By Michael Alan Jones

Ever hear of the “Millionaire Next Door”? It could be you! First, it’s important to determine if you are in the business of building wealth.

As a result of today’s economy, most of us face the reality of working long hours day and night. Maybe some of us even work two jobs. And if that’s not stressful enough, we also face the uncertainty that we won’t have access to social security, or the fact that jobs are being outsourced and/or leaving the United States, or that our pensions lack the sufficient funds needed to retire comfortably. We may have realized that we need to develop and seek out other avenues of securing not only our future, but the future and lifestyle of our children and our families. Here are some helpful tips to becoming financially fit and working toward creating what we most desire for our present and future - wealth.

Wealth is not defined by the automobiles we drive, the clothes we wear or the jewels that we possess. Wealth is to be viewed as the means to live a rich and full life without heartache or struggle. To start, you must learn to live within your means. Learn to pay yourself first before you pay anyone else. Make saving a part of your monthly budget along with shelter, food, bills and last, but not least, your personal entertainment. By setting aside a little each month in a separate account, you can watch the interest grow over time; thereby, creating a much needed cash reserve for emergency situations.

Credit card debt is the first sign that you are living beyond your means, especially if it is for luxury or entertainment expenses. If you want to know what happened to your savings, look at the interest payment on your credit card statement each month, multiply that by 12 months, and then by the amount of time that you plan on paying that small amount. This is where your savings are going - to someone else. Reduce your spending, control your debt and free yourself for the future.

Now that you have some money set aside what do you do with it? Look at your financial picture and ask yourself, do I have 10-15% of my income going into my 401k? If the answer is “yes” then you need to utilize your savings to put in instruments that will yield you interest. For starters look toward your banker for advice on savings accounts, the money market, and certificates of deposit. These are great tools for money that you may need at a moments notice. Once those are in place, educate yourself and ask for advice on investing in stocks, bonds, mutual funds, insurance, Traditional and Roth IRAs, and real estate. Information is the most important tool that we have, and the key to obtaining information is to “ask” those that have it at their disposal. Seek the counsel of those in banking institutions, and/or financial planners and advisors. They are experienced in wealth creation and study the information for your own education. There are many books that contain financial and motivational strategies to help create wealth in your life.

While we live life for today and want to keep up with the “Joneses,” we must pay attention to one small thing, “What if tomorrow does come?” If your goal is to retire and to have something to pass onto other generations, then living for today is not the answer. Preparing yourself for tomorrow is the best investment. Wealth is not an instrument but a lifestyle that you can either choose to experience. But it’s a personal choice and it’s available to all of us. What choice will you make?

Michael Alan Jones, Banking Center Manager, 1 North Wacker Banking Center, Fifth Third Bank, 1 North Wacker Dr., Chicago, Illinois 60606 (312) 251-2344 Phone

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Non-Tax Factors

1.  Limited Liability

Business owners want to protect their personal assets from business creditors’ claims.

2.  Management Control Arrangements

Corporations are centrally-managed by a board of directors that acts in a representative capacity for the shareholders who elect them.

In contrast, LLCs and partnerships have more flexibility than corporations in structuring management and control arrangements.

Partners/members (owners of LLCs) can specify each party’s managerial role through appropriate provisions in the LLC operating agreement or partnership agreement.

3.  Capital Structure

With corporations (including S &C), shareholders must allocate profits, losses, deductions, and capital proportionally to their shareholder’s interest.

With Partnerships and LLCs, partners or members may allocate profits, losses, deductions, and capital in accordance with their specific needs as long as they meet the IRS guidelines.

4.  Transferability of Interests

Generally, shareholders of a Corporation may transfer their interest of a company freely to interested buyers unless they are a closely held corporation (owned by a few individuals).

With partnerships and LLCs, transferability of interests is determined by the operating agreement or partnership agreement.  Typically, transferability of interests is restricted.

5.  Death or Withdrawal of an Owner

A corporation does not dissolve or terminate when a shareholder dies or withdraws.

In contrast, a partner’s withdrawal causes a dissolution that negates every partner’s authority to act as the partnership’s agent except in matters relating to the wind up of its affairs in a partnership.  Beware:  If there is not a partnership written agreement, any partner can cause a dissolution of the partnership by giving notice to the other partner.  With a partnership agreement, the partners plan for each other’s death or withdrawal from the partnership.

Tax Factors

6.  Tax Consequences of Capital Contributions

The tax treatment of cash to a corporation and partnership is treated equally.  Thus, if you contribute $10,000 cash to a partnership or a corporation, your basis or investment in the company is $10,000.  If property is contributed (i.e. stock, bonds, equipment), the tax consequences to corporations and partnerships can differ a lot.

In a partnership, any gain or loss inherent in contributed property is deferred until the partnership or LLC sells the asset or the contributing partner sells his partnership interest (i.e., IBM stock bought at $25/share is transferred to ABC LLC on June 1 with a Fair Market Value of $100/share.  A gain of $75/share is not recognized if done correctly until the LLC or partnership sells the IBM stock.  Partnership or LLC takes a basis of $25/share and when ABC LLC sells IBM stock, it has a gain of Sale Price-Basis=Gain Recognized).

In contrast, a transfer of appreciated property (i.e. IBM stock) to an S Corporation in exchange for stock is a taxable transaction unless the transferor, together with other parties making contributions at the same time, controls the corporation through ownership of at least 80 percent of its stock.  With partnerships and LLCs, it is easier to get a non-taxable transaction when transferring appreciated property in exchange for a partnership/ownership interest.

For example, assume that you have David Smith who is an investor that will contribute appreciated property worth $20,000 in exchange for a 20 percent interest in an S Corporation.  If Mr. Smith is the only person transferring appreciated property to the S Corporation, the IRS will tax this transaction because Mr. Smith only owns 20% of the S Corporation (not 80% as required).  In contrast, assume the same facts as above but a majority shareholder holding 60% of the shares of S Corporation contributes appreciated property worth $10.  Mr. Smith is not taxed by the IRS.

7.  Ownership Restrictions

With an S Corporation, there are ownership restrictions- no more than one class of stock, no more than 75 shareholders, and all shareholders must be U.S. citizens or residents.

With partnerships and LLCs, there are no ownership restrictions imposed on the nature and number of shareholders.

8.  Taxability of Income and Loss

For tax purposes, an S Corporation is not a taxable entity.  It is a pass through conduit through which its income and losses pass through to shareholders.  Each shareholder reports his share of each tax item on his tax return.

For tax purposes, a partnership (LLC is taxed as partnership unless indicated otherwise) is also a pass through entity where each partner/member reports his/her share of each tax item on his/her tax return.

9.  Allocations of Income or Loss Items

Little flexibility is available to S Corporations.  Each shareholder must share profits, losses, deductions, and credits according to their ownership interest in the corporation.  Unlike C Corporations, S Corporations are permitted only one class of common stock.  Although voting stock may differ, preferred stock cannot be used to create different interests in corporate capital and income.

Partnerships and LLCs provide the most flexibility for allocating income, losses, deductions, and credits among the partners or members in accordance with their individual investment and tax goals.  This is a huge benefit and where smart tax planning adds value by saving business owners money.  These tax savings can be re-invested into the business towards sales and marketing, which grows the business.

10.  Basis Limitation on Deductibility of Losses

Small Business Owners who wish to use losses from a business or investment activity to offset their income from other sources must structure the venture to be taxable as an LLC.

A partner or member may generally deduct his losses up to the basis of his partnership interest.  A partial owner of an S Corporation may deduct losses up to the basis of his/her stock.

For ventures that use significant amounts of borrowed funds, a partnership or LLC is the preferred organization form because the basis of a partner’s interest increases by his share of the partnership’s liabilities.  Each partner is treated as if he personally borrowed his share of the partnership’s obligations and contributed that amount of cash to the partnership, even if the partnership debt is non-recourse (i.e. no partner is personally liable for repayment of the debt).  With an S Corporation, a shareholder’s basis is not increased by his/her share of the corporation’s liabilities.

Sean L. Robertson is an Attorney and Counselor with Law Office of Sean L. Robertson (SLR).  He can be reached at 312-570-5506.

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Space planning is a necessary component in real estate investment.  As much as investors dislike the thought of adding time and expense to a project, the reality is that planning in the preliminary stages of real estate investing will save time, as well as money.  Space planning is the process of information gathering, analysis, interpretation, problem solving, and scheduling.

Before investing in real estate, the savvy investor will set goals according to their needs analysis or feasibility of the proposed property.  One of the primary motivators to this equation is the budget.  Without a defined budget, most investors are setting themselves up for unexpected occurrences, delays, and usually spending more than expected.  Other issues that information gathering include are:

• proposed use of space (residential, commercial, institutional, business, etc.)
• existing use of space
• existing condition of space
• zoning ordinances (which will dictate feasibility of proposed use of space)
• building codes
• permits
• licenses
• ROI (Return On Investment)
• surrounding spaces
• traffic studies

This is just some of the information that will need to be investigated in order to have enough information to analyze.

Once you has gathered all of the necessary information, it becomes time to analyze it and make a decision whether or not to move forward.  I would suggest to make a folder (digital as well as hardcopy) and organize the information into categories as not to overwhelm yourself with too much information.  Some of the things that need to be considered in developing your space plan is growth, flexibility, technology, accessibility, comfort, and privacy (or the lack thereof).

Businesses grow, families grow, and sometimes there is not room in the budget for additions or purchasing new facilities.  So flexible spaces that are readily converted to handle the growth are much more desirable than looking for another space.  As technology changes, we have to adapt to the changes or risk being left behind (which is another reason to plan for growth and expansion).  Accessibility is an area of attention in public facilities and is gaining popularity in the residential community.  It’s a rising concern to design homes with accessibility for people with disabilities, empty nesters, the elderly, etc.

It would also be a good practice to have subject matter experts review that information. This group will help you interpret the information in order to recommend the best way to achieve your goal within the budget.  This group or team will also help to advise you on problems that may arise so that you will be prepared for the unexpected and plan accordingly.  This is also the  time to  revise your plan to stay within budget or to make  adjustments for those unexpected matters that you were unaware of before.  Space planners will obtain all of the information collected and develop spaces that will meet the clients’ needs to the best of their ability.  The space should be functional, efficient, and provide comfort while being code compliant as well.

One thing that I have learned in this industry is to always be prepared for changes.  Whether they be minor or major, usually there is some nuance that forces your hand to go in a different direction than planned.  This is also a great time to utilize your resources, mainly your team of consultants.  They will assist you by providing suggestions that you might not realize were possible before.  They will also be able to help you formalize your schedule.

Once the major revisions have taken place, the information has been interpreted, and plans have been made to invest in the property, schedules will need to be developed in order stay within the budget and also make a profit.  Some of the things to consider, especially in the Midwest, is construction season.  It is not recommended to install gypsum board in moist conditions.  It is very expensive to pour concrete in the winter.  Asphalt plants close in November and do not reopen until the spring. Permitting in the city of Chicago for commercial projects are about one month behind.  But you will have investigated all of this prior to this point so it is just a matter of maximizing the positives and minimizing the negatives.

Overall, space planning maximizes the use of the space while creating a satisfied client as well.

For more information, contact Joe Richmond, owner of Sk8 Residential Solutions:  P.O. Box 43168, Chicago IL 60643.  (773)960-8893 or concrete41@excite.com

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By Anita Clinton

1.  DIFFERENT TYPES OF TENANTS

Commercial property tenants are different from those in residential units.  They are usually business owners that are leasing space for their businesses.  Therefore, they are more inclined to take care of their units for the sake of their customers.  In addition, they tend to be more financially stable and are less inclined to miss rental payments or break their lease.

2.  LESS HANDS-ON

Managing multi-unit commercial properties requires less hands-on attention than managing multi-unit or multiple residential properties.  You don’t have to worry about midnight phone calls about stopped up toilets.  In addition, if you hire professional property management, they charge less of a percentage to manage commercial property.

3. LONG-TERM & TRIPLE NET LEASES

Commercial leases are usually long-term, 5-10 years.  In fact, larger companies like Wal-mart and Walgreens sign 20+ year leases.  In addition, triple net leases are also optional where the tenant pays rent, property taxes, insurance, and maintenance expenses.

4.  TAX DEDUCTIONS

Investors in commercial real estate can offset the income from the investment through tax deductions from the depreciation of improvements - parking lots, buildings, equipment, etc.  IRS rules allow nonresidential properties to be depreciated over 39 years.  Additional deductions can also be taken for the interest paid toward the mortgage.

5.   TAX DEFERMENT OPTIONS

Like residential properties, paying taxes on capital gains from the sale of commercial real estate can be deferred by purchasing another

“like kind” property.  The investor can continue to sell properties for a profit and defer taxes indefinitely.

6.   LESS VOLATILE MARKET

Currently the residential real estate market is extremely volatile, due to the abundance of properties that have saturated the market and the changes in the mortgage industry.  On the other hand, the commercial real estate market has barely been impacted by those changes.

7. OPTIONS FOR SMALLER INVESTORS

New forms of ownerships like Tenants In Common (TIC), Passive Investment Syndications, and Real Estate Investment Trusts (REIT) have opened the doors for smaller investors to invest in commercial real estate.  TICs allow investors to own fractional shares of larger real estate projects.  Passive Investment Syndications allow smaller investors to passively invest in larger real estate projects.  And last, but not least, REITs combine the concepts of real estate investing and the stock market.  Investors purchase shares of stock that invest in large real estate projects.

8.  HIGH DEMAND = HIGHER VALUE

Because of the increased opportunities for smaller investors to participate in commercial real estate, the market is becoming more competitive.  As a result, an increase in demand is followed by an increase in value.  Hence the basic economic components of supply and demand.

9.  FINANCING LEVERAGE

Financial leveraging for commercial property allows investors greater returns on their investment.  In a $500,000 investment, with a $100,000 (20%) down payment, the investor could receive a return on both the $100,000 down payment and the $400,000 financed amount.  Therefore, if the investor obtains a 9% interest rate on a $400,000 loan and the property yields a 12% return, the investor would receive a $24,000 annual return.  (12% of the $100,000 initial investment and 3% [the difference between the 12% return and 9% interest on mortgage] of $400,000 financed amount.)

10.  LUCRATIVE PROFITS

Commercial real estate, on average, generates 50%-100%+ more income than residential properties.  Investors generate income from rents, appreciation, and profit on the sale.  Currently, commercial units are being rented for $8-$30 per square feet in the Chicagoland area - you do the math!

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By Kellye Fox

So, you’re a landlord who has been renting apartments for five years?  You’ve established yourself in residential leasing and are ready to move on to bigger and better properties. Why not try the commercial sector with commercial leasing? In this article, I will address the differences between a residential and commercial lease, the various types of commercial leases and the terms to remember when drafting your lease. To refresh your memory, commercial property is classified as business property, retail strip centers, office space, shopping centers, hotels, theaters and parking facilities, to name a few.

The steps to purchasing a commercial property are similar to residential, in that it’s advisable to locate a real estate agent who is well versed in commercial real estate. It is important to know what the space is zoned for, as this will determine what type of businesses can occupy the space. For example, not all commercial space can be used by restaurants. With the help of a qualified agent, refer to the deed and seek legal counsel to identify this information.

As with typical leases, there is a lessor and lessee. The lessor, or the landlord, is the owner of the real estate and the lessee is the tenant. Not all parties of the lease are one person. Some are LLC’s, corporations, partnerships, co-tenants or co-owners. It’s important to identify exactly who owns or is leasing the property for legalities. A commercial lease is a rental agreement that allows the lessee to legally occupy a given business space from the lessor for a monthly fee. The lessee does not build equity in the property, have an option to purchase the space at the end of the lease term, or pay principal and interest.

