Free Book Commercial Real Estate Finance

2. Commercial Real Estate Financing Winston Rowe & Associates No Upfront Fee Commercial Loans Keeping It Simple & Short Series

3. Disclaimer The work (free book commercial real estate finance copyright 2017) is provided “as is.” Winston Rowe & Associates its licensors make no guarantees or warranties as to the accuracy, adequacy or completeness of or results to be obtained from using the work, including any information that can be accessed through the work via hyperlink or otherwise, and expressly disclaim any warranty, express or implied, including but not limited to implied warranties of merchantability or fitness for a particular purpose. The contents of this eBook are only a non-professional opinion by the writer and are protected free speech. Winston Rowe & Associates and its licensors do not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free. Neither Winston Rowe & Associates nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting there from. Winston Rowe & Associates has no responsibility for the content of any information accessed through the work. Under no circumstances shall Winston Rowe & Associates and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise. Winston Rowe (&Associates) is the name (Trademark) of a company and not a real person living or dead, is only a pen name. Winston Rowe & Associates is not a lender, capital source, banker, securities dealer or financial advisory company. Winston Rowe & Associates does not make credit decisions in connection with loans. Always seek the advice of licensed and qualified professionals before making any investment, business or personal decisions. For more information go to winstonrowe.com

4. Introduction This eBook is written to provide as the title implies, simple and short topics organized into self- contained chapters that you can read in any order. Think of this eBook as a reference that you can pick up and read bits and pieces, whenever you have the time. The Keep it Simple & Short free eBook series, is published by Winston Rowe & Associates, a no upfront fee commercial real estate due diligence firm. We wrote this free eBook to help us get more customers and meet new business people like you. Hence, if you have any questions, please reach out to us at winstonrowe.com which is also a great resource for all types of commercial real estate investors.

5. Table of Contents Disclaimer Introduction Commercial Real Estate Basics Commercial Real Estate Types Explained The Due Diligence Investigation Overview Property Income and Expense Data Investigate Comparable Sales and Market Rents Representations about the Leases Area Demographics Physical Inspection Financial Analysis and Due Diligence Purchase Offer Due Diligence Types of Capital Sources for Financing Supporting Document List Questions In A Loan Application The Loan Submission Process Winston Rowe and Associates Authors Bio Glossary of Commercial Loan Terms Reach out to us at winstonrowe.com

6. Commercial Real Estate Basics Winston Rowe & Associates at winstonrowe.com has custom forms, commercial property analysis and explanations of the financial calculations detailed in this eBook. When people get started with their commercial real estate investing, most of them dream of creating a six-figure annual income stream so that they can get off the job tread mill. Everyone’s seen the get rich quick real estate infomercials selling you a fool proof system you can use in your spare time, with no experience, no money and every deal is a winner. Like all types of investing, commercial real estate is hard work which requires that you develop a proficiency with some basic business metrics that are determined through a due diligence investigation. Perfect deals with absolutely no associated risk just do not exist, so don’t waste your time searching for them. In fact, the more challenges there are associated with a project, the more reward one typically can derive from one’s efforts. Make a calculated decision to invest (or not) based on your ability to achieve the rate of return necessary given the amount of risk assumed. Due diligence requires the investor to verify everything before proceeding to the closing table. In addition to the physical condition of the property, there are a multitude of intangibles that must be considered when you are evaluating a commercial property for acquisition. Every document (especially the financials) related to an asset’s historical operation should be examined, and you must confirm that everything you have been told about the property is accurate. Back To Top

7. Commercial Real Estate Types Explained Your first commercial real estate objective is to identify the property type. Your choice of a commercial property will be based on data about its location, its income stream, and its physical attributes. Once you identify the price range, location, and types of properties that are candidates to invest in, then you need to identify which, if any, of these commercial properties you actually want to invest in. If you’re currently considering a commercial real estate transaction and have questions concerning the various property types. Winston Rowe & Associates is always ready to answer questions at winstonrowe.com Commercial real estate can be broken down into several different categories. Office Office buildings are usually loosely grouped into one of three categories: Class A, Class B, or Class C. Class A buildings are considered the best of the best in terms of construction and location. Class B properties might have high quality construction, but with a less desirable location. And Class C is basically everything else. Central Business District (CBD) buildings located in the central business district are in the heart of a city. In larger cities and in some medium sized cities. Suburban office buildings, are generally classified as office space generally includes midrise structures of 50,000 to 500,000 square feet located outside of a city center. Cities will also often have suburban office parks which assemble several different midrise buildings into a campus-like setting.

8. Industrial Industrial property is really a special use category that most large manufacturers would fall under. These types of properties are heavily customized with machinery for the end user, and usually require substantial renovation to re-purpose for another tenant. Light Assembly, are much simpler than the above heavy manufacturing properties, and usually can be easily reconfigured. Typical uses include storage, product assembly, and office space. Flex space is industrial property that can be easily converted and normally includes a mix of both industrial and office space. Warehouses are very large, normally in the range of 50,000 to 1,000,000 square feet. Often these properties are used for regional distribution of products and require easy access by trucks entering and exiting highway systems. Retail Strip malls are smaller retail properties that may or may not contain anchor tenants. An anchor tenant is simply a larger retail tenant which usually serves to draw customers into the property. Community retail centers are normally in the range of 100,000 to 500,000 square feet. Multiple anchors occupy community centers, such as grocery stores and drug stores. Shopping Malls range from 500,000 to 2,000,000 square feet and generally have a handful of anchor tenants such as department stores or big box retailers. Out parcel retail centers contain one or more out parcels, which are parcels of land set aside for individual tenants such as fast-food restaurants or banks. Apartments Suburban garden apartments started popping up in the 1960s and 1970s, as young people moved from urban centers to the suburbs. Garden apartments are typically 3 to 4 stories with 25 to 400 units, no elevators, and surface parking. Midrise Apartments are usually 5 to 10 stories, with between 30 to 100 units, and elevator service. High rise apartments are found in larger markets, usually have 100+ units, and are professionally managed.

9. Hospitality Full service hotels are usually located in central business districts or tourist areas, and include the big name flags. Hotels or motels in the limited service category are usually boutique properties. These hotels are smaller and don’t normally provide amenities such as room service, on-site restaurants, or convention space. Extended stay hotels. These hotels have larger rooms, small kitchens, and are designed for people staying a week or more. Land Greenfield land refers to undeveloped land such as a farm or pasture. Infill land is located in a city has usually already been developed, but is now vacant. Brown fields, are parcels of land previously used for industrial or commercial purposes, but are now available for re-use. These properties are generally environmentally impaired. Special-Purpose The above categories of real estate cover the major types of commercial real estate. However, there are plenty of other types of commercial real estate that investors construct and own. Examples of special purpose commercial real estate include self-storage, assisted living facilities, car washes, theme parks, bowling alleys, marinas, theaters, funeral homes, community centers, churches and restaurants. Back To Top

10. The Due Diligence Investigation Overview It’s important to be diligent in your analysis of the finances and of the physical property to be as certain as possible that the price you pay is fair or the prospective property is not a looser. Winston Rowe & Associates assists clients with expert due diligence analysis free of charge for commercial real estate transactions. Check us out at winstonrowe.com for more information. Property Income and Expense Data If you’re considering the purchase of an income property, you need to know as much as you can about its income and expenses. If you’re considering the purchase of an income property, the information you receive will probably come either directly from the seller or indirectly, through the seller’s agent. Each of the following income and expense items on this list will need to be verified with supporting documentation from the seller. Example Income & Expense List Gross Scheduled Rent Income Other Income Accounting Advertising Insurance (fire and liability) Janitorial Service Lawn/Snow Legal Licenses Miscellaneous Property Management Repairs and Maintenance Resident Superintendent Supplies Taxes Real Estate Personal Property Payroll Other Trash Removal Utilities Electricity Fuel Oil

11. Gas Sewer and Water Telephone Property Taxes Look to see if the current owner has received some sort of tax abatement that may expire or may not apply at all to a new owner. Also, look for evidence of a “phase-in” of a new assessment. Local governments are also masking taxes as “fees”, for example; excessive inspection fees, annual parking permits for your tenants or expensive business licenses. Utility Bills Most gas, electric, and water companies will give you usage information if you go online for their smart meter data. This is the most efficient way to collect expense data on a property. This needs to match the seller’s income and expense statement data, if not ask for an explanation. If what you’ve uncovered turns out to be an honest mistake, you’ve served notice that you are a diligent commercial real estate investor. The same holds true for the rest of the information contained within the income and expense statement. Sections of the Seller’s Tax Return If the owner holds the property as an individual, then the income and expense information probably appears on Schedule E, and he or she can show you just that form. The seller may own the property as a limited liability company (LLC) or some other form of partnership, in which case the property has its own tax return. When you get the correct supporting IRS document, have the client sign an IRS 4506 (t) form. This will enable you to get a copy of the business tax return. If a seller will not allow you to contact the IRS to verify information, most likely the documents presented are fraudulent. Back To Top

12. Representations about the Leases Tenant leases are the cash flow for the commercial property and are also considered an asset. The lease documents are the assets that you are buying; the seller included the building for free. You need to understand it and its cash flow value. You’re going to be subject to the terms of those leases, and do the leases agree with the seller’s representations? You want to know. How long is each lease? Do tenants have options to renew, and at what rates. The age of the tenant leases. If the leases all start around the same date, a seller may have leased up the property with less than optimal tenants just to generate cash flow to list the property for sale. It’s important that the leases are subordinated upon the sale, which means you own the tenants and the leases not the former owner. Review the leases making sure that they are legal binding documents and were prepared properly. Verify the identity of each lease holder ensuring that they are who they say they are. Sometimes a business may get sold or transferred without the property owner’s knowledge. Or an apartment tenant may have sub-leased. In the purchase agreement, have language making the seller liable for the representations contained within the tenant leases. These basic questions will have an important effect on your analysis of the current figures and on the forecasts you’ll make about the property’s future performance and risk. Back To Top

13. Investigate Comparable Sales and Market Rents Through the power of the Internet, it’s fairly easy to check the sales of comparable Properties, there are many quality sources of data for this. One problem you may have is the lack of enough comparable sales. In this phase of your due diligence, is the leg work part. Picking up the phone to check rental rates and drive around looking at comparable properties in the area is a good idea. You may discover that the property is priced to high or is not worth investing in because the market rents can’t support debt service, operating expenses and taxes. As you get into serious property analysis and projections, you need to know what tenants are willing to pay for space and how much owners are obliged to pay for operating expenses. Area Demographics Demographics is essentially your pre-deal due diligence. This is the one area you want to deal with before you begin a serious search for an investment property. It pertains not to a particular property you plan to buy, but rather to the location in which you plan to invest. If you’re going to get involved in this neighborhood, then you’d better know what you’re getting into. Important things to consider in your demographic due diligence are. What is the median income for the area? Who are the major employers within a 10 mile radius? Are there a lot of young family’s or is it mostly people over 60. You’re looking for a mix. A population density of 500,000 or more is required by most capital sources. Is the area low or high income, you need people to be able to afford the rent. Look for graffiti, this is sometimes call the graffiti index, street crime is the number one destroyer of property values. What are the conditions of the other properties in the area?

14. The following is an example list demographic detail items. Population Population Growth Age Distribution Income Range Occupational Profile Major Employers Median Home Price Age of Housing Stock Housing Mix Apartment Vacancy Apartment Rent (range) Office Vacancy Office Rent/sf (range) Retail Vacancy Retail Rent/sf (range) Retail Area Traffic Count Zoning Local Government Issues General Neighborhood Appearance Back To Top

15. Physical Inspection Maintenance schedules need to be verified you’ll need proof that work was preformed, who performed the work, past city inspections and a permit history for major improvements or repairs. If the physical asset is in good condition, then the income stream can flourish; if it’s in poor condition, the stream can dry up. A property that presents you with substantial, unexpected repair costs will quickly deplete your cash flow and reduce that property’s investment value. As you conduct the Inspection, make a note of the cost to replace or repair. This is going to be very helpful during the purchase offer and financing phases of a potential real estate investment. Example Inspection List: Construction type (frame, masonry) Exterior walls (type & condition) Roof (type & condition) Foundation (type & condition) Floors and flooring Interior walls (type & condition) Windows Chimneys Plumbing & fixtures Electrical & fixtures Water & sewer HVAC, oil tanks Doors & hardware Kitchens Bathrooms Security Fire protection Sewer & Water Elevators Lobbies, public restrooms Pest infestations Site Environmental assessment Landscaping Drainage Paving Sidewalks & curbs Outside lighting Trash receptacles

16. Back To Top Financial Analysis and Due Diligence When you're considering the purchase of commercial income property you need to know as much as you can about the income and expenses before you even consider making an offer. If you need help or advice with commercial property calculations and analysis, Winston Rowe & Associates always welcomes calls or emails. Please go to winstonrowe.com for help. Here's how to make a great investment in a commercial property. Don't trust any numbers you hear from the seller, the real estate agent or anyone else representing the seller, use a third party firm that specializes in conducting a professional due diligence investigation. It's critical that you have a realistic idea of what the value is, and what the income and expenses will be and accuracy of the information is everything A professional due diligence investigation will get to the hard evidence from using business analysis metrics to find out what those numbers have been in the past and what they may be in the future. The Financial Metrics of Commercial Real Estate Investing: Gross Rent Multiplier (GRM): Gross rent multiplier is a rough measure of the value of an investment property that is obtained by dividing the property's sale price by its gross annual rental income. GRM is used in valuing commercial real estate. Utilizing the GRM you can accurately determine the value of the commercial real estate prior to ordering an appraisal. Additionally, the GRM can also verify or discredit an existing appraisal. Net Operating Income (NOI): Net operating income (NOI) is used in the real estate market to determine the revenue that a property generates less operating expenses. NOI also determines a property's capitalization rate, or rate of return. Occupancy: The occupancy rate is the number of units filled divided by the total number of units. For instance, if there are 95 units occupied out of a 100-unit apartment complex the occupancy rate is 95%.

