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Are You Focused on Commercial Real Estate?

By Rick Tobin

Earlier this year in January, economists from the International Monetary Fund claimed that commercial real estate prices had fallen at the steepest pace in more than 50 years. As we now approach the fourth quarter here in 2024, the price drops have escalated and only worsened for property owners. Now, we might be seeing the worst commercial property price declines in U.S. history.


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Approximately 20%, or $929 billion, of the $4.7 trillion dollars’ worth of outstanding commercial mortgages owed to lenders and investors may balloon or become all due and payable by the end of 2024, as per the Mortgage Bankers Association’s 2023 Commercial Real Estate (CRE) Survey of Loan Maturity Volumes.

Between 2024 and 2028, upwards of $2.81 trillion in commercial loans are scheduled to come due and need to be paid off or refinanced, according to Trepp. Within this same analysis provided by Trepp, they project that more than $533 billion will balloon or come due in 2025. The largest commercial mortgage holders for these commercial mortgages coming due are regional banks and thrifts that hold over half of these maturing loans through 2028.

Commercial Real Estate Trends

Let’s take a look at both positive and negative commercial property trends across the nation in recent years:

  • The estimated total dollar value of commercial real estate was $22.5 trillion as of Q4 2023, which makes it the fourth-largest asset market in the nation following stocks or equities, residential real estate, and Treasury securities. (Federal Reserve’s April 2024 Financial Stability Report),
  • By 2050, commercial building floor space is expected to reach 124.3 billion square feet, a 33% increase from 2020. (Center for Sustainable Systems, University of Michigan)
  • 72% of commercial buildings in the US are 10,000 square feet or smaller. (National Association of Realtors)
    The typical length of a building lease in the US is three to 10 years. (DLA Piper)
  • Approximately 69% of all commercial buyers in the US need financing to purchase properties. (National Association of Realtors)
  • As of July 2024, the national office vacancy rate reached a whopping 20.1%. This was the very first time ever that the U.S. vacancy rate surpassed 20%. (CommercialEdge)
  • In 2024, the U.S. apartment construction industry is expected to break a new all-time record for apartment units delivered with well over 500,000 units completed, which is 30% higher than back in 2022. (Fannie Mae)
  • An estimated one-third of industrial space in the US is more than 50 years old. (NMRK)
  • The Inland Empire (Riverside and San Bernardino counties) in California had averaged an incredibly low 1.2% vacancy rate for industrial space in 2021 and/or 2022. (Commercial Edge)
  • However, vacancy rates for industrial properties in the Inland Empire skyrocketed to 6.8% by Q1 of 2024, a 400-basis point vacancy rate increase compared to 2023. The Inland Empire now has the second highest vacancy rate for industrial properties on the West Coast, behind only Phoenix. (Kidder Matthews)
  • Nationally, the industrial real estate vacancy rate reached 6.1% in the first half of 2024. (CommercialEdge)
  • For every $1 billion of growth in the e-commerce sector, it requires an extra 1.2 million square feet of new warehouse space. (Prologis)

Is Multifamily Strong or Not?

In many U.S. regions, the multifamily sector is very strong partly since so many tenants can’t afford to buy homes nearby that are currently priced at all-time record highs. In other regions, multifamily apartment landlords may be struggling with significant financial losses.

The multifamily apartment mortgage default rate has quadrupled over the past year, according to Freddie Mac. Last year in 2023, this year in 2024, and through at least 2025, more brand new apartment units will be completed and available for lease than at any other time since as far back as 50+ years ago in 1973.

Multifamily apartment landlords across the nation are defaulting on their mortgages with decade-high rates in states like California, Texas, Florida, and elsewhere.

Some of the main factors why multifamily apartment mortgage default rates are rising are as follows:

1. The owner’s existing mortgage rate may have increased by 100% or more after their previously 3-year, 5-year, 7-year, or 10-year fixed rate converted to a new adjustable rate at today’s much higher mortgage index. As a result, the once positive monthly cash flow turned negative due to the higher mortgage rates and payments.

2. Rising vacancy rates as fewer tenants could afford rapidly increasing rents in many of these apartment building locations found in various metropolitan regions.

3. In other regions, the vacancy rates had increased so much that landlords had to drop their rent prices which, in turn, turned monthly profits into losses.

4. Skyrocketing costs for various types of landlord insurance or umbrella insurance policies as well as increased litigation costs from unhappy or injured tenants.

The multifamily market is projected to add or deliver another 574,000 new apartment units in 2024 alone, according to an analysis shared by the CoStar Group. As a result, future rent prices may start falling as the available supply exceeds the demand.

Upside-Down Office Buildings

Almost 45% of all office buildings nationwide that are leveraged with debt are upside-down or underwater where the existing mortgage debt exceeds the current market value, according to sources like ZeroHedge, Bloomberg, and Morgan Stanley. Some office buildings are now selling for as low as $9 per square foot, not $900/sq. ft.

An eye-opening example of how massive some of these commercial property prices have plunged was the recent April 2024 sale of the 44-story AT&T Center office building in St. Louis, Missouri. Back in 2006 near the previous real estate bubble peak, the same building sold for $205 million dollars. In April, this property sold for just $3.6 million, which was a staggering 98% value drop.

Some savvy investors who purchase these discounted office buildings may choose to convert them into multifamily apartment buildings if the remodel and rezoning costs aren’t too high. Are you seeing heavily discounted office building deals in the areas where you live or invest as well?

Two of the main causes for falling residential and commercial real estate values are related to rising unemployment and upside-down properties as more people may soon clearly see, sadly.

All-Time Record Consumer Debt and Defaults

The ability to pay rent or a mortgage payment is directly related to access to cash and credit for most people. When times are more challenging and the employment or investment income is either lower or nonexistent, many people choose to access their credit cards to make their monthly payments. Once the credit card limits are reached, some tenants may not be able to pay their rents.

There is not a single state in the U.S. today with less than a 10% credit card delinquency rate for their residents as credit card APRs are near 28% to 40% in 2024, depending upon the credit card issuer and the borrowers’ creditworthiness .

Back near the depths of the Great Recession in April 2009 when credit card rates were closer to 12%, the national credit card delinquency rate was only 6.77%.

Highest Credit Card Defaults

By state, here is the percentage of consumers who are delinquent on one or more accounts:

* Mississippi – 39%
* Louisiana – 32%
* Alabama – 31%
* Arkansas – 30%
* Oklahoma – 28%
* Kentucky – 28%
* South Carolina – 27%
* Tennessee – 26%
* Texas – 25%
* West Virginia – 25%
* North Carolina – 24%
* Indiana – 24%
* Georgia – 23%
* New Mexico – 23%
* Missouri – 22%
* Arizona – 20%
* Nevada – 19%
* Wyoming – 18%
* Oregon – 17%
* California – 15%
* Florida – 15%
Sources: Trading Economics and John Williams


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Top 10 Credit Default Cities

Here are the U.S. cities where the largest share of people are behind on their credit cards by at least one payment.
1. McAllen, Texas — 51.7 percent
2. El Paso, Texas — 46.3 percent
3. Baton Rouge, La. — 45 percent
4. Greensboro, N.C. — 44.8 percent
5. Columbia, S.C. — 44.6 percent
6. Jackson, Miss. — 44 percent
7. San Antonio, Texas — 43.8 percent
8. Augusta, Ga. — 43.3 percent
9. Greenville, S.C. — 42.6 percent
10. Memphis, Tenn. — 42.5 percent

Source: LendingTree

Discounted Real Estate Buying Opportunities

Just like following the Great Depression, the Savings & Loan Crisis, and the Great Recession, there were incredible discounting buying opportunities for homeowners and investors who were searching for both residential and commercial real estate deals.

You must continue to stay focused on the opportunities rather than on the obstacles to get ahead in this world. “Out of chaos comes opportunity” as I like to say repeatedly to friends, family, and clients.

If 99 people are running towards the hills and doing nothing, you can be the sole brave and wise person who buys the property for almost cents on the dollar like some of the office building deals. If so, you might create generational wealth for you and your family.


Rick Tobin

Rick Tobin has worked in the real estate, financial, investment, and writing fields for the past 30+ years. He’s held eight (8) different real estate, securities, and mortgage brokerage licenses to date and is a graduate of the University of Southern California. He provides creative residential and commercial mortgage solutions for clients across the nation. He’s also written college textbooks and real estate licensing courses in most states for the two largest real estate publishers in the nation; the oldest real estate school in California; and the first online real estate school in California. Please visit his website at Realloans.com for financing options and his new investment group at So-Cal Real Estate Investors for more details. 


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10 Roads To Real Estate Investing Profits

By Tamera Aragon

“Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.” The Bible – Ecclesiastes 11:2

This is good advice as long as you don’t get so spread out that you are doing too many things but nothing with success. It’s important we understand the fine line between focusing on one real estate niche without putting all your eggs in one basket, (so to speak).

