Properties that are mis-managed or suffering from previous poor decisions in better times are missing their mortgage payments and approaching foreclosure.

Far from an indication that they are not good properties for investment, it’s related more often to management or expenditures made in better times that are now coming back to haunt their owners.

Basic Short Sale Concepts

Commercial short sales are similar in the basics to residential short sale situations. The owner of an income-producing commercial property is having trouble making their mortgage payments, and the lender is threatening further action.

It isn’t a foreclosure yet, and a buyer may create a great purchase opportunity by stepping in and relieving the bank or lender of the costs and hassles of foreclosure.

A buyer in a residential short sale provides the lender with comparable sale data, current comparable property listings, and other data to support an offer significantly lower than the current mortgage balance.

The homeowner/borrower helps by providing documentation of their distressed financial status and eminent foreclosure or bankruptcy. The goal is to get a deep discount deal from a bank or lender wanting to avoid the foreclosure process.

Commercial Short Sale Specifics

In commercial rental properties, whether office complexes, shopping malls, or other property types, the cash flow is the primary valuation factor and lending decision component. It could be assumed that the property wouldn’t be in a short sale position if the cash flow was as it should be.

This could be the case, but it needn’t be because of factors outside the owners’ control. Poor management or decisions on major expenditures could create drains on otherwise good rental income flows.

There is also the strong possibility that the property in mortgage trouble has been subsidizing other losing investments of the owners. As these other property situations deteriorate, an otherwise very desirable property is unable to stay afloat because its cash flow is being drained to fund other poorly performing investments.

When an investor can uncover an opportunity like this and negotiate a successful short sale with the lender, an excellent investment is the result.

Commercial short sale opportunities do require a high level of due diligence, but it can be very well worth it.

I’ll share more with you soon…

Warm Regards,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President

The goal of the NOI calculation is to capture all of the operating expenses, subtracting them from rental income, and resulting in the cash flow after expenses.

Operating expenses can be grouped in many ways, and not everyone does this calculation the same way. But, an example list of operating expenses of an apartment or multifamily project would normally include:

Property Ownership Related Expenses

· Taxes, whether property, school or other taxes on property value or location

· Insurance to protect investment from fire, damage, theft and liability

· Licenses and permits to operate

Utilities or Fuel

· Electricity
· Natural Gas
· Water & Sewer
· Cable TV or Satellite TV services
· Trash removal

Maintenance & Repair

· Exterminating
· Landscaping
· Decorating
· Cleaning
· Pool/hot tub maintenance
· Grounds maintenance/snow removal
· Elevator services
· Parking lot cleaning and maintenance/repaving
· Maintenance supplies
· Repairs

Salaries & Management

· Contracted management services
· In-house management salaries
· Housekeeping and in-house landscaping services
· Office staff
· Security Services
· Bonuses and commissions
· Payroll taxes & other payroll burden
· Legal/accounting/professional

Advertising and Marketing

· Print and other media for advertising
· Marketing materials and design services

These comprise the Net Operating Income expenses without reserves for capital expenditures or reserves for improvements and remodel. Adding these reserves to the subtotal of those expenses listed above would result in the operating expenses. Subtract that total from the income from rents to get to the NOI, or Net Operating Income.

Using this NOI, the potential buyer of an apartment or multifamily property can do a cap rate calculation to help in valuation of the property.

Using the prevailing cap rate of recently-sold properties, the buyer can determine the approximate value of the property in relation to the asking price. As this NOI is the cash flow, the seller can also determine a probable asking price using the prevailing cap rate.

Lenders can also use this number to determine through DSCR, Debt Service Coverage Ratio, the amount to loan on the property in a purchase transaction.

I’ll share more with you soon…

Warm Regards,

Karen Hanover, CCIM Candidate
Apartment Education Institute, President