17. Vacancy: Some investors prefer to use the vacancy rate instead of the occupancy rate. The vacancy factor is just the reciprocal of the vacancy. For instance, in the example above if there were 5 empty units out of a 100-unit apartment complex the vacancy factor would be 5%. Absorption: The absorption rate is the rate at which available rental units are rented in a specific real estate market during a given time period. It is calculated by dividing the total number of available apartment units by the average number of sales per month. For example, this figure shows how many months it will take to exhaust the supply of apartment units on the market. Capital Expenditure (CapEx): Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical assets such as everything from repairing a roof to building, to purchasing a piece of equipment like water heaters, air conditioners, or new plumbing. Cash Reserves: This is very important to every potential capital source; it's the amount of cash that you set aside when running a business. A business that is not properly capitalized can fail in a very short period of time. Internal Rate of Return (IRR): Internal rate of return (IRR) is a metric used in capital budgeting measuring the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. Loan-to-Value (LTV): Loan-to-value ratio (LTV ratio) is a lending risk assessment ratio that financial institutions and others capital sources examine before approving a mortgage. Typically, assessments with high LTV ratios are generally seen as higher risk and, therefore, if the mortgage is approved, the loan generally costs the borrower more to borrow. Debt Service Coverage (DSC): The formula for DSC is Net Operating Income divided by the total debt service. Typically, capital sources want to see at least a 1.10 DSC. This means that for every $1.00 of debt service, the property is producing $1.10 of cash-flow to service that debt.

18. Capitalization Rates (Cap Rate): The capitalization rate is the rate of return on a real estate investment property based on the income that the property is expected to generate. The capitalization rate is used to estimate the investor's potential return on his or her investment. Even though this metric is simple, most real estate brokers manipulate this number (usually by using forecasted income numbers rather than the actual numbers). Always take a stated cap-rate with a grain of salt and do your own math. Back To Top Purchase Offer Due Diligence When you have identified a property on which you want to make an offer, what issues would you expect to hammer out in your negotiations? Once your negotiations with the seller are completed and a purchase contract is in place. The next step is the financing. All of your efforts up to this point have been preparing for this. Many prospective real estate deals fall apart during the financing phase because the deal has not been prepared properly to submit to a capital source. Winston Rowe & Associates can develop custom commercial property lists for you. Check us out at winstonrowe.com The following is an example of a check list to help you prepare the purchase agreement. Example Purchase Agreement Checklist: Price Property inspection list Amount of deposit Offer withdrawn if not accepted by (date) Inclusions (i.e., personal property) Closing date Possession date Seller’s disclosure of known defects Seller’s certification of accuracy of attached lease terms and operating expense data Schedule of security deposits Structural inspection contingency Environmental survey contingency Buyer’s access to property, documents, tenant records; amount of time for buyer’s due diligence Penalty for a default by buyer

19. Penalty for a default by seller Financing contingency—third-party capital source; amount and terms Financing from seller; amount and terms Seller’s and Buyer’s obligations in case of damage, destruction, or condemnation prior to closing Guaranty by seller not to amend or enter into new lease agreements Guaranty by seller not to amend or enter into new service contracts Survival of warranties and representations Seller’s rent guaranty in the event of vacancy before closing Back To Top Types of Capital Sources for Financing The distinctions between the types of commercial capital sources are less than clear at times, but we’ll do our best to break them down into the following categories. We always welcome questions about the capital markets; check us out online at winstonrowe.com Permanent Bank Capital Sources: Permanent loans are usually made by either by life insurance companies, conduits, banks, or credit unions. In terms of the number of commercial loans written, banks are by far the most active makers of permanent loans. Bridge Capital Sources: Direct commercial bridge capital sources occupy their own niche within the commercial mortgage industry, known as the secondary lending market, which has evolved to provide financing to a particular set of borrowers, transactions and property types that other types of capital sources are unable to accommodate. Portfolio Capital Sources: So-called "portfolio" capital sources make commercial mortgages with the intention of retaining the generated asset as part of the company's portfolio. The two most common types of portfolio capital sources are commercial banks and life insurance companies; but this category also includes such entities as pension funds, REITs, and credit unions. CMBS Conduit: Commercial mortgage-backed securities (CMBS) arose in the late '80s following the savings and loans crash as a way of enabling investors to participate in commercial mortgage lending within a managed context.

