Finding, Funding and Closing Commercial Real Estate Investments

1. Finding, Funding and Closing Commercial Real Estate Investments

2. Please help yourself to food and drinks. Please let us know if the roomtemperature is too hot or cold. Bathrooms are located past the reception desk on the right. Please turn OFF your cell phones. Please complete and returnsurveys at the end of the seminar. Housekeeping

3. Agenda • Choosing and Finding Commercial Real Estate Investments • Commercial Nuts and Bolts • How the Deal Gets Closed!

4. Choosing and Finding Commercial Real Estate InvestmentsJohn Levine, Licensed Real Estate SalesmanSitar Company/ONCOR International732-283-9000 x2137levine@sitarcompany.com

5. Types of property 1. Multifamily residential 2. Single Family Residential 3. Office 4. Industrial/Flex/Warehouse 5. Retail 6. Recreation 7. Land – potential uses 8. Net Leases 9. Agricultural

6. Activities 1. Buy 2. Sell 3. Lease 4. Development 5. Redevelopment 6. Make improvements 7. Upgrade usage/conversions

7. Investment Considerations1. Return on investment a. Cash on cash, gross income less expenses b. Refinancing c. Value appreciation d. Depreciation and recapture e. Tax deferment on sale f. Amortization2. Management required, time and effort, Active vs. Passive3. Leases, quality of tenants, rents, duration4. Down payment amount5. Financing, leverage6. Vacancy rate7. Use permits

8. Physical Features 1. Location 2. Sound construction 3. Condition 4. Utilities - electric, water, sewer 5. Public transportation 6. Parking

9. Pulling your team together: The Roles of Your Professionalsl Attorneyl Real Estate Brokerl Mortgage Brokerl Lenderl Title Agentl Insurance Agentl Environmental Consultant & Testingl Engineering Inspectionl Other consultants

10. Paul Quinn, Vice-President 908-231-9100 810 Old York Rd, Raritan, NJ 08869 www.somersetfinancial.com- website info@somersetloans.com- e-mail Licensed NJ Dept. of Banking and Insurance

11. Commercial Nuts and Bolts- WHAT LENDERS LOOK FOR: Debt Service Coverage Ratio (DSCR) * 1.2-1.3 ratio (property monthly net operating income vs. financing expenses). Appraisal * much more expensive and in-depth than residential appraisal. * can take as long as 4 weeks to complete. Environmental Reports * In-depth report on property based on type of business and it’s potential impact on the surrounding area/site. Needed for property types such as restaurants, gas stations, bars, manufacturing, warehouse, etc. Ordered by Lender. Lender Securitization * Affects which lender application will be submitted to. Portfolio lender or sells mortgage to investment firm (Wall Street, etc.) - Can affect time to close, exception allowances, risk tolerance, rate, etc. Somerset Financial Inc. 908-231-9100 www.somersetloans.com licensed NJ DOBI

12. Debt Service Coverage Ratio - DSCR • Rental Income/Property Income -Vacancy & Collection Losses (5%) -Operating Expenses (utilities, taxes, etc.)= Net Operating Income • DSCR = Net Operating Income minus Principal & Interest Payment Property’s Ability to repay it’s debt Let’s look at an example: Somerset Financial Inc. 908-231-9100 www.somersetloans.comlicensed NJ DOBI

13. Debt Service Coverage Ratio - Scenario • 6 Unit Retail Bldg - Sale Price $375,000 • Income-$600/Month Per Unit • Less Vacancy 5% (-$180) • Less Expenses Paid by Owner 30% • (-$1,080) • Remember: NOI = Income -Vcy loss –Expenses • $3600 -$1260 = $2340 (NOI) • Debt Service- $275,000 @ 7.125% for 25 years= $1965 P/I • DSCR = NOI / P&I pmt • $2340 / $1965 = 1.21 DSCR • Qualifies!! Somerset Financial Inc. 908-231-9100 www.somersetloans.com licensed NJ DOBI

14. Somerset Financial Inc. 908-231-9100 www.somersetloans.com licensed NJ DOBI

15. Some Examples of Property Types Truck Stop Condo-Hotels Mixed-Use Apartment Complexes Self-Storage Somerset Financial Inc. 908-231-9100 www.somersetloans.com licensed NJ DOBI

16. Tier Properties - Risk/Financing Tier One Multi-family and mixed use(>50% residential component) Up to 97% LTV (O/O) 6% - 12% depending on LTV, loan product and strength of deal Tier Two Mixed use (<50% residential), office, retail, warehouse, light industrial, self storage, bed and breakfast Up to 97% LTV (O/O) 6.5% - 13% depending on LTV, loan product and strength of deal Tier Three Industrial, automotive, funeral home, rooming home, flagged hospitality Up to 90% LTV 7% - 13% depending on LTV, loan product and strength of deal Tier Four Health care, day care, RV park, un-flagged hospitality, restaurant, special purpose Up to 90% LTV 7.5% - 13% depending on LTV, loan product and strength of deal Somerset Financial Inc. 908-231-9100 www.somersetloans.com licensed NJ DOBI

