Commercial Real Estate Analysis & Market Analysis

Please also see the separate page for Commercial Mortgage-Backed Securities (CMBS)

  Council of Real Estate Investment Fiduciaries (NCREIF) Property Index (NPI)

  MIT Center for Real Estate Transactions-Based Index (TBI)

  Moody's / REAL All Commercial Property Price Indices (CPPI)

  MSCI US REIT Index

  SIOR Commercial Real Estate Index

Real property refers to land, buildings, fixtures, and all other improvements to land. The terms "land," "real estate," and "real property" tend to be used interchangeably. Commercial real estate is any real property that is not inhabited for the purpose of a primary residence only. In addition, commercial real estate is an asset class of itself and is an acceptable, alternative investment to equity and debt securities and part of an asset allocation / diversification plan.

Commercial real estate is purchased as an investment for income generation, tax specific investment, owner-occupancy utilization and value appreciation investment. The key considerations that investors look for when analyzing a property (regardless of being on either the equity or debt side) include:

Positive cash flow or at least a break-even cash flow to cover the operating expenses of owning the property.

Appreciation of market value of the property in the event that cash flow is minimal.

Amortization of the mortgage by the property's cash flow in a reasonable amount of time so that equity builds up. The payments from the tenants essentially services the mortgage and pays for the property.

Tax laws / regulations (existing and pending revisions) that allow taxable income to be reduced by tax deductible expenses related to the operation of the property, mortgage interest expense, and depreciation / cost-recovery (non-cash deduction) related to the presumed decline in value of the property over time due to usage and wear (when in reality the property is actually apprciating in value over time due to inflation). The capital gain received upon the sale of the property at a future date has its own specific tax treatment.

Availability of credit from financial institutions. The acquisition of a property can be leveraged, which means that the purchaser puts down a certain percentage of capital as a down payment (equity) and the balance of the purchase price is financed. In order to do this, banks have to be willing and able to lend.

In addition, when compared to other investments, owning real property provides one with the opportunity that insurance can be purchased to protect the asset in the event of damage, and the cash flow from the property can be used to pay the premium for that insurance policy coverage.

The trade-off is that real estate is not a very liquid asset. In order to take cash out of the property it either must be sold or refinanced. In order to sell the property, an interested and capable purchaser must be located and there is a certain amount of time required for the transaction to be completed. In order to refinance the property, there must be sufficient equity in the property and there must be available credit from a financial institution.

Commercial real estate properties are:

In the United States, primary markets tend to follow U.S. government Metropolitan Statistical Area (MSA) designations. MSAs are delineated on the basis of metro area population size within a continguous area, not by income.

1. New York–Northern New Jersey–Long Island

2. Los Angeles–Long Beach–Santa Ana

3. Chicago–Naperville–Joliet

4. Dallas–Fort Worth–Arlington

5. Philadelphia–Camden–Wilmington

6. Houston–Sugar Land–Baytown

7. Miami–Fort Lauderdale–Pompano Beach

8. Washington–Arlington–Alexandria

9. Atlanta–Sandy Springs–Marietta

10. Boston–Cambridge–Quincy

11. Detroit-Warren-Livonia

12. San Francisco–Oakland–Fremont

13. Phoenix–Mesa–Scottsdale

14. Riverside–San Bernardino–Ontario

15. Seattle–Tacoma–Bellevue

16. Minneapolis–St. Paul–Bloomington

17. San Diego–Carlsbad–San Marcos

18. St. Louis

19. Tampa–St. Petersburg–Clearwater

20. Baltimore–Towson

www.census.gov/popest/metro/index.html

Loans secured by real estate can be divided into 3 categories based on the source of repayment:

Construction loan / project financing where the land and structure(s) are developed to the point of sale or leasing and the loan is paid off or converted to a permanent mortgage.

Acquisition / refinancing of real estate where the source of the repayment of the loan is the income generated by the real estate leases, fees, etc.

Credit-based loans, which are secured by real estate but will be repaid from the borrower's business operations at the property or personal assets.

Commercial real estate financing is further categorized by structure:

Taxable construction, supplemental and permanent loans (generally secured by some combination of a lien on the real estate, an assignment of cash flows from the property or personal guarantees from the real estate developer).

Tax exempt and taxable bonds and bond securitizations (tax exempt bonds are issued by state or local governments or their agencies or authorities that are issued primarily to finance multi-family housing projects. These bonds are secured by an assignment of the related mortgage loans and a general assignment of rents of the underlying multi-family housing projects. No government is liable under these tax-exempt bonds, and government taxing power is not pledged to the payment of principal or interest under these tax-exempt bonds).

Owners of real estate include:

Publicly traded REITs

Private real estate funds

Domestic and foreign financial institutions

Life insurance companies

Sovereign wealth funds

Pension trusts

Partnerships

Individual investors

Credit Issues

The primary risks of owning and / or lending against commercial real estate are:

Fluctuations in the property's value due to the decline in demand for a particular type of real estate property, the over-building of similar real estate properties or in response to general / regional economic conditions.

Higher expenses or lower income than projected due to changes in either national or regional demographic, general economic and business conditions.

Inability to renew leases or relet space as leases expire or the renewal of leases at less favorable terms than current lease terms.

Insolvency or bankruptcy of a major tenant that substantiall reduces the operating income of the property.

Unavailablity or inability to secure long-term, favorable term or sufficient financing.

Expiration of either long-term leasehold or operating sublease interests in the land and the improvements (rather than actual ownership of the of the property by a fee interest in the land).

Changes and/or revision in tax laws or other regulatory systems that affect operations or result in a failure to comply with applicable tax laws.

Structured finance investments such as mezzanine loans, junior participations and preferred equity interests may or may not be recourse obligations of the borrower in the event of a substantial decline in the value of the property.

Environmental problems and liability may result in a requirement for additional capital.

Acts of terrorism may adversely affect the value of properties and / or the ability of a property to generate sufficient cash flow, and could cause insurance premiums to increase significantly. The Terrorism Risk Insurance Program Reauthorization and Extension Act of 2007 (TRIPRA) has been extended by the U.S. Congress in December 2007 until December 31, 2014 (this is originally the Terrorism Risk Insurance Act / TRIA, which was enacted in November 2002). The law extends the federal Terrorism Insurance Program that requires insurance companies to offer terrorism coverage and provides for compensation for insured losses resulting from acts of terrorism.

Ground Lease

The most basic ground lease involves the owner (Lessor) of an unimproved parcel of land leasing it to an unaffiliated second party (Lessee) for commercial purposes. The reason why a lessee may enter into this type of arrangement is that the location of the property may be very good but the owner just does not want to sell it. Similarly, the price of the land may be too high to purchase and the purchaser may not have sufficient funds afterwards to construct a viable commercial structure / develop the property. Conversely, the owner may enter into the arrangement because they retain the fee simple ownership of the property and will receive a steady income stream from a tenant who has made a substantial investment in the construction of a building(s) on the property, which the landlord may never would have had the funds to develop on his own. The tenant is bearing all of the risk and cost of the development project.

