iFunding Weekly Educational Newsletter

Part 1: Introduction to Due Diligence in Commercial Real Estate

Due Diligence – What is it?

Purchasing a property without conducting proper due diligence is like buying a used car without looking under the hood……what looks like the greatest deal can turn into your worst nightmare. Good due diligence consists of a thorough review of the physical, legal and financial risks of a potential investment property before committing to the deal.

The due diligence process serves to confirm all the material facts related to a property that could cause a buyer to hesitate from consummating the deal at the price and on the terms proposed by a seller. At a minimum, due diligence for a commercial real estate acquisition should consist of: (1) an environmental assessment; (2) title and municipal records review; (3) a survey; (4) an engineering and building inspection; (5) a zoning review; and (6) review and confirmation of financial data, each of which will be separately addressed in this Seven Part Series.

Due Diligence Contingencies in Contracts

A buyer can either conduct due diligence before entering into a contract with the seller or after the contract has been fully executed. If a buyer wants to conduct due diligence after a contract is fully executed, the buyer should have a due diligence contingency in the contract. A due diligence contingency is a length of time specified in the contract for the buyer to carry out and perform due diligence. If the buyer is not satisfied with its due diligence the contract contingency gives the buyer the right to back out of a deal without penalty (i.e. the buyer will get its contract deposit back). Contingencies are important for buyers who cannot predict with certainty the physical, legal and financial conditions of the property prior to entering into a contract. If a buyer enters into a contract that does not have a due diligence contingency and then uncovers a material issue the buyer will either have to proceed to the closing and accept the risk or terminate the contract and loose the deposit. Due diligence contingencies can vary greatly depending on the facts of each transaction, however there are two main categories: a general due diligence contingency and a specific due diligence contingency.

General Due Diligence Contingency or “Free Look”

For the buyer a general due diligence contingency in a contract is preferable to a specific due diligence contingency. For a general contingency the language in the contract is drafted to allow the buyer the ability to conduct all forms of due diligence (within reason) that the buyer needs in order to feel comfortable to proceed to the closing. This type of general contingency is known as a “free look” because it allows the buyer to terminate the contract for any reason or no reason and still receive a full refund of any earnest money deposit.

Specific Due Diligence Contingency

Specific due diligence contingencies are tied to narrow investigative procedures like environmental assessments, zoning studies, financing or building conditions. A specific due diligence contingency is most beneficial to the seller because it only allows the buyer to terminate the contract under limited conditions. For example, a specific due diligence contingency could contain an environmental provision that only allows the buyer to cancel the contract in the event that a Phase I Environmental Site Assessment recommends a Phase II Environmental Site Assessment (which involves testing) (Environmental Due Diligence will be covered in more detail in Part 2 of this Series); or a specific due diligence contingency could contain an engineering provision that only allows the buyer to cancel in the event that the building inspection reveals structural issues with the roof, walls or foundation (Engineering and Building Inspection Due Diligence will be covered in more detail in Part 5 of this Series). From the buyer’s prospective a specific due diligence contingency is a much riskier contingency than a “free look” because if due diligence reveals a material problem beyond the scope of the limited conditions, the buyer either loses its deposit or is forced to close and then is stuck with the problem.

Seller’s Tips

  • Use specific due diligence contingencies in the contract
  • For each type of due diligence, clearly identify the reasons under which a buyer can terminate the contract and draft language as narrowly as possible
  • Require the buyer to provide appropriate insurance for all of its consultants naming seller as additional insured
  • Make sure that the buyer indemnifies the seller for any damages or liabilities that arise out of testing and that seller will repair all damage at its expense
  • If buyer wants a right to extend the diligence period, require a non-refundable payment

Buyer’s Tips

  • Get a “free look” general contingency which allows termination of the contract for any reason or no reason
  • For all forms of due diligence contingencies make sure that the contract requires the seller to assist the buyer in conducting the due diligence by providing documents in the seller’s possession such as existing property files, reports and permits
  • If the buyer is allowed to apply for permits or make any applications before closing the contract should grant the purchaser the authority to act on behalf of the seller when dealing with third parties such as municipalities
  • Try to get a right to extend the due diligence period, without a non-refundable penalty
  • For each type of specific due diligence, clearly identify the reasons under which a buyer can terminate the contract and draft language as broadly as possible

