An Estoppel Certificate, also referred to as an Estoppel Letter, is a document used in Commercial Real Estate (CRE) to outline the specific terms of a lease agreement and verify representations made by the landlord.
For a CRE investor purchasing a property with existing tenants, obtaining an Estoppel Certificate is a critical part of the due diligence process. This document ensures that the buyer understands the terms of the leases and avoids potential complications.
Why Are Estoppel Certificates Important?
Estoppel Certificates are crucial for protecting investors from potential liabilities involving current tenants. As you move through the process of acquiring a commercial property, the certificate clarifies any uncertainties regarding tenant agreements. It ensures that the buyer is fully informed about the lease terms, reducing the risks associated with tenant relationships.
What Does an Estoppel Certificate Contain?
An Estoppel Certificate typically includes several key details:
The amount of rent being paid
The security deposit amount
The lease duration
Any special provisions agreed upon by the landlord and tenant
Essentially, the document verifies the terms of the agreement between the landlord and tenant. For a buyer or lender, this information is crucial before finalizing the transaction.
Why Do You Need an Estoppel Certificate?
If you are an investor purchasing a commercial property with tenants, it is essential to verify the rent, payment history, and tenant-landlord relationship. For example, if a landlord claims four tenants are paying $4,700 per month on a five-year lease, how can you be sure that’s accurate? What if the tenants are actually paying $4,300 per month, and the lease isn’t fully signed?
An Estoppel Certificate provides an accurate, verified record of the lease agreement, ensuring you have the correct information. This protects you from future disputes or surprises during the transaction.
Other Uses of an Estoppel Certificate
Besides due diligence, an Estoppel Certificate is also useful when refinancing. If a property owner wishes to refinance or use the property as collateral for a loan, banks or lenders often request estoppel certificates from tenants. These certificates include important financial information such as payment records and credit history. If the documents confirm reliable cash flow, lenders are more likely to approve the refinance.
Thus, an Estoppel Certificate offers confidence to both investors and lenders, ensuring they have accurate financial data about the property.
Legal Importance of Estoppel Certificates
In some cases, unresolved tenant issues might require legal intervention. When this happens, an Estoppel Certificate serves as a legally binding document. If disputes move to court, the certificate proves that the agreed-upon terms between the investor and the tenant are valid. This can be vital during legal proceedings, providing the investor with solid evidence.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com Let us help you stay ahead in the market!
Successful real estate investors excel at perceiving, analyzing, and leveraging other people’s money. They have perfected the art to invest in commercial real estate with minimal personal funds. This approach is particularly appealing to newer or cash-strapped investors who want to enter the real estate market without substantial financial resources or credit.
Feasibility of Investing with Minimal Funds
It is possible to start investing in commercial real estate without spending your own money. However, if you don’t plan to invest your own funds, you’ll need another crucial resource: a reliable network. The key is recognizing who can assist you and how to collaborate effectively with them.You don’t need an endless supply of cash to secure a good deal. Instead, you must understand how to invest in commercial real estate with the right methods and strategies.
Strategies for Investing with Little Money
In this post, we’ll explore strategies and steps for investing in real estate with minimal money or experience. You’ll learn how to begin investing without spending hundreds of thousands of dollars. Any property owned purely to generate profit, whether through rental income or market value appreciation, is considered an investment in commercial real estate.
The Myth of No Money Down
There is no such thing as “no money down” in real estate because the funds must come from somewhere. If you wish to invest in real estate with little or no money, you must learn to detect, analyze, and leverage other people’s money.
Steps to Invest in Real Estate with Minimal Funds
1. Identify an Exceptional Property
First, if you’ve found a commercial property to buy, it must have at least two of the following characteristics:
It’s located in a good neighborhood.
It’s priced below market value for its condition.
It already generates enough net operating income (NOI) to cover mortgage payments.
It has substantial repositioning upside.
These factors could include rentals below market rates, lower-than-market occupancy rates, or opportunities for low-cost operational and aesthetic modifications that allow for rent increases.
2. Secure a 10% Down Payment in Your Name
Next, it’s crucial to raise at least 10% of the down payment in your name. How you achieve this is up to you. You might borrow from your parents or the bank, sell assets, or use a home equity line of credit.This down payment gives you more influence and control over the situation. Every investor and lender will ask how much you’ve invested, and you don’t want to say “none.”
3. Find a High-Net-Worth Investor or Proxy
Identify a mentor with wealth, cash, and experience similar to yours. This allows you to inform real estate agents and lenders that you’re representing a high-net-worth investor in commercial real estate deals. Doing so can open doors to opportunities.This investor may not be the principal in the transaction; you might need to find another before closing. Typically, investors make numerous loans, and a competent investor may replace the initial one.
