All Forum Posts by: Oren K.

If you do want to talk to the tenant, make sure you get the permission of the current owner.

The owner and tenant are in a contractual relationship. Approaching and speaking to the tenant about the contract that you are not a party to could be considered interference (I am not a lawyer and this is not legal advice).

Most landlords do not allow tenant contact until the deal is firm (i.e. past the DD period) but by then it is to late.

Matt Liu - Commercial leasing in many ways is not that different then residential. By that I mean, very generically, that you are providing specific space and services for a fixed amount of money over a period of time. As such, your interests are to secure the payments. If the lease holder does not pay, who can you look to (e.g. Guarantor?) for the payment.

To me financial statements are irrelevant unless they are a very large organization. A non-profit sinks or swims with their funding sources. If they don't get the grant they were expecting or a key contributor backs out, they are in trouble.

Effectively you are looking for stability, reliability and ultimately predictability of the funding sources.

Here are some / type questions I would be asking:
- Is funding primarily from one source or multiple?
- Does it come from governments or individuals?
- What is their track record in attracting funding?
- Is there a personal guarantor (with assets)?
- How far in advance is funding committed.
- IF they can not make rent, are you prepared to terminate their lease?
- How long will it take to fill the space and at what rate?
- Can you carry the investment while looking for tenants?

I am looking at an opportunity but struggling with some non-financial questions regarding Section 8. After doing a fair bit of reading on the topic over the past couple of days on BP (thanks to all the contributors) it seems clear that there are very positive and very negative experiences. In large part, it seems to relate to how well you screen tenants but also which specific office you are in.

The opportunity is a retiring owner who has self managed the property for quite some time in Cleveland. The building is 20 units, 3 story property mostly 2bd/1bath with retail at street level. There is parking behind the property. The rent roll currently has 2 vacancies in the apartments and ~50% vacancy in the retail space. As well, the rent roll indicates that there are only 1 - 2 turnovers each year (9 tenants 2004-08 and 9 tenants 2009-13). With respect to utilities, each unit has it's own heating, tenants pay for their own gas / electrical and landlord pays for water and trash.

I can see from Google / Bing that there have been street level improvements locally in the past 2-4 years (great resource looking at older and current images) in terms of sidewalks, street paving, etc. The building looks good from the outside and the roof was replaced in 2006. I will only get to see the inside of the units at DD. I intend to put in any offer that the property be off-cycle inspected at purchase (annual in December) and credit for any HUD required repairs.

The CAP rate at the offering price is (~15%) on current NOI after adding in a management fee. Expenses before debt service works out to almost exactly 50% of gross (you would think they read BP :).

Here are my questions;
- What would you be asking prior to an offer to help qualify the property?
- Has anyone here worked with the Cleveland local office and what has been your experience?
- I do not know if the owner has property screened the tenants (still waiting for an answer) but can I re-screen on purchase?
- If I re-screen; can I reject if they don't meet explicit criteria or do I have to wait until their lease is over (I suspect so)?
- Can anyone recommend a PM in Cleveland who has Section 8 experience (I will not be able to self manage)?

That's it for now. Any answers or other questions I should be looking at welcome.

Gentlemen,

Wonderful discussion with well articulated viewpoints.

As much as I am also a math guy and build spreadsheet to help with the analysis, I have to side with Eric K. on this, that it is as much about guts as it is numbers. You can also, usually (within limits) find / construct facts to support an opinion.

The market place is about decision making with imperfect information. When one person has a opinion / vision (the opinion / vision is treated as a fact) that is not shared by others or becomes aware of a change in 'facts' before others (in the stock market, this is called insider information ;), they can step in at the current market price and make a profit (either up or down).

If things could be 'system-ized' to the degree that Roger Doe is seeking, there would be very little volatility as everyone would be using the same method to determine 'value'. It would still be true that the creative person could create 'value' by seeing different possibilities but again, it is a change in 'facts' (the vision of a possibility) that would the drive the change in value; Different inputs, different outputs (or as some would say: Garbage In, Garbage Out).