In the Concrete Jungle

In New York City buyers of real estate have been hoarding their cash reserves since the financial crisis in 2008. As a result, there is huge amount of cash chasing after very few deals which has placed a lot of the control in the hands of sellers. In New York City sellers therefore heavily favor entering into non-contingent contracts (often referred to as “all-cash” contracts) and have forced buyers to conduct as much due diligence as possible prior to entering into a contract. One reasonable solution is for the seller and buyer to enter into a non-binding letter of intent, which has an exclusive period during which the seller will only sell to that buyer. This allows the buyer a certain amount of time (usually very short) to conduct limited due diligence before entering into a binding contract. However, letters of intent should be used with extreme caution as courts may enforce them as binding contracts, especially with respect to any promise by the parties to “act in good faith”.

Good Resources

A helpful list of documents that a buyer should consider requesting from the seller prior to committing to any commercial real estate deal is here.

Disclaimer

The information in this blog post (“post”) and website is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. By using this website and post you understand that there is no attorney client relationship between you and Tomlin Law, PLLC. No information contained in this post should be construed as legal advice from Tomlin Law, PLLC or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction. Although the information on this blog is intended to be current and accurate, it is not guaranteed or promised to be current, accurate, or complete. This blog contains links to other web sites. Tomlin Law, PLLC makes no guarantees or promises regarding these web sites and does not necessarily endorse or approve of their content.

Tune in February 22 to Watch iFunding CEO on The Stoler Report

iFunding is pleased to announce William Skelley, Founder and CEO, will be appearing on The Stoler Report this month. The episode debut will air Tuesday, February 22nd, 2016 on NYC CUNY TV. To view a sneak peek of the episode, view it now on YouTube.

The Stoler Report-New York’s Business Report, is New York’s only television broadcast featuring real estate and business leaders. Michael R. Stoler hosts the show. The weekly program features compelling group discussions highlighting current events and issues in the world of real estate.

Featured alongside Mr. Skelley,  in the panel discussion of “The Evolution of Crowdfunding for Commercial Real Estate,” includes renowned real estate and investment professionals: Paul Braungart, Founder and President, Regional Capital Group; John Shannon, Senior Managing Director, HFZ Capital Group; Larry Davis, President, Shorewood Real Estate Group; and Nicholas Mastroianni II, President and CEO, US Immigration Fund.

The show will air over the next three months on the more than twenty university, educational, community, and public access television stations. For those not able to watch live, the episode will also be available on The Stoler Report website and The Stoler Report App, which can be downloaded for free on iTunes and Google Play, after the debut showing on Tuesday, February 22nd .  Also view the episode now, on YouTube!

Eight Habits of Highly Effective Commercial Real Estate Investors

Investing in commercial real estate can be a very lucrative business—but also a risky one that requires patience, fortitude, and industry knowledge to ultimately be successful. How do you separate yourself from the crowd? Here are eight ways highly effective investors stay on top of the game.