To simplify the terms of real estate investing, there are really only three ways for investors to make money in real estate:

  1. Real Estate Appreciation and Equity
  2. Cash flow while you own it
  3. Assignments: Payment when you flip a real estate contract without owning it.

So where do you start? Let’s try to answer this question on every aspiring real estate investors mind. Since real estate investing encompasses so many types of exit strategies or I like to call profit centers, it’s important to study and pick those you are most passionate about. otherwise called exit strategies.


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The following is a summary of Ten of the Most Popular Real Estate Investment Strategies with their advantages and disadvantages.

1. Rentals or Cash flow Investment Property: These types of investment properties are the ones which generate rental income. These are mainly apartment buildings and rental houses.

  • Advantages: One of the easier ways to get started, and good long term return on investment while also earning monthly income.
  • Disadvantages: Risk of not renting property leaving you with the mortgage payment and no income. Property management can be a challenge. You typically will wait awhile to sell your property so payoff is slow.

2. Lease Option. This is when you buy a property, then sell to someone else via a rent-to-own arrangement.

  • Advantages: You get higher rent, and the buyer is usually responsible for maintenance. Cash flow can be good.
  • Disadvantages: Most rent to own buyers don’t complete the purchase (this can be an advantage too, but it does mean more work for you). Bookkeeping must be done properly and can be complicated.

3. Fixer Upper Investment Property. These types of investment properties are the ones which are in ugly condition and need renovation. These properties can be acquired to flip after fixing-up quickly or held to rent out.

  • Advantages: You can receive a quick return on your investment (months). You usually get below market value pricing on properties bringing you instant equity.
  • Disadvantages: Higher risk. (Many unpredictable expenses come up in construction). You get taxed heavily on the gain when you sell in under a year.

4. Vacant Land. Many options including just holding while appreciating. You can also split it and sell it.

  • Advantages: History has shown that land always appreciates in value (it’s the buildings on the land that go down. It is simpler than most real estate investments, with the possibility of great profits.
  • Disadvantages: It can take a long time to increase in value. You have expenses, but no cash flow while you wait unless you sell the contract before closing.

5. Commercial Real Estate. These are any building containing 5 units or over and/or buildings sited for commercial use.

  • Advantages: Long term triple-net leases mean little management and high returns. Lending is usually based on the value of the property vs. personal credit.
  • Disadvantages: Commercial property valuation requires a more complex method, taking into account the income potential of the property. This is recommended for the more experienced investors as there is a lot more involved to set up and maintenance.

6. Buy property with Forced Appreciation. Buy in the path of growth and holding until values rise. For instance buying a lot in a residential development prior to roads being completed.

  • Advantages: Can yield large profits, especially if you buy low to start.
  • Disadvantages: Future price is not predictable – the market can turn, the developer can go out of business. You have expenses with no income while you’re waiting.

7. Preconstruction Investment Property: These types of investment properties are acquired directly from a developer before the construction or renovation is completed.

  • Advantages: Low money out of pocket to tie up property while being built. If purchased in appreciating markets, you make money in equity at closing and can instantly re-sell at a profit.
  • Disadvantages: You can’t always predict what a market is going to do. If market depreciates, you have lost money. Also higher tax rates in selling quickly.

8. Pre-Foreclosure Investment Property: These types of investment properties are the ones which you buy from sellers who are behind in their payments and may lose their property to the bank via foreclosure.

  • Advantages: You have opportunities to buy properties at below value pricing – “Instant equity”.
  • Disadvantages: Legal liabilities are higher. Finding these properties requires a lot research and footwork to find a deal that works. You can do all the work and still not have a deal with enough equity to profit after expenses to sell, (taxes, realtors, etc).

9. Assignments: This strategy has you get into a property at a discount, preferably with a known buyer in place before you commit to your purchase. After you are in contract to purchase a property, you would sell your contract for a fee to someone else. For example you get into purchase contract to buy a $120K property for $100K. You turn it to an investor for $110K and profit $10K cash without the cost and hassles of ever closing on the deal.

