Investment-Money-Loan

INVESTMENT

MONEY

LOAN

WRITTEN BY:
SHAWN RABBAN

Business Consultant
Real Estate Broker
Insurance Broker
Mortgage Broker
310-714-15616

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INVESTMENT – MONEY – LOAN

Author: Shawn Rabban
Printing: Print Land
Chief Editor: Kai Schneider

Cover Design: Agnes Azaryan E-mail: [email protected]
Cover Photo: Nasser Moghadam
Registration Number: 982315

No part of this book maybe reproduced without the permission of the publisher.
Printed in the United States of America.

All Rights Reserved.

Office seminars available

*While reading this book, if you have any questions, you can contact Shawn Rabban
Tel (310)-714-5616
Mailing Address: 2355 Westwood Blvd. Suite 258, Los Angeles, CA 90064

City Capital Realty

DRE. 00667328 | NMLS. 298861/729817 | www.westsidelainsurance.com

[email protected] www.citycapitalrealty.com

Real Estate Broker, CA Dept of Real Estate www.westsidesbaloan.com

Everything in this book is based upon my knowledge, experiences, opinions, and
recommendations through 20 years of working in the field of real estate finance and

mortgage business.

After reading this book, I hope you can apply the information and guidelines in order to
make better investment decisions, as well as finding the best financing option for your

future investments.

For further assistance, consult your Legal Counselor, Accountant, CPA, Real Estate
Broker or your Financial Adviser.

NOTE: We occasionally use materials placed in the public domain. Sometimes it is
practically impossible to identify and contact the copyright holders of certain articles. If
you claim ownership of any material we have published, please contact us and we will be
more than happy to make the necessary proper acknowledgment.

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*CONTENTS*

CHAPTER ONE
Commercial Real Estate Underwriting Guidelines
Amortization Methods…………………………………………………………………… 9
Type of Property……..…………………………………………………………………. 10
Introduction to Income Capitalization Approach……..………………………………... 11
Shopping Center Cash Flow Example……..…………………………………………… 12
Formula For Purchasing & Selling Commercial Properties …………………………… 13

CHAPTER TWO
Commercial Real Estate Loan

Assumable Loans……………………………………………………………….............. 21
First Phase/Second Phase……..….……………………………………………………... 21
Personal Guarantee/Non Recourse…….……………………………………………….. 22
Pre-payment Penalty…….……………………………………………………………… 22
Investment Risk…….…………………………………………………...………..…….. 22
Factors to Consider When Investing in Real Estate……..…….………………………... 23
Number of Tenants as a Function of the Type of Building…….….…………………… 24
Cap Rate……………..……………………………………………………………….…. 24
Partial Release Clause………………………………………………………….……….. 25

CHAPTER THREE

The 504 Program
Project Size/504 Loan Terms………..……...…………………………………………... 29
Split-Interest Rate/Assumption Fees ..…………..……………………………………… 29
Guidelines to Single Purpose Building in a 504 Project ……..………………………… 30
Permanent Financing Structure/Advantages of 504 Loan ……....……………………... 31
How Much can you Expect from the Bank?……..…………..…………………………. 32
Three Components of Lending Decision………..……………………………………… 32
Three Factors that Affect Interest Rate………..………………………………………... 32
What Determines Bank’s Loan Term …….……………………………………………. 32
Bank Financing Analysis/Cash ………………………………………………………… 32
Cash Flow/Analyzing Cash Flow Coverage …………………………………………… 33
Steps Involved with SBA 504 Lending Decision ……………………………………… 33
Structure SBA 504 Financing …….……………………………………………………. 33
7(A) SBA Program/Maturity………………………………...……………….………… 34
The Seven C’s ……………………………………….…………………………………. 35
Business Plan …….…………………………………………………………………….. 36
All SBA Loan Have a Personal Guarantee Provision ………….….…………………… 37
Rentable Property/Life Insurance//Principal(Owners)…………………………..……... 37
Tax Return Requirements …………………….………………………………………... 37
Loan Decision-Approval or Denial …………………………………….………………. 38
Collateral /Loan Documents ………….……………………………………………..…. 38
What SBA Looks for In Approving a Business Loan ………………………………..… 38