Residential vs. Commercial

Like residential leases, a commercial lease can be negotiated. Since the space of most businesses will likely need to be changed, the terms will need to be negotiated. Unlike residential leases, these types of leases reach from 10-50 pages and are extremely complicated with their jargon, addendums, terms and clauses. Generally, a commercial lease protects both parties by documenting all of the agreed terms of the occupancy, responsibilities, obligations and facts in writing.  In many instances, the lease is drafted by an attorney or the landlord’s solicitor, who has the landlord’s best interest covered. There is no “standard” commercial lease used for this industry. Instead, each lease caters specifically to each circumstance.  As the landlord, you should take advantage of this when drafting the lease. Most tenants have no idea what commercial leasing entails and do not take the time to seek an attorney, nor read the lease carefully. While I am not encouraging taking advantage of your tenants, this is a bi-lateral, legally-binding business arrangement and your goal is to make a profit above your expenses. Any unscrupulous activity will be documented and shed an ugly light in terms of your reputation in the commercial sector.

Additionally, depending on the commercial rental market, negotiating the terms of the lease can take from several weeks to several months.  Thus, it is imperative for a lessor and lessee to agree to the terms prior to signing the lease. You don’t want your tenant to find a loophole and somehow get out of their lease, leaving you with a vacant spot and no income. It is wise to take preventative measures and anticipate any future problems.

It should also be noted that other than a few basic provisions applicable to retail leases, the Government has chosen not to regulate or control the terms of commercial leases. Thus, there are no consumer protection laws that rule commercial leases (i.e no caps on deposits or rules protecting tenant privacy).

Types of Commercial Leases

So, now you have decided to purchase commercial space and locate tenants. What type of lease will you have them sign? As a tenant, their commercial loan terms are based on what type of lease they sign. So, be sure to seek legal advice and to think about what type lease makes most sense to you. Here are some of the most common leases to consider:

• Gross Lease - rent includes utilities, repairs, taxes and insurance (much like a residential lease).

• Net Lease - fixed rent plus a portion of the landlord’s operating expenses, including maintenance, building insurance, taxes and utilities.

• Double Net Lease - rent, plus taxes and insurance (lessor pays for maintenance).

• Triple Net Lease - rent, plus property taxes, insurance and maintenance.

• Percentage Lease - rent is determined by a portion of the lessee’s net income or gross profits (typically used for large retail operations).

Drafting a Lease

As with any new business venture, you should establish your team of advisors, including an attorney and property manager. Locate an attorney who specializes in real estate law. Their roles and responsibilities should be defined early on as to avoid any confusion. For example, who will be the negotiator? You or the property manager? After that, issues such as rent, maintenance, improvements and expenses need to be discussed and defined when working with the potential tenant. A letter of intent is optional to secure an offer to lease.

As the owner of the commercial space, it’s important to draft the lease in your best interest and you must decide on several factors - type of lease (Gross, Triple Net, etc), length of lease (short-term or long-term), rental amount, etc. While short-term leasing may give a business more flexibility, that business is not obligated to renew at the end of the term.  In turn, you may lose business. In that case, subletting may be a consideration to recoup costs. On a positive note, if you foresee that a business in your building or complex will be successful and profitable, you may want to include an increase in rental payments when they come up for renewal.

When a lessee is interested in renting a space in your building, there are several factors that they will consider:

§          Parties to the contract.

§          Rental amount (as well as security deposit and circumstances and method of return), term, extension, method of computation, frequency and allowable increases.

§          Type of Lease - does the rent cover utilities, taxes and maintenance or charged separately?

§          Length of lease and whether there’s an option to renew.

§          Insurance.

§          Permitted use and access.

§          Location, actual space rented, common areas that are included.

§          Is special zoning required for the business?

§          Specifications for signs and their placement.

§          Improvements - who will pay and own them upon termination of lease?

§          Maintenance and repair of premises.

§          Whether subletting or assignment is allowed.

§          How disputes are handled (court, mediation or arbitration).

§          Equipment leasing.

§          Responsibility of HVAC system (heating-ventilation-air conditioning).

§          Federal, state and local requirements (i.e. Occupational Safety and Health Administration), hazardous material disclosure or the ADA (Americans with Disabilities Act) compliance.

As a lessor, you’re responsible for calculating various costs including Common Area Maintenance (CAM) and taxes. Luckily, there are several real estate software packages that can assist in generating monthly reports, termination dates and options to renew documents. It’s critical to your bottom line to invest in an accounting system and/or leasing software to expedite your outsourcing fees and staff.

Kellye Fox is a Realtor® with Property Consultants Realty in Chicago. She can be reached via e-mail at kfox@propertyconsultants.com or at 312-492-3234.

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What are your thoughts on the upcoming year for commercial real estate market?

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Rehabbing a property is very exciting.  It’s an amazing feeling to be able to create something new and fresh.  I was able to experience this last spring when I did my very first rehab.  The rehab was more extensive than I envisioned my first to be but I welcomed the challenge.

My first property was a two-story with a full, unfinished basement.  It was almost 40 years old but in great condition.  Luckily, it only needed cosmetic work.  However, there was a lot of cosmetic work to be done.  When I bought the property, it had more wallpaper and vinyl tile than you could imagine but I could envision its potential.  Luckily, I was buying this property through a program that allowed me to roll the rehab loan into the mortgage amount.  This made it easier, and more comfortable, to make all of the changes that I wanted without having to worry about the paperwork or hassle of getting two different loans.  The program was so awesome that it even helped me find a contractor.

After meeting with the contractor, he encouraged me to create a spreadsheet of all of the products and materials I wanted in the property.  This meant that I had to do a lot of homework and shopping around.  I think I have been to every home improvement store in the south suburbs.  I worked diligently for weeks to pick out everything that I wanted.  This means that I had to pick everything from the bathroom faucets to the doorknobs to the color of the trim in the bedroom.  Every detail had to be chosen.  I believe in organization so I created a spreadsheet to outline the items that were needed and took this with me to the stores.  I also took my digital camera with me so that I could have a visual of what was chosen.  After so long and so many items, they begin to become big blurs in your mind.  It’s also helpful, for instance, when you find a bathroom faucet that you like at one store but the vanity that you like is somewhere else.  This allows you to put the pictures together to see if they complement each other.  You may find that changes need to be made to make sure that they actually match.

Once I was satisfied with all of my choices, I emailed them to my contractor.  There was a spreadsheet that outlined all of the fixtures and another for the paint colors and flooring.  I wanted to make sure that all of my wishes were clear since I wouldn’t be able to be at the property all day, everyday.  I also felt that it would make things easier for the workers to do their jobs because there would be no confusion about what was wanted where and how.

I closed on the property on a Friday and the contractors were ready to begin that next week.  It was exciting to come to the property and see the demolition being done.  Since there was mainly cosmetic work to be done, this entailed pulling up the floors, removing wallpaper, removing bathroom fixtures, and the like.  The only somewhat major change that was done to the house was that I decided to open the walls in the kitchen to have access to the living and dining rooms.  I didn’t want the entire walls removed, just an L-shaped bar to make for more seating and entertaining.  However, there was a problem.  The contractors found that the heating and air ducts were in one of the walls so the open bar wasn’t an option unless we wanted them to completely redirect the ducts.  This option would add to the completion time and the budget so I decided against that.  This was my first taste of having to be flexible with what you originally consider.  After discussing all of the options with the contractor, we came to the conclusion that the best option would be to create two big windows into those rooms.  Although it wouldn’t be the continuous openness that was once desired, it still opened the area and allowed access to both rooms.  We were also able to still incorporate the bar for more seating.  Problem solved.

As with any property, the major headaches to revamp were the kitchen and bathrooms.  The other rooms in the house were typically just the flooring, painting, and lighting.  The kitchen and bathrooms, on the other hand, needed everything completely changed.  Remodeling the kitchen was my second lesson in being adaptive with your original plans.  For the countertop, I had chosen a type of quartz stone slab.  However, I didn’t realize that it would be a special order and take at least two weeks to deliver when I originally chose it.  Since the countertops couldn’t be ordered until all of the new cabinets were in and the bar was built, this wasn’t discovered until less than a week before I was supposed to move in and was unacceptable.  So on to the Plan B that I didn’t have.  What I needed to do was find a tile that could be laid immediately.  I actually found that Plan B (marble tiles) looked and worked better in the kitchen.  However, they didn’t look better on my budget.  The tiles themselves were very inexpensive.  I just didn’t know that laying the tiles on the countertop would be as labor intensive as laying the floor tiles.  This was a really big shock that I had to absorb.

As if I didn’t learn my lesson with the kitchen countertop, I found out later that the bathroom vanity for the master bathroom was also a special order and that it would take four weeks for it to arrive.  This meant that I had to go back to the stores to find another vanity that would be suitable.  Changing the vanity also meant changing the paint color so that they would complement each other.  It just seemed as if my trips to the home improvement stores would never end.

At the beginning of the project, I was naïve enough to think that since I had done all of my homework prior to the work being started that everything would go off without a hitch.  When I sent the spreadsheets to the contractor, I really felt a sense of relief that my part of the project was done.  Boy, was I ever wrong.

This property was very personal to me since it was not just a rehab and flip.  All of this was done for the first house that my husband and I bought for our family.  I initially looked at it as making sure that everything was just right for us but then I realized that it was a learning experience for when we do it for profit.  We just submitted offers on four investment properties and hope to have at least one offer accepted.  None of the properties that we bid on are as large as our home and shouldn’t require as much work or time but we are prepared for the worst.

So, what did I learn through this process?

If there is an item you really want, check to see if it is a special order or not.  You can either choose another item or bring this to the contractor’s attention so that they can order it accordingly.

Be willing to adapt to changes.  You never know what lurks behind walls.  Whether it’s plumbing, electrical, or duct work, it would all require more money and time.

Don’t be afraid to ask questions at your local home improvement stores.  They are very knowledgeable and can offer ideas on how to achieve your desired look and purpose.

Enjoy the process.  It will only get more exciting.

“My First Rehab” is a collection of the rehabber’s investment experiences.  Do you remember your first rehab?  Share your story with IWP! Readers.  Visit the “My First Rehab” section on our website or email to krystal@investwithpassion.com.

INSIDE THE NUMBERS

Property

Purchase Price:                         $156,000

Estimated Rehab Budget:                      $33,000

Loan Amount:                                       $189,000

Actual Rehab Cost:                               $35,500

Out-of-Pocket Cost:                               $2,500

After Repair Value:                               $210,000

Equity:                                                  $21,000

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By Kellye Fox

Most of us begin our interest in real estate with the acquisition of some kind of residential property. Once that was done, we felt a sense of well-being and pride in having reached this milestone. But, then what?  The real estate seed has been planted in our minds and we seek other gardens in which to invest.  A natural progression might be to venture into commercial real estate markets. Commercial real estate is an exciting and profitable entity of the real estate market.  To maximize one’s success in this type of real estate venture requires a knowledge of what constitutes commercial real estate and how it is similar to, or differs from, the purchase of residential properties. The commercial real estate investor must understand some basics of the market and must have a plan of action to organize their thinking and their approach to beginning their venture into commercial property ownership.

