Transcript Investment - Grodi2theMAX
Slide 1
Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 2
Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
A Free sample background from www.powerpointbackgrounds.com
Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Slide 14
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
A Free sample background from www.powerpointbackgrounds.com
Slide 18
© 2002 By Default!
Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
© 2002 By Default!
Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
A Free sample background from www.powerpointbackgrounds.com
Slide 21
© 2002 By Default!
Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
A Free sample background from www.powerpointbackgrounds.com
Slide 22
© 2002 By Default!
Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
A Free sample background from www.powerpointbackgrounds.com
Slide 23
© 2002 By Default!
Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 3
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
© 2002 By Default!
Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
© 2002 By Default!
Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
© 2002 By Default!
Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
© 2002 By Default!
Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
A Free sample background from www.powerpointbackgrounds.com
Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
A Free sample background from www.powerpointbackgrounds.com
Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 4
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
© 2002 By Default!
Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
A Free sample background from www.powerpointbackgrounds.com
Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
© 2002 By Default!
Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
A Free sample background from www.powerpointbackgrounds.com
Slide 8
© 2002 By Default!
Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 6
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 7
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
© 2002 By Default!
Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
© 2002 By Default!
Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
© 2002 By Default!
Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
© 2002 By Default!
Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
© 2002 By Default!
Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Slide 14
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Slide 15
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 8
Slide 1
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© 2002 By Default!
Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
© 2002 By Default!
Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
© 2002 By Default!
Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
A Free sample background from www.powerpointbackgrounds.com
Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
A Free sample background from www.powerpointbackgrounds.com
Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 9
Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 10
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Slide 14
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
© 2002 By Default!
Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
A Free sample background from www.powerpointbackgrounds.com
Slide 21
© 2002 By Default!
Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
© 2002 By Default!
Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 11
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
© 2002 By Default!
Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
© 2002 By Default!
Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
© 2002 By Default!
Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
A Free sample background from www.powerpointbackgrounds.com
Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 12
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
© 2002 By Default!
Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
A Free sample background from www.powerpointbackgrounds.com
Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
© 2002 By Default!
Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 14
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
© 2002 By Default!
Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 15
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
© 2002 By Default!
Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
© 2002 By Default!
Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
© 2002 By Default!
Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
© 2002 By Default!
Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
© 2002 By Default!
Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
© 2002 By Default!
Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
© 2002 By Default!
Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
© 2002 By Default!
Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 16
Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
A Free sample background from www.powerpointbackgrounds.com
Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
A Free sample background from www.powerpointbackgrounds.com
Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
A Free sample background from www.powerpointbackgrounds.com
Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 17
Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 18
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
© 2002 By Default!
Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
© 2002 By Default!
Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 19
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
© 2002 By Default!
Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
© 2002 By Default!
Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
© 2002 By Default!
Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
© 2002 By Default!
Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
© 2002 By Default!
Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
© 2002 By Default!
Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
A Free sample background from www.powerpointbackgrounds.com
Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
A Free sample background from www.powerpointbackgrounds.com
Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 20
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
© 2002 By Default!
Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
A Free sample background from www.powerpointbackgrounds.com
Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 21
Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
A Free sample background from www.powerpointbackgrounds.com
Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
A Free sample background from www.powerpointbackgrounds.com
Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 22
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
© 2002 By Default!
Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 23
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
© 2002 By Default!
Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
© 2002 By Default!
Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
© 2002 By Default!
Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
© 2002 By Default!
Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
© 2002 By Default!
Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
© 2002 By Default!
Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
© 2002 By Default!
Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 24
Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
A Free sample background from www.powerpointbackgrounds.com
Slide 32
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 25
Slide 1
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© 2002 By Default!
Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 26
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Slide 14
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
© 2002 By Default!
Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
© 2002 By Default!
Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
© 2002 By Default!
Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 27
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
© 2002 By Default!
Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
A Free sample background from www.powerpointbackgrounds.com
Slide 21
© 2002 By Default!
Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
© 2002 By Default!
Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
© 2002 By Default!
Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
© 2002 By Default!
Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
© 2002 By Default!
Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
A Free sample background from www.powerpointbackgrounds.com
Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
A Free sample background from www.powerpointbackgrounds.com
Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
A Free sample background from www.powerpointbackgrounds.com
Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
A Free sample background from www.powerpointbackgrounds.com
Slide 28
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
© 2002 By Default!
Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 29
Slide 1
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© 2002 By Default!
Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Slide 14
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
A Free sample background from www.powerpointbackgrounds.com
Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
A Free sample background from www.powerpointbackgrounds.com
Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
A Free sample background from www.powerpointbackgrounds.com
Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 30
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
© 2002 By Default!
Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 31
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
© 2002 By Default!
Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
© 2002 By Default!
Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
© 2002 By Default!
Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
© 2002 By Default!
Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
© 2002 By Default!
Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 33
Slide 1
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© 2002 By Default!
Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 34
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
© 2002 By Default!
Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
© 2002 By Default!
Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
© 2002 By Default!
Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 35
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Slide 14
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Slide 15
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
© 2002 By Default!
Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
© 2002 By Default!
Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
© 2002 By Default!
Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
A Free sample background from www.powerpointbackgrounds.com
Slide 21
© 2002 By Default!
Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
© 2002 By Default!
Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
© 2002 By Default!
Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
© 2002 By Default!
Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
A Free sample background from www.powerpointbackgrounds.com
Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
A Free sample background from www.powerpointbackgrounds.com
This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
© 2002 By Default!
Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
© 2002 By Default!
Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
A Free sample background from www.powerpointbackgrounds.com
Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
A Free sample background from www.powerpointbackgrounds.com
Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
A Free sample background from www.powerpointbackgrounds.com
Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
A Free sample background from www.powerpointbackgrounds.com
Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 37
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 38
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
© 2002 By Default!
Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
© 2002 By Default!
Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
© 2002 By Default!
Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
A Free sample background from www.powerpointbackgrounds.com
Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
A Free sample background from www.powerpointbackgrounds.com
Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
A Free sample background from www.powerpointbackgrounds.com
Slide 1
A Free sample background from www.powerpointbackgrounds.com
© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
© 2002 By Default!
Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
A Free sample background from www.powerpointbackgrounds.com
Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
© 2002 By Default!
Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
A Free sample background from www.powerpointbackgrounds.com
Slide 8
© 2002 By Default!
Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 3
Slide 1
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© 2002 By Default!
Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 4
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
© 2002 By Default!
Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
© 2002 By Default!
Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Slide 14
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Slide 15
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 5
Slide 1
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© 2002 By Default!
Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
© 2002 By Default!
Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
© 2002 By Default!
Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
A Free sample background from www.powerpointbackgrounds.com
Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
A Free sample background from www.powerpointbackgrounds.com
Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 6
Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 7
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Slide 14
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
© 2002 By Default!
Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
A Free sample background from www.powerpointbackgrounds.com
Slide 21
© 2002 By Default!
Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
© 2002 By Default!
Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 8
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
© 2002 By Default!
Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
A Free sample background from www.powerpointbackgrounds.com
Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 9
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
© 2002 By Default!
Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
© 2002 By Default!
Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 11
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
© 2002 By Default!
Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 12
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
© 2002 By Default!
Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
© 2002 By Default!
Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
© 2002 By Default!
Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
© 2002 By Default!
Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
© 2002 By Default!
Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
© 2002 By Default!
Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
© 2002 By Default!
Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
© 2002 By Default!
Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 13
Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
A Free sample background from www.powerpointbackgrounds.com
Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
A Free sample background from www.powerpointbackgrounds.com
Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
A Free sample background from www.powerpointbackgrounds.com
Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 14
Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 15
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
© 2002 By Default!
Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
© 2002 By Default!
Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 16
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
© 2002 By Default!
Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
© 2002 By Default!
Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
© 2002 By Default!
Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
© 2002 By Default!
Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
© 2002 By Default!
Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
A Free sample background from www.powerpointbackgrounds.com
Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
A Free sample background from www.powerpointbackgrounds.com
Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 17
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
© 2002 By Default!
Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
A Free sample background from www.powerpointbackgrounds.com
Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 18
Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
A Free sample background from www.powerpointbackgrounds.com
Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
A Free sample background from www.powerpointbackgrounds.com
Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 19
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 20
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
© 2002 By Default!
Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
© 2002 By Default!
Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
© 2002 By Default!
Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
© 2002 By Default!
Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
© 2002 By Default!
Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
© 2002 By Default!
Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
© 2002 By Default!
Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 21
Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
A Free sample background from www.powerpointbackgrounds.com
Slide 32
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 22
Slide 1
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© 2002 By Default!
Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 23
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Slide 14
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
© 2002 By Default!
Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
© 2002 By Default!
Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
© 2002 By Default!
Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 24
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
© 2002 By Default!
Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
A Free sample background from www.powerpointbackgrounds.com
Slide 21
© 2002 By Default!
Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
© 2002 By Default!
Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
© 2002 By Default!
Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
© 2002 By Default!
Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
© 2002 By Default!
Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
A Free sample background from www.powerpointbackgrounds.com
Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
A Free sample background from www.powerpointbackgrounds.com
Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 25
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
© 2002 By Default!
Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 26
Slide 1
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© 2002 By Default!
Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Slide 14
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
A Free sample background from www.powerpointbackgrounds.com
Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
A Free sample background from www.powerpointbackgrounds.com
Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
A Free sample background from www.powerpointbackgrounds.com
Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 27
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
© 2002 By Default!
Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
© 2002 By Default!
Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 28
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
© 2002 By Default!
Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
© 2002 By Default!
Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
© 2002 By Default!
Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
© 2002 By Default!
Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
© 2002 By Default!
Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 29
Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 30
Slide 1
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© 2002 By Default!
Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 31
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
© 2002 By Default!
Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
© 2002 By Default!
Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 32
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Slide 11
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Slide 14
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Slide 15
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
© 2002 By Default!
Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
© 2002 By Default!
Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
© 2002 By Default!
Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
A Free sample background from www.powerpointbackgrounds.com
Slide 21
© 2002 By Default!
Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
© 2002 By Default!
Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
© 2002 By Default!
Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
A Free sample background from www.powerpointbackgrounds.com
Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
A Free sample background from www.powerpointbackgrounds.com
This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
© 2002 By Default!
Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
© 2002 By Default!
Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
A Free sample background from www.powerpointbackgrounds.com
Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
A Free sample background from www.powerpointbackgrounds.com
Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
A Free sample background from www.powerpointbackgrounds.com
Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
A Free sample background from www.powerpointbackgrounds.com
Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 34
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 35
Slide 1
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© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
© 2002 By Default!
Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Slide 8
© 2002 By Default!
Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Slide 9
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Slide 10
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Slide 12
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Slide 13
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Slide 16
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Slide 17
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Slide 18
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Slide 19
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Slide 20
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
© 2002 By Default!
Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
© 2002 By Default!
Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
© 2002 By Default!
Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
© 2002 By Default!
Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
© 2002 By Default!
Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
© 2002 By Default!
Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
© 2002 By Default!
Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
A Free sample background from www.powerpointbackgrounds.com
Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
A Free sample background from www.powerpointbackgrounds.com
Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
© 2002 By Default!
Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
A Free sample background from www.powerpointbackgrounds.com
Slide 36
Slide 1
A Free sample background from www.powerpointbackgrounds.com
© 2002 By Default!
Slide 2
© 2002 By Default!
Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Slide 3
© 2002 By Default!
Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Slide 4
© 2002 By Default!
Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
A Free sample background from www.powerpointbackgrounds.com
Slide 5
© 2002 By Default!
“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
A Free sample background from www.powerpointbackgrounds.com
Slide 6
© 2002 By Default!
Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Slide 7
© 2002 By Default!
Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
A Free sample background from www.powerpointbackgrounds.com
Slide 8
© 2002 By Default!
Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Slide 21
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Slide 22
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Slide 23
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Slide 24
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Slide 25
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Slide 26
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Slide 27
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
Slide 28
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Slide 29
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Slide 30
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
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Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
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Slide 38
Slide 1
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Slide 2
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Real Estate
Brokers’
Program
COMMERCIAL REAL ESTATE
Barbara
Grodaes
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Scope - Commercial Real Estate
Industry requiring warehousing,
manufacturing, integrated office space and
yard storage.
Businesses requiring merchandising or retail
facilities as well as office space – included
are those people seeking to buy or sell
existing businesses.
Investors seeking an income and/or capital
appreciation and/or tax benefits from money
used to purchase real property.
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Scope – Continued …
Industrial Real Estate (SIOR) Society of
Industrial and Office REALTORS.
Leasing (more lease transactions completed
than there are sales – office and retail being
the most significant.
Property and Asset Management.
Business Brokerage (deals with the sale of
ongoing businesses with or without real
estate assets) – has securities law
implications.
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“Security” AB Securities Act
The broad definition includes (plus stocks & bonds):
Investment contracts
Fractional interest in oil and gas properties
Interests in profit sharing arrangements
Evidence of indebtedness, and several other items
Condominium apartments, when sold in with a
developer-sponsored rental pool or hotel operation
Interests in limited partnerships
Other interests if involving the three elements of an
investment contract
Other interest in ownership entities involving profit
sharing arrangements, but not profit sharing
retirement plans.
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Investment Contract
Critical test in any real estate transaction is
the manner in which the property is
marketed. Is the property alone offered, or it
is offered with management or in an entity
arrangement sufficient to constitute an
investment contract?
Securities law will apply every time the 3
elements of an investment contract exist.
They are:
1. Investment in a common enterprise.
2. Profit motive; and
3. Expectations that the profit would derive from
the efforts of the seller (sponsor) or a third
party.
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Scope – Continued …
Investment – Investor is essentially buying
an income. Sales cover the sale of incomeproducing projects to investors looking for 3
things: a good rate of return on capital
investment, security of that rate of return and
potential for investment to grow in value.
Users simply look for property to house
business and concerned with location.
Land Sales – Industrial Land Sales,
Commercial Land Sales, Sale of Residential
Subdivision Land to Developers or Builders
and Design Build.
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Investment
Purchase of a property with the expectation
of future profit to maximize wealth. Obtain
the highest return (income plus capital
appreciation) over an extended period of
time.
Influencing factors include (RALMY) Risk,
Appreciation (inflation/deflation), Liquidity,
(Marketability), Management, Yield.
Investment Considerations Comparison
Chart (rating high, moderate or low) is used
to show relationship of risk versus return.
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Fixed Return vs. Variable Return
Fixed Return Investment means rate of
return is established at the beginning of the
investment and is committed for a specific
period of time.
Variable Return Investment means rate of
return varies according to the performance of
the investment.
Remember, real estate generally is a variable
return investment.
“How much additional risk is acceptable for a
1% increase in the expected rate of return?”
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Real Estate Investment
Any real property bought with the intention to
accumulate wealth or to gain a profit – the
buyer’s intention for use of property rather
than the actual nature of the property.
Single-family home as investment real estate
is purchased with the intention of buying,
holding and renting it for investment
purposes and hoping it will increase in value.
Investors concerned primarily with a return of
(and on) their investment through cash flow
from operations and sale proceeds.
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Amenity Properties Characteristics
Amount of financing is based on the ability of
the owner to generate income.
The market is primarily local.
Ownership is usually individual or corporate.
The property is usually owner-occupied.
The value is usually based on market and
replacement costs (including land).
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Investment Properties Characteristics
The amount of financing based on the ability of the
investment to produce income as well as owner’s
credit worthiness.
Generally, the market is local except very large
investments where market is national/ international.
Ownership rights are either fee simple (freehold) or
leasehold and can be held individually, corporately,
or through joint-venture or syndications.
The property usually leased to third-party tenants.
The value is based on investment value. The return
is anticipated from operations and/or eventual sale.
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Areas of Consideration
Return is usually commensurate with risk.
Potential Income Stream can affect the
investor’s perception of risk, according to the
following 3 characteristics of income:
• Quantity of the net income (how much?)
• Quality of the income (how good?)
• Certainty of the net income (how long?)
Appreciation of both land and buildings.
Liquidity (readily convertible to cash) – Real
Estate has limitations but has partial liquidity
as owner can obtain a loan on property.
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Consideration Areas, Continued …
Management involvement – degree can be
controlled by nature of the investment.
Yield (result of the investment) varies.
• Return OF is the return of the amount of money
invested over the life of the investment.
• Return ON is a return for the use of that capital over
the life of the investment.
Leverage (use of borrowed funds to finance
a portion of the cost).
Taxation (how the investment income is
affected by all forms of taxation).
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Investment Advantages
High degree of personal control. One ccan
sell, redevelop, refinance, effect changes,
obtain new tenants, etc.
Potential tax advantage.
Better than average after-tax retun on
investment through operations, a retirement
of debt (mortgage), and positive financing
leverage.
Potential to increase the property value
through change of use or physical upgrading.
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Investment Disadvantages
There is risk – always a possibility of a
downturn in income and value.
Limited liquidity – real estate may not be
liquid because it can’t be disposed of quickly.
Stocks are liquid.
Requires personal involvement – real estate
ownership requires more personal attention
and involvement partly because one can
have more control. Don’t forget about
property management for cost.
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Elements of Investment
Real Estate Investment - package
comprising land, buildings, equipment,
financing/yield & sometimes management.
Land (valued by highest and best use)
determined by location and zoning or land
use designation.
