Residential/Commercial Transition

From the

Frying Pan into the Fire

Presenter – Roger Frost

How will the day progress!

Breaks – lunch, potty etc

Methodology

Getting to know each other

Who are we all

• Name• Company• Why are you here? i.e. what do

you want to get out of the session.

Roger Frost

• President of Crown Realty LLC

• Ditto Crown Capital

• Ex Academic

• Ex Corporate Executive

• One-time sailor

GOALSTo obtain a clearer

understanding of what commercial real estate is about so you can better serve your clients

To begin to develop a network of like minded folks so as to better serve your clients.

It’s not about you!

• IT’S ABOUT YOUR CLIENTS!

What is Commercial Real Estate?

Anything you can’t (legally) live in.Technically any residential property over

four units.NOTE: a portfolio of SFH used as rentals

is NOT considered commercial RE by HUD and thus Lenders.

Types of Commercial RE

• Multi-family Fairly stableMany “tenants” –

spreads riskHighly regulatedFinancable – if pencilsPossibly

Condominiumizationable

Various sizes

Types Continued:

•

Office

• Fairly stable

• Single user to many tenants

• Good financing

• Condominiumizationable

Types continued: ……

• Hotels

• Flagged – unflagged• Location – very important• Investment grade – sometimes.

(How do hotel chains hold real estate? Answer – many don’t)

• Financing OKish• Various formats – condo hotels

etc

Types Continued:

• Industrial • Special Purpose – often very.

• Small market

• Convert to ??????

Types Continued:

•Health Care

• SNFs

• ALFs

• Hospitals

• Hospices

• Drug Rehabs

Types Continued:

OTHERS

• C-Stores: Environmental issues especially with gas stations attchd

• Churches: and other Religious property

• Agricultural: Farms, forests, woodland etc

• Other Land: Development etc

• Marinas:

• Other: ????

Types by Another Cut

•LOCAL: - SMALL STUFF FOR LOCAL FOLKS

•REGIONAL: I.E. LIKE State Wide

•NATIONAL: FOR THE BIG BOYS

Why is Geography Important??

• Because ……..?

• ………. Licensing becomes an issue.• ………. Marketing becomes an issue.

YET ANOTHER CUT …

• Owner / User• Multi-tenant• Investment

– Triple net leases: WALGREENS EXAMPLE– TICs ???????Tenants in Common – similar to fractional

ownership of residential property.(ISSUE – who sells – real estate brokers or investment advisers?)

Aside Stage Left for a moment …

General Growth Properties – todays Washington Post

Circuit City

NOT ONLY BUT ALSOSpecial Purpose VS General

Special purpose appeals to narrow market, specialized use like assisted living facilities, factories etc

General commercial real estate appeals to wide market – like apartments or offices.

Issues for all commercial real estate!

• Value – both for listing and purchase• Third party reports• Financing• Listing• Contracts• MarketingThis is what we’ll be covering today!

WHAT IS “VALUE” ?

Some form of measurement of worth NO SUCH THING AS “INTRINSIC VALUE”!!!!

Value is purely in the eye of the beholder

Today’s problem is no-one knows how to value things – houses, commercial real estate, toxic assets etc.

Exercise – Valuing a Golf Course!

Value Contd. - Commercial Appraisals

What is an MAI appraisal? Review examples Assumptions Exposure time Different value parameters

a) Income capitalization approachb) Sales comparison approachc) Cost approach

Components of Commercial Value

Real PropertyFF&E

Business Value=

TOTAL MARKET VALUE(As Is)

QUESTION: What does a Lender lend on????

Other Third Party Reports

• Phase 1 Environmental: See Example

Who is calling the shots – State and Banks

- USTs

Other Third Party Reports

• Phase 1 Environmental: See Example

• Property Condition Assessment: Example

And now for something completely different!!!

• FINANCING COMMERCIAL REAL ESTATE

Issue # one ---

• Does it Pencil?

OR

How much debt can it support?What’s it’s Debt Capacity?

Debt Capacity Calcs!

• Some terminology:-

- EBITDA – Absolutely NOT profit

Earnings Before Interest, Taxes, Depreciation, Amortization.

It represents the amount of cash available, or the businesses Cash Flow

Debt Capacity Calcs!

• Some terminology:-

- EBITDA – Absolutely NOT profit

- DSCR -

Debt Capacity Calcs!

• Some terminology:-

- EBITDA – Absolutely NOT profit

- DSCR - Debt Service Coverage Ratio

Debt Capacity Calcs!

• Some terminology:-- EBITDA – Absolutely NOT profit - DSCR - Debt Service Coverage Ratio

This represents the amount of cash available for RE Debt Service.

Who determines the DSCR?Lenders!

Debt Capacity Calcs!

• Some terminology:-

- EBITDA – Absolutely NOT profit

- DSCR - Debt Service Coverage Ratio

- Rate – Interest Rate.

Debt Capacity Calcs!

• Some terminology:-- EBITDA – Absolutely NOT profit - DSCR - Debt Service Coverage Ratio- Rate – Interest Rate. - Term – When does it balloon- Amortization period – if fully amortized.

Calculating Debt Capacity

Going through the numbers

Key Formula for Debt Capacity:-

Available cash (per mnth) divided by monthly payment on $100,000 loan

times 100,000

Listings!

Nothing particularly different!•Special Contract for land

•All disclosures etc needed

Listings!Nothing particularly different!

But Wait ‘till be go to the next page!!!!!

MAKING AN OFFER!

• LOIs

• Letter of Interest• OR

• Letter of Intent.

See Example

Contract to Purchase.

• State ones non-existent or useless

• Get Your lawyer to do one for you.

Marketing your Commercial Listing!

MLS Pretty Useless – blasphemy!!!For sale offering – Riverdale

exampleE-Mail Flyers – getting your e-mail

addresses.Internet – Loopnet, Netlist etc.Signs – very important especially

for local deals.

ANY QUESTIONS?

I’ll Try to Answer them

That’s all Folks!

I hope: You enjoyed the

sessionLearned somethingAnd can now better serve your clients