The 5 W's of Tenant Estoppel Certificates

So you’ve purchased an Income Property with 2-4-7-10 tenants, all of which are being assumed on closing date. In short, a TEC becomes a document which forms part of your closing package.

WHAT? TEC is a document signed by the Tenant which confirms the basic terms of the lease agreement in place (which presumably you have already reviewed during your due diligence, and summarizes the status of the tenancy as of the closing date. It’s primary purpose is to verify the basic details contained in the lease, and to ensure the terms have not been modified since the lease was initially signed.

WHEN? The document is prepared by the Purchaser’s lawyer (in most instances) and provided to the Tenant for signing. It needs to be provided on or prior to closing and often can hold up closing if not available with all the other closing documents.

WHY? Purchaser wants to ensure that the current status of the tenancies, is as presented via the leases. Other matters typically outlined will include – deposits held, confirmation that all rental payments are current, any outstanding obligations with the present landlord (seller), no lease assignment exists etc.

WHO SIGNS? The Tenant and more specifically the actual corporation/individual shown on the lease agreement. The more detailed the TEC, the more advance notice you should give the Tenant to make sure it gets signed in a timely fashion.

WHO RECEIVES? The TECs are forwarded to the Purchaser (or their lawyer) to review as part of the closing process. Depending on the amount of financing, often the lender can also be party to the TEC and certain provisions shall ensure the lender’s rights with respect to their mortgage security.

In addition, a TEC will often include a DIRECTION to the tenant, specifying where future rental payments are to be made and the Buyer’s (New Landlord) address for service. It’s a good idea to incorporate the requirement for a TEC/DIRECTION within your Purchase and Sale Agreement, to make sure the Seller is aware that it is required at closing.

This is normally a matter for the lawyers, but it’s always best discussed early in the process of buying.

Any past experiences with Estoppel Certificates that you would care to share with us – either as Buyer or Seller. Just a click/call away from discussing the opportunities here in Windsor-Essex!

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Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434

Property Management Q&A - Necessary? Benefits? Costs? Who Pays?

As you get ready to close on a commercial property, the question of property management needs to be addressed. Assuming you are not looking to manage the property on your own (NOT hands-on), it's time to assess the issue of hiring a property management company.

NECESSARY? - any tenanted property requires some level of active management. Obviously a single tenant would be less involved, than a multi-unit property involving multiple tenants. On a regular basis, matters arise requiring a landlord's response and you must (or someone on your behalf} attend to those issues. Management services can be tailored to suit your and the property's specific needs -- but appropriate oversight is a must.

Benefits? - the major items would include 1) financial management (collection of rent, follow-up on receivables/bill payment. ,monthly statements, operating cost budgets to name a few). Established management companies can provide better rates on insurance and property services, based on bulk purchasing power. They can also be 'on call' after midnight, based on an unforeseen emergency.

Cost? - Will vary market to market and based on property category. It will also most certainly depend on the actual services being provided, and ensure you are making 'apples to apples comparisons' when considering management firms. Typically on commercial properties, it may fall in the range of 3-5% of the property's gross income. But as with everything - 'you get what you pay for' and the cheapest management costs may not be the most appropriate for your needs.

Who Pays? - That all depends on how your lease agreements read. If you are assuming "NET LEASES", ultimately the tenant pays the cost of property management, through the additional rent provided for in the lease. In most cases, this should make the argument for professional management academic. In cases where the leases are "GROSS", any management costs will ultimately be added to the expense side of the property. As a final caveat, make sure you review the lease agreements to understand what the implications are for hiring on a property manager.

As a final note, good management companies can always provide a list of satisfied clients - get in touch with those references and confirm the quality of services being offered. Good property managers generally make for good (happy) tenants, and that generally makes for a GOOD INVESTMENT!

Tell us about your past management experiences. Just a call/click away if you are interested in discussing investment opportunities in Windsor - Essex!

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Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434

Property Due Diligence

In considering the acquisition of a property, it's wise to take the time to evaluate the building/site on a top-down basis. Typically this is done during a 'conditional period' within your Agreement of Purchase and Sale, and it facilitates your investigation of the property on a number of fronts.

Some of the more common elements of a due diligence review can include the following:

Physical Condition - which should be undertaken by a qualified building inspector or possibly an engineer/architect. Normally this is centered around issues relating to the structural condition (i.e. roof) of the building, electrical/plumbing systems, heating/cooling equipment, and site improvements (i.e. parking lot). The goal is to do a 'top -down' review of the property to determine any deficiencies which will be assumed PRIOR to firming up your purchase agreement. Keep in mind that any deficiencies which are assumed, become expenses which ultimately get added to the acquisition cost.

Environmental Review - normally handled by an environmental consultant within your jurisdiction. Even though it is generally a requirement for mortgage financing purposies, it is generally a good idea to complete one in order to establish a 'base line' position on the property on a go-forward basis. The details of such reports will vary from property to property, as will the costs to complete them. Environmental problems can be expensive to remediate and correct after the fact, so the reviews are most often well worth the investment.

Title Review - this is an exercise best completed during the due diligence process. It should reveal any easements, property restrictions, and lien/encumbrances which affect the property and ultimately your use of it. The bottom-line here, you want to ensure that there are no title matters affecting the property that you are ultimately UNABLE or UNWILLING to accept. It's a good practice to complete it during the conditional period.

Other reviews might include building code/zoning matters, special designations (i.e. heritage), equipment inspections (i.e. cranes).

Dollars spent in conducting good due diligence, is generally money well spent and well worth the investment. 'Caveat Emptor' lives on in the real estate world ... be an Aware Buyer!

Feel free to comment on any of your recent experiences with property due diligence -- the good, the bad, and the ugly. Look forward to connecting with you on any investment opportunities here in Windsor-Essex -just give us a call or connect through our website.

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Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434

Self Due Diligence - Which Real Estate Is For You?

Industry professionals love to promote the fact that investing in income properties is a legitimate way to wealth creation. It can not only provide an income stream, but capital appreciation as property values grow over time. The types and categories can include – residential (both single & multi –family), commercial buildings/strip centers (retail & office), mixed use (commercial & residential), industrial buildings (production & warehouse types), and even land that generates income (agricultural & solar farm).

As you consider the various categories, you also need to assess the type that not only best fits your objectives but best SUITS YOU. Investment property markets are littered with acquisitions which have ‘gone bad’, often times because the investor did not do sufficient SELF DUE DILIGENCE.

Some key questions to consider include:

• Am I more interested in residential or commercial/ industrial properties?
• Locational / neighbourhood criteria?
• Do you intend to be ‘hands on’, or will you require a property manager?
• Can you accept cash flow/return declines in the operation of the property?
• Are you in a position to re-capitalize a property if circumstances change?
• What are the risk factors which you cannot accept?
• How can you best limit any liability?
• What are the market expectations? The read of the current market?
• Is liquidity an issue if you need to sell quickly?
• Type of financing required and initial cash (downpayment) capability?

Any investment comes with its share of risk and income properties are no different. Good preliminary planning - starts with an honest assessment of YOU, your objectives, capabilities, comfort zone and so on. Once that’s figured out, it’s time to move on to the market in a direction that fits best.

Always looking to network with investors and other professionals in the broker community. We’d welcome your comments and feedback. And as always, would be pleased to discuss the opportunities here in Windsor-Essex!

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Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434

When Maximum Leverage = Negative Leverage

In a world of low interest rates and plenty of commercial mortgage options, how could we ever experience “NEGATIVE LEVERAGE?"

Surprisingly, it happens and when it does - the fall out becomes a cash flow problem and an investment property - which becomes best described as a “POOR INVESTMENT”.

Firstly, here’s how it occurs (mathematically). Consider the following illustration:

Property Purchase 1

I - Price - $100,000 (no mortgage) 
w/ Annual ROI on Cash Invested of 6% (Yields $6,000 /yr.)

II - Price - $100,000 (mortgage of $80,000 @ Int. Rate of 7%) w/ Annual ROI on Cash Invested -1.23% (Yields -$1385.40/yr).

In the above example, NEGATIVE LEVERAGE is created by the fact that the mortgage rate is above the overall return component as shown in ‘I’ (no mortgage). If for whatever reason, the mortgage interest rate exceeds the basic return component for the property, you will find yourself in a NEGATIVE LEVERAGE situation.

Market opportunities where maximum leverage is often promoted, may well lower your initial investment requirements, only to create cash flow problems once mortgaging costs are factored in. Best practice here - is investigate mortgage options available on any prospective investment and compare it back to the basic return component which the cash flow provides.

The concept of LEVERAGE is widely accepted strategy in the real estate industry – keep the focus on “POSITIVE LEVERAGE”!

How does your market area look as we close out 2015.? Has it been a good year to add to your portfolio, or to sell investment properties? 

Ready – Willing - & Able to be of service in Windsor-Essex - give us a call!

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Mark Lalovich
mark@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 259-5434