Also, with respect to the tax appeal analogy / example; using any probability of success only applies if there is a significant number of similar appeals. This is basic probabilistic decision tree analysis. Over time, you learn how successful (and to what degree) appeals are successful and feed that back into the model so it becomes a better predictor of outcomes. You would also 'tune' your appeal to the most successful argument / strategy to increase your likelihood of success. Modeling a single event with out any history in this context is of little value and very arbitrary.

Oren

There are two separate issues. One is contract and the other is relationship.

As Brian Wall says; under contract you owe the commission. But it is my belief, that any agent who takes the profession seriously would wave the contract in this situation despite the fact that the excluded list was not explicitly listed. A good agent works in partnership with their client and the relationship has a lot of value from their perspective.

On the relationship front, I agree with the other comments that something is in order. Even if it was not a lot of time and no funds were spent on marketing; time is money. Helpful comments and suggestions from an knowledgeable person can make a lot of difference.

Having said that, I don't know if cash is the way to go. Nothing wrong with cash but a thoughtful gift might be even more appreciated. Also, next time you have a chance to refer business their way or bring business to them, do it. A referral is the best advertizing an agent can get.

Oren

Pat L., you are of course correct in that, generally speaking (almost a law of physics), no taxing authority willingly gives up revenue and taxes trend upwards.

My original point was a caution to account for the increase in taxes in a purchase decision.

Having said that, there are lots of appeals and quite a few successful ones. I don't know if you can in your jurisdiction, but perhaps you can sit in on other appeals and see what arguments / information works.

From a buyers perspective, figure out when / what your property taxes are going to be. If a property has an assessment of $X and due to the sale, the property is gong to assessed at $2X, your property taxes are going to double.

Even if the impact is a year or two out and appeals not withstanding (which have their own costs), this can tip the cash flow enough to impact your decision.

This can obviously also work in reverse if the purchase will cause the property taxes to go down.

On another thread, a few hours ago, I wrote that with commercial properties, almost always, lenders demand at least a Phase 1 as part of the terms of the loan. After thinking about this, I am not certain this is correct and BP would be a great place to find out.

As a lender, when do you make an environmental assessments a condition of the loan?

As a borrower on commercial property, when haven't you been asked for an environmental assessment?

I am currently looking at a property and have solicited proposals from a couple of firms for both Phase 1 & Phase 2 work.

For anyone who is not familiar with them;

Phase 1 is mostly a paper study of the property by looking at the history of the business on and AROUND the property in question. This involves simple things like checking old phone books for business listed at the address, checking with various agencies regarding any known issues to more complicated such as understanding the type of soil under the property and topography to tell which way contamination is likely to flow.

If the Phase 1 is 'clean', a Phase 2 is not generally needed. Also, Phase 2 is in part dependent on Phase 1. Whether a property has a chemical plant on it or a parking lot going back over the past 50 years, raises, obviously, different concerns. But generally speaking, a Phase 2 will drill a number of boar holes down to the water table and test each sample for different contaminates. The drilling and testing drive the cost of the Phase 2.

The property I am looking at, a 65K sq ft light industrial zoned site with retail frontage and residential all around it, has a history of automotive usage (e.g. repair, storage) but so far no known underground storage tanks (big warning flag) or body work / painting (another warning flag) or industrial manufacturing. The proposals for the Phase 1 have come in between 2-3K. No one, understandably, will give a firm quote on the Phase 2 until the Phase 1 is done but the range is likely to be 8-12K.

If the Phase 2 comes back with contamination, that is where the fun starts. I believe (not certain) it must be reported to the EPA.

EPA has a reputation of making sure it gets dealt with; Tracing it to the source (it may not be on the property investigated) and having it cleaned up by the owner of the source of the contamination. This may affect multiple properties cost much more then the property is worth or insurance coverage. They find the deep pocket or get as much as they can.

This is why every institutional lender I know of and most private lenders want a clean bill of environmental health as part of the loan terms. Leaving aside the value of the property itself, they don't want to be the ones responsible for any 'cleaning' that needs to be done.

Hope this helps.

I came across a site called www.lendinguniverse.com.

Don't know anything about it other then what is on the home page. Looking for opinions / thoughts / comments on service it provides and if anyone has used it.

If you do know the site; is it useful for all types of loans (e.g. Commercial, Residential, etc.) or really only for one type.

Thanks