Selling an Apartment Building FAQ's

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Top Frequently Asked Questions on Selling a Multi-family in Chicago

Are you thinking of selling your multi-family property?

Here are some of the most frequently asked questions we get from clients looking to sell multifamily properties in Chicago.

Before You Sell:

How is selling a multi-family different than selling a single-family home?

If you’ve sold an investment property before, you’ll be familiar with the ins and outs of selling a multi-family. However, if it’s your first time, you’ll learn that the process works differently than it would with a single-family or condo.

A large part of a multi-family’s sale appeal will lie in its cash flow. Buyers looking for a multi-family are looking for more than just a home: they will want to see a property that generates good rental income, rents easily, and provides a financial incentive for them to buy. This could be in the form of easy upgrades they can make to boost rental income or as an empty unit for them to occupy and offset their own living expenses.

Do I need a broker to sell a multi-family?

Of course, we’re biased...but we do recommend working with a broker who is experienced in the multi-family market in your neighborhood. Not only will they be able to pull good comps and provide a market analysis of how you should price the property, but an experienced agent will know how to show the proeprty to different types of buyers, whether they are experienced investors or first-time multi-family buyers who want some supplemental income. Brokers who work in multi-family markets are also in the know about rent prices and trends, which will help them sell your home at the right price.

Do I need to make repairs before selling?

Some buyers look for multi-families with units that could benefit from some updating because they see it as an opportunity to raise the rent using some sweat equity. Your agent should be knowledgeable of the renter’s and buyer’s market for your area and property type and will have good recommendations of what types of updates to make before selling.

Making simple upgrades around the property and in common areas like hallways and entryways can be an easy way to boost the property’s curb appeal that won’t break the bank, whether it’s through new fixtures or a fresh coat of paint.

How do I list a multi-family?

One of the most important parts of getting ready to list your property is confirming the number of legal units in the building. In a city full of old homes like Chicago, many apartment units have been created in old basement spaces or have been de-converted into larger single unit. If you sell your property with an incorrect number of legally recognized units, you could face legal issues down the road. To get the most accurate picture of how your property should be valued and listed, get in touch with the local village to confirm the number of legal units listed in their records.

How should I price my multi-family?

Buyers and their lenders will typically appraise a multi-family home using the income approach method instead of simply using comps in the area to compare values. This means that the appraiser will look at the cost of property maintenance and rental income to evaluate a property’s cash flow. To price your multi-family, you should do appraise a building’s income and use comps in the area to accurately represent what someone might want to pay for it.

How should I market my multi-family?

• You’ll want professional photos of each unit to get ready to list your property, which means asking your tenants to clean their spaces and set up a time for the photographer. Having an empty unit comes in handy because it gives you the opportunity to deep clean the space and potentially even stage it with furniture to show off its potential.
• Put together a financial breakdown and lease abstract to show possible buyers. This might include details like current rents, cost of utilities, and other maintenance fees to give them a better idea of potential rental income.

Selling a building with tenants.

How do I sell my multi-family with occupied units?

One of the trickiest parts of selling a multi-family is to make sure that you are aware of your tenants’ legal rights and that you make the selling process as effortless for them as possible.

• Breaking the news to tenants: Announcing that you’re listing your property for sale isn’t the easiest conversation to have with tenants. For them, it means the hassle of cleaning their apartments for multiple showings, a change in landlords, and a potential increase in their rent after the sale. However, you are legally obligated to inform your tenants when you sell the property, so it’s important to have that conversation before getting too far into the selling process.
• Tenant’s rights when a property is listed for sale: To protect yourself from liability and provide a smooth transition for your tenants during the sale process, it’s important to be aware of their rights determined both by the state and by their lease agreement. Your tenants most likely have a right to be notified a set amount of time before showings and have a lease that can’t be terminated just because you want a vacant unit to sell the property. Reread your lease agreements and the tenant’s rights for your city before listing your home or schedule showings.

How do I show a property with occupied units?

An experienced Broker will know the ins and outs of how to show a property with occupied units (which is one of the biggest reasons why you should take your time to find a good agent). The most important concern when it comes to showing units is to make sure that the tenant is aware of the appointment sufficiently ahead of time. Check your lease agreement to see if there are already guidelines in place, or contact your tenant prior to listing the process to come to an agreed-upon amount of days or hours before the showing when they should be contacted.