Any improvements (both above and below ground) constructed on or at the property revert to the landlord upon the termination of the ground lease. Thus, the lessee must accurately draft a cost benefit analysis that will clearly demonstrate that the annual lease payments and cost to construct any improvements will result in a commercial enterprise that provides an income stream that compensates for the expenses and provides a predetermined profit.

The lease term is usually long term, which is a relevant statement: for some 25 years may be sufficient while it is not uncommon for leases to be for 99 years (or even exceed 100 years; a shorter initial term may also have multiple renewal options but may include rent amount increases). The tenant constructs a commercial building(s) and other improvements whose economic life and functionality will coincide with the length of the lease. The tenant can construct a structure for owner-occupied purposes (a manufacturing facility, warehouse) or can construct structure to be leased to sub-tenants (retail stores).

Any lease between the lessee and their sub-tenants may not exceed the term of the ground lease.

The ground lease is normally on a non-recourse to the lessee basis: the obligation(s) of tenant under the terms of the lease is dependent upon the commercial operation conducted on the land and not the credit worthiness of the lessee.

The ground lease may include ceratin covenants:

Obligation to build: the lessee is requirde to construct a structure within a certain time frame.

Right to mortgage: the property owner can encumber the land with a mortgage independent of the improvements on the property. Conversely, the lessee can encumber the leasehold improvements with a mortgage without the prior consent of the owner (landlord).

Credit issues:

If the ground lease has a renenwal option(s) that are not clearly defined and the owner and lessor cannot come to terms then lease may terminate early or the new terms may not be viable for the lessor and any sub-tenants.

It is possible that the tenant's business / financial affairs could result in a lien(s) to be placed on the property that could result in the landlord losing the fee interest and / or the improvements. Similarly, the Comprehensive Environmental Liability Response Act of 1980 (CERCLA) (42 U.S.C. § 9601 et seq.) indicates that the landlord and tenant are jointly and severally liable for contamination of the property when a hazardous substance or condition is present on the property during the term of a lease.   www.law.cornell.edu/uscode/42/9601.html

If the owner / lessor enters into a fee interest mortgage (mortgage on the underlying land) then the leasehold mortgagee must require the owner / landlord to subordinate the landlord’s fee interest in the property, and any fee mortgage, to the ground lease and the leasehold mortgage; or there must be a Subordination, Non-Disturbance and Attornment Agreement (SNDA), which clearly indicates that the possession of the leasehold improvements shall not be disturbed, affected, impaired by, nor the lease or the term terminated, a foreclosure and/or suit brought against the land owner in relation to a fee interest mortgage, or any judicial sale of the mortgaged property.

If the lessee enters into a mortgage on the leasehold improvements then the mortgagee must have the right to take over the lease upon foreclosure.

Construction Lending

Construction lending carries substantial risk. Why is construction lending a poor prospect for a financial institution?

Some of the unique set of risks related to construction lending include:

The entire amount of funding allocated by the lender to the project cannot be released all at once at the beginning of construction. Rather, funding must be released in increments as specific phases of the project construction are completed and new phases are commenced, and as various percentages of unit sales / leasing at the project are committed to by purchasers / tenants. This means that the lender must have, and rely upon, the expertise of either an in-house or impartial third party inspector who can verify that various phases of the construction have been completed in an appropriate manner (and authorize the release of the next amount of funding).

If the lender releases funds for the land acquisition and initial start-up of construction but the borrower / project developer does not commence construction then the lender may have to foreclose on raw or only partially improved land that does not have sufficient value to cover the initial release of funding.

If a certain amount of funding is released and the project developer becomes insolvent or there is some type of problem that halts the project then the lender may have to foreclose on a property that is incomplete, may not recover all or a partial amount of funding from the borrower, may have to hire a new company to come in and complete the project and provide additional funding to that new developer, and may only be able to sell units or lease space at a discount due to publicized or perceived problems connected to the property and project.

The financial institution, regardless of any statement made by the borrower, must make certain that the contractor has an active license in the municipal jurisdiction where the project is located. The financial institution should also independently verify references and investigate the contractor’s qualifications and experience. The contractor must be able to demonstrate that he/she has adequate insurance coverage, including comprehensive general liability and workers’ compensation, preferably from an A-rated carrier, and verify the contractor’s ability to obtain payment and performance bonds (see next).

The general contractor should be required to carry payment and/or performance bonds on the project. The premium for such bonding is usually paid by the owner (the borrower). A performance bond ensures that the construction of the project will be completed even if the contractor is unable to do. A payment bond ensures that the subcontractors and suppliers on the project will be paid if the general contractor fails to pay them.

Prior to construction and throughout the construction phase, the general contractor is required to provide a schedule of values or a budget for the project to help ensure that the contractor stays within the contract price and to guard against overpayment. Further, the contract should provide that the owner may withhold a retainage fee of 5.0% to 10.0% from each progress payment until the work is fully completed and inspected (and the time for subcontractors and suppliers to record mechanics’ liens has expired). The financial institution / owner should also receive timely audits, a full accounting for the project and documentation of expenses with each draw request.

A Building Permit must be issued by the building department of the proper municipal authority. The permit is the legal permission to commence construction of the building project in accordance with the approved drawing plans and specifications. The insurance company many not cover the work completed without the permit and periodic on-site inspections. The actual construction, which includes the design, materials, and the interconnection and application of materials must follow the local building code.

Eminent Domain

In 2005, in the court case of Kelo v. New London, the United States Supreme Court decided that state and municipal governments could seize private land for the purpose of commercial development and use in order to the revitalize the local economy. The case involves the New London Development Corporation (New London, CT), which siezed approximately 9 acres, moved the residents and razed several dozen residential properties for the purpose of building a 750,000 sq. ft. offce complex for Pfizer Corp., who received tax concessions to locate the operation in New London (a planned hotel, retail stores and condominiums were never constructed). The decision by the U.S. Supreme Court was nationally criticized and resulted in 43 states passing legislation that would prevent a similar usage of eminent domain for private, commercial purposes. In November 2009, Pfizer publicly indicated that over the next 24 months it would either close or sell the office building, move approxiamtely 1,400 employees from the location but would still be obligated to continue to make the required real estate tax payments.

Lease

  Lease Analysis Template - Credfinrisk.com

In the United States there is no general or national stadardized form of a property or unit lease. In addition, all states have their own guidelines on what a lease must and may not cover / include. Thus, all leases are different and are written for each specific situation.

A lease is also a contract, the terms of which are enforceable in a court of law. Thus, a lease can be interpreted as the owner / landlord and the tenant entering into a business relationship. All of the obligations of both parties need to be clearly identified and defined in the lease because in the absence of a specifically defined responsibility, there is no obligation by either party to perform a function. Neither parties can assume that some function will be performed, it must be specified in the lease or it is a non-issue.