Buildings (main producers of income) have a
limited life.
Equipment usually has a shorter life.
Financing - value by itself can make or break
a deal (low downpayment = higher price).
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Types of Investors
Speculators – buy and hold property for
resale.
Users – buy & retain property for business.
Investors – buy & retain property for income
from operations and eventual sale (private or
institutional).
Land developers – buy, subdivide, promote
and sell on completion.
Builder developers – invest in land and
construct buildings for resale.
Dealers (flippers) buy for turnover/profit.
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Investors’ Behaviour
Prudent investor will prefer the investment
with the following:
•
•
•
•
•
Smaller initial cash investment
Largest periodic cash flows
Largest proceeds from disposition
Earliest cash flow
Safest cash flow.
Primary motivation is to obtain the future
cash flows the investments produce – “more
is better than less”.
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Responsibilities of Agent
Understand the investment objectives of the
client.
Analyze properties that suit these objectives.
More businesslike and unemotional
approach to sales is required.
Have a good knowledge of clients (financial
needs, desires, tax position, present and
expected income, etc., motivation and type).
Develop strong relationships with specialists
to provide proficient service to your client.
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Selling Investment Property
Buyers and Sellers are the decision-makers
in investment real estate.
Industry members are facilitators for them in
the investment decision-making process.
Agents act to support buyers/sellers by
gathering and present information.
Cash flow (before and after tax) for annual
income.
Sale proceeds is the amount of income
generated by a sale.
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Cash Flow Analysis
Annual Property Operating Data Form
(APOD) provides a marketing tool
describing income and financial data to
develop an operating statement and to
determine cash flow before taxes.
It is standardized and communicates with
buyers in selling and supporting value
and presents owner’s cash flow (before
taxes) with existing/alternative financing.
You need to know what each line is used
for and how it is used.
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Cash Flow Analysis Formula
Effective Rental Income = Scheduled
Rental Income – Vacancy & Credit Loss
Gross Operating Income = Effective
Rental Income + Other Income
Net Operating Income = Gross Operating
Income – Total Operating Costs
Cash Flow Before Taxes = Net Operating
Income – Annual Debt Service.
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Reconstructed Statement
Developing a Reconstruction Statement
(proforma) allows the forecasting of the
property’s cash flow before taxes under
normal market conditions for the coming
year. (Buyers are paying for future potential)
Aids present or potential owner in
understanding the future investment potential
of the property.
To develop, listing information (personal
knowledge and research), brokerage files
and interviews can be invaluable.
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Investment Measures
Value is directly related to use. Market
Value, Assessed Value, Reproduction Cost,
and Value in Use - ways to determine value.
Time is money. Agent must be able to
adequately forecast revenue and expenses
(income streams).
Present day value can be put on a future
benefit.
If you know income stream and desired
return, through methods of discounting and
compounding, you can arrive at a present
day value on an investment.
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Discounting/Compounding
Money has a ‘time value’.
Compounding is the amount a dollar will
grow over a given number of periods at a
given rate of interest, if the total investment
including interest is left in the investment.
Discounting (reverse of compounding) is
computing the value of a dollar to be
received in the future at a given discount
rate.
Not having money at hand is opportunity
cost.
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Rate of Return Formulas
V=
I
R
R=
I
V
I =
V=Value
I=Net Operating Income
R=Capitalization Rate
RxV
NOI
Cap Rate
Value
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This formula is used when an
investor uses a capitalization rate
with the net operating annual
income to determine the
maximum an investor can pay to
achieve the value.
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Formulas Continued … (ratios)
Gross Rent Multiplier .. GRM = Price /
Scheduled Rental Income
Capitalization Rate or Yield Rate ..
Capitalization Rate = NOI / Value
Cash-On-Cash Rate .. COC = Cash Flow
Before Taxes (CFBT) / Initial Investment
After Tax Cash-On-Cash .. COCAT = CFAT /
Initial Investment
Equity Return Rate (ERR) .. ERR = CFAT +
Principal Payment +Change in Value / Initial
Equity Investment
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Financing Investments
Financing of real estate investments is
generally based on the ability of the property
to generate sufficient income to repay funds.
Several variable items are significant:
• Rate of interest on the loan.
• Ratio of the loan amount to the value of the property.
