All Forum Posts by: Dominic Enea

Have you tried having the owners finance the building. They would be acting like the bank?

Also you could try for an SBA loan for the business part of the deal. You will need a good business plan for this (hopefully you have one already.)

Dominic Enea
Coldwell Banker Commercial

I'm guessing market value, but it is definately NOI/value.

Here is how a typical real estate investment is evaluated.

Yield (or ROI)= Cap Rate + Growth Rate

This does not include leverage or tax implications.

But basically cap rate measures your immediate return while growth rate is a measure of appreciation.

We have seen cap rates fall significantly because the expected growth has increased. As the market cools, the growth will not be expected to be as high which will cause cap rates to rise.

As this happens, prices will drop and rents will rise.

Dominic Enea
Coldwell Banker Commercial

Here are a couple more options that may work for you.
1) Attempt to lease the building now.
Positives fo you:
You will have less monthly costs.
You will find qualifying for a loan in the future much easier if can show proof of a profitable business.
If something goes wrong, it will be easier to back out.
You can negotiate first right of refusal. (This means that if they do find a buyer in the future, then you have a right to match the offer and buy the building.)
Negatives for you:
Price may be higher in the future.
You may not be able to buy that building in the future.

Positives for owners:
The owners will have a building worth more because it is performing.
The owners will be making money monthly, instead of losing it.
Negatives for owners:
They lose the chance to matket for owner users.
They may not want to deal with negotiating and managing a lease.

Option 2:
See if the owners will finance some or all of the sale to you.
Positives for you:
You get the building now.
Negatives for you:
It will likely be more expensive than a bank loan.
There is a risk you would not be able to refinance in the future.

Positives for sellers:
They get their asking price.
They don't have to be landlords.
Negatives for sellers:
They have to wait for some or most of their money.
There is risk that if you default, then they would have to foreclose.

I hope this is helpful.

Dominic Enea
Coldwell Banker Commercial

I am guessing this a FSBO. A good agent could probably sell that property in a couple months. Even at 2.5M, it is salable.

From all the information you have provided, I would say that getting in for 2M or under would be a good deal. That would be more than an 8 CAP with upside.

I would try to structure it this way.
70% 1st 5yr Fixed/30yr ammortization $1,400,000 @ 8% = $10,300
15% 2nd 5yr Balloon $400,000 @ 10% (5+5)= $1750
10% Down $200,000

DCR of 1.13 is on the riskier side, but if your fairly sure you can get the theatre going it would jump to a very healthy 1.47.

You would have a cash flow of over $1500 per month with a potential to earn over $5000/month.

The seller get 1.6M now for a property that is not selling, but still gets fair value.

If you can get a lower price, all the better.

Dominic Enea
Commercial Agent

Does the annual gross income include the projected theatre income or is the actual income? If it is projected, then the sales price is way off.
How much more income would the theatre add if rented or you were operating it?

Also, who manages the apartments? If it was the owner, then there is a good chance that they left out that expense. Make sure to include this cost in your expenses. Even if you plan to manage them yourself the lender will include the expense in their NOI calculation.

When negotiating with the seller, you may want to negotiate on terms as well as price. If you can get seller financing you could keep more in your pocket for the rehab.

Dominic Enea
Commercial Agent

From my experience, Apartments run form 30-40% of the rent.
Retail and Office 25-35% and Industrial 15-25%.

As to the original poster, from the information you provided this looks like a good deal. You are looking at an 8.6 CAP and 7% loan, that is pretty good leverage. However, as Apartment King mentioned the leases are very important.
When do they end?
What kind of rental increases are scheduled?
Do they have options to renew?
How are expenses handled?
Also make sure to verify the expenses as well.

What is your goal with this property?
If it is cash flow, then you may want to consider a loan with an IO period.
If it is growth and you want maximum leverage, consider trying to get some owner financing to lower your down payment. This property should be able to handle another $700 in financing/month rather safely.

Dominic Enea
Commercial Agent

With prices dropping and rents rising, see if you can get some houses under contract that can cash flow. This will not work in the Bay Area, but I have seen some in Sacramento and the Central Valley that it could work.

Dominic Enea
Global Real Estate Services
Commercial Division

Thank you for your insightful post. I attended one of their presentations and was intrigued. Their reps said that they were required to obtain a series 7 license and a real estate sales license in CA.

As a commercial agent, this seemed like a good product for some of my clients. I am just trying to find out if there is a way for me to get paid on the deal.

Dominic Enea
Global Real Estate Services
Commercial Division

This is what we ended up doing about a week ago. And as I suspected, something was fishy. After we sent them the contact info, they told us the seller had decided to not work with other brokers. Why have a broker confidentiality ageement made for a specific property if the seller is not cooperating with brokers?

They then contacted the buyer directly. When we called them on it, they told us we could act as outside counsel, but they would not split any of the commission. I also found out they are getting 4% commission from the seller.