From the owner's view point, a commercial lease is long-term contract yet there is only one way to determine whether a tenant has the capital to renovate the space and then fulfill the annual obligation of the lease, and that is through due diligence / credit analysis.

From the lender's view point, the inportant information is who are the tenants, how long have they been in possession of the unit (paying rent), what is their present financial condition, and in what year are they of the lease and how much time is left until the lease terminates? If the lease is terminating prior to, or immediately after, the granting of a mortgage then are the owner and tenant in discussion? If there is no preliminary renewal terms then the income from that unit may not be used as part of the analysis of the cash flow of the property.

The future cash flow from a lease can be discounted to determine the net present value of the lease, which the property owever will utilize in order to determine the value of an offer from a tenant to lease the property or unit, and to negotiate with the tenant. The discount rate should equal either what a similar investment already is or can earn, what an alternative investment already is or can earn, or what amount of a return the property owner wants to receive.

An estoppel agreement (certificate) provides information (amount of rent, the commencement and termination date of the lease, and whether any defaults currently exist) to the lender about the leases / tenants at an income producing property. Most leases have a requirement for the tenant to sign / provide an estoppel certificate upon the request of the landlord.

Property Analysis

  Property Analysis Template - Credfinrisk.com

The key consideration when analyzing a property (regardless of being on either the equity or debt side) is a positive cash flow or at least a break-even cash flow (the property's revenue covers the operating expenses as a property may not immediately be profitable due to vacancy or the need for renovation or may not be always profitable over the period of ownership due to an occasional vacancy).

In analyzing an income producing property one must take care to become acquainted with the current conditions in the local market:

What is the local economic conditions compared to the rest of the country?

What is the vacancy rate for the specific type of property and are vacancy rates increasing or decreasing?

What is the average lease rate for the specific type of property and are lease rates increasing or decreasing?

What is the absorption rate for existing properties (net gain or loss in occupied space)

What are prevalent square footage asking rents for similar types of property?

Is there pending construction that will bring additional capacity into the market within a short amount of time?

Is there any pending rezoning that may change the allowed usage for various properties located within the local market?

Is there any pending legislation (municipal, state or feferal) that may declare an area a Development Zone, which would provide matching funds or tax credits for new construction / renovation within a specific area?

What is the present cost of financing (interest rates)?

How to analyze an individual property:

All leases must be provided, must be clear and legible and signed by all parties.

Previous and pending tax bills, and utility bills may be requested to verify these two major expenses.

Does the property currently have tenants?

Is there a single major tenant?

Which leases come up for renewal within the next six months to a year?

Will any tenants be leaving the property within the next six months?

Does the property need to be renovated / updated compared to similar types of properties in order to be competitive and attract or retain tenants?

Is there any hostility from a local Community Board with regard to the planned usage for the property?

Is the property "net-leased", meaning that tenants are responsible for property taxes and utilities?

Is the property "net-net-leased", meaning that tenants are responsible for property taxes, utilities and insurance (and perhaps some maintenance expense)?

Gross Income. Accurately Add-up the Total Annual Income:

Commerical tenants (use lease step-up if it will commence within next 6 months)

Residential tenants (use lease increase if it will commence within next 6 months)

Air rights (if being paid in installments)

 

Note: Gross rent is the monthly/annual contract rent plus the monthly/annual cost of utilities, (electricity, gas, and water and sewer) and other fuels (oil, coal, kerosene, wood, etc.) if these items are paid by the renter in addition to rent.

 

Gross Potential Income. Gross Income minus the Vacancy / Credit Loss Factor:

Vacancy Allowance / Vacancy Factor / Credit Loss - can range from 2% to 15%, depending on present local vacany conditions. This allowance is applied because the property may not be fully occupied during the course of the analysis period.

 

Expenses. Accurately Add-up the Total Annual Expenses. Some of the key components of expenses include:

Real Estate Taxes - determine if any re-assessments are pending; determine if tenants coverall or portion, or a percentage increase over a base year.

Property Insurance - determine if the tenants contribute any payment to insurance coverage; Insurance is required by a Lender so the the property is reconstructed, or the mortgage holder is paid off, if the property if destroyed or impaired.

Professional Management - maintenance and repair of the property, collect rent, pay utility bills, screen tenants; expense can be from 3% to 10% of the rent.

Reserve - some owners will create an account to pay future maintenence and repair expenses and some owners just "pay-as-you-go" when repairs arise.

Depreciation / Loan Interest and Amortization *

 

Net Operating Income. Determine the Annual Net Income (or Net operating Income / NOI)

 

* Depreciation is a non-cash item that appears on tax returns, not part of the operating expenses. Loan repayment is also not part of the essential operating expenses to maintain the property. Rather, the ability of a property to service an amount of debt at prevailing interest rates is applied against the NOI (see DSC next).

The most basic determinant of the property demonstrating that it generates sufficient debt-repayment ability is through the the Debt Service Coverage ratio (DSC). This means that the Net operating Income (NOI) is divided by the mortgage debt obligation (both numbers are normally expressed in terms of the annual amount) and the NOI must cover the debt repayment by 1.20X (for every dollar of debt there is a $1.20 available to repay the debt; This is the traditional industry standard, some institutions and investors may require a higher or lower ratio with the floor usually being 1.15X if the loan-to-value ratio is low).

The Income Approach to determining the value of the property requires that the annual Net Operating Income figure be divided by a capitalization rate. For instance, if the annual net operating income was $126,000, and one would expect an 8% return on the investment: $126,000 divided by .08 results in a value of $1,575,000 for the property. If one expected a 12% return on the investment then one would only bid $1,050,000 for the property ($126,000 divided by .12). In the equation showing the relationship between the income, cap rate and value, income is "I", the cap rate is "R" and the value is "V". Thus:
V = I / R
I = V x R
R = I / V

Capitalization rates tend to be localized.

Another quick rule of thumb is that if one expects a 20% return on an investment in real estate then one would bid (or lend, as the building is collateral for the lender) 5X the net income amount.

An Earn-out Provision is a provision in a loan that requires that the Borrower take a partial amount of the loan upfront and then once certain renovations are completed and/or the property is fully leased up and the cash flow increases then the balance of the loan is disbursed and permanent financing terms are granted.

New construction within metropolitan areas usually have height restrictions on building size. The zoning for a specific lot or community usually has a corresponding FAR (Foot Area Ratio) assigned. The FAR is used to calculate the allowable vertical height of a building. This maximum height is determined by multiplying the specific lot's area by the FAR. The larger the FAR number is, the more allowable stories can be built.

Hotel Property Analysis

Underwriting a hotel property is slightly unusual: it is a cross between a business loan and a real estate loan. The reason why this is so is because there are no leases for the hotel rooms. Rather, the hotel is constantly “selling” the hotel rooms at prevailing market rates.

Categories of hotel properties include:

Full-service

Extended-stay

Boutique

Resort

Branded

Independent Properties

The prices for hotel rooms are affected by two situations, which tend to make the pricing volatile.

The price is first very much reflective of what is happening in the general economy. Leisure travel is dependent upon discretionary income and when consumers feel financially secure then spending is stable or increases. Conversely, in a recession travel spending declines, which affects the demand for hotel rooms, and the occupancy rate declines and then hotel room prices are reduced to stimulate demand.

Secondly, room prices are now managed “dynamically”. This means that because prices can easily be updated on-line both internally and for general public presentation, daily prices can be adjusted based on the day of the week and the actual / pending occupancy rate of the property.

The key to hotel property financial performance is RevPAR (Revenue per available room), which is the relationship between the room occupancy rate (percentage) and average daily rate, presented in a single number for comparison purposes.

There are several variables that are combined to determine the RevPAR of a hotel property within a specific period (example: 100 room hotel / one year):

Total number of rooms: 100

Potential (or available) number of rooms: 36,500 (100 rooms x 365 days per year)

Occupied rooms: 31,350 (actual total amount of rooms sold)

Occupancy rate: 85.9% (31,350 occupied rooms divided by 36,500 available rooms)

Average daily rate: $159.00 (gross room revenue divided by number of rooms sold - $4,984,650 divided by 31,350 rooms)

RevPAR: $136.58 ($159.00 x 85.9% or Revenue per available room; similarly, represents total guest room revenue divided by the total number of available rooms; RevPAR differs from ADR because RevPAR is affected by the amount of unoccupied available rooms)

Other sources of income for a hotel property are from food and beverage sales, usage fees and services.

Many hotel and resort properties operate under a franchise agreement with a national or international hotel chain. The franchise agreement is very important as it gives the property a readily identifiable brand image and defines the standard under which the hotel will operate. The franchise agreement places requirements and obligations on the property, which must always be in the position to comply with those demands in order to remain a franchisee. Most properties are inspected on a regular basis by a franchisor brand consultant for quality assurance. The key benefit in addition to the branding is is that the franchisor usually provides a property management system that automates reservation management, room inventory, guest accounting, front office accounting, accounts receivable, auditing, group reservations and provides various types of reports. The franchisee also benefits from a national and regional cooperative marketing program (television, radio, billboards, print and on-line) in several languages. In most cases the entire system is web-accessed and it connects the subject property to the franchise operations. Some franchisors also operate a qualified vendor and group purchase program for the benefit of its franchisees, which provides opportunities save money on everything from insurance to fixtures.

In return for admitting the property as a specific brand / franchise operation, the property owned must usually pay a Monthly Royalty Fee and a Monthly Marketing Fee. The fees are computed as a percentage of gross revenue (franchise agreement payments are usually made prior to debt service and other expenses).

In the United States, the physical inspection of franchisee properties and report is actually carried out by a company named LRA International, which is one of the major hotel industry participants (the company conducts quality assurance reviews for Choice, Hyatt, Starwood, Ritz Carlton, Wyndham, InterContinental, Hard Rock, Best Western, Hilton, Westin).

One of the problems for a lender to take a hotel or resort property as collateral is that it is a specialized property. Without kitchens, the rooms are not viable residential units thus the property can either only be sold to another hotel operator or to a party that is willing to make the investment in the renovation of the property to a residential building.

Additional credit issues:

General economic conditions within the United States and internationally.

SARS, H1N1 Influenza and similar pandemics can severely reduce travel traffic and effect room occupancy rates.

Terrorist activities can also severely reduce travel traffic and effect room occupancy rates.

Airline fares can increase the cost to travel and lower the overall volume of travel traffic.

Airport security regulations’ affect on travelers have been well publicized in the media.

Visa application regulation revisions for travel to the United States have increased the time and effort required to obtain a visa, which can reduce travel traffic.

Foreign travel is strongly influenced by currency exchange rates, which need to be in the favor of the nation of which the traveler resides in so that they can purchase more in the nation they are planning to travel to.

Commercial Condominium

A commercial condominium is either a retail or professional office unit in a condominium building (there are light manufacturing / industrial condominiums as long as zoning and building fire codes permit such activity; There are also warehouse condominium properties). A condominium is a building or development with individually owned units. The owner has their own deed, and very likely, their own mortgage on the unit (the purchaser is buying the right to occupy a space within a larger building). Each unit has separate utility meters (gas, electric, water). Each unit can either be occupied and utilized by its owner, leased to a tenant by its owner or individually sold by its owner. The owner also holds a common or joint ownership in all common areas and facilities that serve the project such as the land, roofs, hallways, entrance elevators, etc. An owner's association is usally established and given the responsibility for maintenance of all common areas and landscaping (the association usually hires a professional managment agent to perform this function) and also for obtaining property insurance necessary to protect the common property of the association. The building can consist of entirely commercial condominium units or there can be commercial condominium units on the lower or specific floors and then there may be residential condominium units on higher or specific floors of the building. The project can be a new construction or the conversion of an existing commercial building to a condominium form of ownership (provided a tenant is not then in default under their rental arrangement, each tenant in a building to be converted is usually offered the right, for a specific time period after the municipal approval for the conversion, to purchase their unit on terms equal to or more favorable than the terms on which such unit is to be offered to the general public). These types of properties can be found in many of the major urban centers within the United States and typical tenants are small businesses, professional firms, art galleries and medical practices .

Some of the characteristics and credit issues of commercial condominium buildings / units:

A condominium project is regulated by state authorities and the project sponsor must prepare and submit a declaration and a plan for review and approval.

The size of the units can be small, even less than 1,000 sq. ft., and sometimes commercial brokers do not want to deal with them.

The build out cost of the new building or conversion of an existing commercial building / unit can sometimes be less than the prevailing square foot cost of leasing space.

Separate, individual businesses that serve a common customer (for instance, doctor's office and a medical laboratory) can be located in the same building, which is convenient for both the businesses and the consumer.

Some companies prefer to own the real estate that they are located in (single-user structure) because it will insulate the company from rising base rents and and the business owner also builds equity in the property.

For small business that cannot afford to purchase real estate the condominium can provide a well located, well maintained, professional business environment.

It may be difficult for a company to expand space to accommodate growth. Conversely, it may be difficult to reduce space in the event of downsizing.

There can sometimes be disputes between the individual owners with regards to the design, maintenance, upgrade and costs associated with the common areas.

A small business that either owns the unit or leases the unit can go out of business (without recourse) and the owner may not be able to continue to make owner's association payments. Similarly, the unit may be sold at a distressed price that the lowers the value of the remaining units.

An owner's association has more leverage than an individual unit does with the developer/contractor in the event of a a construction-defects claim.

Not every commerical building is suitable for condominium conversion: the location of the stairwell or elevator shaft can result in subdivision of the building that is not conducive to operating a business, especially one where the public is coming onto the premises.

Condotel

The Condo-Hotel, or Condotel, combines the attributes of a hotel operation and condominium within a single structure. The residential units are sold as condominium units to owers who must finance the purchase and are then responsible for the monthly maintenance / home owner's association fee. However, in many cases the purchaser does not reside, or is restricted from residing, in the unit the year round. Thus, when the owner is not in residence the hotel operation has the right to lease out the unit on a short-term basis similar to a hotel room (the renting out of the unit can be nightly or weekly, what ever the market will bear). The owner of the condominium unit receives a percentage of the income. The owners are usually restricted from having personal property within the unit when not in residence but usually receive hotel services and amenities when in residence.

Commercial Real Estate Appraisal

An appraisal report is the professional appraiser's opinion of the value of the property. It should always, and only, be the starting point of the valuation of an asset / collateral by the credit analyst because remeber, it is an opinion not the final decision. In addition, the report should be carefully reviewed for dated information, inconsistencies and mistakes.

Appraisals are utilized to determine:

Single property valuations related to financing purposes (loan collateral), purchase or sale

Portfolio valuations (acquisition, disposition)

Market analysis

Insurance valuation

Litigation related to foreclosure and/or bankruptcy

Litigation involving land valuations, damages, or losses

Ad valorem property tax assessments

Eminent domain (condemnation) proceedings

Estate planning, gift valuations, or inheritance issues

Preparing an appraisal report involves:

Researching comparable sales

Researching comparable leases / rents

Determining "Highest and Best Use"

Value estimate by the Cost Approach, which should be in the form of computational data, arranged in sequence, beginning with reproduction or replacement cost and should state the source (book, page, including last date of page revision, if a national service such as Marshall & Swift) of all figures used.

Value estimate by the Sales Comparison Approach, which utilizes recent and unforced, arms-length sale(s) of similar type of properties as the subject.

Value estimate by the Income Capitalization Approach through current capitalization (cap) rates or using the Discounted Cash flow approach. Capitalization of net income shall be at the rate prevailing for this type of property and location.

Value estimate by the Land Residual Approach

The Gross Rent Multiplier (GRM) is a very simple equation: Value divided by Gross Income. Thus, a recently sold property at $875,000, has a gross income of $115,000, for a GRM of 7.61x ($875,000 divided by $115,000). The GRM is of value in looking at several other recently sold similar properties, computing the GRM for each property respectively, and then comparing the average to a subject property. Is the GRM in line with the other comparables, and if not (higher or lower) then what is the reason? Conversely, an analyst (or an investor) can quickly determine the approximate market value of a property by knowing the gross revenue of a property and the local GRM (gross revenue x GRM = estimated market value).

In the United States, each state or territory has a State appraiser regulatory agency, which is responsible for certifying and licensing real estate appraisers and supervising their appraisal-related activities, as required by Federal law (Title XI of the Financial Institutions Recovery, Reform, and Enforcement Act of 1989). Appraisers are required to meet the performance and ethical standards of the Uniform Standards of Professional Appraisal Practice (USPAP) as established by the Appraisal Foundation and overseen by the Appraisal Standards Board (ASB). A related organization, the Appraiser Qualifications Board (AQB) has oversight of the minimum education, experience and examination requirements individuals are required to meet to become and continue to be a real property appraiser. The Appraisal Institute is the professional trade organization that provides indiviuals with the MAI, SRA and SPRA designations.

Appraisers of commercial real estate are required to complete specific courses in order to be certified.

USPAP National Course

Basic Appraisal Principles

Basic Appraisal Procedures

Bachelor's degree or higher (or equivalent attendance of courses for English Composition; Principles of Economics (Micro or Macro); Finance, Algebra, Geometry, or higher mathematics; Statistics; Introduction to Computers, Word Processing/Spreadsheets; and Business or Real Estate Law)

General Appraiser Market Analysis and Highest & Best Use

General Appraiser Sales Comparison Approach

General Appraiser Site Valuation and Cost Approach

General Appraiser Income Approach

General Appraiser Report Writing and Case Studies

Real Estate Finance, Statistics, Valuation Modeling

Agricultural real property appraisal also requires that the appriaser be able to determine soil quality, water quality and availability, water rights, and crop potential. The property may also include residential and agricultural-related structures, permanent plantings and processing facilities.

In Canada, the Appraisal Institute of Canada, is the national professional institute of real estate appraisers that provides individuals with the AACI (Accredited Appraiser Canadian Institute) designation. Appraisers and appraisal reports standards are established by the The Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP).

National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index

The National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index (NPI) is an index of the quarterly total returns to the U.S. commercial real estate properties primarily held for tax-exempt institutional investors by the members of NCREIF. The NCREIF Property Index consists of both equity and leveraged properties, but the leveraged properties are reported on an unleveraged basis. As such, the Index is completely unleveraged.

Actively managed portfolios or commercial real estate attempt to outperform the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index (NPI).

LEED (Leadership in Energy and Environmental Design)

The Leadership in Energy and Environmental Design / LEED Green Building Rating System devised by the United States Green Building Council (USGBC) has become an international benchmark by which to measure the "green", or environmental sustainability, profile of a commercial real estate structure. The key to the rating system is how much energy is consumed, what is the carbon imprint and how is the immediate environment affected in the operation and maintenance of the structure. The organization will certify the building based on 6 criteria:

There are evaluation programs for both new construction and existing buildings (LEED-EB). The evaluation is actually quite helpful to improve building design and efficiency and actually reduce operating expense. Secondly, the improved quality of the structure may help to attract tenants at higher rental rates compared to a building that is not certified.

Municipal Real Estate Ad Valorem / Property Tax Assessment

Ad valorem tax means a tax based upon the assessed value of real property. The term "property tax" tends to be used interchangeably with the term "ad valorem tax".

An assessment is the determination of the value of the property by the local tax assessor's office, which is then used to calculate the property's taxes. The local tax assessor's office reviews the public records and may also make a physical inspection of the property in order to estimate the market value of a commercial property by comparing the sale prices of similar properties, estimating the cost to construct the property, and/or calculating the potential rental income that the property could generate (if any). Factors that are considered include:

Size of the plot of land

Location of the property

Number and size of improvements located on the land

Physical characteristics of the improvements including number and type of units / rooms

Quality of construction of improvements

The valuation (taxable value) assigned to the property by the assessor's office is then multiplied by a specific tax rate (which is determined by local law and/or the city, county, school board, water district taxing authority) to derive the "property tax". The tax rate is also sometimes referred to as "Millage" ("Mill" means one one-thousandth of a United States dollar or $0.001, which results in an arithmetic computation whereby the millage is converted to a decimal number and then multiplied by the taxable value of the property to determine the tax on such property). The property taxes collected are then utilized to cover the cost to build and maintain public property and services (schools, fire departments, police departments, street maintenance, libraries, public parks).