20. Commercial mortgages that the conduit originates become part of a standardized pool of such assets, shares of which are then sold to investors. Thereafter, the conduit capital source may service the loan, but the interest payments are collected on behalf of the investors. Conduit capital sources are the main source for long-term financing for purchase and refinance of conventional commercial properties. Private Investors and Funds: A more diverse and fluid category of commercial mortgage capital sources is occupied by so- called "private" or "hard money" capital sources. Generally the main distinctions between these capital sources and the above "institutional" capital sources are: (1) that the loaned funds generally derive from a private individual or a group of private individuals, rather than from a company's assets, and (2) that hard money capital sources are willing to make loans with higher levels of risk in return for a higher return on the investment. However, there are now many self-described hard money capital sources whose internal funding structure is quite similar to that of portfolio capital sources, so the latter distinction is probably more crucial. Most bridge capital sources fall into this latter category. Small Business Administration (SBA): These commercial loans are written by private companies, such as banks and specialty finance companies, but which are largely guaranteed by the Small Business Administration. SBA loan guarantees were created by Congress to encourage the formation and growth of small businesses. United States Department of Agriculture (USDA): The Department of Agriculture’s Business and Industry loan program is very similar to the SBA loan program, where a conventional capital source makes the loan but the USDA guarantees most of it. USDA Business and Industry loans were created to help create jobs in rural areas. Federal Housing Administration (FHA) 223 (f): FHA 223(f) apartment loans are available for the acquisition or refinancing of 5+ unit multifamily properties and are a great financing option for borrowers looking for maximum leverage and longer fixed rates and terms.

21. There are no income or rent restrictions under Section 223(f) unless otherwise required by a project based HAP contract or other regulatory agreement. FHA 223(f) insured mortgages are non-recourse with no market - economic or population - restrictions. Back To Top Supporting Document List All of the due diligence you’ve conducted up to this point, hopefully has prepared you for the supporting document phase. This is the most important part of the commercial real estate loan submission process. Whenever you seek to borrow money for a real estate investment, you will have to understand the process and the documentation. Before you even consider presenting an offer to purchase a commercial real estate investment, you will need to package your loan proposal ahead of time. Then be prepared to support the facts to a capital source’s underwriter during their due diligence investigation. If you don’t provide everything that’s requested or take too long, your financing request will never fund. Winston Rowe & Associates, a due diligence and advisory firm, if you need assistance, check us out at winstonrowe.com Since there is really no typical transaction, the following is an example supporting document list and in the following chapter a typical list of questions that you’ll see on a loan application. Financial Supporting Documents: The last three (3) years corporate tax returns The last three (3) years personal tax returns Name and address of corporate bank Business profit & loss statement Most recent copy of business bank statement Personal financial statement for all guarantors Detailed use of proceeds

22. Property Supporting Documents: Schedule of tenants leases Copies of tenant leases Schedule of units with square foot per unit Schedule of improvements to be made with cost breakdown to subject property Exterior photos of subject property photos of parking lot, street view Interior photos of subject property Appraisal List of all litigation past and present Guarantor Supporting Documents: 4506 (t) IRS form Tri merge credit report Government issued photo ID front and back copy Articles of Incorporation Professional resume Personal financial statement Personal bank account information Back To Top Questions In A Loan Application Most capital sources that finance commercial real estate throughout the United States utilize similar questions within their loan applications and summaries for the initial review of your proposed financing request. The world of commercial real estate finance is not standardized; hence just about every capital souse uses their version of an application form and has their own intake process. The areas most focused on in a potential capital source’s application form are property type, value, loan amount, loan to value (LTV), debt service ratio (DCR), transaction type (purchase or refinance) and business and personal financials for the property and owner. Contact us if you need custom submission forms developed or a little help with your commercial loan application at winstonrowe.com

23. The following are example questions that you may encounter on a commercial loan application form. Property& Valuation Section: Building Name Borrower’s Name Building Type Number of Units Age of Building(s) Property Address City, State Zip Building Website Building Phone Number Building Email Address Is the Building Listed for Sale Link for the Listing Cash Down Payment Total Financing (Loan) Amount Required Cash Out Amount Detailed use of proceeds required Present Value of the Building Date of Last Appraisal Date of Last Sale Transaction Type Section: REO / Foreclosure Short Sale Land Contract Chapter 11 Bankruptcy Family Transfer Rate & Term Cash Out Refinance Tax Sale

24. Property Income & Expense Section: Total Number of Rental Units Current Occupancy Rate Current Vacancy Rate Loan to Value (LTV) Gross Building Area (GBA) Total building floor area square feet Usable Square Footage (USF) Rentable Square Footage (RSF) Annual Gross Scheduled Income (GSI) Money generated by the occupied units Potential income lost due to vacancy Annual Gross Operating Income (GOI) Total Annual Operating Expenses (OE) Net Operating Income (NOI) Annual Debt Service (ADS) Monthly mortgage payments Debt Coverage Ratio (DCR) Capitalization Rate (Capx) Current Mortgage Holder Section: Current Mortgage Holder (Bank / Capital source) Contact Person Street Address City, State, Zip Code Website Email Address Telephone Number 1st Current Mortgage Balance 1st Original Mortgage Balanc Date of Original Mortgage Current Rate & Term Any Late Mortgage Payment Mortgage in Default / Forbearance Is the Property in Bankruptcy

