Money for Real Estate : One Norair Yeretsian

One of your greatest challenges after searching, finding, analyzing,
deciding and negotiating to purchase an income producing property ;
is finding the Money to  cement the deal together.

Well , if you already have all the needed funds you’re there .
( no need to continue to read this blog move on the strategies )

Residential mortgages for single units or multi-unit residential
apartments are much easier to arrange and close.
In Canada, these loans are  CMHC insured and the lenders have
reduced exposure to risk.

Commercial and Investment lending is not insured , so much
more risk to possible loss by lender(s). The lenders are less motivated
to lend to commercial. Commercial loans are more complex, there are
financial statements to consider, appraisal reports to read,
environmental assessments to consider, etc.
It costs the lender more money to facilitate and administer, so they charge for it.
They need people who are smarter and trained in this area, this is usually lacking
at most banks in the country.

This also creates a degree of  illiquidity in the
commercial real estate market place, which the private lenders take advantage
of and move in with their money at higher rates and more challenging
terms (negotiable).

This puts downward pressure on any price increases in commercial /
investment real estate.
This maybe another reason why valuations and pricing is less volatile in
commercial real estate in Ontario.

Where do you find this money ?

What is the cost of this money ?

What are the terms for this money?

Scenario  1 : 25% down payment 75 % financed
You have some equity, but need to find the balance of the Acquisition Price.

Scenario 2 : 10/20/30 + down payment , balance VTB / STB financing

Scenario 3 : set up a   limited partnership / or a simple partnership
You have no money. Where do you start ?

Scenario 4 : syndicate the project , through a corporate vehicle.

Scenario 5: WEIT  ( whatever it takes ) +  AAC ( at any cost )

Where can you find money ?

Usual sources include : the banks, trusts + credit unions,
life insurance companies, some pension funds…

You may want to go to a broker first and have them access
these sources on your behalf and for a brokerage fee(s) but
they will organize a presentation for you and they are motivated
to get you and your project the funds.
Make sure they only get compensated on performance
( the loan actually happens ).

Private money is also potential available, you can access them
through the gatekeepers: lawyers /accountants/business managers.

Depending on the amount(s) you may be seeking , if the local lenders are tight
you may consider going international.
Some of these groups have offices here in Toronto/ Montreal/Vancouver , Canada .

What is the cost of this money ?

This is a good question to ask because , you want to know whether
your  investment can’t handle it . Is there room to pay this amount and
still keep it interesting for you and your group.

The cost is not a fixed item, it is negotiable.
It could range from zero ,1,2,3,4 points or percent of the amount borrowed.

There are also costs such as application fee,  appraisal(s) , environmental
assessments, survey  and other due diligent costs. These again are not fixed
amounts, but they will be in the thousands and not hundreds of dollars.

And its all negotiable, yet another reason to get a professional on your team.

Some of the name(s) in our local market place with respect to finding funds
for your real estate investment opportunity :

Commercial Financial One : http://www.cfogroup.com
……………………………. (905) 886-6542 : Mark Kay

Firm Capital : http://www.firmcapital.com

First National : http://www.firstnational.ca

Romspen : http://www.romspen.com

Exercise caution when dealing with any lender, remember they are in business and their prior is their interest , not yours .

The better professionals you have on your team,  less costly errors will be made. Using a knowledgeable realtor is an asset.

Let’s continue the discussion on Twitter @ EnvoyCapRealty

nyeretsian@yahoo.com       May 22, 2010

Capital Madly Getting off in all Directions Norair Yeretsian

” Markets can remain irrational a lot longer than
you and I can remain solvent .” John Maynard Keynes

This is one of the biggest challenges we investors face,
to be rational /analytical ,to have goals and targets and
have a planned /systemic approach. And then we are faced
with the irrationality of the market place as driven by the
irrational humans that invest in it.
If we then explore the irrationality of the investor in this
challenging market place ; chaos .

Irrational Buying versus Rational Buying , what’s your bet ?

Everyone has a motivation, some rational,others irrational.

Most investors are motivated by making money :
cash flow and capital appreciation .
If you can’t see how to make money or calculate how
to make money in an opportunity,
your not investing you are doing something else.