  • Advantages: This is a great way to make quick cash with low or no upfront investment, low risk and fewer headaches from closing and ownership. This strategy creates a win win win outcome for everyone involved.
  • Disadvantages: This will only work if the property you are buying has equity so that you may buy it a discount. In declining markets, this type of property is harder to find. Also when dealing with banks on REO’s or Short Sales you will find they will not allow you assign your contract. However, there are ways to get around this if you plan and handle the contract correctly up front.
    Do you want to know how I have managed to get around not being able to assign a contract? I have purchased properties in the name of an LLC set up exclusively to buy properties. I then sold the LLC to someone, making them the owner of the LLC, therefore making them responsible for closing on the purchase contract and end buyer of the property.

10. Flipping – Wikipedia defines Flipping as is a term used primarily in the United States to describe practice of buying an asset and quickly reselling (or “flipping”) it for profit ..

This description pretty much explains property flipping, with there being a slight difference from that description of flipping assets. In real estate you can get into an agreement to flip a contract you have gotten into before you even buy it. This can be done with ease when you know exactly what your buyers want and with no money out of your pocket utilizing transactional funding. Flipping can also mean closing and quickly reselling your property, sometimes even doing both transactions the same day – this being subcategorized a “double closing”.

  • Advantages: My favorite strategy. You work the deal backwards. You create relationships with buyers who can close quickly with cash. Then you find a property meeting the needs of your buyers. This strategy allows you to profit literally from no money down, with lower risk and very little of your own time.
  • Disadvantages: The law requires you to disclose your intent to resell quickly to sellers. When dealing with banks, this can sometimes cause your offer to be rejected. You must buy properties in the name of an LLC in order to utilize transactional funding. Setting up and maintaining an LLC will cost you money. Though the intent of a buyer might be to close on the transaction, sometimes “life happens” and something causes the buyer to be unable to follow through. You may have to walk away from earnest money if you cannot find another buyer quickly

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Now that you that you have learned strategies to consider, you will need to consider the type of properties you want to go after, developing a marketing strategy to find motivated sellers of those deals. Over the next months I will be sharing steps and strategies on how to profit investing in real estate 12 different ways.

Please leave a comment if you have anything you would like add to what I have written here with the heart to support fellow real estate investors. (Any solicitations for business will not be published) I appreciate the feedback!


Tamera Aragon

Tamera Aragon is a professional online entrepreneur and has bought and sold over 300 properties, establishing her as an expert in the real estate investing field. Since 2003, she has purchased over 10 million dollars in real estate and currently holds properties all over the world. Tamera’s focus is on the booming Foreclosure market, buying Pre-foreclosures, REOs and Short Sales. Tamera who is a noted Author, Success Trainer, Speaker & Coach, shows her passion for helping others with the 17 websites she has created and several specialized products to support fellow investors throughout the world. When Tamara is not busy running her website, she is very involved with her Fiji joint ventures and investments. Tamera Aragon is one of the few trainers and coaches who is really “doing it” successfully in today’s market. Tamera’s experience has earned her a solid reputation in the industry as well as the respect and friendship of many of the top national real estate investment and internet marketing experts. Tamera Aragon believes her success has garnered her the financial freedom to fully enjoy her marriage and spend quality time with her children.


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Breaking Into the Commercial Real Estate Industry

By Vista Capital Solutions

Finding the right place to invest your money is often more challenging of an experience than many people realize. There are risks involved in any investment scenario and it can be difficult to figure out which options are going to yield the biggest results. Though far from a sure thing, commercial real estate is definitely one of the more lucrative areas when it comes to investments. If you think this path might be the perfect fit for your journey, take a moment to review the basics and get a better feel for what to expect.


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Why CRE?

The first question many investors have when presented with commercial property options is why this choice is better than residential real estate. This is especially true in recent years, when the fix-and-flip model has offered first-time investors amazing opportunities. Though advantageous, residential properties are still very limiting in what they can offer an investor. With commercial options, an investor is given an opportunity to see a much bigger return and turn a single piece of property into several recurring points of income.

What Are the CRE Property Types?

The main reason commercial real estate is more appealing than residential options is because it can be used in several different ways. The four main categories of CRE include retail, multi-family housing, office, and industrial. Depending on the location of the property itself, you might want to explore any one of these options. Each choice can produce a number of benefits and challenges, so it is wise to think through the pros and cons before making any final decisions. The main goal is to find a property with several units that can be rented out separately.


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What Are the Key Benefits of CRE?

Investing in commercial properties is advantageous because it allows the investor a chance to see income that lasts for a long while. Residential properties are only designated to be used by one renter at a time. With a commercial property, you can rent each unit out to a different person or group. This creates a number of points of cash flow that you can rely on each month. Many investors use the funds created by these properties to fund future investments and grow their empires. All it takes to get started is some dedicated research.