Critical Components for Success
4. Secure a Fully Executed Purchase Contract
Private investors and lenders won’t consider your proposal until you have a fully executed purchase contract on the commercial real estate. This step shows your commitment and capability to invest. You achieve this by putting down the 10% payment mentioned earlier.
5. Explore Seller-Paid Down Payments
Ask the seller if they’re willing to pay your down payment. You may end up paying above their asking price to structure this deal, but it shouldn’t matter if you avoid out-of-pocket expenses. However, getting the property appraised for your new purchase price might be challenging.
6. Gather Critical Property Financials
Your transaction won’t succeed without a pro forma predicting revenue, costs, mortgage payments, and net profit for at least two years or the duration of ownership. These financials should be based on facts, not assumptions in the listing broker’s proposal. You’ll need current and historical rent rolls and profit and loss statements to prove the accuracy of the financials.
Ensuring Strong Financial Returns
7. Present a Strong Pro Forma
Investors need to see solid returns on their investment after the property has been repositioned. A minimum annual cash-on-cash return (CCR) of 8% is required, with 10% to 12% being preferable. More importantly, focus on the annual internal rate of return (IRR), which includes both operating income and appreciation. Appreciation often outperforms operations in commercial properties.
8. Create an Excellent Executive Summary
Your Executive Summary should be top-notch, ideally at least four pages long, to pitch your business to investors and lenders. Start by highlighting the property’s estimated annual CCR and IRR. Then, describe the property, including its location and proximity to key areas like malls and highways.Include the price you’re paying, the cost of value adds, and a forecast of the property’s worth in a few years. Address potential risks and explain your strategies for mitigating them. Demonstrating that the property can break even with 75% or lower occupancy shows its resilience during economic downturns. Finish with a clear exit strategy.
Additional Financing Strategies
9. Consider Seller Financing
Ask the seller if they’re willing to carry the debt on the property. You might make monthly payments to the property owner rather than going through rigorous lender approvals. However, seller financing may balloon after a few years, requiring you to refinance to pay them off. Alternatively, they might carry the debt for the property’s entire life—this depends on how you structure the deal.Reasons for sellers to consider refinancing include:
Avoiding tax obligations from a sale.
Enjoying a steady monthly income.
Accelerating the sale of the commercial property.
Securing more attractive long-term returns.
10. Propose a Lease with Option to Buy/Own
If the commercial property is currently unoccupied, propose a lease-to-own arrangement with the landlord. You can lease the property, operate your business, or sublease it to other tenants. This arrangement can last as long as you and the owner agree, with a portion of your rent payments going toward the purchase price.Your monthly payments contribute to the building’s purchase, eliminating the need for a significant down payment upfront. All of this can be done without showing money at the initial stage of the transaction.
Conclusion
If you want to invest in commercial real estate with little to no money, follow this strategic guide. Success requires mastering the art of presentation to investors and lenders and leveraging the expertise of a seasoned commercial broker specializing in investments.Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the LeveragedCRE Investment Team at Commercial Properties, Inc. is here to help you achieve your business and investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.Meet The LeveragedCRE Investment TeamPhill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com Let us help you stay ahead in the market!
Financing is essential for constructing, developing, and investing in commercial real estate (CRE) properties. When investors or CRE developers lack sufficient funds, they often seek CRE loans from various entities, including banks, independent lenders, insurance companies, and private investors. These loans typically have repayment terms ranging from 5 to 20 years, with an amortization period that is often longer than the loan term.
If you’re new to CRE investing or development, it’s crucial to familiarize yourself with some important terms. Below, we’ll explore key concepts that will help you navigate CRE loans with confidence.
Key Terms in CRE Loans
Loan-to-Value (LTV) Ratio
One of the first things you’ll encounter when applying for a CRE loan is the Loan-to-Value (LTV) ratio. This ratio measures the loan amount against the property’s value (loan amount ÷ property value x 100). Typically, lenders prefer loans with lower LTV ratios because they involve less risk. Therefore, a lower LTV ratio indicates that the property has a higher equity stake, which is beneficial for both the lender and the borrower.
Credit Rating and Guarantee
Another crucial aspect of CRE loans is the credit rating or financial record required by lenders. In many cases, if an applicant lacks a sufficient credit rating, the lender may request the business owner to provide their own credit history as a guarantee for the loan. However, if no guarantee is provided, the CRE property itself often serves as the only means of recovery if a loan default occurs. This type of loan, known as a non-recourse loan, limits the lender’s recourse solely to the property.
Loan Repayment Schedules
As mentioned earlier, commercial loans typically range from 5 to 20 years, with an amortization period that usually exceeds the loan term. Importantly, longer loan repayment periods generally result in higher interest rates. Consequently, it’s essential to understand how the repayment schedule will impact your overall investment strategy.
