Introduction to Commercial Leases - Part two

If the value is still there I'll go in and check the place out. Problems cost money, updates make money. Watch the show "Income Property" on HGTV. The yard was scaring people off because the house was in a nice neighborhood where people took care of their yards. Now lets discuss selling the property.

If you are just starting out with commercial property you are going to need capital and large cash flows. If you are listing your commercial property for $100,000, this means the agent would get up to $6,000. So if you're profiting $20,000 per home you could make $20,000 on 1 home selling it by yourself, or $28,000 selling 2 homes through and agent. If times are slow, use an agent.

What if this is your 10th commercial property investment?

If you are making $ 20,000 profit per flip, you should have roughly $200,000 cash to work with plus your initial working capital. If you can flip each commercial property investment in 3 months, making $20,000 each, you could have $184,000 at the end of the year.

Now buy and finance 4 homes again. A lot depends on your tenant.

If you are renting out another part of your home to offset your mortgage, do not rely on the payments coming from your tenant.

If you are renting a vacation home, congratulations!

If I do this, I can pay my payments on the house, pay my rental agency, and I have a cool place to hang out 35 weeks out of the year! This is an ideal vacation rental home.

Then decide if you can afford an agency or if you have to do it all yourself.

A Complete Guide to Investing in Commercial Property

As we move on in this article, we'll discuss additional lease types and become familiar with lease additional clause, strategies and identify common terms used in commercial leases.

Ground Lease

A ground lease is as lease for land alone, and is typically a long-term net lease. Following the end of the lease term of a ground lease, title to the land and improvements reverts to the lessor/property owner.

Step Leases

While the lease payments vary over time and the term of the lease, the actual payments are calculated and disclosed prior to the signing of the lease agreement.

Indexed Leases

Additional lease clauses

Lease Renewal Options

Commercial leases often grant a tenant the ability to renew a lease for a pre-specified period of time following the initial lease expiration. However, the rate at which the lease may be renewed is specified in the initial lease contract. Even though the tenant is not obligated to renew the lease, hence the term 'option', the tenant is not bound by the lease to remain and may decide to find another location for the business if either the business requires it or the tenant so desires.

If additional contiguous space cannot be provided in a reasonable time frame for the tenant, an owner may agree to relocate the tenant within the building or shopping center within a specified time period.

Financial impact of lease clauses

After a decision has been made to lease commercial space a commercial real estate specialist may be enlisted to prepare a financial report which quantifies the potential tenant's lease costs and which compares and contrasts alternative leases.

Base (contract) rent: This is the specified, pre-defined contract dollar amount for periodic rent (monthly payments).

Total effective rate: This is simply the total effective rent divided by the square footage.

Average annual effective rent: This is the total effective rent divided by the total years of the lease term.

In many commercial leases, the base rent does not necessarily equal the effective rent.

Here then is a basic formula for calculating a tenant's effective rent:

The base (contract) rent + (Additional Costs - Concessions and/or allowances) = The Total effective rent paid which will be paid by the tenant.

From the owner's perspective

Here then is a basic formula for calculating effective rent from the owner's perspective:

Base (contract) rent - (Net additional costs - Concessions and/or allowances) = The owner's Total effective rent as income.

A sublease is a separate lease in which the tenant may lease all or part of the leasehold interest to another tenant while retaining liability for the property and primary lease to the owner.

Rental rate risk: It may be necessary to sublease at below-contract rent.

Tenant quality risk: It may not be possible to find a high-quality tenant.

Lease-term risk: A sub-lessee may want a shorter or longer lease than that of the primary lease.

Lease agreement risk: A sub-lessee may want concessions, allowances, and other features that are not provided in the primary lease.

An assignment of lease is where all of a tenant's leasehold interests in a property are transferred to a third party.

There are many different ways to structure lease transactions, clauses and financial implications in commercial real estate leasing.

An important item to remember is that many lease clauses will be applied to a cost to either the prospective tenant or the owner.

Should I Invest in Real Estate in Today's Market?

FALL 2010 UPDATE

What follows are some random thoughts on the Income Property marketplace as I see it, and from what I've heard on the street. By no signifies am I an economist. And I do not think that any one can accurately predict the future. The Commercial Property Market is incredibly dynamic and continually changing. But it is interesting to hypothesize and to see how close we can come to predicting the future. Use these thoughts as an add-on to what you have already experienced and are presently experiencing. The even more views you can get, the far better you will be at understanding this dynamic marketplace and be able to make up your own mind as to how the future will unfold. With that in thoughts, here goes:

I've been told by quite a few economists and market place pundits that the current financial climate can be characterized as an "Atypical" Recession with an "Atypical" Recovery.