Finding the perfect piece of commercial real estate takes time and effort. As long as you understand the basics of CRE investments, you will be able to commit to the search and see the best possible results. Vista Capital Solutions offers an array of CRE funding solutions for all types of commercial property transactions and projects, nationwide. Reach out to our offices today to explore your options.


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Risk Associated with Selecting Third Party Vendors

By Dan Harkey

Where does risks begin in commercial real estate lending business?  It begins with your process of hiring highly competent third-party vendors.  Your job is to assemble the most qualified real estate support professionals to eliminate costly mistakes and to ensure the best quality closing.

This includes service providers who originate new loans, process, underwrite, appraise, and eventually close the transaction. This sounds like a broad statement since the process also requires your participation in marketing, to procure the transaction.   Your competency is displayed throughout the process by understanding the borrower’s wants and needs, the loan programs and requirements, property types and characteristics, underwriting skills, geographic locational differences, government regulations, and then hiring professional service providers to match.

  1. Appraiser(s)

It is your responsibility is to identify a well-qualified, licensed, and insured appraiser who is familiar with the geographic location and property type, and various methods of valuation. Hire someone who follows the requirements of Uniform Standards of Professional Appraisal Practice (USPAP). USPAP can be considered to be the quality control standards applicable for analysis and reports for appraisal of real property, personal property, intangible assets and business valuations in the United States and its territories.  A state licensed appraiser must adhere to USPAP standards.  USPAP provides the body of knowledge and performance standards for the appraisal process as authorized by the US Congress (this was part of FIRREA in the early 1990’s and arose from the Bernard Amendment). As noted above, this legislation contains standards for all types of appraisal services, including real and personal property, business enterprises.  It is reviewed annually and revised and updated every two years.  The Real Estate Broker/Mortgage Loan Broker must establish that the appraiser is qualified by license and specific certification to accept the assignment and must be sure the appraiser is state licensed for the type of required appraisal.   This is a mandate by the Bureau of Real Estate Appraisers in California and their equivalent in all states and required in California pursuant to Business and Professions Code Section 10232.6.  In most cases the appraiser must also be approved by or acceptable to the lending source.

The first document you will use is an “order form”, which will document the type of appraisal, by whom and when the appraisal will be paid and “what parties rely on the appraisal”.  If you, as a mortgage broker/lender, are acting as an agent on behalf of private investors/lenders who intend to fund the loan, or you intend to sell or assign the loan following funding the loan with our own capital, then the appraiser needs to be informed that the private investors/lenders have a right to rely on the appraisal report.

You must identify all intended users of the appraisal report or you need to specifically direct the appraiser as to whom the report should be addressed.  To comply with appraisal standards and requirements, and depending on property type, the appraiser will typically conduct a rent survey and an absorption study and will additionally research various market rates for additional indicators such as capitalization rates and discount rates to establish market conditions applicable to a subject property.  In appraising the property, the appraiser typically will research market rents for the property type, research market rent trends in general and analyze historical lease-up or absorption rates for the subject property type.  Depending on the type of subject being appraised the appraiser may also need to include personal property value or may find that the appraisal requires a going concern valuation for an operating business wherein there may be additional value elements such as FF&E, good will or intellectual property.

Choosing an appraiser for a federally insured home loan differs.  It is important to note that neither mortgage brokers, loan officers nor homeowners may select the appraiser for the property on which they want to lend/borrow such funds.  At the current time all such appraiser selections and appraisal orders are handled by Appraisal Management Companies (AMC’s).

“Assumptions and Limiting Conditions” are sometimes thought of as the “legalese” or “boilerplate” of appraisal reports. The “assumptions” relate to the concept of scope of work identified in the appraisal process. The appraiser will lay out in writing assumptions such as the correct legal description, that the zoning is correct for the property use and that the information furnished is true and correct. A “limiting condition” is one that limits the use of the appraisal, primarily by specifying the use and intended users of the appraisal report. That is, who may rely on the contents of the report. However, each assumption or condition must be reasonable and supportable in the context of the appraisal, and not conflict with the “Extraordinary Assumptions or Hypothetical Conditions.”