25. Applicant Information Section: Company Name Company Street Address City, State, Zip Phone Number Email Address Company Web Site State of Incorporation Date of Incorporation County Countr Borrower Name Professional Resume Personal Financial Statement Source[s] of income (employer) Net Worth Annual Gross Pay Liquid Assets (Cash) Liabilities Years of Business Experience Credit Score (FICO) Bankruptcy in Last 10 Years Judgments in the Last 10 Years Any Litigation or In Last 10 Years Income Tax Returns Current & Available Back To Top

26. The Loan Submission Process When you submit your commercial real estate loan application, it may seem like it disappears into a black hole. If you need help to prepare and package your commercial real estate loan proposal reach out to us at winstonrowe.com Some capital sources like to prequalify potential borrowers to determine how much they can afford, with an initial telephone or personal interview. This will also give you and your capital source an opportunity to see which loan program would be most appropriate for your needs. The capital source will gather basic information, such as your income and existing debts. To initiate the loan process, you must then complete and submit a loan application. Once your application is received, a loan officer or processor will review your credit reports, the amount of available collateral, and your income. Your loan officer will determine if any additional documentation is required. There almost always is. If you are purchasing real estate, you may also need to submit preliminary environmental reports, area maps, title reports, property appraisals, and lease summaries. If you are going through a broker, he or she will package your loan request and submit it to several capital sources for approval. After your commercial loan package is submitted to the decision makers — either a loan committee or underwriter — the processor will present you with a letter of intent or term sheet. This is a formal document intended to ensure that all parties involved (the capital source and your company) are on the same page. The letter of intent may include the names of involved parties, amount of financing, type of security (collateral), and other key terms. Decisions are usually made in one to five days. However this is a client driven process. If you do not submit supporting documentation correctly or in a timely manner, your financing proposal will not have a positive outcome. Also, during the underwriting process, you may need to furnish additional documentation. After all third-party reports are successfully completed and underwriting conditions are satisfied, the final loan package is resubmitted to the loan committee for final approval.

27. At this point the capital source may issue a final full loan commitment. If your loan is approved, your closing agent, who may be an attorney, a title company, or escrow company representative, will receive closing documents. Your closing agent will record or file deed transfers and mortgages, order title insurance, coordinate the exchange of funds, and arrange for you to sign the loan documents. Closing can take place within days of approval or underwriting. At the closing, the capital source funds the loan with a cashier’s check, draft, or electronic wire transfer. Back To Top Winston Rowe and Associates Authors Bio Winston Rowe & Associates is a no upfront fee professional consulting firm that performs an initial due diligence review and analysis for commercial real estate transactions. With a core focus on flexibility, we really want to be able to find a way to help everyone who comes to us find a funding solution that meets their needs. The best funding solutions occur when we combine data with consultation and common sense. That's why Winston Rowe & Associates actually wants to speak with clients for free, so we can truly understand your business and its distinct needs. We have access to a full spectrum of capital solutions and sources nationwide; check us out on line at winstonrowe.com If you have an idea for an eBook subject please feel free to let us know. Back To Top

28. Glossary of Commercial Loan Terms A Adjoining In actual contact with another object (i.e., attached). Same as “Contiguous”. Agent An individual/entity who transacts, represents, or manages business for another individual/entity. Permission is provided by the individual/entity being represented. Assignee Individual to whom a contract is assigned. Assignment The manner by which a contract is transferred from one individual to another individual. Assignor An individual who transfers a contract to another individual B Build Out The construction or improvements of the interior of a space, including flooring, walls, finished plumbing, electrical work, etc. Building Permit Written government permission to develop, renovate, or repair a building. C Cancellation Clause A provision in a contract (e.g., lease) that confers the ability of one in the lease to terminate the party's obligations. The grounds and ability to cancel are usually specified in the lease. Capital Improvement

29. Any major physical development or redevelopment to a property that extends the life of the property. Examples include upgrading the elevators, replacement of the roof, and renovations of the lobby. Capitalization Rate (Cap Rate) The value given to the property when the Net Operating Income (NOI) is divided by the current market value or sales price. A cap rate can be used as a rough indicator of how quickly an investment will pay for itself. The higher the cap rate, the better. Example: A property has an NOI of $100,000, and the price is $1,000,000. The cap rate would be 10% ($100,000/$1,000,000 = 10%). Based on this calculation, you would see a return in 10 years. Certificate of Occupancy (CO) The government issues this official form, which states that the building is legally ready to be occupied. Chattel Household goods, including personal property such as lamps, desks, and chairs. Common Area Maintenance (CAM) This is the amount of additional rent charged to the tenant, in addition to the base rent, to maintain the common areas of the property shared by the tenants and from which all tenants benefit. Examples include: snow removal, outdoor lighting, parking lot sweeping, escalators, sidewalks, skyways, parking areas, insurance, property taxes, etc. Most often, this does not include any capital improvements that are made to the property. Commissions Split An agreed upon division of commissions earned between a sales agent and sponsoring broker, or between the selling broker and listing broker. Example: The seller of a $1,500,000 building paid a $75,000 commission at closing. The commission split was 50/50 between the listing and selling brokers. Each broker then split the fee received with the sales agent responsible for the sale, in accordance with each firm's commission split schedule. Contiguous Touching at some point or along a boundary