Okay, but what does this honestly mean? Clearly, in hassle-free terms, it basically signifies that we are not in your common recession and recovery scenario. While we've been seeing an improving financial recovery because the market place meltdown of 2007-2008 there are signs out there that this recovery is slowing down, possibly even on the verge of faltering, and the recovery is certainly becoming an uneven one.

Globally, all is not nicely. Distinct markets have their own issues such as in Japan exactly where they are possibly looking at a deflationary atmosphere, and absolutely everyone is aware of the U.S. issues exactly where the housing industry is nonetheless on its rear end. Then again, we can generalize by saying that we are in a low growth environment with substantial debt loads both for the government as nicely as for people. Overall, according to these specialists, we can expect to see low consumer demand out there, which will eventually translate to excess capacity. The economies of created nations will continue to go nowhere. The marketplace pundits say that for the reason that the recovery is atypical it is not going to work itself out in just a year or two. Disinflation has been mentioned as a possibility. Not precisely a rosy picture.

The US has just lately announced the implementation of Quantitative Easing whereby the Federal Reserve will go out and purchase Treasuries. This implies the US will be printing a lot of income in order to do this. I guess Ben Bernacke figures that he can print his way out of a recession. Japan is also set to commence printing Yen. You're going to begin seeing currency destruction all more than the location as countries begin playing quick and loose with their currencies. This portends massive inflation down the road. The stock market is in fact predicting high inflation down the road as is evident in the recent runup in the price of gold (investors are putting their dollars in gold so it doesn't erode when inflation begins up). As I write this article the headlines are rife with the new highs that gold is hitting.

Some other thoughts:

Investment advisors have told me that with all of this uncertainty, investors out there are looking for certainty. Thus there is a tremendous demand for safety, i.e. safety of capital along with the requirement for income and yield (since of what the investor/consumer has gone by way of in the last 2-and-a-half years). There is a significant allocation shift going on here.

Remember

• There have been two huge bear stock markets inside ten years
• We have noticed the biggest housing collapse in US history (US customers have seen their single biggest asset severely impacted as well as their sense of security)
• Job destruction in the US has been the greatest because the depression.

This impacts Canada since the US is our greatest trading partner. Thus the consumer/investor desires and requires to cut down danger in their portfolios. As a result the Demand & Need for Income! Savings have been impacted substantially (due to the recent setbacks in the housing and stock markets). Many people are living longer yet retiring earlier. Those folks retiring have been shocked to understand that their retirement income has been impacted to the point where they need to return to the workforce. People are looking for SOLID Danger-ADJUSED RETURNS.

People today are going to save, not spend!

Investors are now looking for Stable Cash Flows, Solid Balance sheets, & growing dividends.

So what does the future hold?

My best guess and personal viewpoint is that we are halfway by way of a three-four year deflationary period that will be followed by high levels of inflation. For this reason 1 wants to get BOND substitutes that will do nicely in an inflationary atmosphere (you will need to have to grow your leading line when your cost of capital increases). Investments that can be acquired at a great value, that can supply stable dividends, and dividends that can be increased more than time will be the ones that investors seek out. In other words: BACK TO THE Fundamentals OF INVESTING.
Exactly where to appear for these investments?

My answer is: BRICKS & MORTAR INVESTMENTS! Particularly Investment Real Estate.

Why investment real estate?

It's A Safe ASSET. Here in Canada investment real estate is viewed as a Secure Asset Class (SAC), then again it can be turned into an unsafe one (ie. the US Housing market exactly where valuations had been pie in the sky, mortgages had been provided at higher than 100% of the inflated underlying value, and the mortgages were non-recourse to boot!).

IT Gives STABLE Cash FLOW STREAMS THAT CAN GROW Over TIME. Well-positioned real estate will constantly be in demand. If purchased at a fair value then it can provide years of stable money flow streams. Being properly-positioned would also bode well for future increases in the rent, as properly as future appreciation of the property itself.

It's INFLATION PROTECTION. Well positioned investment actual estate gives an superb hedge against inflation. As costs in the marketplace boost so do the underlying rental rates. Therefore your cash flow increases as inflation increases. We all know that the cost of a property is a reflection of the income it produces. Improve the income of the property, and you boost it is value.

