All Forum Posts by: Account Closed

I have a client/investor that is building his own apartment complex. Its 20 units and located in Colorado. He has about $750K in the deal plus a bank construction loan of about $1.6M.

He is 50% preleased and is running short on funds to complete the project. He is looking for a $200K to $250K loan/investment/anything to complete the project. The projected value on completion is in the $2.8 to $3.0M range.

Any ideas, referrals, solutions?

Set up one LLC to run and manage all your properties (ie receive rent and pay expenses) then have that LLC send you a owners check for your personal use. Since the LLC is just a pass through entity, you can allocate tax related issues as needed. In Texas you can set up a Series LLC to offset the cost of incorporation.

I would agree. The formula I highlighted is just a simplification of the entire Band of Investment concept. If you want to take it to the max, then each element you highlighted becomes a factor and you then add all together to come up with the cap rate. Google "Band Of Investment" calculations and "Appraisal Theory" to find out more. 

The real message is that each investor should calculate a cap rate applicable to their own investment criteria. Since no two investors would calculate the same NOI, a cap rate is personalized to each investor. Obviously, properties transact in a range and if an investor's criteria is outside that range,he/she may never find a suitable investment. The Band of Investment approach is very helpful in comparing properties that have different strategies if you can comfortably assign a value to each element.

Do not use Quick Books. There are many online programs such as Buildium that provide much better reporting functions than QB when it comes to property management. Nothing wrong with QB just that it is not as good as programs specifically design for Property Management. What QB does is provide you financial reporting but very poor property management functions such as lease maintenance, work orders, ect.. For the same cost, go with a program designed just for property management and get both the financial controls and the property level reporting. makes life a whole lot easier.

Not an atty, but if the property is owned by a trust, then neither of you are the owners, the trust is. As such, the trust documents determine who may do what but I pretty sure that as a legal entity, the trust would need to hire a third party manager if the role is not defined as a function of the trust managers. Very round about way of saying talk to an atty.

Paul R. Olson

Vice President

Gershman Mortgage

111 West Jackson Boulevard, Suite 1700

Chicago, IL 60604

312-953-4575

They are based in St. Louis but this may be to small a deal.

So you are saying that you want this deal with 100% financing and the amortization and management to be paid for by the cash flow.  Assuming that your expenses and other cost are correct, then you will have "invested" less than $2000 a year. I would say thats a good deal since your tax benefits are well in excess of that. I assume that you have an exit strategy that justifies the purchase since your cash flow even after the rent increase and repairs is only marginally better. This seems like a long term hold so maintenance will be you biggest concern.

As for whether the economics of the deal are correct, there is not near enough information.

Quick lesson on Band of Investment Cap Rate:

LTV x Interest rate = Debt Cost

+

Equity x Equity Yield Desired = Equity Return

Derived Cap Rate

Example:

(80%LTV) x (4.0% Interest Rate) = 3.20%

+ (plus)

(20%equity) x (10% Desired Yield) =         2.00%

Cap rate need to achieve above =             5.20%

Hope that helps.

Let me start by stating that this type of behavior is NEVER ACCEPTABLE. These guys got what they deserved and there is never enough punishment to make up for this openly criminal behavior.

Unfortunately, upfront fees and due diligence cost are a reality and anyone pursuing a commercial loan needs to be aware that just because a lender or mortgage broker asks for an up front fee, does not mean that they are crooks. Indeed, HUD multifamily government loans can cost well in excess of $100,000s of thousands of dollars with no assurance that the loan will fund.

As for what is a large up front  fee? I think that the issue is where the money is going and the difference between fees and deposits. Below are some typical fees that most investors should expect to pay upfront.  In the commercial world, there is seldom a relationship between these cost and the loan amount hence the cost for a small loan can easily seam overwhelming.

1. Environmental - $1,500 to Open
2. Appraisal - $2,500 and up to $15,000
3. Due Diligence - $500 to Open - Most FHA HUD MAP lenders charge $2500 to $10000
4. Lender Legal fees - Open
5. Engineering Reviews PCNA's - $1,500 and Up
6. Title Review - $500 and up
7. Lender Application Fees. -Open
8. Market Studies - $1500 and up
9. Packaging and Preparation fees $500 and up

These are by no means all the legitimate upfront fees and they do not include your cost to prepare the documents you need for the lender which can be very costly. Again using the FHA HUD MAP program, they require full and complete architect plans. These can cost into the $100,000's. Nor does this include the actual funding cost such as success fees, commitments, closing, and legal fees.

Many lenders and mortgage brokers require a deposit. This is usually a good faith deposit and is applied to the costs as they are incurred. They do this in part to know that you are serious and not just shopping around. Additionally, many borrowers start to get cold feet when they realize that the underwriting may not yield the funds they expected and demand their money back. The problem is that the lender has already undertaken the commitment to third parties and as such the money is gone. Most lenders and mortgage brokers make little to no money in the loan application process and usually do not even cover their overhead associated with the application.

Let me state again that I am not defending these guys, but rather saying that just like residential loans, there is a cost to get a loan. due to the much more complicated nature of commercial loans, the due diligence and processing cost are significantly higher.

My advice is that anyone who tells you that you can get funded, without spending significant money, probably will not get you funded. For me, my radar starts flashing when a lender tells me that they can begin to fund the top tiers of the capital stack. As for the fees, the reason these guys got away with this for so long is that $10,000 is not out of line, in fact it is actually on the low end.

Our deals are pretty simple on paper but make should you get an atty. We pay our investors first their preferred return, then depending on the deal we split the monies based on what we agree. We offer no catchup (in case the prefer is not met). If we have significant money in the deal then, we pay the investor their return, pay ourselves our agreed minimum return and then split the extra.