Let us first define commercial real estate. Commercial real estate refers to retail properties, office buildings, shopping centers, hotels/motels, educational buildings, warehouses, apartment complexes (a.k.a. Multi-Family Housing), vacant land and manufacturing facilities. It is property that is leased or sold to achieve a business goal, or an investment to obtain a rate of return on the money invested. The property can be as simple as a gas station or as complex as a mini-mall. So, basically, it is almost any kind of real estate other than single family homes and single-family lots.

There are some similarities between the purchase of residential real estate property and the purchase of commercial real estate. The first similarity is that you would want to seek the assistance of a licensed real estate agent.  Second, you need to have some idea about which type of commercial property investment you want to purchase and where you would want it located. Certainly, your agent would need some idea about your financial parameters and what type of financing, if any, you might need to obtain. These are the same issues you would deal with if you were purchasing residential property.

The differences that you would find between being an investor in commercial real estate instead of residential would be the type of property and the purpose for which it is being purchased. Another difference would be the amount of financial reserves needed. In commercial real estate, the unexpected expenses can be extremely costly (i.e. foundations, air conditioning systems). Commercial property generally requires a 20% cash down payment. Buying this type of real estate requires a lot of money and expert financial, legal and real estate advice.

In summary, residential real estate focuses on the wants and needs of a homeowner and is a more emotional decision. Residential sales are for individual use and are usually housing for family units. Subjectivity is rarely a factor in deciding to buy a commercial property. Return on Investment (ROI) is the determining factor. Renting out your commercial space can certainly be an excellent way to earn income and build equity. However, it is important to take into account your time, skills and investment goals when making this decision.

So, you want to buy your first piece of commercial property. Here’s a review:

1) ASSESS YOUR FINANCIAL PICTURE & GOALS

Do you have the finances to support this type of project? Seek advice from a loan officer or financial advisor. Are you looking for something long-term to generate income over time or do you need a steady income?

2) DECIDE ON WHAT TYPE OF PROPERTY TO PURCHASE

Conduct research and/or ask for advice. What interests you? What area of expertise do you have that fits the type of commercial property available? You need to narrow down your criteria, property type, location and size. Be watchful of your local market and identify opportunities.

3) LOCATE A COMMERCIAL REAL ESTATE AGENT

Check out the National Association of Realtors website. The webpage (http://www.realtor.org/commercial/index.html) allows you to search for a Commercial Real Estate Broker in a particular office, e-mail address, city, state, name, designation or field of business. Simply click under Commercial Resources, find a Broker and go! The search results allow you to view the agent’s address, personal phone number/fax/e-mail, website, license number, designations and Board affiliations.

4) CONTACT THE AGENT

You’ve narrowed down your search to an agent who is experienced in the area of commercial real estate that you would like to purchase. Make contact with them via telephone, e-mail or an office visit. Discuss your needs and ask them to answer any questions you may have.

5) LOCATE A PROPERTY/MAKE AN OFFER/CLOSE THE DEAL

Once you’ve located a property you’re interested in, work with your agent to negotiate the best deal possible and accomplish your goal requirements. With time, you will learn to structure deals too good to pass by. Be sure to check with your local zoning ordinances to make sure your type of commercial business will be allowed in your area.

TERMS TO KNOW IN COMMERCIAL REAL ESTATE:

*Lessor - the person who OWNS the property for lease

*Lessee - the person who is trying to lease the property for their use

*Return on Investment (ROI) - the ratio of money earned (or lost) on an investment to the amount of money invested

*Capitalization Rate - the net operating income of the property divided by the purchase price of value of the property; a percentage of the value of the income-producing property to its projected income

*Annual Debt Service (ADS) - the amount of principal and interest to be paid each year to satisfy the obligation of a loan.

*Debt-Coverage Ratio(DCR) - net operating income divided by annual debt service.

*Gross Building Area (GBA) - the total enclosed and unenclosed area of the building at all building floor levels

*Rental Square Feet (RSF) - the area for which rent is typically charged; the usable area (USF) plus the tenant’s percentage share of the building’s common areas (lobby space, corridors, restrooms, etc.)

Commercial Mortgages

*A mortgage to be used to fund land or property which will be used for commercial purposes.

*Can also be used to purchase business assets like machinery

*Involve a more stringent set of conditions, including higher interest rates, shorter amortization schedules, and higher equity positions or down payments.

Commercial Real Estate Agent Designations:

*Certified Commercial Investment Member

*Counselors of Real Estate

*Institute of Real Estate Management

*Realtors® Land Institute

*Society of Industrial and Office Realtors®

Kellye Fox is a Realtor® with R.F. Vaughn Estates in Chicago, IL. She can be reached at 708-351-2823 or kellyefox@msn.com.

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I wrote an article back on September 24th for InvestWithPassion.com, before the $700 billion Plan (TARP) was approved - which essentially layed out the reason why we needed it and what the potential consequences were without it.  (very informative article, you should read it).  Shortly thereafter, the plan was approved and it seemed we were heading in the right direction.  I don’t think anyone believed that the plan would immediately fix all the problems with the economy, however it was intended to be a start.

