Wealth Opportunities in Commercial Real Estate

GARY GRABEL is the Managing Director of Ethan Christopher, LLC, the holding company for his real estate activities. The company specializes in value-added real estate with a focus on retail centers and medical office buildings. Ethan Christopher currently owns and manages over one million square feet of real estate in California, Arizona, and Texas. Mr. Grabel brings to this text his extensive practical experience as an owner/operator of commercial real estate. For over thirty years, he has been involved in all aspects of commercial real estate including financing, leasing, acquisitions, and the day-to-day running of a real estate portfolio. Mr. Grabel is a real estate broker, a member of the California bar association, and a frequent lecturer on real estate–related topics.

List of Abbreviations xiii

Introduction xv

Chapter 1 An Overview of the Problem, a Solution, and a Game Plan 1

The Problem 1

The Solution 2

Four Key Elements in the Solution 3

Concerns about the Solution 8

Acquiring the Skill Set to End the Cycle 9

A Game Plan to Achieve the Solution 9

This Book is about Center B Properties 18

Chapter 2 The Basics 21

Gross Income: The Starting Point 21

Vacancy and Collection Loss: Gross Income Reducers 21

Operating Expenses and Net Operating Income 23

Fair Market Value and Capitalization Rate: What’s It Worth? 24

Gross Rent Multiplier 25

Value per Square Foot versus Reproduction Cost per Square Foot 26

Inverse Relationship between Cap Rate and FMV 29

Initial Determination of Value 29

Leveraged Return and Return on Equity 30

Cash Flow before Taxes (CFBT) 32

Reserves/Impound Accounts 32

Taxes and Insurance Impounds 32

Cap X, TIs, and Leasing Commissions 33

Devil in the Details: Over Simplified Analysis 38

Chapter 3 Detailed Financial Analysis 41

Gross Income 41

Vacancy and Collection Loss 43

Operating Expenses 43

Four Basic Types of Leases 46

Nonrecoverable Expenses 55

Time-Frame Assumptions 56

Static versus Active Analysis 57

Compounding 58

Rent Roll 59

Argus Ten-Year Discounted Cash Flow Model 60

Analysis Reflecting 100 Percent Occupancy 65

Reversion 66

Disposition Costs 66

The Time Value of Money: Present Value and Discounted Cash Flow 67

Net Present Value (NPV) 68

Internal Rate of Return (IRR) 68

Conclusions from Argus Analysis and the Hypothetical Facts 69

Analysis Reflecting a Large Vacancy after Purchase 70

Analysis Reflecting a Large Vacancy with a Tenant in Tow 72

Chapter 4 Lease Analysis 75

The Importance of Basic Lease Provisions 75

Twelve Key Economic Ingredients in a Lease 77

Frequently Negotiated Lease Provisions 96

Chapter 5 Real Estate Financing 119

Sixty to Eighty Percent of the Game 119

Types of Financing 120

What is the Right Answer to Debt Structuring? 122

Seven Key Factors to Consider in a Real Estate Loan 124

Loan Underwriting 131

Cash-on-Cash Return 137

The Mortgage Loan Application 138

The Pitfalls of Mortgage Lending 138

Negotiable Points of a Loan 153

Chapter 6 Real Estate Taxation 157

Income Taxation 157

Real Property Taxation 163

Taxation in the Event of a Refinance 164

Taxation in the Event of a Sale 165

Installment Sale 166

Section 1031 Exchange 168

Chapter 7 Acquisitions and Dispositions 179

Focus on Specific Property Types in Specific Geographic Locations 179

Establish Buying Criteria 181

Acquisition Philosophy 181

Governmental Impact 182

Initial Screening 183

The Purchase and Sale Agreement 187

Building a Team 199

Due Diligence 199

Dispositions 206

Chapter 8 Case Studies 219

Problem Number 1 219

Problem Number 2 230

Problem Number 3 242

Problem Number 4 244

Problem Number 5 248

Problem Number 6 255

Problem Number 7 258

Chapter 9 Development or Rehabilitation (Build to a 12 Percent Yield) 269

The 10 Phases of a Construction or Rehab Project 269

Assessing a Construction Project 270

Developer as Conductor 272

Does the Project Hit Your Minimum Yield? 274

Argus Developer 279

Feasibility or Market Study 283

The Composition of a Feasibility Study 284

Residual Land Value 285

Preleasing 286

Equity and Financing 287

Mechanics’ Liens 287

Liability under the Construction Loan 288

Design and Construction Drawings 289

Governmental Approvals 290

Covenants, Conditions, and Restrictions (CC&Rs) 291

Ground Lease Restrictions 292

Construction of Improvements in a Ground-Up Development 292

Inspections 295

Insurance 296

Decisions, Decisions, Decisions 296

Communication, Communication, Communication 298

Graphic Time Line 299

Project Operating Costs 302

Lender’s Disbursement Form 303

Change Orders 303

Rehabilitation Project 303

Construction of Improvements in a Rehab Project: Decisions, Decisions, Decisions 311

Rehab Project: Communication, Communication, Communication 311

Summary 311

Chapter 10 Marketing, Leasing, and Management 313

Definition of Marketing, Leasing, and Management 313

Marketing 314

Leasing 319

Strategy 319

Management 345

Management as a Business 353

Conclusion 354

Chapter 11 Partnership Structuring and Deal Restructuring 355

Partnership Structuring 355

Securities Issues 357

Fifteen Key Structuring Issues 361

Debt Restructuring 371

Borrower’s Proposed Terms 383

Lender’s Counterproposal 384

Chapter 12 Keeping the Money 389

Planning 389

Fractional Interests 396

Estate Planning Checklist 400

Acknowledgments 403

About the Website 405

About the Author 407

Index 409