Follow the money and you will understand ,
I was told by a sophisticated investor.

Well I can follow the money if the investor is rational
and the investment is made rationally.
If  I  can connect all the dots the investment is logical
and rational at least on one level .

If you can not connect the dots and the investment calculations/analysis
does not seem to work or make any sense —
then there is something else happening (irrational behavior ).

Well  either the investment is  rational or irrational , it can’t be both .

You can calculate the yields and returns, measure and count the cashflow.

Rational equals logical, irrational equals  emotional .

What rational investing is easily understood.
It is following a logical, systemic approach that we can calculate.
We can see the motivation : return on the investment and return of the investment.
It is more tangible and less subjective ( future sale of the asset in 10 years ).

Behavioral Economist tell us that the average investors
are full of irrationalities :

1. Too self confident; ignoring luck.
They have an illusion of control by exaggerating both their skill and the importance of that skill.

2.They have an Optimistic Bias — too bold.

3. Risk Averse , overly timid.

4. Too scared / afraid of loss.

5. Quick to trade.

Who always makes the sensible financial choice ?

Daniel Kahneman (Princeton psychologist) said :

” Psychology has a story to tell about investing, and its different from the one economics tells.”

Average investors are full of irrationalities and inconsistencies, according to Behavioral finance.

Things get really scary when one thinks about irrational investors and
their approach to investing versus the rational investors:

and the idea or rather the confusion or miscalculations/ misunderstanding
of the market  ; and the famous quote

” The markets can stay irrational a lot longer than you can stay solvent. ”
And of course government(s) do not help, they seem to inflame the situation
or create concern when none seem to exist just to keep things interesting
and cash flowing through the economy.

Let’s continue the discussion : Twitter ; EnvoyCapRealty or
just leave a comment below

nyeretsian@yahoo.com May 16, 2010

Where is the Cash ? by Norair Yeretsian

Looking for new capital for either a new syndicated project or
to refinance an existing project?

Where would you start looking for it?

Work your network and contacts , explore all possibilities … but
before you start calling and knocking on doors : Prepare !

Prepare yourself and know what you are longing for and for what purpose.
Know how you intend to pay it back, and show the bankers !
Organize your presentation with all the relevant information

about the propertyand have an excel spread sheet prepared of
the financial pro forma for the term of financing you are seeking.

Anticipate the questions and the information that a rational lending would ask
and prepare your package accordingly. If you are asking for serious money you
better be serious and be every bit the professional you need to be : in seeking,
sourcing , presenting and asking the prospective lenders for the funds that you
need for the real estate purchase or development.

Seek out the new capital everywhere — banks, insurance companies, private lenders.

In the search for this capital , make it known to law firms and accountants ,
you work with, that you have this real estate project and the amount you need.

They are gatekeepers and they know who among their clients are interested
in placing funds to work in real estate and earning a few extra points of interest ,
secured with the real property .

You could also refine your presentation (package )
with their assistance , so that all the necessary information for
their clients / superiors  is addressed.

You need to know what you are doing and the
confidence that the project makes good business sense,
before anyone is going to have the confidence
to believe in your project and place a significant amount
of their money in your hands!

follow us on twitter  :   EnvoyCapRealty

nyeretsian@yahoo.com May 11, 2011

R/U Factor : What is it good for ? Norair Yeretsian

The efficiency factor also known as the gross up factor :
the R/U  Factor which represents the relationship between
rentable over useable areas in a commercial property .

Why use it ? What and How can we use it ?

In leasing office or retail space, we can test or compare the level
of efficiency between buildings we are considering for our tenant(s).

As we represent the interests of our tenant(s), we  want to maximize the dollars
for space that our tenant(s) clients need for their businesses.

Therefore we must know both the useable area and the rentable area and
do the calculation to determine the R/U Factor and compare the results.

The useable area is the actual, occupied space by the prospective tenant.

The rentable area is : the useable area plus a propositional allocation
of the common areas (such as the lobby,hallways,utility rooms,etc ).