ALL-TIME LOW COMMERCIAL MORTGAGE RATES. Any historian of commercial mortgages will know that we are in a period of all-time low commercial mortgage rates. The time has by no means been far better to secure a superb rate for your investment property. The market place pundits are predicting that these rates will possibly be about for the next couple of years. Take advantage of these awesome rates now, or kick your self in later years for failing to act.

According to the specialists, the most productive technique moving forward will be: "Investments that are REASONABLY PRICED that have the Ability TO PAY Money DISTRIBUTIONS & THE Capacity TO GROW THOSE Money DISTRIBUTIONS.

NEW MANTRA: "Secure Income at a reasonable price" (SIRP) Equity investors have gone by means of the ringer twice. They will need to get away from those volatile cost swings. They've had enough of the proverbial flyers.

Again my answer as to where to invest is in well-positioned genuine estate acquired at a very good value. These kinds of properties will be your bond substitutes that will do well in an inflationary atmosphere. They generate Stable Cash Flow streams that can grow over time - and provide you with Inflation protection.

Remember you want discipline in not taking on huge leverage (say a maximum 50% Loan-To-Value Ratio). The concentrate requirements to be on value. Shopping for properly-positioned investment actual estate at a fantastic value will give you the very best chance for growing your money flow streams over time as properly as rising your equity for investors.

The industry analysts tell me that Canada, Australia, and the Scandinavian nations all have good investment real estate fundamentals

What kind of returns can one expect?

We are seeing a 5-8% Return for North America Income Property. In Canada particularly we are seeing an 8% return. This is based on a 6% Yield on an Income Basis and a 2% Appreciation & Money Flow Growth Yield.

For all of the above causes I really feel that now is the time to invest in genuine estate.

There are various methods to in which 1 can invest in Investment Actual Estate. You can begin off modest by purchasing Units of a publicly traded Real Estate Investment Trust or REIT as they are referred to (be sure to do your homework or seek out an investment advisor before investing). If you want a bigger slice of the pie, you may want to look at private Actual Estate Syndications whereby your money gets pooled with others to get a good quality asset that would otherwise be out of your reach. The remaining alternative would be an outright obtain of a property on your own.

Building Cash Flow Without Cash - Formula 5 "Flipping Paper"

You've heard of flipping houses, haven't you? This has turn into nicely-recognized more than the past years, mainly simply because of a lot of Actual Estate "Gurus" teaching seminars, writing books, selling tapes, and so on. There's even been some bad connotations from many types of government mainly considering they don't recognize it, rather they believe & do whatever the Banking Business tells them to do. I do not mean to get off on a political soapbox however, the type of home flipping I know about and have written about is perfectly legal and if completed right, advantages all parties.

So what about this "Flipping Paper" thing? Nicely, it is a lot like flipping houses. It is also really similar to getting a Bird Dog for residence-buyers, as I discussed with you in one of last week's articles.

What I'm going to discuss with you now is precisely what I did when I 1st got in the paper enterprise. I took a seminar taught by Mike Meeker, a nicely-identified and exceptional teacher, who I think is now retired from teaching. I also believe he is living in Florida, or was when I last had get in touch with with him.

Anyway, back to our story. This was back in the late 1980′s and I had no revenue out there for investing. Here is the idea: You want to obtain Genuine Estate "paper" (Land Contracts, Trust Deeds, Mortgages, Notes) that is "For Sale" or will turn out to be for "For Sale". To make it uncomplicated, let's just call all these different sorts of paper, "Notes". You are searching for Notes that had been made in an Owner-Financed sale of Real Estate. Due to the fact of today's marketplace, these varieties of notes are plentiful nonetheless, in any kind of market place there will normally be these "Private" Notes on the market given that several buyers cannot qualify for Bank Financing and countless properties will not qualify for Bank Financing. To give you an concept of today's marketplace, just take a appear at any key newspaper's "Real Estate For Sale" section, and look for those ads that state "Owner Financing", "No Bank Qualifying", "Special Financing", and so on.

Trust me on this point there will Generally be Private Notes accessible and lots of of the owners of these notes would rather have a significant chunk of cash Now rather than monthly payments over X number of years. Also, there are and often will be Private Investors (and occasionally big corporation investors) who acquire these notes. Why? Due to the fact virtually ALL Private Notes can be bought at a substantial discount. Why? Mainly because of the higher risk involved in these non-qualifying buyers and/or properties. In fact, I have never ever seen or heard of anybody who would pay 100% on the dollar for a note.