It is important to review the appraisal section, “Extraordinary Assumptions and Hypothetical Conditions”. This means the appraiser has taken some action or used a method that departs from USPAP standards. The appraiser may have made assumptions that could render the appraisal of little or no value by following outside standards. You may find this when the property is zoned incorrectly for the neighborhood or the property’s intended use, or when comparable are extremely difficult to locate. Some examples of extraordinary assumptions may be: whether all entitlements are complete for a construction project, there is adequate absorption for lease up, that the building conforms to zoning and usage ordinances, that the property construction will be completed timely and on budget, and that there are no environmental concerns.  The appraiser may need to invoke certain hypothetical conditions under some directives by the client.

Extraordinary Assumptions are specific assumptions made and utilized in the development of the estimate of value and which, if found to be false, could alter the resulting opinion or conclusion.  Hypothetical Conditions are assumptions made which are known to be contrary to fact, but which are assumed for discussion, analysis or formulation of opinions.

As a final comment, it is important that you read the entire appraisal. There are issues such as the amount of area vacancy, the applicable capitalization rate, and a discussion regarding verification of zoning or permits that you may want to personally verify. These are not always clear in the first reading. For example, the area vacancy and the application of a capitalization approach may be different in Riverside, CA. than in Newport Beach, CA.

  1. Documentation/ Legal Counsel

I have combined these two together for this reason, some lenders farm out their legal documentation preparation to a third party. Since it is the lender who is responsible for state and federally required documentation, a third party legal counsel or knowledgeable consultant is advised.

Commercial lending is sometimes characterized by loaning to entities such as trusts, corporations, limited partnerships, and limited liability companies. There is a required technical understanding of the laws relating to these entity types, and the documentation differences that each will require. There is another matter of the issue of lien priority. Documentation complexity can be compounded when the issues of lien priority and tenancy are added to the mix. Your borrower may own a property in a family limited partnership, occupy the same property as an operating business which is a corporation, and have other unrelated tenants, who may also own their businesses in different forms of entities.

  1. Escrow Companies

All escrow officers are not alike. A competent, experienced, and highly technical escrow officer is a must. Escrow acts as an intermediary and dual agent, between the principal parties to ensure that instructions and agreements are carried out correctly. The lender’s final closing instructions to the escrow officer should summarize all the conditions that have been met and under what conditions he/she may close the transaction, using the correct title insurance policy and endorsements in place at the recording to ensure lien priority.

  1. Commercial Real Estate Broker(s)

In metropolitan areas, finding a real estate professional who has the background, knowledge and experience of the product type and geographic area is a matter a good referral or inquiry. If the subject property is in a sub market or a rural market, the time should be taken to locate a broker on the front end while the loan transaction is being processed. Brokers in these areas tend to be generalists who list and sell whatever kind of real estate is available. Your job is to locate that one broker who has the specialized skills you may need.

  1. Environmental Engineer

As a lender you have the option of a quick public records search to identify any properties around the subject that may have used contaminants which could affect the property or that would call attention to the need for further inquiry. An example, a data base in California is the State Water Resource Control Board is known as a “Geotracker”. The lender also has an option for a limited phase I, or full phase I to determine whether the property contains or has ever contained identifiable contaminants. The environmental engineer will report that information and will comment on how it may affect the desirability and salability of the property. For properties built before 1978 the issue of asbestos arises. Also lead based paints were commonly used in construction before 1978. Today, the common approach is to do nothing about asbestos or lead based paint if it appears that they are contained or sealed. Adverse findings by the environmental engineer may lead to the need for soils borings, a phase II, or a phase III. Some properties are purchased with the knowledge there is known environmental issues, and that the purpose of the loan may be for mitigation.

  1. Credit report and credit reporting agency

Very little needs to be said about credit reporting agencies. They all use the same data bases to accumulate the historical credit background of a borrower. However, Real Estate Brokers who make or arrange loan transactions in California are subject to 10232.5 of the Business and Professions Code which consists of a summary of disclosures and requirements to investors who may purchase a portion or all the trust deed investment. Section 10232.5 subsection (4) states that the Real Estate Broker must provide the “identity, occupation, employment, income, and credit data about the prospective borrower or borrowers as represented to the broker by the prospective borrower or borrowers”. This is easy to comply with when the borrower is either an individual or a seasoned entity with years of financials, history, and credit. A standard credit report should provide all the information you need. However, loaning to an entity newly formed for the sole purpose of purchasing or holding a property creates an additional question. Do you need to run a credit report on the entity knowing that nothing will show up? The answer is “yes”, and as an abundance of caution, you should also run a credit report on the individuals who created the entity.

