Achieving Superior Investment Returns Using Commercial Real Estate

What if it was possible to buy a real estate asset like say a Walgreens, a Sam’s Club or even a Verizon Wireless East Coast Corporate Headquarters that delivers you a safe, guaranteed return on your money in the range of 10%-30% annually, year over year, for the life of the tenants long term lease?

What if the cost to acquire such an asset only required a 27% down payment on the asset and came with a 1.5% interest rate, fixed for 30 years, with 30 year amortization and could be used on any retail, industrial, office or residential property requiring $500,000 to $300 Million per deal? What if the loan was not based on your credit and had no prepayment penalty if you sell the asset?

Welcome to the world of the structured finance investor!

Traditionally bank financing has been the only way to purchase assets and properties. However this is not the case, It is simply the most marketed and most known avenue of finance. When you move into the world of High Finance you encounter financing arrangements that look more like securities offerings and less like a traditional loan, however, these deals typically only happen in the $100 million and up range to finance large scale public work projects, humanitarian aid projects, and larger development deals. This is the world of structured finance. There are lending institutions that for years has replicated the same business model only at loan amounts that start at $500,000 and up. In a nut shell, these deals are funded by insuring the target property at 3x its value utilizing performance bonds and other insurance products which can be leveraged to provide an extremely low interest rate towards the purchase or refinance of an asset. These deals are structured and delivered the same way as a traditional mortgage however they close much quicker, have a much higher LTV, have a 1.5% interest fixed for the life of the loan and are based on the asset rather than the borrower.

These programs are available anywhere in the US.

Lets play with #’s to see how this plays out for you, the investor!

The following examples are real assets available now in the marketplace (as of the time of this writing), either openly listed or off market deals that only a select few investment sales broker’s know about.

Example #1:

Walgreens located in Orange Park FL. Walgreens is a ‘BBB’ S&P rated investment grade company with annual net earnings of $2.5 Billion dollars a year and sales revenue of $72.2 Billion. Landlord responsibilities: None. Tenant responsible for roof and building structure.

$3,306,000 Asking purchase price
$250,000 Net Operating Income
$892,620 Down payment including all points and closing costs (27%)
$2,479,500 Loan Amount (75% LTV – no prepay penalty)
$11,409.67 Monthly Debt Service @ 1.5%, fully amortized, fixed for 30 years
$136,914 Annual DS
$113,086 Annual Cash Throw Off (NOI after debt service)
12.67% Return on Investment

Example # 1 using traditional bank financing:

$3,306,000 Asking purchase price
$250,000 Net Operating Income
$859,560 Down payment including all points and closing costs (26%)
$2,479,500 Loan Amount (75% LTV – prepay penalty)
$17,245.67 Monthly Debt Service @ 4.75%, fully amortized, fixed for 10 years
$206,948.04 Annual DS
$43,051.96 Annual Cash Throw Off (NOI after debt service)
5% Return on Investment

Example #2:

269 Unit Class A Apartments located in Boynton Beach FL next to brand new $300 Million dollar hospital. Built in 2001. Acquired below present estimated replacement cost. 93% occupancy plus upside revenue of $400,000 per year from renovations into project.

$38,000,000 Asking purchase price
$2,232,206 Net Operating Income
$10,260,000 Down payment including all points and closing costs (27%)
$28,500,000 Loan Amount (75% LTV)
$98,359.26 Monthly Debt Service @ 1.5%, fully amortized, fixed for 30 years
$1,180,311 Annual DS
$1,051,895 Annual Cash Throw Off (NOI after debt service)
10.25% Return on Investment

Example # 2 using traditional bank financing:

$38,000,000 Asking purchase price
$2,232,206 Net Operating Income
$9,880,000 Down payment including all points and closing costs (26%)
$28,500,000 Loan Amount (75% LTV)
$148,669.49 Monthly Debt Service @ 4.75%, fully amortized, fixed for 30 years
$1,784,033.88 Annual DS
$448,172.12 Annual Cash Throw Off (NOI after debt service)
4.536% Return on Investment

Example #3:

East Coast Headquarters in the Carolinas for a Top 25 Global Company, cell phone carrier. A 150,000 square foot building built in 2004 to companies specifications to withstand a category 5 hurricane. This building was built as a fortress to ensure that if the East coast of the US goes down, this building has the capacity to fix the problem and bring its East Coast cellular network back on in an expedient manner.

$21,950,000 Asking purchase price
$1,652,835 Net Operating Income
$5,962,500 Down payment including all points and closing costs (27%)
$16,462,500 Loan Amount (75% LTV)
$56,815 Monthly Debt Service @ 1.5%, fully amortized, fixed for 30 years
$681,784 Annual DS
$971,050 Annual Cash Throw Off (NOI after debt service)
16.38% Return on Investment

Example # 3 using traditional bank financing:

$21,950,000 Asking purchase price
$1,652,835 Net Operating Income
$5,707,000 Down payment including all points and closing costs (26%)
$16,462,500 Loan Amount (75% LTV)
$114,501.59 Monthly Debt Service @ 4.75%, fully amortized, fixed for 30 years
$1,374,019.08 Annual DS
$622,035.72 Annual Cash Throw Off (NOI after debt service)
10.899% Return on Investment

As one can see with the above examples, purchasing ‘Cash Flowing’ Commercial Real Estate using structured finance allows an investor to maximize their return on their money via leverage while minimizing risk. When applied to the investment arena of ‘Single Tenant Triple Net Leased Investments’, an investor gains above markets returns backed by corporate guarantee’s on long term leases that are typically not seen in the market place.

This program created superior returns backed by the strongest Commercial Property assets in the United States. This combines for a long term, stable, consistent and winning investment model for all levels of investors.

How To Choose An EB5 Investment Firm

Very few people have half a million dollars that they would not miss if they lost. Therefore, you want to make sure that the money you invest to get your EB5 Visa is not wasted. That means choosing a Regional Center that will use your funds to meet the requirements of the EB5 program and allow you to attain permanent resident status.

There are over 100 regional centers across the United States with dozens of new applications pending. You have a wide choice of regional centers to choose from that offer 3 types of investments that they manage-loans, real estate, and equity.

Low interest loans are the type given to businesses, targeting industries that show promise of expansion and growth. Some examples of this would be loans to businesses that engage in or promote tourism, technology, hospitality, and transportation.

Real estate loans usually involve the purchase of warehouses that are converted into shops, offices, storage, or even hotels and resorts. You should review this type of loan carefully and study the surrounding economy and the type of people that would visit there. A small town in the middle of nowhere may not be a good place to invest in real estate that is intended as a theme park; there may be no surrounding attractions, no easy access to the location, and no major airlines with hubs there. This type of investment would not be profitable unless there was an accompanying plan to provide the infrastructure. Each loan would depend on the success of the other and double your chances of losing your investment.

Equity investment is where you invest your money and after 5 years you can cancel the loan and request return of the funds or convert them into that company’s stock which might return profits to you. Depending on the business to which the loan has been made, this type of investment has the potential to be very profitable.

Although regional centers are approved by the government, that doesn’t mean that they offer wise investments. Regional centers compete for your money, just like any other business. They’ll all tell you that their projects are the best and will present the positive aspects without the negative. It pays to research the investments of each center and their success rate. Get recommendations from other EB5 Visa applicants and make an internet search on the center; you may find complaints from investors who lost all their money or you may find glowing recommendations. Every bit of knowledge you find is another tool for success. Be sure that the regional center is able to tell you how and when you get your money back.

Non-Traded Financial Assets – Illiquid, Non-Traditional, Alternative Investments

What is a unique, illiquid, non-traditional financial asset?
Income producing investments are financial assets. Examples: shopping centers, apartment houses, rental retail properties, vacant real-estate, closely held businesses, mineral interests, and life insurance policies; loans, real estate mortgages loans, and promissory notes are in this classification. These income producing financial assets will be our focus. They are all important investing categories and they all require individual valuation appraisals.

Why are these non-traditional assets difficult to value?
The valuation problem they present is their unique characteristics make finding comparable investments difficult. They are not traded on a financial market; therefore, they do not have readily determined buy-sell prices. The current value of stocks and bonds, the more traditional investment assets, are readily ascertained because their buy-sell prices are published hourly and daily-it is all public information. In contrast, loans, mortgages and promissory notes do not trade publicly. Every transaction is private. The parties to the transaction wish to keep their business activities private. This lack of pricing information causes great difficulty in valuing unique financial investments. The valuation difficulty also affects their resale value; it impacts their marketability and liquidity.

Real Estate Mortgage Loans and Promissory Notes as Financial Investments
Loans and mortgage notes are held in many investing accounts. This type of investment includes real estate mortgages, promissory notes secured by deeds of trust or liens, and unsecured loans.

The investor, or a hired professional, is responsible for collecting payments, securing and inspecting collateral, and, if the note is secured by real property, ensuring the timely payment of property taxes, and verifying insurance coverage is current and adequate. If nonpayment occurs, the investor is responsible for foreclosure or debt collection processes.

The valuation question to be answered by the investor and the appraiser is, “are the invested funds adequately protected from loss”? Factors to be considered are:

• Does the real estate securing the loan provide adequate value to cover the principal and interest of the loan in the event of a default?
• Does the borrower have the financial capability to repay the loan?
• Do the loan documents establish the priority of mortgage lien as a first position lien?
• Is the hazard insurance adequate to protect the property?
• Is the loss-payee clause in the insurance policy accurate?
• Are proper records being kept of all income and expense items?

Appraising, valuing and managing real estate promissory notes
Appraising and managing real estate promissory notes presents numerous challenges. Environmental liability, leases, rent collection, property tax payments, insurance coverage, physical inspection of the property, maintenance, repairs, and capital improvements are factors requiring attention.

While most loans and notes have a higher yield than traditional income assets, they generally have longer maturities and less liquidity then stocks or bonds. They are not readily marketable, they may require large capital outlays compared to other investments, and they require inspection of the collateral. All of these factors add to the difficulty of arriving at market values.