Have you thought of selling your property and would like to know what it's worth? Request a valuation for your property below:

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Source: Selling an Apartment Building FAQ’s

[/ux_text] https://www.creconsult.net/market-trends/selling-an-apartment-building-faqs/

Mason Square

Fully Equipped Car Wash For Sale
1250 Douglas Rd. | Oswego, IL | 3,750 SF | 6 Bays | 1.19 Acres
Mason Square Car Wash, a fully equipped and operational 6-bay carwash in southwest suburban Chicago’s Oswego, IL. Ideally located on an out-lot of the Mason Square Shopping Center along heavily trafficked Route 34, averaging 45,000 vehicles per day,
Listing Agent: Randolph Taylor 630.474.6441 | rtaylor@creconsult.net
https://www.creconsult.net/fully-equipped-car-wash-oswego-il-route-34/

Understanding The Right of Offset

Whether you work at a financial institution, develop real estate, invest in property, or act as a broker, there’s a common thread that binds all facets of the real estate world together.  It’s highly likely that you have one or more financial products like a credit card, debit card, deposit account, car loan, commercial real estate loan, and/or checking account.  Sometimes one or more of these products are held with the same bank, credit union, or issuer.

As it relates to commercial real estate specifically, it is very common for a lender to require a borrower to open a checking account as part of the transaction.  Because of this, it is critical that borrowers have awareness of a lightly understood and rarely enforced, but potentially devastating clause in a typical retail bank’s deposit account agreement known as the “Right of Offset.”

Right of Offset Defined

You may be thinking, what does a bank account have to do with my real estate loan?  It is a fair thought, but whenever you have a loan and a checking/savings account with the same bank, understanding how the Right of Offset works is important, particularly if the loan repayments fall into a state of delinquency.

In non-legalease, the Right of Offset gives a bank the legal right to withdraw funds from your checking account, savings account, or any other account without any advance notice, to repay a delinquent loan, outstanding debt, or other fee.  The terms of the Right of Offset are agreed to when deposit account agreement is signed and they are usually buried in tiny font and confusing language.  To illustrate this point, consider the actual legal language from a national bank’s deposit agreement:

“Except to the extent otherwise agreed by you in writing, any loans, charges, service or analysis charges; overdraft or other obligations; or other indebtedness now or hereafter owed to us by you may be charged in whole or in part to the Account, to any other account(s) in your name, or to accounts of co-owners and of certain individuals, to the extent permitted by law.  

You grant us a security interest in the balance of the Account and in any other account(s) in your name to pay all loans, charges, service or analysis charges; overdrafts or other obligations; or other indebtedness now or hereafter owed to us by you.  In addition, we may exercise our right of set off without any advance notice to you and without regard to any other right that we may have against you or any other party.  Such setoff shall be effective immediately upon the occurrence of the event giving rise to the set off rights, even though we may enter the set off on our books at a later date.

Our security interest and right of set off shall prevail and take priority over any adverse claim, change of ownership, pledge, attachment, garnishment, levy, court order, or other legal process of any kind whatsoever.  Should one of these events occur, we may take any action permitted or required by law.”

Take a moment to let that soak in.  By signing a deposit agreement, the account holder agrees to allow the bank to take funds from any individual account in their name or from joint accounts with co-owners and other individuals at will.  Granted, this is rarely enforced, but when it is, it can drive a business or real estate project into insolvency.

Implications of The Right Of Offset – A Cautionary Tale

In a typical commercial bank, the sales staff (usually called Relationship Managers) tends to lead with loans, but are often responsible for meeting deposit goals as well.  To meet those goals, they will leverage a loan approval into requiring the borrower to open one or more checking accounts with the bank.  These may be an operating account for a business or a personal checking account, or both.  In either case, the relationship manager will push the borrower to bring as many deposits as possible as a condition of loan approval.  In the vast majority of situations this strategy is perfectly fine, but the cautionary tale below outlines the risk of this approach.

In the market downturn of 2006 – 2008, I worked at a bank as a Commercial Real Estate Underwriter and we had a client who was a well-regarded custom home builder.  As the housing market turned south, they had increasing difficulty making required loan payments because their homes weren’t selling.  After an extended period of delinquency, multiple failed efforts to restructure the loan, and many missed payments, the bank foreclosed on the properties/loans outstanding under the line of credit.  In the march up to foreclosure, bank officials exercised their Right of Offset and, with little advance notice, withdrew a six-figure sum from the borrower’s personal checking account.  They used the proceeds to repay the delinquency on their line of credit.

To say that the borrower was shocked and upset is a massive understatement.  They had allocated the money as a “rainy day fund” and the sudden disappearance of it placed a major strain on their personal finances, credit score, and ability to support their homebuilding business. Worse, they had to learn a very hard lesson about the Right of Offset because they’d never heard of it before.

