Estoppel Certificate

What is an estoppel certificate and why do we use it?

First of all it is a letter or a form that generally contains the pertinent or important information found within the lease along with the status of the tenant's and landlord’s rights and obligations under the lease. This certificate is key when it comes to closing commercial real estate transactions where there are tenants in place when the property is sold. The certificate is often drawn up by an attorney and will contain information such as when the lease began, when it ends, how much the tenant has agreed to pay, if the tenant has any payments due but not yet paid, whether there are any options to extend the lease, security deposit amounts, if any free rent has or will be given. It also may cover any other additional agreements that may be out of the ordinary such as if the tenant has a right of first refusal, but has waived that right. As a part of the lease most tenants have agreed to review and show their agreement by signing the certificate or dispute the information in the certificate. This gives the purchaser of the property the opportunity to get a clear picture of the lease and the tenant's status under that lease before he or she purchases the property.

Vacancy and Credit Loss

So what is the actual difference between Vacancy and Credit Loss. Vacancy is the loss of potential income which is attributed to space in a building that is not leased. More simply put...this is empty space that could be making money for the landlord. Credit Loss, on the other hand, is the rent due that the landlord has not been able to collect due to a tenant's default. Again, simply put...rent that is owed that has not been paid.

This is one of the reasons that bankers will often use vacancy and credit loss in the formulas that is above a current vacancy rate. The apartment complex may have a vacancy rate of 5% for the last 3 years, but the banker may use a 10% vacancy and credit loss rate in order to cover any tenants that may be in place, but not paying the rent due.

New Federal Funds Rate-Lowered Again

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today's action, combined with the policy actions taken earlier, should help promote moderate growth over time.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis.

http://money.cnn.com/2007/12/11/news/economy/fed_statement/index.htm

Let's Define Net Operating Income (NOI)

The Net Operating Income (NOI) of a property is very simple to figure out. It is defined as follows:
Potential Gross Income=The total amount of money a property could make
-Vacancy and Credit Loss= subtract any empty space or tenants in place that haven't paid.
-Operating Expenses= subtract actual expenses on the property i.e. Utilities, Taxes, Insurance, maintenance, employees, etc. (this does not include the mortgage or income taxes)
=Net Operating Income

Athens commissioners already preparing restrictions for medical offices

Recently an article came out in the Athens Banner Herald regarding proposed restrictions for future medical space to be built along Prince Avenue. (Here is the link for the article http://www.onlineathens.com/stories/100907/opinion_20071009024.shtml ). The commissioners of Clarke County have discussed adding a size restriction for future medical offices to be built along the Prince corridor by adding a size restriction to make Prince Avenue more "pedestrian friendly".

Does keeping a building small (less than 10,000 SF) make the area more pedestrian friendly? I think the answer is no. Scott Weinberg, a planning commissioner, threw in his two cents by approaching the process through design standards. I think this is a far better option than size restrictions. All of us can think of ugly little buildings and big beautiful buildings. I happen to own an office in The Georgian Hotel that is gorgeous and in one of the most pedestrian friendly parts of the Southeast. I think that the Commission and Planning Commission need to do some serious homework regarding the future of the medical industry before they restrict away at random. The medical industry is establishing partnerships between previously unlikely co-owners. The commission may regulate away some excellent medical facilities that may allow Athens become the other end of the bio-science research corridor that it desires to be.

Don't get me wrong, well thought out design standards give areas character and can make a town beautiful i.e. Charleston, Savannah, Madison, just to name a few that are close by, but it is through creativity, variety, and thoughtful design that buildings are built for posterity.

Benefits of Seller Financing

Often times one will see a commercial real estate opportunity that offers Seller Financing. The question is then asked by the Purchaser, "what is the benefit of Seller Financing if I still have to pay the same price?" To answer this we will have to walk through two financing scenarios: one that involves a "conventional financing" process and one that involves seller financing.

Example One: Purchaser has $50,000 in which to invest in commercial real estate. She has located a property that is for sale for $300,000. Purchaser has talked to several lenders and has discovered a lender that will loan her 90% of the purchase price at 8% over a 20 year amortization. The payments for the loan are $2,258 per month. The purchaser must come up with the other 10% or $30,000. Closing costs are estimated to be approximately $5,000. The Purchaser would like to make some improvements in order to attract a tenant. She finds a contractors who estimates that the improvements should cost about $6,000. The purchaser only has 4 months to find a tenant before her remaining $9,000 has run out! This does not allow her much flexibility.

Example Two: Another Purchaser has the same $50,000 in which to invest in commercial real estate. He is looking at a different property which is also $300,000. He talks to the same lender who offers the same loan terms of 90% of the purchase price at 8% interest to be amortized over a 20 year period. The Purchaser will still have $5000 in closing costs and $6000 in improvements. This purchaser then approaches the Seller of the property and asks if the Seller will finance the remaining $30,000 of the price at 10% interest over 5 years. The Seller would like to receive the additional money from the interest and agrees. This is an additional monthly payment of $637.00 per month. Although this Purchaser will have a monthly note of $2895.00 for the first 5 years, this purchaser still has $39,000 in cash in which to cover expenses or 13 and 1/2 months of mortgage payments. Big Difference!!!

The extra cash on hand can cover anything from mortgage payments to repairs to the purchase of other properties. Always ask if the Seller would be interested in owner financing. It may benefit both of you.