  1. Property Inspection/Property Condition Assessment

Some lenders will require a property inspection by a third party who is trained in that field. The Property Condition Report (PCR) is used by purchasers and lenders who take property back in foreclosure, as part of the assessment of value for resale and limiting liability on resale. These reports tend to be very detailed and may require several specialists to evaluate the various components of the property, both real and personal. The process can be expensive costing from $20,000 to $100,000. This form of third party assessment is rarely used in private money loan transactions because of the nature and purpose of the loan request. Limited condition assessments may be available for much less expense.

There are many risks associated with commercial real estate lending, many of which will be written about in subsequent articles. None, however, quite rise to the level of the need to use highly competent and highly skilled third-party vendors. You are the one who has the option to search and hire the most professional vendors. You, your company, and of course your investors, will also be stuck with the results if substandard vendors are used.

Sun and Sea Villas Boutique Hotel Changes Hands

Lauderdale-By-the-Sea, FL- March 21 – Rick Tobin of Premier Hotel Realty announced today that Sun and Sea Villas, a 9 unit hotel, was sold Friday March 15th to a buyer from North Carolina, for $1,990,000. Sun and Sea Villas is located at 4512 Bougainvillea Drive, one block from the beautiful Atlantic Ocean and 2 blocks north of Lauderdale by the Sea’s bustling downtown.

Sun and Sea Villas has been a favorite of seasonal travelers because of its proximity to the Atlantic Ocean and to Lauderdale-by-the-Sea’s popular beach area, downtown shops and restaurants. The pet-friendly property also offers access to a public park across the street with tennis courts, basketball courts, a playground and a dog walk.

The seller sought out the help of Premier Hotel Realty to market the property both locally and internationally to buyers who would appreciate the increasing values, great weather and economic and political stability of this seaside community.

Rick Tobin, Broker for Premier Hotel Realty and a Director of the Greater Pompano Beach and Lauderdale by the Sea Chambers of Commerce said, “We saw massive interest from both local and foreign buyers looking for a South Florida beach-area resort. Investors from around the world are noticing the long term value of the area. This is one of the many recent hotel sales that I’ve been involved in. I’m honored to be playing a part, not only in helping these sellers move on to new goals, but also to be bringing new owners to the area. I only wish I had more properties for eager buyers.”

About Premier Hotel Realty

Premier Hotel Realty, led by Broker, Rick Tobin, is based in Pompano Beach, Florida and globally markets a wide variety of commercial properties. Premier has been advising on hotel and other commercial transactions in South Florida’s beach communities. Tobin also markets local apartment buildings, industrial properties and other types of commercial real estate, often marketing to investors from around the world, recently including Canada, Sweden, the Ukraine, Denmark, Israel and various countries in South America.

For more information contact Premier at [email protected]

 

The TOP FIVE Reasons to Consider COMMERCIAL REAL ESTATE for Your Portfolio

By Tom K. Wilson

While many investors see single-family homes as their “bread-and-butter” investment, investing in commercial properties is an option that can also help you achieve your financial goals.

“Commercial” in its broadest lay vernacular includes multifamily apartments, however, the true industry definition separates multifamily properties (over five residential units) from true commercial, such as retail, office space, industrial, self-storage or medical centers.

I’m often asked what kinds of properties I recommend. There is, of course, no one size that fits all investors or markets. While in a normal market multifamily properties are a natural progression from single family homes, this is anything but a normal market and currently there are too many multifamily buyers chasing too few deals, so it currently has lower CAP* rates or returns than pure commercial.

Here are five reasons to consider commercial properties for your portfolio.

#1 HIGHER ROI

Commercial properties often have higher and more predictable return-oninvestment than single-family homes, in part due to the economies of scale from investing in a larger property not usually available to the small investor.

For example, a current commercial retail center that we are acquiring has an 8.2 CAP rate and a four-year internal rate of return* of 12.0%. When you can borrow money at 4.25% and invest it in something yielding 12.0%, that’s worth considering!

#2 FEWER HEADACHES

It’s generally easier to manage one large property through a professional property management firm than to manage scattered single-family homes. Also the business tenants you get in retail or office space are usually of higher quality than most residential tenants. Business tenants have higher credit/risk scores, have pride of ownership in their businesses and want to protect their livelihoods. As a result, they have an interest in taking care of the property.

Many commercial properties are NNN* (triple net), so the tenant pays most of the expenses including taxes, insurance, and maintenance making the owner’s expenses very predictable and consistent.

#3 STABLE CASH FLOW

Commercial leases are typically 5-10 years in length vs. annually for single-family homes. Additionally, commercial leases include annual bumps in rent and options to-renew. As a result of all these factors, cash flows are more predictable.

#4 NO 10-MORTGAGE FANNIE MAE LIMIT

Any loans taken by the owner or syndicate do not count against your 10-mortgage limit because they are in the name of the owning entity and not on your personal credit. This enables you to put more of your capital to work.

#5 APPRECIATION MULTIPLIERS

Unlike single-family homes, which are strictly valued based on market demand, or ‘sales comps’, commercial properties are valued as a multiple of their Net Operating Income (NOI),* which can be driven up by a good property manager’s addition of value. At a Cap Rate* of 8.0,everyone-dollar increase in annual NOI can result in $12.50 of appreciation!

Steps you can take to actively improve NOI include:

  • Upgrading the existing buildings
  • Increasing TI (tenant improvement)
  • Adding leasable square footage
  • Raising rents
  • Reducing operating expenses
  • Adding amenities
  • Adding additional revenue generating resources (ATM kiosk), and many more

Rather than wait for market forces to raise real estate prices organically, you can create appreciation using levers like the ones listed above.

ADDITIONAL BENEFITS

Of course, the five advantages of commercial real estate listed above are in addition to the usual benefits of any real estate investment:

  • Tax Benefits
  • Hedge against inflation
  • A hard asset with intrinsic value

Caveats of Commercial Investing

No discussion of commercial investing would be complete without noting a few issues that investors should be aware of.

Financing can be more challenging

Typically, the investor(s) must put down 25-30% of the sales price and finance the loan amount over a 5-10 year term with a balloon payment at the end of the term. Selling or refinancing options at that time will vary depending on market conditions. And there can be stiff prepayment penalties.

Not as Liquid

If you own 10% of a Commercial building and want to sell your interest, you can sell to your fellow investors (who usually get first right of refusal) but if none are interested, it may be difficult to get out of the investment. That is why long-term funds, like IRA money, are ideal for commercial properties.

Sale of a Commercial Property can take longer

While just about everyone wants a home, only a small percentage of the population is capable of purchasing a retail center or office building. The smaller market of potential buyers coupled with a detailed due diligence process means that the sale of the property can take longer than for a single-family home.

Syndications

Many of the challenges outlined above can be mitigated by investing with an experienced syndicator. Their knowledge, track record, and ability to qualify for the loan and manage the property, allows the small investor to participate in a high quality commercial property or to invest in multiple projects to distribute their risks.

SUMMARY

The benefits, economies of scale, opportunities for forced appreciation and higher returns make commercial properties an attractive addition to most investors’ portfolio, and one worthy of serious consideration.

For your free copy of Wilson Investment Properties article “Are Real Estate Syndications for You?” and a guide to “Commercial Real Estate Terms” please go to our website, www.TomWilsonProperties.com .

Tom K. Wilson has utilized his experience and skills acquired in 30 years of managing some of Silicon Valley’s pioneering high tech companies to buy and sell more than 2,500 units and over $130 million of real estate, including three condo conversion projects, eight syndications, and seven multifamily properties. He founded and owns Wilson Investment Properties, Inc., a company that has provided over 500 high cash flow, high-quality, rehabbed and leased residential properties to investors. Active in real estate associations, Mr. Wilson is a frequent speaker on real estate investing where his expertise and experience makes him an audience favorite. He is the weekly host of the Wed 2pm edition of KDOW’s RE Radio Live in San Francisco, the Wall Street Business Network (1220am).

*A GLOSSARY OF COMMERCIAL TERMS

CAP RATE (Capitalization Rate)

A measure of return calculated by dividing the property’s net operating income by its purchase price.

CONC (Cash on Cash Return)

A measure of return calculated by dividing pre-tax cash flow from a property by the total cash invested (e.g., down payment plus closing costs).

GRM (Gross Rent Multiplier)

The Gross Rent Multiplier is a measure of how expensive a commercial property is relative to the gross rents it brings in, calculated as: GRM = Purchase price of the property / Gross monthly rents.

NOI (Net Operating Income)

The total income from a property minus vacancy, credit losses, and operating expenses.

NNN (Triple Net)

A commercial lease in which the tenant pays three operating expenses (in addition to rent): Property taxes, insurance, and maintenance.

ROI (Return on Investment)

ROI measures the amount of return on an investment relative to the investment’s cost and is calculated as: ROI % = (Gain from the investment – Cost of the investment) / Cost of the investment.