Example :

Rentable area  :  1200 sf          =    R/U Factor of   1.2000  or ( 20% gross up )
Useable area  :  1000 sf

therefore if we had :
1000sf of useable area with a 1.2000 R/F factor = 1200 square feet rentable area

All rent payments ( Net rent + Additional rent ) are calculated and paid on Rentable Area.

As a comparative tool , comparing the efficiency between properties :

Building/ Property

sample     1 …………2…………….  3…………….  4

………………….1000 sf  useable area(s)

…………………………….(x)

1.2099                1.1587           1.1275                1.1639  :  R/U Factor

resulting Rentable area for each of the 4  buildings above  :

1,209.9 sf          1,158.7 sf     1,127.5 sf            1,163.9 sf

Well appears that building number 3 , all things being equal
is the most efficient and the prospect tenant can get the same
space for the least rent. This is one more variable to consider when
leasing space, its a tool as part of your analysis.

However in reality everyone knows that all things are not equal !

nyeretsian@yahoo.com May 7, 2010

Capitalization ! Norair Yeretsian

The direct capitalization approach to estimating value is a simple
yet effective way of determining a quick value or worth of an
income producing property.

Those of us in the real estate profession know it as the formula:

V= I/R . Where the V = Value , I = NOI and R= cap rate .

R = I/V , Where the R= capitalization rate ( cap rate ).

I = V x R , Where the I = Net Operating Income (NOI).

Given :  $ 70,000 NOI /$ 700,000 Value = 10% cap rate

This 10% is known as the overall cap rate ,this rate represents the return
for an investor ( return on and return of  the investment).
It represents the return for one year and on an  all cash position .

If the investment was leveraged, then we would use another simple formula

CFBT / Equity = Equity Capitalization Rate

[ also known as ROI or ROE ]

Given the NOI from above is ……………………………… $ 70,000
then we would deduct the Annual Debt Service (P+I)     – 30,000
results in CFBT …………………………………………….. $ 40,000

and Given that the $ 30,000 supports a debt of say $ 425,000
therefore our prospective client has $ 275,000 of Equity .

Calculation :   40,000 (cfbt) /275,000 (equity) = 14.55 % ECR or ROE

Since we have come this far with these calculations we could go
a little further and determine based upon the above numbers
whether the client should or should not finance this purchase?
Determining the type of leverage, positive/negative/neutral
leads us toward the resolving the question.

By comparing the OCR to the ECR we can resolve it.

If the ECR is greater than the OCR then we would have :

Positive Leverage ,  and since 14.55  > 10.0 . We have positive leverage and
so yes the client should finance this purchase as opposed to using his own
cash to make the acquisition.

In the event the OCR was greater then the ECR , the result would be :
Negative Leverage , which would lead us to Not want to finance
the purchase rather use  your own cash

If both equal :  OCR =ECR , this is referred to as Neutral Leverage
and it does not matter either way.

However one should would about your Leveraged ratio and not
get over-leveraged and be at the mercy of the rise and fall of interest rates.

Leverage and its skillful use ( maybe luck ) is one of the secrets of great wealth accumulation .

OPM , other people’s money . Use it to your real estate advantage .

nyeretsian@yahoo.com May 6,2010

Tax free Cashflow ? by Norair Yeretsian

You successfully negotiate a purchase of an income producing property for
$4,200,000  and determine by way of contractual agreement APS Form 500
attached schedule A with an appropriate clause included, negotiated at market,
at arm’s length and determine an allocation of  70/30 split for building and land.
[ 70% for Building + improvements and 30% for land : no depreciation ]

CCA Calculation : $ 4,200,000 purchase price plus cost of acquisition of $ 175,000.
Which totals $4,375,000 as acquisition price, this is the number we apply the
allocation : 70/30. And arrive at a UCC of  $ 3,062,500.
This is the value of the Undepreciated Capital Cost (UCC)  at the beginning of year 1.

Given that this property is a Class 1 asset with a marginal rate of 4 %
(CRA , Regulations to the Income Tax Act) and the half year rule applies,
let us calculate and develop a 5 year table of CCA Taken + UCC.