How to Protect Yourself

Start with the assumption that it isn’t possible to negotiate away the Right of Offset in a loan or deposit transaction. It is a foundational principle that the bank likely isn’t going to budge on.  Also assume that not opening an account isn’t a likely option either.  As part of loan closing, many banks require it.

So, commercial real estate borrowers are left with two options to protect themselves from an unannounced withdrawal by their bank.  The first is simple, make the required loan payments on time.  As long as this happens, the existence of the Right of Offset is a non-issue.  If you fall behind, be transparent and realistic with the lender about your plan to get back on track.

The other option is to always be aware that the Right of Offset exists and manage cash accordingly.  To the extent that it’s allowed under the terms of the loan, keeping separating personal and business checking at two different banks is a best practice.  In addition, it can also make sense to have credit card accounts and personal loans with separate banks as well.

Conclusions and Summary

This article is not meant to instill fear.  Instead, it is meant to inform readers that the Right of Offset exists in almost all banks. To be clear, the Right of Offset is rarely enforced and the kindest banks will provide some level of advance notice before exercising it.  However, it is an important concept for commercial real estate borrowers and investors to be aware of should they ever become delinquent on their loan payments.

Disclaimer:  This article is illustrative in nature only and not to be taken as legal advice.  For questions about your specific loan and deposit situation, it’s best to consult with your banker.  For legal questions, it’s best to consult with a qualified attorney who can provide advice specific to your situation.

 

 

Source: Understanding The Right of Offset

https://www.creconsult.net/market-trends/understanding-the-right-of-offset/

1120 E Ogden

Retail / Medical Office Space for lease in Naperville, IL
1,500–3,673 SF | $26/SF MG
1120 E Ogden Ave., Suite 101, Naperville, IL 60563
Broker: Randolph Taylor, rtaylor@creconsult.net, 630.474.6441

https://www.creconsult.net/retail-office-for-lease-1120-e-ogden-ave-suite-101-naperville-il-60563/

What is a Rent Roll?

 

When real estate investors are evaluating a potential rental property purchase or a bank is underwriting a potential loan, one of the first documents that they will ask for is the property’s “rent roll” or “rent roll report.”

In this article, the rent roll document is described in detail and its utility in the CRE due diligence process is highlighted.  Let’s start with a simple definition.

What is a Rent Roll?

A rent roll is an important document that lists all the tenants in the property.  In real estate investing, it is an indispensable part of the due diligence process, and it is typically provided by the current owner or property management company.  The format of the rent roll can vary – sometimes it is an Excel file, other times it is a printed report – but they all contain the same general information:

• Tenant Name:  The name of the current tenant occupying a particular space in the property.  If the space is unoccupied at the time the rent roll is produced, the tenant name could be “vacant.”
• Unit Number:  The number of the suite or unit occupied by the tenant.
• Unit Size:  The number of square feet (or square meters) occupied by the tenant.  For example, a tenant may occupy 1,000 square feet of space.  This number is particularly significant because rent is often charged – and rent payments are calculated – on a per square foot basis.
• Percent of Net Rentable Square Footage:  Based on the tenant’s unit size, this is a calculated value that represents the percent of total square footage occupied by the tenant.  For example, if a tenant occupies 1,000 square feet in a 10,000 square foot building, they occupy 10% of the net rentable square footage.
• Rental Rate:  The rental amount paid by the tenant.  Typically, there are two columns for this information.  The first is typically expressed as a value per square foot annually and the second is the total gross monthly rent amount, which is a value calculated by multiplying the total SF leased by the gross rent PSF.
• Annual Rent:  A calculated value that represents the total annual rent for the space.  It is obtained by multiplying the monthly rent by 12.  For example, if the rent for a space is $1,000 per month, the total annual rent is $12,000.
• Lease Start Date:  The date that the lease became effective.
• Lease End Date:  The date that the lease expires.
• Lease Term:  A calculated value that represents the total term of the lease.  It is typically expressed in months.
• Security Deposit:  Some rent rolls, especially those for multifamily properties, may contain a section on the amount of security deposit that is currently being held for the tenant.