  1. Create a Solid Business Plan – It’s important to visualize both your short and long-term goals, which helps maintain focus and get back on track if you ever hit a stumbling block.
  2. Know Your Market Inside and Out – Acquire an in-depth understanding of each of your markets by keeping on top of current trends, transactions, and key economic figures that allow you to make informed decisions about purchases, dispositions, and other opportunities, both now and for the future.
  3. Read the News Every Day– Subscribe to publications that cater to both your market and industry, including daily newspapers, business journals, and trade publications. Set aside time each day—whether at breakfast, on your commute, or on a break—to catch up on the latest news. Blogs, Twitter, Facebook, and LinkedIn are four other sources to find and share stories related to your market.
  4. Never Stop Learning – Keep abreast of all industry regulations, laws, trends, terminology, and technology, which will allow you to adapt easily to market changes and conditions. Understand the ins and outs of your properties, your tenants, effective ways to save money, and how to keep your assets competitive.
  5. Understand Risk – There’s a reason there’s that old adage, “If it sounds too good to be true, it probably is.” Educate yourself on the risks that come with real estate investments—not only in terms of deals, but legal, financial, and market risk. Avoid investing in assets you don’t understand.
  6. Carve a Niche – While it may be enticing to be a jack of all trades, many successful real estate investors build their business on a specific niche; for instance, it might be only investing in certain asset classes, industries, or geographies. This allows investors to really develop a deep knowledge of the niche and everything that comes along with it.
  7. Build a Solid Team – From accountants, lenders, and lawyers to business partners, operational experts, and mentors, successful investors build a hard-working, knowledgeable team around them in order to share expertise and gain insight.
  8. Network – You never know from where your next deal or opportunity may come—perhaps from a colleague, client, business partner, friend, mentor, or fellow alumnus. There are many ways to drum up new business: Attend networking events, join boards, or become a member of industry or alumni organization, to name a few.

Ten Markets for Investors to Watch in 2016

While many investors aspire to own a piece of the skylines dotting America’s gateway cities, 2016 is the year of the secondary and tertiary markets, which are offering a better proposition value than most of the traditional “Big Six” markets. The Urban Land Institute (ULI) recently released its “Emerging Trends in Real Estate” report, which highlights some of the best markets to watch this year.

Issues found with larger markets, the report says, is that they have become so highly valued on a global perspective that pricing has risen to unattainable levels for a typical domestic investor. When ULI reconciled its survey results, it became clear that markets were moving in the rankings as a result of market participants’ need to take a more offensive approach to the market or to set up a desirable defensive position.

The cities in the top 10 are a combination of traditional higher-growth markets that offer favorable business conditions; markets that were slowed by the global financial crisis, but are now in a position where demographics may drive future growth; or new markets that appear to be positioned to move up a class in the investment strata.

ULI’s 2016 markets to watch, and the reasons they made the list:

  1. Dallas/Fort Worth – Impressive employment growth driving the local economy, supported by a business-friendly environment, attractive cost of doing business, and a cost of living that has allowed the market to enjoy many corporate relocations.
  2. Austin – Continued strong economic and real estate performance and a city that benefits from diverse job creation ranging from service jobs to higher-end STEM and TAMI positions. It remains an attractive place to live for all generations, but there is some concern the market is growing faster than local infrastructure.
  3. Charlotte – Good job and population growth, coupled with development of urban centers, has made this market attractive to residents. There is some concern that the concentration of the financial services industry may not offer the same level of growth as some of the more tech-oriented markets.
  4. Seattle – A diverse industry base that is benefiting from the growth of TAMI industries. While growth has been strong enough, the only potential risk is if it can sustain this current pace.
  5. Atlanta – Experiencing strong growth in key economic sectors without concerns of oversupply. It also offers a lower cost of doing business, which is attracting corporate relocations.
  6. Denver – Economic strength and a location and culture that attracts a qualified workforce and a growing technology sector. Further growth will be driven by a number of public and private infrastructure investments.
  7. Nashville – A once up-and-comer that has now arrived, adding to the number of 18-hour cities with a growing and vibrant urban core, yet offers attractive suburban locations. Similar to Austin, there is some concern that infrastructure won’t be able to keep up with growth.
  8. San Francisco – Even though this Top Sixer is seemingly at its peak in occupancy, rent levels, and valuations, respondents noted that if it ever drops, the chances are it will bounce back even higher—so they’re keeping this one on their top 10.
  9. Portland, Ore. – A market that may rise from secondary to primary status in 2016, due to its being at the forefront of what makes an 18-hour city. However, there is some room for improvement in public and private investment and the local development community.
  10. Los Angeles – Another Top Sixer to make the list, its pricing and fundamentals are strong, but relatively mild compared to those in San Francisco. There’s potential for future growth in select neighborhoods, and both multifamily and retail are undersupplied.

Real Estate Investment to Remain on Fire for 2016

As we head into the new year, investor sentiment toward commercial real estate remains positive, with many investors reporting that they plan to increase their allocations in 2016, reports the recently released Colliers International Global Investment Outlook. Overall, the U.S. remains the top destination for global capital, with global gateway cities the preferred investment target.

One trend the report noted was that while global appetite for real estate remains strong, rising uncertainty stemming from China, economic weaknesses in emerging markets, the tightening of monetary policy in the U.S., and geo-political events across the global has made investors more wary. Of the 600 investors surveyed for the report, 44% said they’re “likely” or “highly likely” to take on more risk over the next 12 months—a drop from 59% a year earlier, though this also may reflect that fund managers have taken as much risks as their mandates allow them. This trend was apparent across all types of capital, with the sharpest reduction in private equity funds, which dropped from 81% to 47% over the year.

When the report looked specifically at U.S. investors, it found that they have dialed back their intended investment activity from last year, with 21% of investors expecting to be net sellers this year, compared to none last year. Fewer investors also intend to expand their activity, while this group, as a whole seems to be moderately risk averse. Yield expectations among U.S. investors tend to be more bullish, with 68% of them expecting leveraged returns of between 11% and 20%, even though they recognize that finding the right yields has become increasingly challenging and further cap rate compression may be dwindling in some markets.

Given these trends, iFunding believes that crowdfunding will become a more popular investment vehicle for those looking to buy into commercial real estate opportunities in 2016.

Investors are reporting the opportunities provided through real estate crowdfunding have competitive risk-adjusted returns, high tangible asset value, attractive and stable income return, and are a good hedge against inflation. While there is always risk associated with investing in real estate, iFunding has the experience and capacity to perform due diligence on all our listings with the goal of minimizing risk and maximizing returns, whether in multifamily, office, industrial, retail, or hospitality.

The Most Popular Property Choices

According to Colliers, the most popular property choice for global investors in offices in central business districts at 61%, up from 46% last year. This followed by industrial and logistics (48%), developments (39%), and shopping centers (38%). Suburban office came in fifth and was one of the fastest growing sectors in terms of preference (32%, up from 21% in 2015), while multifamily felt the steepest drop, falling from second to sixth place this year despite continued interest from U.S. and Canadian investors. To read the full Colliers International Global Investment Outlook report click here.

 

Four Reasons Crowdfunding Makes Sense for Financing Real Estate

In 2014, global crowdfunding grew by 167% to reach $16.2 billion raised—$9.4 billion in the United States alone, and $1 billion of that in real estate. This year, Massolution, a crowdfunding research and advisory firm, predicts that number will more than double.

Many industries are taking advantage of this innovative platform, including businesses, entrepreneurs, social causes, films, performing arts, music, and recording arts. Real estate has particularly latched on to the model, with Times Realty News tracking 152 real estate crowdfunding platforms in the United States and 62 globally as of December 21.

Whether you’re a new or seasoned commercial real estate sponsor, tapping into a crowdsourced platform like iFunding should be taken into serious consideration for financing acquisition and development projects in the new year. Here are four reasons why crowdfunding makes sense:

1) It’s an excellent alternative to traditional lending sources

Since the market downturn, banks and other traditional lenders have enacted stricter credit and lending standards. Crowdfunding can fill in gaps created by more diligent underwriting and provide capital for projects that these lenders may otherwise find too complex. Larger institutional lenders may also pass over opportunities underneath a certain price threshold, instead preferring one $30 million investment to managing six $5 million investments. Crowdfunding is a strong contender in the mid-market space.

2) It taps into an entire new class of hungry investors

Companies like iFunding track the solicitation, preferences, and commitments of thousands of accredited investors whom sponsors or developers may not have access to via traditional networking. Crowdfunding’s digital platform allows for a broader promotional reach, introducing projects to investors who may not otherwise be familiar with the sponsor or geographical area.

Overall, crowdfunding broadens participation in real estate investment. iFunding’s typical customer is an entrepreneur with $1 million to $5 million net worth seeking high-quality deals, and investment opportunities are available for as little as $5,000 across a broad range of property types, including multifamily, retail, office, and mixed-use. And as crowdfunding regulations begin to encompass more investors, we’ll see greater participation at even lower buy-ins.

3) Technology makes the process simple and efficient

In addition to tracking potential investors, technology utilized by crowdfunding companies takes care of a project’s promotion, subscription, due diligence, fund management, project documentation, investor communication, and financial reporting—allowing sponsors to instead focus on project quality and completion. The overall process is more streamlined, reduces sponsor and investment fees, and increases transparency into a project.

4) It’s a targeted approach

A digital platform allows investors access to carefully selected investments based on their preferences, from property type and location to risk profile and return profile. This ensures the right investors are matched to the right sponsors and projects.

Real Estate Crowdfunding is Only Rising with iFunding’s Best Month in August 2015

iFunding, a leading real estate crowdfunding platform, had its best month in its 3 year history, offering investors over $14 M in real estate investment properties.

August is typically one of the quietest months of the year, with investors distracted by summer activities. However, due to the quality of iFunding’s real estate opportunities, the company quickly funded six of its eight projects listed within a week of introducing the project to its 7,000 accredited investors.

“iFunding takes pride in providing quality deals for our investors, “ William Skelley, Founder and CEO, states, “We have been focusing on developing sound relationships with our sponsors, and this month, it’s clear this effort has paid off.”

“We thoroughly enjoy working with the iFunding team and using its platform for our funding source.” Myles Bruckal, Founder of The Bruckal Group says, “Raising capital with iFunding exceeded our expectations, and therefore listing with them again was an easy decision. We are honored to be apart of its most successful month, and we’re in discussions regarding our next project for the iFunding platform. ”

iFunding expects continued growth by offering larger and higher quality opportunities and acquiring additional accredited investors.

About iFunding 
iFunding is a leading real estate crowdfunding platform, facilitating debt and preferred equity fundraising for properties ranging from multi-family residences to apartment towers, hotels and resorts, ,retail locations, malls, offices, mixed-use buildings, and more. iFunding provides opportunities for its 7,000 accredited investors to invest in institutional-quality real estate deals, with a minimum investment of $5,000. The company oversees deals throughout their lifespan, providing extensive information and transparency to give investors insight and oversight into their investments. It also generates financing for multi-project funds, and partners with family offices to co-fund opportunities with its individual investors. iFunding offers flexible financing terms to real estate developer and operators. Visit http://www.ifunding.co for more information, or connect with us on LinkedIn athttp://www.linkedin.com/company/innovational-funding, on Facebook at http://www.facebook.com/iFunding , or via @inno_funding on Twitter. The phone number for investor and operator inquiries is 844-367-4386.

iFunding Contact:
Paula DeLaurentis
Marketing
844-367-4386 ext.3
press(at)innovationalfunding(dot)com

A New Indicator of the Health of Real Estate Investing

US government data indicates that commercial real estate lending is healthier than it has been for many years.

With Q2 ’15 data analysis now available, the Federal Reserve notes that commercial real estate loan delinquency rates have been in steady decline, implying a healthier economy and real estate market.  The percent of CRE loans from banks with delinquent payments dropped to 1.2%, the lowest rate since 2006. In between these years, the delinquency rate climbed as high as 8.77%, during the major recession. There’s a great chart here, with a screen capture below.

iFunding sees this as another sign that commercial real estate investing may be in a ‘goldilocks’ environment now, where market demand and property prices are growing slowly but steadily and investment performance overall should bias positively.  Although there are no guarantees about the future, many industry pundits agree the U.S. domestic economy is relatively robust (see the video here), the existence of an investment bubble is very unlikely, and the possibility of a recession is low for the next several years.
What does the Fed’s loan data mean for your real estate investing? You may want to consider that:
  • Investment opportunities with a 1- to 3-year target for return of capital are attractive yet prudent, as they are predicted to avoid major macro-economic surprises.  Longer duration investments also can be favorable, but understand that your capital may be locked in for an unexpected amount of time until the market is right for a property sale.
  • Both first-lien debt and well-underwritten mezzanine (“second tier”) debt, with its higher average return rate of several percentage points, can be reasonable investments for an income-generating portfolio at this time. First-position debt is secured by a first-in-line lien against the property, meaning that even if there are payment delays or defaults, a company like iFunding is in position to take control the property and protect investors’ principal.
  • The average loan default rate will vary by the type of commercial property held, the structure of the loans, as well as local and demographic economic trends, and each property carries its own risks. Therefore, spread your investments across multiple holdings to diversify away much of the default risk.

 

iFunding raises $1.27 Million for property in metro Denver, Colorado

New York, NY, August 14, 2015– iFunding, an online real estate market place that’s revolutionizing real estate investing, raised $1.27M within days of listing a new project in the metro Denver area on its platform. The capital was raised for the building and development of 12 townhomes that have been named Virginia Village.  The property is located in an urban Denver neighborhood just south of Cherry Creek.

Virginia Village is located at 4400 E. Bails Place and 4401 E Jewel Avenue, Denver, Colorado. Collectively the property is 30,000 square feet. This property will have 12 urban townhomes. Marcus & Millichap 2015 Q1 reports the Denver metro area is poised to be one of the strongest apartment markets in the country.

“iFunding continues to provide the strongest investments and highest quality sponsors for our investors. This project is a testament to our goals and values,” William Skelley, Founder, Chairman, and CEO of iFunding states,  “The quality of deals and sponsors on our platform has significantly grown this year along side the growth of our team. We are excited about what the future holds for our investors as well as our company.”

 

About iFunding
iFunding is a leading real estate crowdfunding platform, facilitating debt and preferred equity fundraising for properties range from multi-family residences and condominium estates, to apartment towers, hotels and resorts, single-family homes, retail locations, malls, offices, mixed-use buildings, and more. iFunding provides opportunities for accredited investors to invest in institutional-quality real estate deals, with a minimum investment of just $5,000. The company oversees deals throughout their lifespan, providing extensive information and transparency to give investors insight and oversight into their investments. It also generates financing for multi-project funds, and partners with family offices to co-fund opportunities with its individual investors. We offer flexible financing terms to real estate developers. Visit http://www.ifunding.co for more information, or connect with us on LinkedIn at http://www.linkedin.com/company/innovational-funding, on Facebook at http://www.facebook.com/iFunding , or via @inno_funding on Twitter. The phone number for investor and operator inquiries is 844-367-4386.

 

iFunding Contact:
Paula DeLaurentis
Marketing
844-367-4386 ext.3
press@innovationalfunding.com

William Skelley on panel, 2nd year in a row, at Annual Crowdfunding Forum for Real Estate 2015

For the 2nd year in a row, William Skelley, CEO and Founder of iFunding, will be speaking on a panel at the Annual Crowdfunding Forum for Real Estate hosted by IMN. This year’s event will take place September 16th and 17th at the Fairmont in Santa Monica, California.

William Skelley

Skelley is founder and CEO of iFunding, the online, commercial real estate investment marketplace for accredited investors and institutions. He is responsible for business development activities at the company, which has financed over 35 real estate projects with total real estate value of over $400 million. William specializes in working with family offices. Prior to iFunding, he founded a boutique investment bank that underwrote $2 billion in real estate transactions, ranging from hotels/resorts acquiring hundreds of millions of dollars in financing, to mixed-use properties and single family homes. Earlier, William was a principal at Rose Park Advisors, a hedge fund founded by Harvard Business School professor Dr. Clayton Christensen, specializing in “disruptive innovation.” He has also worked at General Electric, Olympus and as an advisor to several start-ups.  He attended Harvard Business School and Hobart College.

Skelley will be speaking on the panel discussing, ‘Evaluating the Expansion of & Economic Factors Behind the Growth of Crowdfunding’ along side other executives in the real estate crowdfunding industry.

iFunding will be meeting with developers and investors by request from September 16th through 17th. If interested, email press@innovationalfunding.co.