30. Contingency A requirement in a contract that must occur before that contract can be finalized Contract A legal agreement between entities that requires each to conduct (or refrain from conducting) certain activities. This document provides each party with a right that is enforceable under our judicial system. Covenants Wording found in deeds that limits/restricts the use to which a property may be put (e.g., no bars). D Deed A signed, written instrument that conveys title to real property. Deed Restriction An imposed restriction in a deed that limits the use of the property. For example, a restriction could prohibit the sale of alcoholic beverages. Default Failure to fulfill a promise, discharge an obligation, or perform certain acts. Delivery Transfer something from one entity to another. E Ejectment Action to regain possession or real property. This is a last-ditch effort that is used when there is no relationship between landlord and tenant. Eminent Domain The government's right to condemn and acquire property for public use. The government must provide the owner fair compensation. Endorsement

31. Signing one's name on the back of a check. Escrow A written agreement among parties, requiring that certain property/funds be placed with a third party. The object in escrow is released to a designated entity upon completion of some specific occurrence. Estoppel Certificate A legal instrument executed by the one taking out the mortgage (i.e., mortgagor). The owner of a property may require an individual leasing a property to sign an estoppel certificate, which verifies the major points (e.g., base rent, lease commencement and expiration) existing lease between the landlord and tenant. Eviction (Actual) Physical removal of a tenant either by law or force. Eviction (Constructive) The landlord or his agents disturb the tenant, rendering the leased space unfit for the tenant's previous use. Eviction (Proceeding) A legal proceeding by the landlord to remove a tenant Exclusive Agency An agreement in which one broker has exclusive rights to represent the owner or tenant. If another broker is used, both the original and actual broker are entitled to leasing commissions. F Full Service Lease See Gross Lease Fiduciary A person who represents another on financial/property matters. Fixtures

32. Personal property so attached the land or building (e.g., improvements) it is considered part of the real property. G Grace Period Additional time allowed to complete an action (e.g., make a payment) before a default or violation occurs. Gross Lease A lease of property whereby the landlord (i.e., lessor) pays for all property charges usually included in ownership. These charges can include utilities, taxes, and maintenance, among others. H Hard Money Loan An asset-based loan in which a borrower receives funds that are secured by the value of a piece of real estate and often at a higher interest rate than a traditional commercial property loan. They are used for acquisitions, turnaround situations, foreclosures and bankruptcies. Holdover Tenant A tenant who remains in possession of leased property after the lease term expiration. I Incompetent An individual who is unable to handle his own affairs by reason of some medical condition (e.g., insanity, Alzheimer's). Instrument A written legal document created to secure the rights of the parties participating in the agreement. Irrevocable Incapable of being altered, changed, or recalled. J Joint Tenancy

33. Ownership of real property by two or more individuals, each of whom has an undivided interest with the right of survivorship. Judgment A formal decision issued by a court relating to the specific claims and rights of the parties to an act or suit. L Landlord One who rents property to a tenant. Lease A contract whereby the landlord grants the tenant the right to occupy defined space for a set period at a specific price (i.e., rent). Leasehold The estate or interest a tenant has as stated in the tenant's lease. Lessee An individual (i.e., tenant) to whom property is rented under a lease. Lessor An individual (i.e. landlord) who rents property to a tenant via a lease. Letter of Intent An informal, usually non-binding, agreement among parties indicating their serious desire to move forward with negotiations. Listing An employment contract between principal and agent that authorizes the agent (such as a broker) to perform services for the principal and his property. Loss Factor What percentage of the gross area of a space is lost due to walls, elevator, etc. Rule of thumb in Manhattan is approximately 15%

34. M Mandatory A requirement that must be conformed to as specified in any written document. Market Price The actual selling or leasing price of a property. Market Value The expected price that a property should bring if exposed for lease in the open market for a reasonable period of time and with market savvy landlords and tenants. Meeting of the Minds When all individuals to a contract agree to the substance and terms of that contract. Minor A person under a legal age, usually under 18 years old. Multiple Listing An arrangement among Real Estate Board of Exchange Members, whereby each broker presents the broker's listings to the attention of the other members so that if a lease results, the commission is divided between the broker bringing the listing and the broker making the lease. N Net Lease Also called triple net lease. The lessee pays not only a fixed rental charge but also expenses on the rented property, including maintenance. Example: Super Saver Markets enters into a triple- net lease. They are to pay for all the taxes, utilities, insurance, repairs, janitorial services, and license fees; any debt service and the landlord's income taxes are the responsibility of the landlord. Non-Disturbance Agreement The tenant signs this to prevent himself from being evicted if the property owner does not pay its mortgage to the bank.