The dollar amount of the annual real estate tax may change annually due to revision of the tax rate and / or a change in the "market value" for properties similar to the subject property. Thus, an increase in property values both helps and hurts the property owner: if the property is to be sold then the owner will net more value but if the property is held for a long period then the property tax may increase. Most communities provide some type of procedure of redress if the property owner believes that that the assessor's office has overestimated the value of the property. In addition, most municipalities usually provide property owners with a notice of proposed property taxes changes that will also indicate the times and places of budget hearings to be held by taxing authorities .

If property taxes are not paid within a specific time period then they are considered "delinquent", at which time additional interest and fees are added to the bill. If thye remain unpaied within a specific period then the property may be seized by the taxing authority to satisfy the outstanding tax bill. In most instances, the taxpayer is "held to know", which means that the property owner is required to know when taxes are due and payable even if a taxpayer does not receive a tax notice (it automatically becomes the taxpayer's responsibility to contact the tax collector's office).

State / Municipal Real Estate Transfer / Deed Recording Taxes

In the United States, several states, and in some cases the local municipality, has a transfer tax that is levied on the sale or transfer of real property within the respective jurisdiction of the tax authority.

1031 Exchange

The 1031 Exchange takes its name from the corresponding U.S. Internal Revenue Service code section. What it does is allow the Seller of a property avoid having to pay capital gains on the sale of a commercial property by purchasing another commercial property of "like kind" at an equal or higher value than the property just sold. By using the profit just obtained on the sale to acquire the new property the capital gains tax is avoided. "Like Kind" is a very broad definition and really refers to commercial usage rather than quality or condition. The IRS mandates that a Seller indicate that a sle and purchase are part of a 1031 exchange in the sales contract, that a new property is identified within 45 days and the purchase consumated within 135 days afterwards (180 days total), and that the new property be held and not immediately resold. The transaction also requires what is known as a "Qualified Intermediary" (QI). The QI is normally a small corporation, perhaps related to the real estate brokers connected to the transaction, that functions as the Agent for the parties involved in the 1031 exchange by transferring the proceeds from the sale to the escrow account for the new purchase. Thus, the Seller / Purchaser never takes control of the funds (the QI never takes title to the property during the transaction).

Tenant In Common Program (TIC)

TIC is similar to the 1031 like-kind exchange however purchasers can buy an interest in a property rather than the whole property but still qualify for the deferral of capital gains. These programs were allowed by the IRS in 2002 and usually invlove a real estate management firm lining up a group of investors to sell existing properties and buy a larger property (a property larger than any single investor could have managed to purchase on their own). The investment and ownership is suppose to be passive in order to qualify for the tax benfit. In addition, all investors must have equal ownership rights (maximum of 35 investors). However, it should be noted that these types of transactions must also be registered and offered as a security with corresponding disclosure statements, not just as a simple real estate investment.

Discounted Cash Flow Analysis

Discounted Cash Flow is helpful in analyzing a real estate property that produces income at regular intervals (annually). The two most important methods of analyzing the discounted cash flow from a real estate asset are Net Present Value (NPV) and Internal Rate of Return (IRR).

The formula for determining the Net Present Value
      (Where NPV = Net present value of a discounted cash flow)
      (Where CF₀ = initial investment in the property, a cash outlay)
      (Where CF_j = cash flow at period j)

This example is for an opportunity to purchase a mixed-use property for $550,000. The investor wants a 12% return on the investment. The first year's anticipated net income from the property is a net loss of $5,000 due to the anticipated major refurbishment and renovation of the property. The second year's anticipated net income is $69,000. The third year's anticipated net income is $79,000. The fourth year's anticipated net income is $95,000. It is anticipated that the property can be sold at an amount higher than the initial investment (purchase) in the property, approximately $750,000.

 

Press the ON button in the lower left-hand corner.

 

Press the Yellow " f " button and then press the "FIN" button (clears information in memory).

 

Press the Yellow " f " button and then press the "REG" button (clears information in memory).

 

Enter 550000, then press CHS button (changes the figure to a Negative cash outflow), then press the Blue " g " button and then press the CF₀ (PV / NPV) button in the left top row (stores the number in the CF₀ Register).

 

Enter 5000, then press CHS button (changes the figure to a Negative cash outflow due to the loss), then press the Blue " g " button and then press the CF_j (PMT / RND) button in the left top row (stores the number in the first CF_j Register).

 

Enter 69000, then press the Blue " g " button and then press the CF_j (PMT / RND) button in the left top row (stores the number in the second CF_j Register).

 

Enter 79000, then press the Blue " g " button and then press the CF_j (PMT / RND) button in the left top row (stores the number in the third CF_j Register).

 

Enter 95000, then press the Blue " g " button and then press the CF_j (PMT / RND) button in the left top row (stores the number in the fourth CF_j Register).

 

Enter 675000, then press the Blue " g " button and then press the CF_j (PMT / RND) button in the left top row (stores the number in the fifth CF_j Register).

 

Enter 12, then press " i " (INT) button in the left top row (enters the interest rate of the desired return).

 

Press the Yellow " f " button and then press the "NPV" button (calculates NPV).

 

The NPV = (positive) 160.08 indicates that the cash flow and anticipated sale value will result in an acceptable investment that will attain the the desired 12% return on investment. However, the NPV could be compared to the NPV of other projects as the higher the NPV the better the project. If the NPV had been a Negative figure then the investment would have been unacceptable.

 

Commercial Real Estate Closing Documentation

Contract of Sale (if a purchase) plus all attachments and schedule

Payoff Letter from other financial institutions

Evidence of Commercial Property Insurance

Title Insurance Policy

Short Interest from the date of closing to the date of the first payment. It is computed by multiplying the loan amount by the interest rate, divide that number by 360 or 365 calender days (depending on the financial institution), then multiply that number by the actual total days that will elapse between the closing date and the first payment date.

Collect commitment fee due.

Collect reimbursement for the Appraisal, Phase I Environmental Assessment and any other out of pocket costs.

Attorney Fee

Flood Insurance waiver or endorsed policy

Certificate of Incorporation (of corporate entity that will own the property)

Mortgage Note

Mortgage and Security Agreement

Assignment of Rents, Leases and Other Contract Rights

ADA and Environmental Indemnity Agreement

UCC-1 Financing Agreement

W9 Form (Request for Taxpayer Identification Number and Certificate)

Attorney’s Opinion (closing attorney for financial institution)

Secretary’s Certificate (of corporate entity that will own the property)

Compliance Agreement (signifies that the Borrower will re-execute any documentation)

Certificate of No Material Change (of corporate entity that will own the property)

Identification of Borrower (correct name and offices)

Affidavit of Title

Disbursement Direction Letter (how much and to whom checks were issued)

U.S. Investment Real Estate Tax Treatment

Please also see the Tax Information Page for U.S. IRS Investment Real Estate Tax Treatment

Owning an investment property has specific tax advantages in the United States.

 

All of the expenses paid during the course of the tax year related to the operation of a specific property and/or capital expenditure improvement of the property

Depreciation of the life fo the asset (cost recovery)

Amortization of loan points (points paid as part of the granting of the loan, which are considered an interest charge as they are priced as a percentage of the loan amount)

Loan interest paid (as part of the regulalry scheduled monthly payments for the full year)

 

are all deductible against the gross revenue income (and other income) generated by the property. Finally, any net loss that the ownership of the property produces (reported on Schedule E) can then be deducted against the total income of the individual tax filer.

REIT (Real Estate Investment Trust)

A REIT is a closed-end (fixed number of shares) investment fund with many investors that invests in commercial real estate or high-end residential properties. The types of properties are domestic U.S. retail, office, industrial and multi-unit residential properties. There are also specialized REITS, for instance equity or mortgage investments in nursing homes, or REITS that invest specifically in property outside the United States. Some REITs are also listed and traded on exchanges (NYSE, Amex and NASDAQ), however there is no requirement that it be a publicly traded entity. REITs allow investors to obtain exposure / investment in the commercial real estate market (usually a portfolio of properties rather than a single property) and also allows an investor to benefit from the expertise of a professional real estate manager.

The Board of Governors of the National Association of Real Estate Investment Trusts (NAREIT), which exercises som control over the REIT industry, mandates that REITs calculate Funds from Operations (FFO) by adjusting net income (loss) (computed in accordance with GAAP, including non-recurring items) for gains (or losses) from sales of properties, real estate related depreciation and amortization, and after adjustment for unconsolidated partnerships and joint ventures. FFO itself is a non-GAAP financial measure.

  Dow Jones Wilshire Real Estate Indexes

  TSE REIT Index (Tokyo Stock Exchange) / Bloomberg

  MSCI US REIT Index

REOC (Real Estate Operating Company)

A REOC is not required to pass all of their income on to the investors as REITs are required to do.

Professional Management, Services & Advisory

Multi-service (brokerage, appraisal, leasing and research) commercial real estate management company functions include:

Site plan / Master plan oversight and project objectives (acquisition, re-development / re-positioning, development opportunities)

Feasibility and economic analysis

Land due diligence and site analysis

Land acquisition and negotiations

State / Municipal negotiations and approval and securing entitlements

Architectural and Engineering coordination

Contractor selection and oversight

Utilities review and negotiations

Anchor Tenant negotiations

Construction and occupancy coordination

Environmental reviews and remediation

Tax consultation and analysis

Accounting (control and reporting) services

Property Management involves:

Negotiate local lease transactions

Manage expense reduction opportunities through national purchasing and service agreements

Schedule and complete routine maintenance (interior / exterior)

Manage HVAC environments / Temperature control

Manage Internet and telephony services / connections

Mange visitor traffic / building security / key and locksmith requests

Manage maintenance emergencies, such as floods, HVAC, mechanical failure, elevator malfunction, power outages, lightning / severe weather conditions problems; Manage street-level civil disturbance

Cleaning, testing, calibration, and maintenance of smoke detector systems

Cleaning, testing, calibration, and maintenance of fire extinguishing equipment and systems

Medical emergency response (some large buildings / projects have deployed portable Automated External Defibrillators / AED units)

After hour access (overtime employees of tenants or services) / freight elevator service

Manage daily trash removal and cleaning service

Manage specialized tenant promotions / events, and seasonal activities

Manage property (or portfolio) accounting, which includes rent collection, accounts payable, cash management, financial reporting, tenant billing and budgeting; major real estate accounting systems include JD Edwards, MRI, AMSI, Skyline and Timberline

The Institute of Real Estate Management (IREM) is the professional trade organization that provides individuals with the Certified Property Manager (CPM), Accredited Residential Manager (ACM), and the Accredited Commercial Manager (ACoM) designation, and provides companies with the Accredited Managment Organization (AMO) designation. Similarly, the National Association of Residential Property Managers (NARPM) is a professional trade organization that provides individuals with the Professional Member designation.

Please note: in many cases a Managing Agent is a separate legal entity / company and operates under contract / instructions of the property management company.

Commercial real estate brokerage (sales and leasing) requires an understanding of the specific details of the market in order to correctly value a property, and the ability to negotiate effectively to bring both sides of the transaction together. Qualifying potential purchasers requires the ability to verify their public representations and ascertain their capabilities.

Commercial Real Estate Regulation

The authority for national banks to engage in real estate lending in the United States is set forth at 12 USC 371 and the Comptroller of the Currency's regulations at 12 CFR 34. National banks may make, arrange, purchase, or sell loans or extensions of credit secured by liens on interests in real estate.

The City of New York probably has the most regulated residential rental apartment market in the United States:

 

New York State Division of Housing and Community Renewal (DHCR) - regulates rent stabilized and rent controlled units under the terms of the Omnibus Housing Act of 1983. Owners of rent controlled units in buildings of six or more units are required to register these units and provide information on their tenants and unit characteristics to DHCR. Owners of rent stabilized units are required to file registrations annually. The Rent Regulation Reform Acts of 1993 and 1997 provided owners with certain terms and conditions in terms of vacancy, monthly rent levels and leaseholder incomes that allowed them to decontrol both rent controlled and rent stabilized units. Rent controlled units can also be passed to a next generation of close relatives or domestic partners who have shared the unit for a period of years with the original leaseholder (referred to as succession rights).

 

Controlled units are subject to the provisions of the Rent Control Law and Regulations, which have jurisdiction over some occupied private rental units. All increases in rent are set and must be approved by the state DHCR. The following units are classified as rent controlled: units in buildings with three or more units constructed before February 1, 1947, where the tenant moved in before July 1, 1971, or units substantially rehabilitated prior to January 1, 1976 under the provisions of J-51, which were initially occupied by the current tenant prior to January 1, 1976; units in buildings with one or two units constructed before February 1, 1947 which were initially occupied by the current tenant prior to April 1953. Some controlled units may remain in buildings converted to cooperatives or condominiums.

 

A owner of a rent regulated building that does not respond to New York City building code violations issued by the NYC Department of Buildings can be fined. Class B violations mean that conditions are hazardous and must be corrected within 30 days. Class C violations mean that conditions are immediately hazardous and must be corrected within 24 hours.

Commercial Foreclosure

What happens when the Borrower / Mortgagor defaults?

The Lender / Mortgagee usually sends a written notice of arrears / default to the borrower by certified mail.

The borrower is usually provided with a given period of time after proper notice to pay the lender the outstanding amount required in order to "cure the default" and to reinstate the loan.

If the loan is not cured then the lender has two options:

Non-judicial foreclosure by following the procedures indicated in the Mortgage Note and / or the Pledge and Secturity Agreement.

Judicial foreclosure by filing a lawsuit to obtain a court order to sell the property and have the outstanding amount (and any related expenses) repaid from the proceeds of the sale of the property with the balance of any profit passed through to the owner.