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Preparing for all Possibilities ………….……………………………………………….. 39
SBA Loan Checklist …………………………………….……………………………... 41

CHAPTER FOUR
Business Loan
SBA Loan Program…………………………………………………………...………… 45
Advantages of Different Brand Name Companies …..………………………………… 45
Guidelines for Obtaining SBA Business Loans ……...………………………………… 46
10% / 15%/ 20% Down Payment …………………………………………………...….. 47
Prior to Purchasing a Business ……………………………………………….………… 48
Escrow Period …….……………………………………………………………………. 49

CHAPTER FIVE
Environmental Report
Why perform a Phase I.?………………………………………………………………... 53
What is a Phase II?……………………………………………………………………… 54
What is Phase III Site Remediation ………………………………………………...….. 55
Consulting & UST Closure …………………………………………………………….. 56

CHAPTER SIX
Things to Consider Before Making Any Real Estate Investments
Issues to Consider Before Making a Real Estate Investment .………….……………… 59
Bank Consolidations in Recent Years ………………..………………..……………….. 60
Reasons for Bank Consolidations ……………….…….……………………………..… 61
Things to Consider Before Making Any Real Estate Investment ……………………… 61
Dry Cleaner/Rental Agreement/Lease Cancellation/
Security Guard/Parking Supervisor…………………………………………………...... 62
Gas Station/Supermarket……………………………………………………....……….. 63
Our Recommendations for Property Owners with Vacant Shops ……...……………… 64
Public Tenants ………………………………………………………………………...…64
Few Words About Different Types of Tenants ………………………………………….65
Business Failure/Income Range/Population Density…………………………….………66
Traffic Count …………………………………………………………………...………. 67

CHAPTER SEVEN
Steps to Prevent Problems when Purchasing/Selling Real Estate
When The Seller Accepts Your Offer …………………………………….………….… 71

CHAPTER EIGHT
How to Prepare a Contract
How to Prepare a Contract ..…………………………………………...……………….. 75
Liquidated Damages ………………………………………………………………….... 76
Why You Should not Pay Initial Deposit to the Seller?..…………………..……..……. 76

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CHAPTER NINE
The Best Guide to Your Credit Score
Your Payment History/Do You Owe Too Much?…………………………………...…. 81
Credit History Length/Acquiring New Credit …………………………………….....… 81
A Variety of Credit In Use ……………………………………………………..………. 82
How Credit Scoring Will Help You?…………………………………...…………….… 82
Tips for Raising your FICO Score ………………………………………..……………. 84
Evaluating Your Credit Report …………………………………………………..…….. 85
“Paid Only”/ “Settled Only” / “Paid Charge Off”……………………………………… 87
Statutes of Limitations ………………………………………………………..….…….. 88

CHAPTER TEN
Home Loan
Secured Credit Card/Timing is Everything …………………………………………… 91
Right of Recession ………………...…………………………………………………… 92
How to Obtain A Credit Card ………………………………………………………….. 93
How to Maintain Your Credit Rating ….………...…………………………………….. 94
Advantages of Five-Year Fixed Rate ……………………………………………...…… 95
Methods of Making Mortgage Payments ………………………….…………………… 96
Process of Making Mortgage Payments When Refinancing ……………..........………. 97
Factors Causing Higher Interest Rates …………………………………………………. 98
Interest Only Loan……………………………………………………………………… 99

CHAPTER ELEVEN
Insurance
Lloyds of London……………………………………………………………………. 103
Reinsurance………...………………………………………………………………….. 103
The Law of Big Numbers ………….…………………………………………………. 104
Insurance …………………….……………………………………………………….. 105

CHAPTER TWELVE
Brokers Link Borrower to Lenders
Four Types of Brokers …………..……………………………………………………. 111
Letter of Interest ………...…………………………………………………………….. 112
Securing the Link …………...………………………………………………………… 113
There is a Loan for Everyone …………………………………………………………. 114

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CHAPTER ONE

Commercial
Real Estate
Underwriting
Guidelines

Shopping Center, Office, Medical,
Industrial, Hotel/Motel, