it is somewhat expensive and time consuming. There are four classes and each class lasts five days. But, if commercial investing is where you want to be, this is the course you want to take. This will help you analyze projects at depths you had no idea existed. You will also learn how to do demographic studies, leases, etc. Plus the networking at these courses are invaluable. When you finish all the courses, you will have an opportunity to get certifed but you will have to meet some strict and demanding guidelines just to qualify to take the final test. But…I digress.
5) Find a friend, make a friend. Find someone in your local area that is successful at doing what you want to be doing and follow their lead (also known as modeling). This is by far the best advice I can give you. If you have a great interest in commercial real estate, finding someone who is a success at it is the best thing you can do for yourself. This may take some time and it is uncomfortable at first….but well worth it. Chances are this person/mentor will be a real estate agent/broker/CCIM investor.
If you do all the above and still want to go to a smooth talking guru…..by all means….but I definitely went full circle starting out with gurus and ending up with the “right way.” Real experience from real investor is by far the best way to find success in commercial real estate.
Until next time…..rob
Due Diligence Check List for Commercial Real Estate
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Due Diligence Process
Level 1
Financial
• Current rent rolls
• Operating and capital budget
• Operating statements YTD or 12 months running (certified)
• Discrepancies between rent roll and actual occupancy
• Unit mix or certified square footage
o Respective rents
• Existing financing or liens on property
• Check of value
o Cap rate
o Cost/Unit
o Cost/Sq Foot
o Gross Rent Multiplier
o Replacement Cost
• Understand staffing costs
o All current employees
• Name
• Job title and description
• Pay rate
o Benefits
General
• Physical confirmation of property conditions through site walkthrough
• View all vacant spaces to determine what capital would be required to induce a
new tenant
• View all common areas and base building areas
• Interview management team, leasing personnel, handyman (scope of work,
employee or contract labor, rate)
• Machinery/Equipment
o Office Equipment
o Maintenance Equipment
o Tools
o Vehicles
o Other
• Supplies
Physical
• Physical confirmation of property conditions through site walk through
• Property zoning classification
• View all base building areas, all floors, central plant, roof, exterior wall
• View all areas of building exterior and interior common areas
• Walk property line, photographs
• Night Inspection
o Security and lighting
• Review all architectural and engineering documents related to property
• Street size, congestion, condition, accessibility into property
• Biggest recurring maintenance problem
• Vacant sites on property (potential to expand existing property)
Level 2
Financial
• Add: Rent rolls, Operating Statements (certified), Capital Expenditures past 3
years
o Operating Income statements for past 3 years
o Balance sheet statements for past 3 years
o Tax returns for past 3 years
o Chart of accounts
o Accounts Receivable:
• Rents (Rate, due dates, history)
• Misc. Income sources
• Home sales, leases, rent/lease option, notes, contracts
• Bank accounts, deposits, other financial assets
o Accounts payable:
• Purchase orders
• Open/credit accounts
• Petty cash
• Notes payable
o Approved vendors
o Contracts
• Copies of every lease on rent roll
o Include names, addresses, current amount, deposits, rent history, estoppel
certificates, late fees, NSF, collection)
• Schedule for rent increases
• Estoppels from no less than 75% of tenants in commercial building, including
ALL tenants expiring or renewing in next 3 years and ALL tenants leasing over
10% of the building area
• Determine if any change in property taxes (Do taxes break out cost of land?)
• Pull original land purchase price on project
• Understand all transaction costs
o Real estate commission, if any
o Legal fees pursuant to transaction
o Accounting fees relative to financial statement review and pro forma
preparation
o Possible acquisition fee if an advisor’s services are utilized
o Title-related costs (insurance)
o Mortgage costs (points and closing fees)
o Appraisal
o Inspection
o Engineering reports/survey
o Environmental study
• Recalculate:
o Cap rate
o Cost/unit
o Cost/sq ft
o 1st year cash-on-cash
o 1st year total ROI
• Investigate financing possibilities
General
• Thorough understanding of the workings of the property under current setup
o Policies/procedures Manual
o Move in & move out procedures
o Existent files for residents, vendors, etc
o Emergency notebook
o Leases (written or verbal)
o Deposits/administrative fees
o Software used including maintenance and support
o Office supplies
o Forms/letterheads
• Interview all tenants on estoppel list to confirm information provided by seller
o Ask about problem areas—Management, physical property/structure, etc
• Delinquent units
• Confirm all information received against information developed through
investigation
• Develop a trust quotient with Seller
• Name and contact info for existing Insurance agent and coverage
o Copy of existing policy
o Workmen’s comp, liability, bond, hazard
• Local commercial agent
o What do apts sell for
o What are current rents
o What would comparable structure sell for
o Sales info for other groups in same area
o Average per capita of storage square footage
• Local residential agent
• Look into local advertising
o Current yellow pages cost
o Yellow book
• What percentage of competitors are in Yellow book
o Other avenues
• Local transactional real estate attorney
• Local Industry contacts i.e. Applicable associations
• Location of local:
o Post office
o Bank
o Schools
o Stores
o Employers
o Public Transportation
• Local rent survey, average rates for standard units
o Last 2 completed by Seller
o Over last 5-10 years if possible
o Check local newspapers for ads, etc.
o Local telephone directory and Yellow book for ads
o List of local competing retailers
o Evaluation Seller’s currently used ads, signage, brochures, etc.
o Chamber of Commerce packet
o Verify occupancy, rates fees charged, security systems
o Phone call and physical visit to each competing property (See
supplemental “Market Study” form)
• Pictures if permissible
• Interview managers
• Name of off-site management company
• Need copies of permits:
o All city and county permits
o Storm water management permit
o Consumption use permit
o Water supply permits
o Pool, Jacuzzi, etc.
• Learn about local laws
o Leases
o Evictions
o Regulation
o Licenses
Regulatory Agencies
• Board of health
o Copy of license
o Property records
o Pool and Jacuzzi reports
o Violation notices, if any
• Building department
o Talk with inspector
o Planning for other similar projects
o Ease of permitting
o Name of good roofer
o Name of good inspection company
o Building costs
o Name of good appraiser
o Certificates of occupancy
o Permits in force
o Local codes
o Known violations and records thereof
• Engineering Department
o Drainage information
o Local soil maps
o Proposed area improvements and related assessments
o Impact fees
o Utilities concerns
• Sewer, water, electrical and gas
• DER-EPA (Dept of Environmental regulation and environmental protection
agency)
o Wastewater treatment plant discharge permit
o Effluent testing results
o Flow records
o Treatment plant violations
o Domestic water supply permit
o Domestic water test results,
o Domestic water violations
o Domestic water flow records.
• City Planning—talk to senior planner
o Current new building permits for projects under development
o Path of development
o Floodplain maps
o Impact fees?
o Barriers to entry
o Ease of permitting
o Zoning in 4 mile radius
o Zoning in our area
o Special zoning?
• Map
o Thoughts of over-building of ________(student housing, self storage, etc)
• Tax assessors
o How much will property taxes be after sale
o How often do they reassess
o Name of good appraiser
• Better business bureau
• Chamber of commerce
o Growth statistics
o Boom bust economy
o Typical job types
o Projected growth areas
o Path of development
• Register of Deeds (or possibly a title company)
o Property ownership
o Eases and Encumbrances
o Legal description and acreage
Utilities
• Copies of meter record for both treatment plant and water supply wells
o Sewage treatment plant and water supply records
• Approvals for water sanitary collection system
• Approvals for domestic water distribution system
• Utilities Department
o Sewer and water rates
o Tap-in fees
o Impact fees
o Sewer and water capacity requirements
• Utilities commission
o Rules, regulation and status of utility
• Drainage district
• Name and contact info for gas and electric utility company
o Types of approved units
o Who owns and maintains
• Name and Contact info for telephone company
• Trash collection
• Name and contact info Cable television
o Who owns system
o Who maintains system
o Who invoices users
o Existence of a formal agreement between property and cable company
• Can it be renegotiated
Physical
• Professional contractor inspection
• Maintenance
o Evaluation
o Deferred maintenance items
o Obsolescence (how/why)
• Night Inspection
o Security and lighting
• Street plans with utilities identified
• Roof condition
• Boundary survey including all easements and encumberances
• Retrieve air quality samples
• Drainage type and adequacy
• Sewerage handling and adequacy
• Irrigation system
• Floodplain presence
• Vegetation and maintenance
• Environmental issues
• Inspect all maintenance records and interview supervisors in charge of critical
areas
• Receive copies of all documents related to mandatory inspections ADA/TDLR
compliance, ACM inspections, etc.
• Develop 5-10 year Capital plan for property, price projects, schedule out
o 2 Bids on cost of major improvements
o Cost for installing security, alarms, video
• Research any problems with elevators, other equipment
Fire/Life safety system status
• Type of building structure, any below grade levels, soil type
• Type of building cooling and heating systems
• Vertical transportation systems
• Type, age, and condition of roof (warranty)
• General assessment of leaks and exterior wall condition
• Elevators up to ASME A17.3 standards (Texas)
Red Flags
• Seller balks at providing records or access as committed in contract
• Stained ceiling tiles around the perimeter of the building (or shrinking
gaskets/joint failure)
• Dirty mechanical and electrical closets
• Poor maintenance and inspection records
• Financial records or estoppels not available
• Significant error in process or accounting