According to Neel Kashkari, Assistant Secretary of Treasury, the funds were to be used in the following areas:

Mortgage-backed securities purchase program: Identify which troubled assets to purchase, from whom to buy them and which purchase mechanism will best meet the policy objectives.

Whole loan purchase program: Identify which types of whole residential mortgage loans to purchase first, how to value them, and which purchase mechanism will best meet the policy objectives.

Insurance program: Establish a program to insure troubled assets (mortgage-backed securities and whole loans).

Equity purchase program: Design a standardized program to purchase equity in a broad array of financial institutions.

Homeownership preservation: When mortgages and mortgage-backed securities are purchased, every possible opportunity to help homeowners will be explored, including working with borrowers, counselors and servicers to keep people in their homes.

Executive compensation: The law sets out important requirements regarding executive compensation for firms that participate in the TARP - therefore define the requirements for financial institutions to participate in three possible scenarios: One, an auction purchase of troubled assets; two, a broad equity or direct purchase program; and three, a case of an intervention to prevent the impending failure of a systemically significant institution.

Compliance: The law establishes important oversight and compliance structures, including establishing an Oversight Board, on-site participation of the General Accounting Office and the creation of a Special Inspector General, with thorough reporting requirements.

Sounds like an overall solid plan with potential, right?  Well, have you ever heard the term “bait and switch”?  It is a term used frequently in the mortgage industry and it usually unfolds at the closing table.  Clients (borrowers) are given acceptable fees/closing costs at the initial time of application, however when they get to the closing table (approximately 30 days later) those costs have increased considerably.  Usually, because of the emotions involved in closing on the house, this change is overlooked (somtimes intentionally and other times unintentionally).  This is an unethical way of doing business and many of my counterparts don’t see the problem operating as such.  This is exactly what I believe Treasury Secretary Henry Paulson and the Kashkari team has done here.  If you remember, Congress denied the bill several times partially because it did not include any relief for homeowners and it did not establish any restictions on “golden parachutes” for executives.  And it was not moving at all until these issues were addressed - hence the final proposal laid out above.

Now in a recent press conference, Paulson states:

“As credit markets froze in mid-September, the Administration asked Congress for broad tools and flexibility to rescue the financial system. We asked for $700 billion to purchase troubled assets from financial institutions. At the time, we believed that would be the most effective means of getting credit flowing again. During the two weeks that Congress considered the legislation, market conditions worsened considerably. It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets - our initial focus - would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks.”

In other words, we changed our mind and absolutely none ($0) of the $700 billion will be going toward helping homeowners as originally agreed upon.  Now it seems to me that he never had any intention of deviating from his orginal plan which did not include assisting homeowners.  Instead, once he realized that the original plan was not going through, he decided on the old “bait and switch” technique.  I don’t understand, well yes I do understand, why Paulson and his team feel they can start to repair the problems with the economy without addressing the foreclosures - one of the underlying reasons we are in this perdicament.

I remember, a couple of months ago my brother borrowed my vehicle and I ended up driving his for a couple of days.  While his vehicle was in my possession, the battery died on me.  I had the vehicle towed to a service station and was told the battery had been drained due a faulty alternator.  Now I had no clue what he was talking about and asked “so can I just purchase a new battery and be on my way.”  The mechanic advised that I could obtain a new battery and the car will probably run for a short period of time, however if the problem with alternator is not addressed - the new battery will eventually be drained also.  Eventhough I know very little about cars what he told me made sense, common sense.  So I had the alternator and the battery replaced and the car was and still is running fine…

So if we apply that analogy to the current economic situation, essentially Paulson and his boys are trying the replace the battery without addressing the problems with the alternator.  Doesn’t it just make sense, as opposed to giving the banks money (”strengthen bank balance sheets”) that they help the homeowners in foreclosure that are causing the bank’s financial problems?  Can’t they see that if they start with the homeowners - that this will eliminate the bad debt that the banks are holding and therefore addressing the root cause of their financial problems - common sense.  I can remember years ago, my grandmother telling me - ”common sense isn’t so common.”  As I’ve grown older, I see this more and more in everyday life.  Could it be that people sometimes allow greed and power to control their actions?  Or maybe it is as Jim Cramer (whom I love) stated a couple of months ago - “THEY KNOW NOTHING!”

Watch Cramer - THEY KNOW NOTHING!!!

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About the Author
AC Clinton, the Mortgage Closer, is the licensed loan originator, investor, author and entrepreneur.  She believe’s that ownership of Real Estate, Stocks/Bonds, Business is the key to obtaining financial independence -  Ownsomethingtoday.com.

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Residential construction contracting has demonstrated a successful trend in recent years. However, as the trend rises, so does the competition.  This could lead to dwindling profit margins. These traits show a clear contrast to commercial construction contracting which has more lucrative profits.  But just as the rewards are greater, so too are the challenges. Knowing the dos and don’ts prior to embarking on a commercial construction project serves to benefit all parties involved in the project from its inception to completion.

Commercial construction contracting projects seem like a different world as it relates to residential projects. Acronym phrases like ASTM, HAZCOM, OSHA, CSI, etc. pepper the project specification manuals and give the impression of passwords or codes to a secret underworld society even to one experienced in residential projects. The owner needs only to surround themselves with a great supporting cabinet much like the US President in order to receive sound advice for making good decisions. Having been in residential for twenty plus years and commercial for over a decade, I have seen some common mistakes that plague most residential project gurus when trying to jump feet first into the ocean of commercial projects. They believed they were the big fish in the small pond rather than “The Little Engine That Could.” In order to jump into the game, you must know the rules. There are four key factors that require strict attention as one transitions from residential to commercial contracting projects.

The first key is selecting of the right design staff. The architect serves as the quarterback for the design professionals. If the architectural firm is picked correctly, then the architect will have the ability to understand the project’s intent and how to achieve the project goals in the most efficient manner. Some of the responsibilities under the architect’s umbrella are engineering  (civil, structural, mechanical, and electrical), regulatory and building code compliance, zoning laws and covenants,  budgeting, consultations, contract administration, and meetings with local municipalities regarding issues that affect the project. Construction costs of a commercial project are extremely important to the owner and the architect is the owner’s representative who manages costs from every facet. They must design the most cost efficient project based on the owner’s intent for the project. This design cost responsibility does not end at the project’s construction phase- the architect needs to consider the owner’s long term costs.  Predetermining a building’s potential energy usage can allow the architect’s mechanical engineer to have a reasonable calculation of what the owner will pay in utility costs over the life of the project. This helps determine what the design should include with regards to building enclosure materials, mechanical and electrical systems, appliances, etc. As you can see, the importance of selecting the right architectural design firm is as important as picking a partner.

The second key factor is selecting the most qualified contractor.  The architect manages the project on the owner’s behalf in most cases from the very beginning and even refers qualified general contractors to bid competitively on the project by a predetermined bid date and time. This step is just, as if not more, important as the design professional selection. The term “you lose or make money in the field” stems from the importance of the right contractor. After being determined the successful bidder, the entire process for the commercial contractor takes a gargantuan leap from that of a residential contractor. Once selected, the commercial general contractor will need to begin the submittal process. This process involves submitting all product data/cut sheets on materials, samples, shop drawings detailing equipment, and mock-ups of assemblies to the architect to be checked against the specified products as outlined in the plans and specifications. In conjunction with starting these clarifications of requirements with the architect and engineers, the commercial contractor must start the permit process which is a step up from your average everyday checks and balances system. Through the permit process, the local city governing agents ensure that the project meets all local codes and ordinances.  They also verify that all subcontractors are licensed, the required individual permits (such as electrical permits, sewer connection permits, etc.) have been pulled, and city inspectors visit the project site periodically to perform inspections required at particular milestones prior to completing certain portions of work and moving on to subsequent portions. The local government has a responsibility to ensure that construction projects are performed in the safest manner to the public. But the commercial contractor has more involvement with ensuring safety on projects and with some of the most elaborate safety programs they strictly enforce consistent compliance with all aspects of the safety programs requirements. There is clearly nothing more important than keeping a work place environment safe for the workers, neighbors, and the public.  That’s why these precautions are followed closely by professional commercial contractors. The safety concerns last throughout the project all the way to the completion date.

The third critical step is creating the construction schedule.  The construction schedule outlines all construction activities in detail and leads up to the most important activity for the owner- the completion date. Once the right architect and contractor are selected, you will arrive at the one part of the project that the owner is most concerned about, the construction schedule (this leads to return on investment milestones). Commercial contractors’ construction schedules are formal and can be as detailed as listing dollar amounts to the line items making it a cost loaded schedule. Some schedule software programs (Prima Vera, Suretrack, Microsoft Project, etc.) are specifically required in the specifications so the architect, as the owner’s agent, can monitor the project’s progress and ensure completion of the project without delays. With accurate scheduling, the contractor can track productivity and man-hours, update the architect during progress meetings and allow the owner information to help the owner manage the owner-related issues affected by the schedule. Or if the project has been assigned liquidated damages, then the amount associated with any delays on the part of the contractor can be assessed and charged against the contractor’s fee. Any negative impact on a contractor’s fee has the complete and undivided attention of the contractor.  So outside of the normal concern for the schedule, the contractor monitors the schedule activities extremely close to minimize any opportunities for a reduction in profits. This leads back to the making money or losing money in the field concept.

The fourth major factor is comparing the difference between the profit margins.  The thought of losing money gets a commercial contractor’s attention just as much as a residential contractor.  The problem is that profits on commercial projects are generally three times as much so the impact is greater causing more attention. Commercial construction costs are calculated on a different scale and it includes things such as labor rate increases, trade professional rate charges, standard mark up percentages, etc. Because the risks are far greater, the rewards are in line with such large risks. The requirements at each phase of construction have charges and risks that are normally included in the bid of the project or a contingency is established that allows for such unknown expenses. At an average, you will find subcontractor profit margins to be anywhere between 15% and 25%. With profit margins like these, commercial construction projects can attract competition from all corners of the building industry. The thing to remember most with commercial projects is that with great rewards come equal and opposite risks. So it is imperative to ensure all the proper faculties of a project are considered to allow for the maximum profit margin.

With careful management over these factors the potential owner of a commercial construction project is armed with ample support to allow for a successful project and experience maximum profits with minimum delays. The right team and a well devised plan allow you the opportunity to wield a well-oiled tool and produce a wonderful product that will make you proud for years to come.

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Shaun Gray is the President of Three Six Zero, Inc., a General Contractor/Construction Management company.  For more information, he can be reached at (773) 424-8576 or

sgray@threesixzero-inc.com.

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