With appropriate End of Year  (EOY ) numbers for each year.
This income producing property is assumed to have a taxable income
before CCA application Taken of at least the amount of the CCA calculated
in each year. You can not create a loss using CCA.

UCC at Beginning of Year 1 : $ 3,062,500 .

CCA Taken             UCC

EOY 1 :                        61,250              3,001,250
( 2% taken )

EOY 2 :                   120,050                2,881,200
(4% taken)

EOY 3 :                    115,248                 2,765,952
(4% taken)

EOY 4 :                    110,638                 2,655,314

EOY 5 :                    106,213                  2,549,101

Recapture CCA : $ 513,399  potential

In the event you sell the property at the beginning of year 6 for at least the value
of the original UCC, you must first recapture all the CCA Taken over the years and
add it to your ordinary income for that year and be fully taxable on the total .

Without good tax planning and organizing your affairs appropriately this may
end up being a heavy burden on yourself, your estate or your corporation.

Seek the best tax accountant(s) before you enter into a sale agreements ( Buy / Sell )
to help you set up the arrangement correctly and discuss these tax matters with the accountant.
No one wants a surprise where Taxes are concerned.

nyeretsian@yahoo.com May 5, 2010

Real Estate Investing–Negotiate it ! by Nor Yeretsian

Nail that Deal , said the Broker of Record (BOR) to his sales representative (SR),
who is  negotiating the marketing of a small shopping center.
I’m trying BOR,  says the SR      What’s seems to be the problem , price /terms ?

We are waiting for the due diligence package with all the lease agreements and
some financial statements (operational statements ) and inspection reports.
We signed the  agreement conditionally and they will be sending us the package.

My buyer is starting to get cold feet . I don’t know if it is buyer’s remorse or
the talk of rising interest rates, and he is considering leaving the deal for now
and coming back in a few months and buying the plaza for a lower price.

Lower price ? Yes , interest rates go up, capitalization rates rise and values go down.

Show me the math on this later , okay . I will show you now, look at this example;

If the property has $175,000 of Net Operating Income (NOI) and the Overall cap rate were

OCR 10% would give the property a value of   175,000/10% = $ 1,750,000 Valuation.

If the OCR goes up 12% with the same NOI $175,000 would result in a Valuation of $1,458,333.

So the conclusion is if OCR go up the Value goes down and the opposite is true also – try

that yourself on your calculator.

I thought you said the deal was done. Well its done conditionally.

That’s only a good first step in the right direction .
Lots of work still to be done and lots of hand holding and continuous negotiating.

You are going to earn your commission on this deal , with all the hours you will be spending on it.

How long is the due diligence period ?
Its 45 business days, I need to review documents and prepare for the financing application.

I will be walking all the paperwork, until the successful conclusion of this Deal .

Well , let me give you some  Negotiation tips, because the next stage of the game is starting
where you will be negotiating with everyone along the way–
until the Deal is successfully concluded.

Negotiations is vital at this stage. Here are some classics to consider :

1. Getting to Yes by  William Ury and Roger Fisher

2. Getting Passed No by William Ury

3. Winning thru intimidation by Robert Wringer

and my personal favorite is

4. Negotiating Rationally by Max H. Bazerman + Margaret A. Neale ,

And it does all the things the Chicago Tribune says :

” Insightful, entertaining … draws on the state of the art in decision theory ,

game theory and psychology.”

Check out our books; THE GREATEST MONEY MACHINE   and  SILVER BULLET INVESTING , both are available on Amazon, print editions at http://www.booksforbusiness.com and OREA College’s Real E Store and at TREB’s Realtor Store – great tools for the real estate professional and investors.

   

Do you have a fall back position?

You need a plan B ?

The Negotiating Rationally calls it your BATNA :
Best Alternative to a Negotiated Agreement.

Think about it , read the book.
Remember to frame your negotiations . Have a plan and know your goals.

Keep the emotions and the EGOs  off the table . Work your plan !

Nail the Deal !

 

Twitter : EnvoyCapRealty

http://www.envoycapitol.com 

Envoy Capitol Realty Inc., Brokerage     Toronto , Canada