• Term of the loan or the period over which the loan is
made and the method of amortization of the loan.
• Ratio of annual debt service to net operating income
or the coverage factor.
The higher the interest rate, the lower the
ratio of the loan amount to the value of the
property – safety of investment decreases.
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Principles of Leveraging
Positive leverage – borrowing at interest rate
below the overall rate of return.
Neutral leverage – borrowing at interest rate
equal to the overall rate of return.
Negative leverage – borrowing at interest
rate higher than the overall rate of return.
Loan-to-Value Ratio = Loan Amount /
Property Value.
Annual Debt Service (ADS) – total principal
and interest payments for year.
Debt Coverage Ratio (DCR) = NOI / ADS
(DCR >1 if NOI is > than ADS)
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Slide 31
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Terms & Sources
3 General Types typically available being:
Interest-Only Loan, Fully Amortized
Mortgage Loan, and Amortized Mortgage
Loan With a Term.
Variety of sources including Institutional
Lenders, Private Investors and sometimes by
the seller of the property.
There are additional costs and expenses
involved because of the financing and should
be evaluated so that the investor can
measure potential yield on amount invested.
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Slide 32
© 2002 By Default!
Loan Application Process
Primary Application, Interim Submission,
Final Submission (broad checklist).
Overview of the Project, Market Studies,
Feasibility Study, Site Location, GeoTechnical Surveys, Plan for Building, Cost of
Project, Management Plan, Ownership
Information, Description of Loan Terms
Requested, Appraisal, Real Property Report,
Environmental Audits.
Consideration for submission to a lender in
obtaining loan for investment property.
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Slide 33
© 2002 By Default!
Environmental Audits
Three-Phased Approach
Sampling and/or Testing required in Phase II
may include Sampling Plan, Analytical Plan
and Health and Safety Plan and then
reported in a Final Report.
Phase III is remedial action plan which may
include Repair, Isolation, Encapsulation,
Enclosure, Removal & Disposal, hopefully
limiting a problem of Stigma – marketimposed penalty which affects property
known to be/was contaminated. Stigma is
intangible but decreases value of property
because of the fear of future hazards.
A Free sample background from www.powerpointbackgrounds.com
Slide 34
© 2002 By Default!
Investor Considerations
Many elements critical to the financing
structure of a real estate investment
opportunity include:
• Term of the Loan, Method of Payment, Default
Conditions and Procedures, Insurance Required, Tax
and Insurance Payment Required, Provincial Laws
Under Which Leases Will Be Interpreted, Assignment
of Rents, Exculpatory (hold-harmless) Provisions,
Assumption and Assignment, Recourse.
Above list is not inclusive but will help the
agent assist the investor in reviewing what is
necessary.
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Slide 35
© 2002 By Default!
Leasing
The field of leasing open to the commercial
industry is literally unlimited.
The only alternative to leasing is ownership.
3 Basic types are retail, industrial and office.
Lease is a contract between the lessor and
lessee for a term.
Tenants receive the use and possession of
the premises for which they pay rent to the
landlord.
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Slide 36
© 2002 By Default!
Types of Leases
Net Lease (net net lease or triple net lease)
requires tenant to pay all ancillary expenses
except structural repairs, landlord’s income
taxes and the landlord’s debt servicing costs.
Gross Lease requires tenant to pay allinclusive amount to the landlord.
Semi-Gross Lease requires landlord to
assume specified portion of operating costs.
Percentage Rent Lease is a form of rental
directly related to the tenant’s sales.
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Slide 37
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Elements of Valid Lease
Identity of the Parties (clearly described)
Description of the Leased Premises
Terms and Commencement Date
Description of Rent, Rent-Free Period
Percentage Rental
Use of Premises
Any Lease Schedules (plot or site plan,
breakdown, legal description, building plan)
Quiet Enjoyment, Restrictions and infinite
number of variations.
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Slide 38
© 2002 By Default!
Trends
Power Centres (strip malls)
Big Box (no-frills warehouse-like)
Loft Condominiums (vacant warehouse-type
space in urban centres to residential usage)
Hotelling (sharing office space)
Commercial Condominium (attractive and
advantageous to owners which want to
control costs or generate profit in the event
real estate values increase).
Basics for success constant – personal
ethics, people skills and good work habits.
A Free sample background from www.powerpointbackgrounds.com