So let's start off putting this together. Remember, you are going to function as a "Middle Man", not-unlike the "Bird Dog" mentioned earlier. Here's how we get started:

Obtain the Notes. There are countless sources such as Realtors, Title Organizations, Genuine Estate Attorneys, etc. You can run a short ad in your neighborhood paper, such as - "I Obtain Genuine Estate Notes" or "Top Dollar For Your Real Estate Note". If you scan the ads you could possibly see other consumers searching for notes. Don't be concerned - There are sufficient to go around.

You could also look for ads offering "Owner Financing" in order to sell a property. Call the person, then ask them if they may want to sell their note following they close on the sale.

So let's say you discover a note for sale, what now? You have to have to have funds on the market to purchase the note. Where do we get that? How do we know how a lot to pay for the note?

Just as we discovered how to obtain and obtain Actual Estate paper, which we will refer to as "Notes", we will a great deal more or much less use the exact same tactics to find somebody whom we can flip these notes to, for a profit. Superb sources are Realtors, Real Estate Attorneys, CPAs, Monetary Planners, Stock Brokers, Loan Officers, and so on. Having said that, the best probable way is the old "Ad in the Newspaper" formula. You could advertise with words like "Real Estate Note For Sale" or "Investor Necessary To Buy Actual Estate Notes". Check the newspapers and Yellow Pages for ads like "We Get Notes" and/or "Leading Dollar For Your Notes". In other words, appear for the identical ads we saw and made use of to get Notes to acquire & flip.

When you come across an Investor or Note Buyer, you need to have to determine the requirements and perimeters of the Note Buyer, such as:

What kinds of properties will they accept as security for the note? For example, Single Family members houses, Land or Lots, Apartments, Commercial Property, or Mobile Homes with or with out Land.

What kinds of minimum yields do they want from the notes they purchase? This will differ based on a lot of variables, such as security for the note.

Investors will want greater yields on greater danger notes. For example, a note secured by a Single Family, Owner-Occupied (with great pay history) would most likely need the lowest yield, let's say 12% return on the investment. On the other finish of the scale may well be Raw Land, wherein an investor could call for 18% or 20%. In this article I'm not going to get into how to calculate yield. I will, still, advise that everyone interested in these sorts of offers acquire a very good financial calculator or software program.

Examples of other items an investor may well require are Title Insurance, Appraisals, Credit Reports, Casualty Insurance, and so on. These factors discussed above require to fit the investor which you may possibly be dealing with.

OK, so now we have located a note to acquire on a Single Household property. The face quantity of the note is $80,000 with ten% interest payable monthly more than 20 years. You know that the "Going" investor yield requirement for this kind of note is 12%, which you could sell this note for $70,115. So for you to make a profit of, say $four,000, you supply and get accepted a bid of $66,115. You should certainly in fact get a written contract to buy the note from the owner, preferably an "Option To Buy". You have to keep in thoughts who is going to pay issues like Title Insurance, Closing Costs, etc. If you are going to pay for these fees, you superior subtract the amount of these costs from your supply to the owner of the note. Investors do not normally pay these costs.

What you are going to do is have a "Double" or just about simultaneous closing wherein you will close with the owner of the note initial. Then a few minutes later you close with your investor who is getting the note. The closer(s) will then disburse the funds $four,000 to you, and $66,115 (much less Title Insurance charges & Closing fees) to the note seller. Really, I identified it works improved if I paid these expenses and bought the note at a lesser price, say $64,500. Oftentimes when people today go to a closing they grow to be unhappy when they comprehend they are receiving less dollars that they thought they had been going to.

I know I've covered a lot here that seems complex, and it is - a small nevertheless, as soon as you've done a few deals it becomes routine. I don't forget when I very first began trying this. I became discouraged and it took me a couple of months to close my first deal even so, considering that that time I would estimate that I've bought and sold over 6,000 notes - And most of those, one at a time. Of course as soon as my volume elevated I hired consumers to aid me.

The note business enterprise is a awesome and very intriguing career Something new or unique all the time. 1 thing I want to pressure is that it is rather fundamental to have that double closing so that you basically own the note, even if only for a couple of minutes, just before you sell it to your investor.

I will be publishing a book in the future, showing in detail how to thrive in this excellent small business. I will be selling the book for a nominal price, which at this time I haven't determined. It will depend on how much time I put into it on the other hand, I want it to be as total as I can make it. I'll tell you this, if a individual enthusiastically gets into this small business, the small business will always be there with exceptional monetary returns.

These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment suggestions. If such suggestions is needed or desired, the services of competent professional persons ought to be sought.