A rent roll is typically stored in a spreadsheet, so each of the above elements represents a column.  It could look something like this (again, the actual format can vary greatly from one rent roll to the next):

Why the Rent Roll Is Important

There is no question about the importance of the rent roll, but its utility varies based on the perspective of the individual viewing it.  For an investor, analyzing it is a critical part of the pre-purchase due diligence process.  For a banker or lender, it is a critical part of the loan underwriting process.  In either case, there are several key insights that can be obtained from a rent roll:

• Property Income:  The sum of annual rents for all tenants provides an indication of the total annual income for the property.  For example, if there are 3 tenants whose annual rent is $10,000 each, the property’s total income is $30,000.  This is a useful starting point for calculating the property’s net operating income, or net cash flow after operating expenses.
• Tenant Concentrations:  In commercial properties with multiple tenants, it is common for there to be one or more “anchor” tenants who lease most of the space in the property.  For example, in a grocery store anchored retail shopping center, the grocery store leases the bulk of the square footage in the property and is supported by several other smaller tenants.  The grocery store’s lease creates a “concentration” of space in the hands of one tenant and raises the risk profile of the property.  If an anchor tenant decides not to renew their lease, it could be difficult to fill and could cause a drastic reduction in income for the property.
• Expiration Concentrations:  If leases for multiple tenants expire on or around the same date, this represents a potential risk that investors and lenders would want to be aware of. In a worst-case scenario, none of the tenants renew their leases, which results in a drastic reduction in property income until the space is re-leased.  Less rental income equals lower net operating income and a lower valuation.
• Tenant Roster:  Who the tenants are has a major impact on the risk profile of the property.  For example, a rent roll filled with unknown local businesses represents more risk than a rent roll filled with nationally recognized companies who are known to be financially strong.  For this reason, bankers and investors like to review the names of each tenant and use them to research their financial condition.
• Lease Lengths:  The length of each lease is important because it allows the banker and lender to forecast how long the stream of income produced by the lease will last.  Rent rolls with tenants on long-term leases are preferred to those who have shorter term leases.  In reality, most rent rolls tend to contain a mix of long and short-term leases.
• Comparable Properties:  From an investor standpoint, a rent roll can be particularly useful as a tool to compare market rates from one property to another.  For example, suppose the target property has average rental rates of $15 PSF, but similar properties in the same market are leasing for $18 PSF. In this case, it could be a sign that there is room to raise rents, which is a positive for investors.
• Vacancy/Occupancy:  A rent roll helps investors to determine the total number of rental units occupied versus the total available to rent.  A high vacancy number raises the risk profile of the property, unless there is a valid reason or pending leases for new tenants.
• Due Diligence:  Finally, the rent roll can be a useful tool for pre-purchase due diligence for real estate investments.  Commercial property owners, especially smaller ones, are notorious for keeping poor records.  So, the rent roll can be used as a tool to evaluate the accuracy of reported income.  For example, if the sum of total rental income on the rent roll is $50,000 annually, but the income statement reports $75,000, this can be a sign that one of the two documents is not accurate.

Although it may seem like a humble spreadsheet document, the points above support the idea that a rent roll is a critical tool that can be used to understand the health of a property.

Summary & Conclusions

A rent roll is a document that provides key information about the tenants that occupy a commercial rental property.  Its format can vary by property owner or property type, and it is typically provided by the existing property manager as part of the pre-purchase and pre-loan due diligence process.

Despite potential differences in format, all rent rolls contain the same basic data points including things like tenant name, SF leased, rental rate, lease start date, lease end date, and the unit number.

Analysis of the rent roll can provide key information like tenant concentrations, property vacancy, potential rental income, and how the lease rental rate compares to the market rent for comparable properties in the same market.

 

 

Source: What is a Rent Roll?

https://www.creconsult.net/market-trends/what-is-a-rent-roll/

Three Types of Commercial Real Estate Obsolescence

One of the unique challenges of commercial real estate investment is that markets, types of property, return expectations, and physical environments are in a constant state of change.  As a result of these changes, a commercial property could be cash flow positive one day and undesirable the next due to shifts in tenant desires or some other factor.

The real estate term for this type of risk is “obsolescence” and there are three types that CRE investors should be aware of.

Functional Obsolescence

Functional Obsolescence is the impairment of a real property’s functional capacity due to changes in market tastes and/or standards.  In other words, a property could become functionally obsolete when its design, style, amenities, or technology no longer meet the needs and/or expectations of modern tenants.  There are no clearer examples of functional obsolescence than in the realm of technology.  Modern tenants require high speed internet connections, strong cellular reception, advanced security features, and modern audio/video capabilities.  Could you imagine an office building without videoconferencing or high speed internet?  Properties that do not have these features could be well on their way to becoming functionally obsolete.

Depending on the situation, there are two types of functional obsolescence,  “curable” and “incurable.”  If there is curable functional obsolescence, it means that the property could be renovated or upgraded in a cost efficient manner to bring the property up to modern standards.  For example, it is possible to retrofit a property with high speed wireless internet or badge scanners for increased security.  If there is incurable functional obsolescence, it means that the property cannot be upgraded or that it is not economically feasible to do so.  For example, it would be nearly impossible to retrofit an older 10-story building with a modern elevator system.

It should be noted that there is a subset of functional obsolescence known as “superadequacy.”  It may seem counterintuitive, but it is possible to improve a property too much and that is where the concept of superadequacy comes into play.  For example, if a multifamily developer purchased a property and renovated it with luxury finishes in a market that cannot support them, the property could be considered “superadequate.”

Economic Obsolescence

Economic obsolescence – sometimes called external obsolescence – is the depreciation in the market value of a property due to external factors that cannot be controlled by the owner.

Common causes of economic obsolescence are things like: traffic pattern changes, zoning changes, flight pattern changes, construction of public nuisance projects like a jail or sewer treatment plant, rising crime, or job loss.  For example, imagine a successful apartment complex that is located in close proximity to a major airport.  The property is full, cash flow positive, and residents like to live there due to its proximity to the airport.  But, one day the FAA decides to change the approach path to the airport.  The new pattern brings aircraft directly over the apartment complex at a low altitude at all hours of the day and night.

The property owner had no input on the change, but they will likely suffer the consequences of it in two ways.  First, tenants are likely to leave, causing increased vacancy in the property.  Second, the increased vacancy will require rents to come down to a point where they are perceived to be a good deal, despite the aircraft noise.  Combined, these economic factors can create a shortfall in operating income and drive the property value lower, perhaps to a point where it is considered economically obsolete.

Unfortunately, economic obsolescence is incurable in most cases.  In the example above, there is little, if anything the property owner could do to get the flight path changed other than to log their complaint with local authorities.  In many cases, they may have to sell the property at a loss or find other ways to deal with the erosion of value.

Physical Obsolescence

Physical obsolescence is the decline in a property’s valuation due to physical depreciation or gross mismanagement.  It is a given that there will be physical deterioration in all real estate assets over time, but it can be managed with a proactive maintenance and replacement program.  True physical obsolescence happens when maintenance requirements are ignored and the property physically degrades to a point where it has no desirability.  For example, suppose that a property owner never changes the air filters in the HVAC system.  Over time, this allows for the growth of mold and mildew throughout the property to the point that it isn’t safe for occupancy.  This would have a negative effect on the value of the property and would likely result in decreased occupancy, decreased economic life, operating losses, and potential capital losses.

The question of whether or not physical obsolescence is curable is a function of the replacement cost to fix it.  If the pricing is such that it is either cost prohibitive or the cost can’t be recovered through improved occupancy or higher rents, it is likely incurable.  However, if the cost is relatively minor, it could be cured with ease.

Summary and Conclusions

From an investment standpoint, the threat of obsolescence is that it happens quickly and the property owner never sees it coming.  For this reason, it is important to consider each of the above types prior to purchasing a property.

The first line of defense for recognizing obsolescence is the real estate appraisal.  Appraisers/assessors are trained to look for it in the subject property, to quantify the cost of fixing it (if possible), and to summarize the obsolescence results in their lenders reports.  If it exists, it is up to the property owner/investor to assess the cost of repair/renovation versus the benefits that they will receive from it.  Quantifying this cost/benefit metric can be tricky because it is dependent upon certain locational characteristics of the property, its capitalization, operating costs, effective age, and the useful life of potential upgrades.  There is no “right” way to do it because it varies widely from one property to another, but looking at the cost for comparable properties may be helpful.

The more important point is that all types of obsolescence be considered prior to purchasing a property and a plan to address them if/when they arise should be developed.

 

 

Source: Three Types of Commercial Real Estate Obsolescence

https://www.creconsult.net/market-trends/three-types-of-commercial-real-estate-obsolescence/

Mason Square

Fully Equipped Car Wash For Sale
1250 Douglas Rd. | Oswego, IL | 3,750 SF | 6 Bays | 1.19 Acres
Mason Square Car Wash, a fully equipped and operational 6-bay carwash in southwest suburban Chicago’s Oswego, IL. Ideally located on an out-lot of the Mason Square Shopping Center along heavily trafficked Route 34, averaging 45,000 vehicles per day,
Listing Agent: Randolph Taylor 630.474.6441 | rtaylor@creconsult.net
https://www.creconsult.net/fully-equipped-car-wash-oswego-il-route-34/