Debt-Service Coverage Ratio (DSCR)
The Debt-Service Coverage Ratio (DSCR) is a critical metric that assesses a property’s ability to cover its annual mortgage payments based on its annual net operating income (NOI). This ratio is calculated by dividing the property’s annual NOI by its annual mortgage payment (annual NOI ÷ annual mortgage payment = DSCR). Ideally, a DSCR greater than 1 indicates that the property’s cash flow is sufficient to cover its mortgage payments. Conversely, a DSCR less than 1 suggests that the property’s cash flow may not be adequate to meet its annual mortgage obligations.
Tax Implications of CRE Loans
With these loan provisions in place, CRE investors and developers still face the challenge of taxation. Understanding tax deductions can help ease these burdens, making it essential to explore how tax deductions work in the context of CRE loans.
What is a Tax Deduction?
A tax deduction reduces an individual’s or organization’s taxable income by subtracting a government-validated amount. This amount may include annual expenses that can be deducted from gross income. Governments establish tax codes to determine which items are taxable and which expenses are tax-deductible, including mortgage interest for investment properties. So, are CRE loans tax-deductible? Yes, they are, but let’s delve into how this works.
How Tax Deductibility Works
When you take out a CRE loan, the interest payments on the mortgage are considered tax-deductible. These deductions are reported on the Mortgage Interest Statement. Importantly, lenders are usually required to provide this form if the mortgaged property is considered real property.
For example, if your annual taxable income is $100,000 and your annual mortgage interest payment is $30,000, the mortgage interest payment can be claimed as a tax deduction. Consequently, this reduces your taxable income to $70,000.
Itemized vs. Standard Deductions
Tax authorities typically allow the use of either itemized deductions or standard deductions. You can choose to take a fixed standard deduction or itemize qualified expenses that are considered tax-deductible. Understanding the difference between these options can significantly impact your tax strategy.
Determining Tax-Deductible Interest
You may wonder how to determine the threshold of tax-deductible interest you can claim. This depends on your marginal tax rate, also known as your tax bracket. Essentially, the higher your income, the higher the tax rate, which directly affects the deductibility of mortgage interest.
Qualifications for Tax-Deductible Mortgage Interest
To qualify for tax-deductible mortgage interest, three conditions must be met:
The borrower must be legally liable for the loan.
The lender and borrower must agree that the borrower intends to repay the loan.
A legitimate lender-borrower relationship must exist.
These provisions ensure that loans are genuine and not merely strategies to avoid or reduce income tax. Additionally, the loan must be used, not just kept in a bank. If the loan isn’t utilized, tax authorities may disallow the deduction, even if repayments are being made.
Conclusion
Taxation can be complex, especially for beginners in CRE investing. However, by understanding these basic terms and provisions, you can navigate the field of loans and taxation more confidently and make informed decisions about your CRE investments.
Even after outlining all the information above, dealing with loans when investing in CRE can still seem daunting. That’s why the LeveragedCRE Investment Team at Commercial Properties, Inc. is here to help you achieve your business and investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com Let us help you stay ahead in the market!
DISCLAIMER:
Leveraged CRE is not a law firm, and its employees are not attorneys nor are we affiliated or associated with attorneys. The information contained in this blog is general information and should not be construed as legal advice to be applied to any specific factual situation.
Here are some related articles about investing in CRE:
As a real estate investor, you’re likely always assessing your portfolio to ensure your investments perform well. This process often involves evaluating your real estate options to determine if you can extract value and reinvest in more profitable ventures.
You have two primary options to realize the equity in your assets: selling the property or refinancing with a cash-out. But which is the better choice for you: selling your property and performing a 1031 exchange, or refinancing and pulling out cash?
What is a 1031 Exchange?
A 1031 Exchange, also known as a like-kind exchange, allows you to swap one investment property for another. This strategy enables real estate professionals to grow and diversify their portfolios while minimizing federal income tax implications. To qualify under Section 1031, the exchange must involve real property held for productive use in trade, business, or investment.
Additionally, the new property must serve a similar purpose. This approach defers tax payments until the property acquired in the exchange is eventually sold.
What is Cash-Out Refinancing?
Cash-out refinancing replaces an old mortgage with a new one, typically with a higher loan amount. The borrower can then use the difference to access cash. This option usually provides more favorable terms, such as lower interest rates or monthly payments, and allows for debt consolidation or credit score improvement.
Advantages of a 1031 Exchange
Low Minimum Investment: Multiple investors can pool resources, making the minimum investment on a TIC (Tenants in Common) property lower.
Portfolio Diversification: The lower investment barrier allows you to diversify across multiple properties, reducing the risk of significant losses.
Access to High-Quality Real Estate: Pooling funds grants access to higher-quality properties, potentially attracting higher-income tenants.
Ease of Ownership: Shared ownership distributes day-to-day management responsibilities among multiple investors, reducing your workload.
Disadvantages of a 1031 Exchange
Shared Risk and Rewards: Sharing risk also means sharing rewards. Rental income is divided among all investors, resulting in smaller individual shares.
Limited Decision-Making Power: Co-ownership limits your ability to make unilateral decisions. Major decisions require a vote, which may not suit those who prefer independent control.
Advantages of Cash-Out Refinance
Lower Interest Rates: Cash-out refinancing often offers lower interest rates, especially if current rates are lower than when the property was initially purchased.
Debt Consolidation: You can use the cash from refinancing to pay off high-interest debts, potentially saving thousands in interest.
Improved Credit Score: Paying off credit card debt with a cash-out refinance can boost your credit score, increasing your borrowing power.
Tax Deductions: Mortgage interest on a cash-out refinance may be tax-deductible if used for property improvement, reducing your overall tax liability.
Disadvantages of Cash-Out Refinance
Foreclosure Risk: Using your home as collateral means that failing to make payments could result in foreclosure. It’s crucial to ensure you can manage debt payments to avoid this risk.
Closing Costs: The new mortgage will come with new terms and closing costs. Double-check interest rates and fees to avoid unexpected expenses.
Refinancing a 1031 Exchange Property: Before and After
Refinancing before a 1031 exchange is straightforward. The lender uses the property’s equity as collateral, and the taxpayer pulls out cash. After selling the property, the taxpayer pays off the loan and reacquires the debt on the purchase side of the exchange.
This approach allows the taxpayer to extract cash from equity without triggering tax liability, especially if the new debt has a lower interest rate than the refinance loan. However, some tax experts suggest refinancing the replacement property after the exchange. Therefore, it’s essential to consider the risks and consult your tax expert before making a decision.
Conclusion
If you’re looking to sell your property, generate income with low investment, diversify your portfolio, and share risks and rewards, a 1031 exchange might be your best option. On the other hand, if your goal is to secure lower mortgage interest rates, consolidate debt, or improve your credit score, cash-out refinancing could be the ideal choice.
Even after outlining all the information above, deciding whether to go for a 1031 Exchange or a Cash Refinancing can still seem daunting. That’s why the LeveragedCRE Investment Team at Commercial Properties, Inc. is here to help you achieve your business and investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com Let us help you stay ahead in the market!
Commercial Properties, Inc./CORFAC International (CPI)
Commercial Properties, Inc./CORFAC International (CPI), Arizona’s largest locally-owned commercial real estate brokerage, successfully completed the sale of Building F in Venture Court Professional Plaza, Anthem, Arizona. This two-story office building, covering ±27,223 SF, is located at 41810 N Venture Drive.
Its excellent position off I-17 and Anthem Way provides high visibility from the freeway. Additionally, being just six miles from the new TSMC semiconductor manufacturing plant in Phoenix, the building is strategically placed in a rapidly developing business hub.
Key Transaction Details
Eric Butler and Phill Tomlinson of CPI represented Liftable Media, Inc., the seller of the property. Meanwhile, Keith Lammersen from JLL represented the buyer, Maricopa County Libraries. The transaction, valued at $9 million, equated to $330.60 per square foot.
This successful sale benefits the buyer as they plan to transform the property into a new home for Maricopa County Libraries, which will serve the local community.
Resolving Legal Challenges
North Valley Regional Library was previously located on the Boulder Creek High School campus, where it shared space with students and the public. However, moving to Building F required amendments to the development’s Covenants, Conditions, and Restrictions (CC&Rs). Eric Butler and the CPI team stepped in to assist Maricopa County Libraries with this legal process.
Butler said, “We helped the library navigate the necessary changes to the CC&Rs, ensuring the move could proceed. It was a smooth process, and both parties were happy with the results.” By staying actively involved throughout the sale, CPI successfully addressed all legal obstacles.
CPI’s Commitment to Excellence
CPI’s involvement in this transaction reflects their dedication to providing exceptional service to their clients. Their ability to handle legal complexities and facilitate a smooth transaction demonstrates their commitment to achieving client satisfaction. Moreover, this sale contributes to the continued growth of Anthem’s business community, further enhancing the area’s development.
Need assistance with your 1031 Exchange or DST? We’ve got you covered!
We’ve prepared a comprehensive, free e-book designed to guide you in achieving your long-term business goals or acquiring that dream property you’ve been eyeing.
Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
The team leverages their extensive knowledge and expertise to help investors and property owners maximize their returns and navigate complex real estate transactions with confidence.
Stay informed with the latest in Commercial Real Estate strategies designed to enhance your income property investment results by bookmarking www.leveragedcre.com Let us help you stay ahead in the market!