35. Notary Public A public officer who is authorized to witness and verify certain documents (e.g., contracts, deeds, mortgages). Also an affidavit may be sworn before this public officer. O Oblige The person who will receive the outcome of an obligation. Obligor An individual who has engaged to perform an obligation to another person (i.e., oblige). Open Listing A listing given to any broker without liability to compensate any broker except the one who first secures a buyer who is ready, willing, and able to meet the terms of the listing, or secures the acceptance by the landlord of a satisfactory offer; the lease of the property automatically terminates the listing. Option A right given to purchase or lease a property upon specified terms within a specified time. If the right is not exercised, the option holder is not subject to liability for damages. If the holder of the option exercises it, the grantor of option must perform the option’s requirements. P Percentage Lease A lease of property in which the rent is based upon the percentage of the sales volume made on the specific premises. There is usually a clause for a minimum rent as well. Personal Property Any property which is not real property. Examples include furniture, clothing, and artwork. Power of Attorney A written instrument duly signed and executed by an individual which authorizes an agent to act on his behalf to the extent indicated in the document. Principal The employer (e.g., landlord) of an agent or broker. This is the agent's or broker's client.

36. Q Quiet Enjoyment The right of a landlord or tenant to use the property without disturbances. R Real Estate Board An organization whose members consist primarily of real estate professionals such as brokers. Real Estate Syndicate When partners (either with or without unlimited liability) form a partnership to participate in a real estate venture. Real Property Land and any capital improvements (e.g., buildings) erected on the property. Realtor A coined word which may only be used by an active member of a local real estate board, affiliated with the National Association of Real Estate Boards. Rent Compensation from tenant to landlord for the use of real estate. Restriction A restriction, often specified in the deed, on the use of property. Revocation An act of rescinding power previously authorized. Rule of Thumb A common or ubiquitous benchmark. For example, it is often assumed that each worker in an office will need approximately 250 square feet of space. S Situs

37. The location of a property. Specific Performance When a court requires a defendant to carry out the terms of an agreement or contract. Square Feet The usual method by which rental space is defined. It is the area of that space, calculated by taking length times width. For example, a room 30 feet by 60 feet has an area of 1,800 square feet. Statute A law established by an act of legislature. Statute of Frauds State law (founded on ancient English law) which requires that contracts must be reduced to written form if it is to be enforced by law. Statute of Limitations A law barring all right of redress after a certain period of time from the moment when a cause of action first arises. Subagent An agent of an individual already acting as an agent of a principal. Subletting The leasing of space from one tenant to another tenant. Subscribing Witness The witness to the execution of an instrument who has written his name as proof of seeing such execution. Surrender The cancellation of a lease by mutual consent of the tenant and the landlord. T

38. Tenancy at Will A license to occupy or use lands and buildings at the will of the landlord. Tenancy by the Entirety An estate which exists only between husband and wife. Each has equal right of enjoyment and possession during their joint lives, and each has the right of survivorship. Tenant Improvements Work done on the interior of a space, can be paid for by landlord, tenant, or some combination of both, depending on the terms of the lease. Tenancy in Common Ownership of property by two or more individuals, each of whom has an undivided interest, without the right of survivorship. Tenants at Sufferance An individual who comes to possess land via lawful title and keeps it in perpetuity without any title. Tie-in Arrangement A contract where one transaction depends upon another transaction. Tort A wrongful act or violation of a legal right for which a civil action will lie. Triple Net Lease A lease requiring tenants to pay all utilities, insurance, taxes, and maintenance costs. Example: Super Saver Markets enters into a triple-net lease. They are to pay for all the taxes, utilities, insurance, repairs, janitorial services, and license fees; any debt service and the landlord's income taxes are the responsibility of the landlord. U Urban Property Property in a city or a high-density area. V

39. Valid A binding situation that is authorized and enforceable by law. Valuation Estimated price, value, or worth. Also, the act of identifying a property’s worth via an appraisal. Variance Government authorization to use or develop a property in a manner which is not permitted by the applicable zoning regulations. Violation Act, condition, or deed that violates the permissible use of property. Void Something that is unenforceable. Voidable A situation which is capable of being unenforceable but is not so unless direct action is taken. W Waiver The intentional relinquishment or abandonment of a specific claim, privilege, or right. Work Letter An amount of money that a landlord agrees to spend on the construction of the interior of a space per the lease, usually negotiated. Z Zone An area, delineated by a governmental authority, which is authorized for and limited to specific uses. Zoning Ordinance

40. A law by a local governmental authority (e.g., city or county) that sets the parameters for which the property may be put to use. Back To Top