More Related Content

Slideshows for you(20)

Similar to Investing in Commercial Property (Series: Real Estate Investing 101 - 2020) (20)


More from Financial Poise(20)


Investing in Commercial Property (Series: Real Estate Investing 101 - 2020)

  1. 1
  2. 2 Practical and entertaining education for attorneys, accountants, business owners and executives, and investors.
  3. 3 Thank You To Our Sponsors
  4. Disclaimer The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 5
  5. Meet the Faculty MODERATOR: William McGuinn - Sugar Felsenthal Grais & Helsinger LLP PANELISTS: Tracy Treger - Syndicated Equities Biff Ruttenberg - Atlas Partners Jason Doran - Momkus LLC 6
  6. About This Webinar Investing in Commercial Property Before taking the plunge into commercial real estate investing, one should have a clear understanding of how to select the right location, preferred type and class of property, what due diligence to do, how to secure financing, how to negotiate a deal, and how to manage the property going forward as a commercial landlord. This Financial Poise panel explains the process from looking for the investment, to contract, to closing, and beyond. 7
  7. About This Series Real Estate Investing 101 Real estate has always been a popular asset class for investment. After all, as the adage says, “they’re not making more of it.” More and more investors are turning to real estate as an investment class. Investors considering making an investment in real estate have a variety of choices: retail, office buildings, industrial, raw land, and, of course residential. This Financial Poise webinar series covers several types of real estate classes that one may choose to invest in, explaining where to look for opportunities; how to diligence them; possible funding solutions; and best practice for execution. Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and executives without much background in these areas, yet is of primary value to attorneys, accountants, and other seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes. 8
  8. Episodes in this Series #1: Investing in Residential & Multi-Family Real Estate Premiere date: 2/18/20 #2: Investing in Commercial Property Premiere date: 3/10/20 #3: Investing in Real Estate through Equity Crowdfunding Premiere date: 4/14/20 9
  9. Episode #2 Investing in Commercial Property 10
  10. Choosing Commercial Property Why choose commercial real estate/property for investment and what do we mean by “commercial Real Estate”? 11
  11. Defining Commercial Property • Multi-family • Industrial (single vs. multi-tenant) • Office (single vs. multi-tenant) • Retail (single vs. multi-tenant) • Hotel • Land 12
  12. Sources of Equity • Individuals • Joint Venture Partners • Broker Dealers • Crowd Funding 13
  13. What to Expect • What can an investor expect from the various property types? 14
  14. Property Considerations • What are the biggest risks associated with different classes of commercial real estate? 15
  15. Economic Due Diligence Tips • Determine market rates for similar properties in same area • Determine vacancy rates in area • Determine costs for repairs/painting and maintenance • Estimate operating costs  Fixed expenses – obtain copy of seller’s insurance policy, property tax bill, utilities bills, management company bills  Variable expenses – obtain property’s financial statements & compare to actual invoices. Consider cost to eventually replace roofs, HVAC, etc. 16
  16. Key Considerations • Tenant turnover • Collections • Maintenance • Potential for appreciation  Discounted price  Fixer upper  Rezoning potential 17
  17. Expenses to Consider • Advertising • Cleaning and maintenance • Commissions paid to rental agents • Insurance premiums • Legal fees • Mortgage interest • Taxes • Utilities • Management fees 18
  18. Acquisition Costs • Transfer taxes • Title insurance • Loan fees (tax and insurance escrows) • Move in- move out fees 19
  19. Key Contract Provisions • Contingencies – inspections and attorney review • Tax proration – make sure you understand local taxes, payment and reassessment dates • Seller reps and warranties • Required condition of title • Default and remedies • Amount of Earnest Money required and who holds • Proration of Rents and assignment of Security Deposits • Assignment of leases and collection of rents following closing  Need to understand all provisions of leases in place and any surviving contracts 20
  20. Title and Survey Considerations • Boundary line issues – (Insured over by title?) • Easements (must be reviewed and understood) • Liens - should be released at closing • CCR – covenants, conditions and restrictions of record – should be reviewed and understood • Any applicable maintenance issues. • Tax status. 21
  21. How to Take Title • Personally? • LLC, Partnership or corporation  Advantage is limitation of liability to assets of the entity  Holding title personally is never recommended  Lender issues with holding in an entity 22
  22. Managing • Deciding between self-managing vs property manager • Factors include size of building, number of tenant, location, management experience • Property managers generally provide owners with expertise in both securing tenants and maintaining the property that owners may not have • Downside - fees 23
  23. Financing • Commonly based on property’s ability to generate income as opposed to buyer’s credit • Sometimes such investing is encouraged through favorable financing regs • Leverage – pros and cons  Amount of equity invested can change risk profile 24
  24. Cap Rates • If you collect $1,000,000 in rents and other income (i.e. vending machines, satellite tower) and pay $600,000 in expenses (excluding major capital expenditures), your “Net Operating Income” is $400,000 • Once you have the NOI, divide the price or value of the property into it. For example, if you have $400,000 in NOI, and you paid $4.8 million for the property, the Cap Rate is = 8.33%. 25
  25. Generating an Operating Proforma • Revenue: Rent and other income (parking, utility/tax reimbursement, etc.) • Expenses: Property Taxes, Insurance, Repairs & Maint., Turnover Costs (leasing & make ready), Landscaping, Utilities, Contract Work, Legal, etc. • Net Operating Income: Revenue less Expenses (NOI: Purchase price creates a cap rate value) • Financing Expenses: Interest, Principal, Reserves • Capital Expenses (roof, windows, appliance replacement, major repair, etc.) • Cash Flow: NOI less financing costs and Capital Items – when created for a predicted investment hold period, a DCR analysis can be completed. 26