17. Financing Options • •Credit Scoring • •A: 680+ • •A-: 640+ • •B: 580+ • •Terms: • •15, 20 & 30 Years • •Fully Amortizing, interest-only • •Loan Types: • •6-Month Adjustable • •2, 3, 5 & 7 and 10-year Fixed • •30-Year Declining Fixed Rate No-prepay penalties on some programs, up to 5-10 years on others. Somerset Financial Inc. 908-231-9100 www.somersetloans.com licensed NJ DOBI

18. How the Deal Gets Closed!

19. Jesse P. Nash New Jersey: 721 Route 202-206 Bridgewater, NJ 08807 Phone: (908) 722-0700 Fax: (908) 722-0755 New York: 875 Third Avenue 18th Floor New York, NY 10022 Phone: (212) 808-0700 Fax: (212) 808-0844 Picture Areas of Practice: Real Estate, Finance, Corporate Admitted to Practice in: New Jersey, New York Education: Seton Hall University School of Law, J.D., 2003Liberty University, B.S

20. Investment Considerations: Same Issues as with Most Other Investments: • Return on Investment • Risk Tolerance • Importance of Developing Bargaining Strategy Early in the Process

21. Assembling and Managing Your Team:The Roles of Your Professionals • Getting The Right Person for the Job • Reputation • Making Sure Work is in Professional’s Field • Understanding the Roles of your Professionals • Responsiveness • Cost Control

22. Investment Vehicle - Choice of Entity and Entity Management • Tax Treatment • Liability Protection • Flexibility/Ease of Use • Management Structure Alternatives • Management • Whether Investors Should Have Management Prerogatives • Transfer Restrictions • Distribution of Profit and Losses • Avoiding Sales of “Securities”

23. An Agreement of Sale and A Typical Commercial Real Estate Purchase Transaction Timeline • The Parties • The Property Confirm that property interests to be acquired are adequately described in the contract, including, to the extent applicable: • Real property, including land, improvements, fixtures and appurtenances • Personal property (equipment, spare parts, tools and other items used in the operation of the property)

24. An Agreement of Sale and A Typical Commercial Real Estate Purchase Transaction Timeline (cont’d) • Leases and Related Agreements • Other Contracts (commission agreements, management contracts, service contracts, etc.) • Permits, Approvals, Licenses, Warranties, Guaranties, etc.

25. The Purchase Price • The Deposit • When does the deposit “go hard”? • Escrow Issues • Who should act as Escrow Agent? • When should monies be released from Escrow? • Balance of Purchase Price

26. Closing Contingencies • No Attorney Review in Commercial Deals! • Financing Contingency • Approvals Contingency • Representations and Warranties Contingency

27. Title Considerations • Marketable Title • “Good and marketable title, insurable by a reputable title insurance company at regular rates, and subject only to exceptions to title that will not impair Buyer’s intended operations on the Property.” • Title Review • Right to Raise Title Objections • Right to Terminate if Objections are not Eliminated • Judgment Searches • The Lender’s Position on Title Issues

28. Due Diligence • Reserve Right to Investigate All Aspects of the Property • Types of Due Diligence Review: • Property Condition • Approvals/Permitting • Environmental • Lease Review • Hiring Right Due Diligence Professionals • The Lender’s Stake in the Due Diligence Process

29. Representations and Warranties • Make Sure All Necessary Representations and Warranties are Obtained • Authority • Physical Condition of the Property • Leases and Other Contracts • Title Matters • Compliance with Laws • Environmental Matters • Litigation • Anti-terrorism Laws

30. Pre-Closing Obligations • Seller Obligated to Deliver the Property in “Broom Clean” Condition • Seller Obligated to Correct Code or Other Violations • Seller’s Obligations Under Existing Leases

31. Closing • Date/Time/Place • The Mechanics of Closing • “Time of the Essence” Issues

32. Default and Remedies • Notice and Cure Periods • Limitation on Seller’s Pre-Closing Remedies – ideally, terminate the contract and damages limited to keeping the deposit • Buyer’s Remedies – Specific performance, terminate and receive damages • Prevailing Party Entitled to Attorney’s Fees (disincentive to litigate) • Indemnification • Generally, the obligation to defend and hold harmless another from liabilities incurred

33. Closing Adjustments • Real Estate Taxes • Assessments • Rents • Association Fees • Utility, Sewer and Water Charges • Payments Under Service Contracts or Other Agreements • Realty Transfer Tax/Mansion Tax

34. Specialized Legal Considerations that Arise with Different Types of Real Estate Investment • Purchasing Leased Properties • Lease Review • Estoppels/SNDA’s • Purchasing Property to Develop/Redevelop • Approval Review • Surveys and Site Plans • Brief Comment on Land Use Approval Process

35. Specialized Legal Considerations that Arise with Different Types of Real Estate Investment (cont’d) • Environmental Contamination Issues • Proper Environmental Due Diligence • Goal is to undertake site assessment and investigation as necessary to take advantage of available statutory defenses • Proper Contract Provisions • Who is responsible for cleanup obligations and costs • Representations • Indemnification • ISRA • Compliance is Seller’s obligation • Is Property ISRA subject? • If so, must have DEP approval to close

36. Questions & Answers