If the lender decides to pursue a foreclosure then a foreclosure referral is sent to either the in-house or third party counsel. The referral includes copies of the Note, Mortgage, personal guaranty, specifics of the date of default (including outstanding prinicpal and interest), preliminary negotiation information, and contact information.

The legal counsel sends a Demand Letter by certified mail to the borrower indicating that the loan is in default and the amount of the arrears; and if the arrears are not cured (paid in full) by a certain date then the Note will be accelerated (now due to be paid in full prior to the indicated maturity date) and the foreclosure action will be commenced.

At the expiration of the Demand Letter period the legal counsel orders a foreclosure search to identify any and all defendants in the foreclosure action: subordinate mortgages, creditors (judgments, mechanics lien, tax authority)

A Summons and Complaint is drafted and then sent to a process server for preliminary filing in the local county clerk's office where the property is located. A corporate or individual borrower / defendant is then served with a copy of the Summons and Complaint. A borrower in default may not disregard a lawsuit. If the lender properly serves the borrower with a Summons and the Complaint, and if the borrower takes no action, then the borrower will eventually face a default judgment in favor of the lender.

A Lis Pendens is filed in the county clerk's office, which is a notice that indicates a foreclosure action has been commenced against the property. If a party has not been listed as a defendant by the time the Lis Pendens has been filed then that party has no further claim or interest in the property (usually with the exception of tax claims).

If necessary, a Receiver is appointed by the court to collect the rents and maintain the property (repairs, maintenance, tax payments). The Receiver takes direction from, and answers to, the court. However, the receiver may not be entirely capable of all functions given the size of a property and may in turn hire a managing agent, accountant, attorney, etc.

The Motion for Order of Reference is requested by the lender if no party as answered the Summons and Complaint so that the court will declare all appropriate parties in default and appoint a Referee to compute the amount that is due to the lender.

If a party has answered the Summons and Complaint then the lender's legal counsel may request a Motion for Summary Judgment. In this motion all defenses, claims and counter claims must be addressed. If the Motion is succesful then the court will issue an order striking the defendant's response and the Referee will then be appointed.

The Oath and Report entitles the lender to a judgment of foreclosure and sale, which is received with a Motion for Judgment (amount due, attorney's fees and directs the Referee to conduct the foreclosure sale).

A Notice of Foreclosure Sale is usually published in the local newspaper.

A public sale is usually conducted by auction where the highest, qualified bidder purchases the property.

The lender may establish a minimum bid amount (upset price) at the outset of the public auction, which is usually equal to the amount of the judgment. If there are no initial bids that equal the minimum bid then the lender can either withdraw the property or lower / eliminate the minimum bid.

If the public auction and sale of the property results in an amount insufficient to cover the outstanding principal balance amount and accrued interest then the lender may also request that the court overseeing the foreclosure process enter a Deficiency Judgment against the Mortgagor if the loan was on a recourse basis (the borrower also personally guaranteed the loan). Deficiency judgments can be used to place a lien on the borrower's other property that obligates the Mortgagor to repay the difference of the principal amount due and what the foreclosure sale obtained. It gives lender a legal right to collect the remainder of debt from the sale of mortgagor's other assets.

The lender itself may also purchase the property on its own behalf by submitting a credit bid based on the amount of the outstanding mortgage.

If the lender purchases the property (is actually declared the winning bidder) then the lender is within their right to sell the property at a later date in a private sale.

Regardless whether it is a third party or the lender who purchase the property, the deed to the property is signed over at the sale or final closing.

The Mortgagor and / or their tenant must vacate the premises after proper notice. If the Mortgagor and / or their tenant does not vacate within the legal, indicated time frame then an eviction proceeding is commenced. It is important that either a representative of the lender or a sheriff is present to oversee and ensure that the Mortgagor / tenant vacates all persons from the property, no transferred property, equipment or fixtures are removed, personal property is removed, and the locks are changed.

The Mortgagor is usually allowed to keep the property if at any time during the loan foreclosure process they obtain separate financing and the loan is paid off and the lender is reimbursed for any foreclosure costs.

What happens when the defaulted loan is on leasehold improvements?

If the lease is considered below market and extends for a long enough term then it may have value to a party that wishes to operate a commercial business at that location. They may be interested in making a lump sum payment for the assignment of the lease (if it can be assigned) or they may be willing to assume the loan terms as is / slightly modified for the opportunity to assume the lease.

Commercial Real Estate Information Resources

Appraisal Foundation   www.appraisalfoundation.org/

Appraisal Foundation, 2008-2009 Uniform Standards of Professional Appraisal Practice (USPAP)   commerce.appraisalfoundation.org/html/USPAP2008/index.htm

Appraisal Institute of Canada   www.aicanada.ca/

Appraisal Subcommittee (ASC)   www.asc.gov/

Association of Appraiser Regulatory Officials (AARO)   www.aaro.net/

Association of Real Estate License Law Officials (ARELLO)   www.arello.org/

Building Performance Institute Accredited Contractor Lookup   www.bpi.org/content/consumers/find.php

City of New York, New Housing Marketplace   www.nyc.gov/html/hpd/downloads/pdf/10yearHMplan.pdf   (.pdf format)

DOE-2 building energy usage and cost analysis program   www.doe2.com/DOE2/

Hong Kong Institute of Surveyors (HKIS)   www.hkis.org.hk/

International Valuation Standards Committee (IVSC)   www.ivsc.org/

Korean Association of Property Appraisal   www.kapanet.co.kr/

MIT Center for Real Estate   web.mit.edu/cre/

National Council of Real Estate Investment Fiduciaries   www.ncreif.com/

NYC Rent Guidelines Board   www.housingnyc.com/

Property Institute of New Zealand   www.property.org.nz/

Real Estate Research Institute   www.reri.org/

Selected Findings of the 2005 New York City Housing and Vacancy Survey   nyc.gov/html/hpd/downloads/pdf/2005-Housing-and-vacancy-survey-initial-findings.pdf   (.pdf format)

Tax Incentives Assistance Project (TIAP)   energytaxincentives.org/

U.S. Census Bureau   www.census.gov/

U.S. Census Bureau, New York City Housing and Vacancy Survey (NYCHVS)   www.census.gov/hhes/www/housing/nychvs/nychvs.html

U.S. Census Bureau, Rental Vacancy Rates (U.S. National)   www.census.gov/hhes/www/housing/hvs/hvs.html

U.S. Census Bureau, Survey of Market Absorption of Apartments (SOMA)   www.census.gov/hhes/www/housing/soma/soma.html

U.S. Environmental Protection Agency, Hazardous Sites   www.epa.gov/enviro/html/cerclis/cerclis_query.html

U.S. Green Building Council   www.usgbc.org/

U.S. Treasury, Terrorism Risk Insurance Program Reauthorization Act of 2007   www.treas.gov/offices/domestic-finance/financial-institution/terrorism-insurance/