  26. Cash on Cash Return • If you have a mortgage, your return isn't the money you collect in your NOI. It's what you have left after making your mortgage payments • To calculate your after-debt return, called a cash-on-cash return, you divide that net cash flow by your down payment. If you put $700,000 down on that $2.4 million property, you would owe $1.7 million • If your annual debt service was $130,000, and you took it out of the $200,000 NOI, you would end up with a $70,000 annual cash-on-cash return • When you relate the $70,000 to your $700,000 down payment, you would end up with a 10 percent cash on cash return 27
  27. Alternative to Cap Rate • A Discounted Cash Flow analysis assumes an investment for a period of time, and discounts it back at an investment rate. This can be analyzed as an IRR or Net Present Value. Ignoring the NPV for now, the IRR allows one to determine the return of an investment over a period of time. The calculation includes the initial investment, a projected end value for the investment and all of the distributions in between. While it has some faults, it can be a more accurate tool than a cap rate. 28
  28. How Do You Calculate NOI? Net Operating Income Formula: Potential Rental Income - Vacancy and Credit Losses Effective Rental Income + Other Income Gross Operating Income - Operating Expenses Net Operating Income 29
  29. Indirect Investing • Investing in a fund/with a syndicator • Advantages/drawbacks to indirect investing • How to evaluate your fund sponsor/REIT/syndicator 30
  30. About the Faculty 31
  31. About The Faculty William McGuinn - Bill’s real estate practice extends to the acquisition, development, sale, leasing and financing of commercial, office, residential and retail properties. In his affordable housing practice, Bill has represented owners and developers of thousands of housing units in numerous states with multi- layered financing including taxable and tax exempt bonds, low income housing tax credits, HOPE VI, Community Development Block Grants, Neighborhood Stabilization Program funds, Tax Credit Assistance Program and Tax Credit Exchange Program. Bill has also represented developers of conventionally financed projects, both residential and commercial. He also guides buyers and sellers, landlords and tenants through all aspects of their respective transactions. Aside from real estate matters, Bill has worked with numerous closely held businesses on a variety of matters including representing business in obtaining credit facilities, structuring start-up organizations and the purchase and sale of a number of business entities. Bill is an avid sailor and participates annually in the Chicago Yacht Club Race to Mackinac. Bill has also competed in the Transpac, racing from Long Beach, California to Honolulu, Hawaii. 32
  32. About The Faculty Tracy Treger - Tracy Treger is Principal at Syndicated Equities. Tracy helps high net worth individuals and family offices to profitably invest in real estate. She also assists investors in identifying appropriate replacement property to complete tax-deferred exchanges under Section 1031 of the Internal Revenue Code. Drawing upon her 20 years of legal experience in the areas of real estate, bankruptcy and corporate restructuring, finance, and commercial law, Tracy seeks out opportunities to improve the relationship between Syndicated Equities and its investors, to cultivate new investors, and to identify new investment opportunities and align them with investors’ goals. Tracy joined the Syndicated Equities team in 2013 after serving as vice president and assistant general counsel for a private REIT, where she handled all legal aspects of the company’s daily operations and its joint venture relationships in the U.S. and Mexico. Prior to working with the REIT, she was a partner in two large Chicago-based law firms with national and international practices. Tracy holds a B.A. in Psychology and an M.S. in Psychological Services from the University of Pennsylvania, and a J.D. from Chicago Kent College of Law. She is a committee chair for CREW Chicago, and actively serves on the Global Advisory Committee, Foundation board, and regional board of the Anti-Defamation League (ADL). 33
  33. About The Faculty Biff Ruttenberg - Biff Ruttenberg has 48 years of retail development, redevelopment, management, and leasing experience. His real estate background, including mortgage banking, construction, real estate brokerage and lending experience, has contributed to Mr. Ruttenberg’s years of successful business projects and relationships. He holds a BA from the University of Pennsylvania and an MBA from the Kellogg Graduate School of Management at Northwestern University. He is the president of Atlas Partners, LLC, a real estate services firm focusing on consulting to asset- based lenders, institutions and other users of commercial space. It specializes in workouts, turnarounds, dispositions, and maximizing the value of difficult properties. The company’s registered slogan is "The real estate department for companies that do not want to be in the real estate business...but are."® Affiliates of Atlas Partners also acquire distressed debt and operating businesses. To read more, go to 34
  34. About The Faculty Jason Doran - Jason A. Doran was born in Park Ridge and was raised in Bolingbrook, Illinois. After studying for two years at Lewis University in Romeoville, he completed his undergraduate studies at Northern Illinois University, graduating from its School of Business in 1996 with a Bachelor of Science degree in Marketing. After graduation he worked for a few years at AAR Corporation in Wood Dale Illinois before attended law school at Northern Illinois University. He earned his Juris Doctor with honors (Cum Laude) in 2001. Jason was admitted to practice law in the state of Illinois in November of 2001. In January 2002, he was admitted to practice in the United States District Court of the Northern District of Illinois and in 2010 he was admitted to practice before the United States Supreme Court. His practice is concentrated in estate planning and estate administration, commercial real estate (including "work outs" (forbearance, foreclosure, short sale, and deed-in-lieu agreements)), business transactions, and general representation of business entities and their principals. In the beginning of his career Jason was a litigator with a firm in Aurora, Illinois, and he brings that experience as an invaluable tool in assisting his clients in his current practice. 35
  35. Questions or Comments? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 36
  36. About Financial Poise 37 Financial Poise™ has one mission: to provide reliable plain English business, financial, and legal education to individual investors, entrepreneurs, business owners and executives. Visit us at Our free weekly newsletter, Financial Poise Weekly, updates you on new articles published on our website and Upcoming Webinars you may be interested in. To join our email list, please visit: