“…Investing in commercial real estate should be challenging and financially rewarding. For many though, it is a mystery. When investing, what you don’t know can and will hinder your ability to achieve your objective. There are methods and techniques that savvy investors use when investing. All successful real estate investors follow a straightforward approach that incorporates three fundamental principles: (1) They know why they are investing in real estate, (2) They know how to invest in real estate and (3) They know what to do with the real estate investment during their ownership period to build wealth. Market savvy investors who are creating wealth through acquiring commercial real estate and building a real estate portfolio approach the task as a business person would-they have an agenda-for the business …” -Joseph L. Petrole

 

 Book Review

 

Acquiring Commercial Real Estate and Building Wealth provides a comprehensive “how to” overview for both successfully acquiring commercial real estate and building wealth with real estate. Presented in a practical step-by-step approach, this book literally walks the reader through all the acquisition and wealth building steps in the order in which they are most likely to arise. With just the right balance between what is practical and what is academic, this unique book contains numerous checklists, forms, comments, cautions and suggestions. Readers will obtain a clear understanding of how to acquire commercial real estate and the sophisticated wealth building techniques used by savvy investors that they can put into practice immediately. The text is designed to be flexible enough for use for individual use, in a seminar series, for educational credit, and for general investment or licensing information.

 

Level of Material

 

The text is easy to understand, and is written in clear and concise language with educational material covering the introductory, intermediate and advanced levels. Each chapter includes comprehensive case studies to reinforce the learning experience. The seminar is interactive, creating a mental learning environment that creates total immersion in the information. The text is packed with information that is valuable to anyone interested in commercial real estate. There are many useful step-by-step techniques that can be used immediately to achieve your real estate goals. The texts are interactive, creating a mental learning environment that creates total emersion in the new information.

 

Format of Each Chapter

 

• Overview with learning objectives and key terminology.
• In-depth explanation of concepts from multiple points of view, accelerating the learning process.
• Many examples illustrating how the specific comcepts are used in practice.
• Step by step calculations walks you through the math and finance encountered in the industry.
• 10 summary review questions and a 5 question “number crunching” case study which will allow you to apply what you have learned to real world situations. An answer key with detailed explanations and step by step calculations.
• A complete glossary with clear
• Extensive adendums with web site directories, document templates and due dilligence checklists

 Chapter 1: Commercial Real Estate As An Investment  

 

In Chapter 1, Commercial Real Estate As An Investment, real estate investment is introduced. Commencing from the basic answer to what real estate investors expect, the decision to invest in real estate is presented as a trade-off between its relative advantages and disadvantages. The good news is that these advantages and disadvantages are measurable. As such, the decision to invest in property can be set within a framework, which allows for of a systematic and quantitative decision-making process that assists in removing guesswork, emotion and unsupported conjecture. These measurable advantages and disadvantages are discussed in detail. The ability to quantify monetarily the advantages and disadvantages of investing are seen as fundamental to the decision making process. In-depth presentations of topics include:

 

What Real Estate Investors Expect	Power of Combining Investment Advantages
Advantages of Real Estate As An Investment	Disadvantages of Real Estate As An Investment
Net Operating Income and Cash Flow	The Capital Intensive Nature of Real Estate
Real Estate Tax Shelter Qualities	Long Term Investment Holding Periods
How Property Depreciation Works	The Concept of Value and Non-Liquidity
Mortgage Debt Reduction Using NOI	Real Estate Is Management Intensive
Types of Increases In Value	Economic, Market and Property Related Risks
Equity and Equity Build-up	The Opportunity Cost of Real Estate Capital

 

Chapter 2: Establishing Investment Objectives   

 

In Chapter 2, Establishing Investment Objectives, real estate investments and the need for establishing investment objectives is emphasized. What investors expect, what investments are, and degrees of investment risk and monetary return are explained. The benchmark of safety- US Government Securities, are introduced. The differences in risk and return, between institutional and non-institution quality real estate are presented in great detail. The concepts of investor sentiment, safety, income and growth are discussed. As we continue to explore the advantages and disadvantages of commercial real estate as an investment, the concept of establishing investment objectives is introduced. The language of investment real estate continues to take shape. The need to establish an individual’s investment sentiment, which consists of emotions and feelings as well as facts and figures, comes to the forefront of the discussion. Employing investor “tools” such as a mission statements and an investment matrix are introduced. The ability to “get in touch” with each investors unique disposition toward investing is seen as fundamental to the investment process. In-depth presentations of topics include:

 

What is an Investment?	Establishing Your Investment Objectives
Physical & Financial Architecture of Real Estate	What is Market Sentiment?
Cash Flow Diagrams	Annuities and Commercial Real Estate
Direct Capitalization and Yield Capitalization	Economic, Market and Property Related Risks
Zero Coupon Bonds, Laddered Maturities	Investment Basics: Safety, Income and Growth
Establishing Your Investor Sentiment	How Investment risk and Return Works
Using An Investment Sentiment Matrix	Institutional and Non-institutional Real Estate
Debt Coverage Ratios and Loan to Value Ratio	Economic, Market and Property Related Risks

Chapter 3: Acquiring Property- Essential Concepts

 

In Chapter 3, Acquiring Property- Essential Concepts, the acquisition of commercial real estate is elevated to a near art form. Successful property acquisition is presented as both an art and a science. Real estate acquisition is presented within the framework of eight identifiable steps. Each one of the steps, which are action oriented, builds upon the previous step, and forms an interlocking paradigm, which allows investors to proceed successfully toward a closing of a real estate transaction. Chapter 3 presents the first four identifiable steps, which are considered the essential concepts of property acquisition. Commencing with Step 1: Determining the all-important investors’ individual sentiment, we proceed with purpose to Step 2: building our capital structure and resources, and then Step 3: selecting members of our “acquisition team”. We can now venture out into “the marketplace” and move on to Step 4:  conduct preliminary investigations into various properties, evaluating them as to their compatibility with our previously established objectives and goals.

 

Once we are clear about the merits of a property, we should begin investigations into the possibility of acquisition as soon as possible. These investigations are segmented into two phases. The idea of the phases is to have an “emotion free” method that determines the suitability of a property, and allows an acceleration of the informational gathering process, based on thresholds previously established by an investor. It virtually eliminates guesswork and the emotional aspects of investing-which is the point. An investor should move forward only if-as-and-when the preliminary investigation results in an acceptable combination of five key property attributes. In-depth presentations of topics include:.

 

Establishing Your Investor Sentiment	Alienation and Due on Sale Clauses
Money Works: Capital Structures and Resources	Reasons to Build Relationships With Lenders
Types of Money: Types of Capital	Mortgage Brokers, Bankers, Loan Correspondents
Hidden Benefits of Working With Lenders	Traditional Lenders and Niche Market Lenders
DCR’s and LTV’s: Debt Coverage and Loan Ratios	“Soft” Acquisition Costs
Gap Finance: PMM’s, 2nd Mortgages, Mezz Equity	Selecting Consultants, Advisors and Team Players
Passive and Active Equity	What is Preliminary Property Investigations?
General and Limited Partnership Equity	4 Questions When Investigating Property
Inter-creditor and Standstill Agreements	5 Areas To Look When Investigating Property

 

Chapter 4: Acquiring Property-Advanced Concepts

 

In the previous chapter “Acquiring Property-Essential Concepts” the first four steps- the foundation for successful property acquisition - was developed. Chapter 4, Acquiring Property-Advanced Concepts, builds on that foundation. Yet, there is one significant difference between the first four steps and the last four steps. From an acquisition perspective, the first four steps do not necessarily require any interaction with the prospective seller at all. It is possible to conduct most if not all of the tasks associated with preliminary property investigations stealth like, without detection or an owner-seller’s involvement, as no decision to buy or sell has been made yet. Conversely, from an acquisition perspective, the remaining four steps cannot occur without interaction with the prospective seller.

 

We begin with a discussion of an offer to acquire the property by Step 5: submitting a Letter of Intent, commonly referred to as an “LOI”. Considered both a simple form of a term sheet as well as a sophisticated negotiating tool, the general outlines of 3 legally non-binding LOI’s are presented, compared and discussed. Based upon the LOI the buyer and seller negotiate acquisition terms and arrive at Step 6: negotiation offer and acceptance for the purchase and sale of the property. A general outline of a legally binding contract for the Purchase and Sale of property, known as a P & S, is presented for discussion emphasizing the differences between the P & S and LOI.

 

The difference between a Buyers Due Diligence and an Acquisition Due Diligence is presented. During Step 7: Acquisition Due Diligence, the prospective purchaser has the right to investigate issues pertaining to the property which is contracted per the P & S.  An exhaustive Acquisition Due Diligence underwriting document is then presented, which has been categorized into 12 sections containing over 250 questions covering every conceivable area of property investigations is presented. To facilitate these time sensitive tasks, an Acquisition Due Diligence Flowchart is presented.

 

When lender financing has been secured, a Loan Commitment serves as evidence that this part of the purchase price has been appropriately secured. The general outlines of the loan submission process, as well as 4 Loan Commitment Letters are presented: Preliminary, Conditional, Qualified and Firm Loan Commitments are compared and discussed. Lastly, in Step 8, the parties, entities and intricacies of a closing are discussed. Issues such as pertinent closing documents, lender documentation and, pro-rations and pre-payments, as well as who is responsible for each is addressed.

 

Each of the steps, which are action oriented, builds upon the previous step, and forms an interlocking paradigm, which allows investors to proceed successfully toward a closing of a real estate transaction. In-depth presentations of topics include:

 

When to Use a Letter of Intent	12 Areas of Acquisition Due Diligence
3 Examples of Letters of Intent	The 250 Question Due Diligence Checklist
Negotiating	Using an Acquisition Due Diligence Flow Chart
Contract for Purchase and Sale	Scheduling A Closing
Outline of a Contract for Purchase and Sale	Parties and Entities to a Closing
Buyer’s Due Diligence	Pertinent Closing Documentation
Acquisition Due Diligence	When “Time is of the Essence”
When to Use a Loan Commitment	Lenders Closing Documentation
3 Examples of Loan Commitments	Prorations and Prepayments

 

Chapter 5: The Role of Real Estate Market Cycles in Building Wealth

 

In Chapter 5, The Role of Real Estate Market Cycles in Building Wealth, we explore what real estate market cycles are, and how they can be used as a reliable forecasting tool for reducing real estate investment risk and increasing real estate investment wealth. Investors know markets rise and fall, but my not be aware that these ups and downs are based on predictable patterns. This chapter provides the explanation and tools allowing for a keen understanding of the reasons behind the rhythm of real estate market cycles.

 

 

 

Let’s use an analogy. There is a definite cyclical patterns of the four seasons or “Phases” which form the complete climatic cycle: spring, summer, fall and winter. Successful farmers learn that the time to plant seeds is in the spring, nurture growing crops through the summer, begin the preservation or harvest throughout the fall, and store the best seeds before the coming winter arrives, so as to have an abundance of crops the following planting season. Successful farmers strive to know what lies ahead within a seasonal weather cycle because they know that they can get caught in a turbulent part of that weather cycle which will prevent them from realizing their objective-harvesting crops for sale at a profit.

 

Similarly there is a definite cyclical patterns of the four seasons or “phases” which form the complete real estate cycle: recession, recovery, expansion and contraction. Successful investors learn that the time to invest money is during the recovery, nurture growing investments through the expansion, begin the refinance or sale throughout the contraction, and store the profits made before the coming recession arrives, so as to have an abundance of money available for the following investment season.

 

So, successful investors strive to know what lies ahead within a real estate market cycle because they know that they can get caught in a turbulent part of that real estate market cycle which will prevent them from realizing their objective-positioning property for sale at a profit.

 

Knowing what Phase you are in the real estate market cycles, understanding the origins of why we are in that phase and then plan for the coming phase, investors become attuned to the dynamics of the investment cycle as it changes. So investors can be prepared while others get blindsided by unexpected events or fall victim to destructive investment emotions such as fear and greed.  

 

Successful real estate market cycle forecasting is presented as both an art and a science. The challenge is how to go about the study of real estate market cycles in a way that does not drive us into information overload and confusion. Based on the author’s proven proprietary methodology, the components of real estate market cycles are separated, studied and discussed, and then individually reassembled, layer upon layer forming the economic forces that move real estate through its valuation cycle.

 

Utilizing a 6 question Market Survey and an 8 question Market Matrix tool also developed by the author, the real estate market is presented within the framework of eight identifiable “technical indicators”: Supply, Demand, Buyer Type, Prices, Capitalization Rates, Rent Rates, Occupancy Rates, Money and Financing. Each one of the technical indicators, which interact with one another forms an interlocking paradigm. By simply answering 8 questions from the Market Matrix allows investors to understand where the market has been, where it is, and most important, where it is headed. This is key to understanding risks, since “The economy is not a predictor of real estate market actions, rather, the real estate market actions are a predictor of the economy”.

 

With the use of powerful visual aids such as a Real Estate Market cycle Time Clock and A Real Estate Market cycle Waveform, we can plot the answers provided by the Market Matrix, and now can visually see that the oscillating real estate markets ups and downs are actually the market speaking to us. The markets are speaking to us all the time, we simply have to learn its language. It is always letting us know what phase of the real estate market is in and what phase is coming next.

So investors learn that there is a definite cyclical patterns of the four seasons or “phases” which form the complete real estate market cycle: recession, recovery, expansion and contraction. By mastering these recurring patterns investors increase the probability to improve their results.  The result is a clearer understanding of what is actually occurring throughout the real estate market cycle, which then shifts the odds of investment success in our favor.

 

In-depth presentations of topics include:

 

Real Estate Markets Defined	Visualizing the Market Using the Timeclock Cycle
Component Parts of A Real Estate Market	What Are The Phases Of The Real Estate Market?
Real Estate Markets and Market Cycles	Description of Recovery Phase of the Market
Real Estate Market Cycles Defined	Description of Expansion Phase of the Market
Where is the Real Estate Market Cycle?	Description of Contraction Phase of the Market
The Use of Market Cycles for Building Wealth	Description of Recession Phase of the Market
Cost, Price and Value: Building Blocks of Wealth	8 Technical Indicators of Each Market Phase
Market Cycles and the Market For Money	Using A Market Matrix Tool For Forecasting
What Do Real Estate Market Cycles Look Like?	Predicting the Ups and Downs of the Market
Visualizing the Market Using the Waveform Cycle	When to Buy, Sell or Refinance Property

 

Addendum: Additional Resources

 

Additional resources are located in the addendum. They include an answer key, a web site directory, a glossary of terms and an index.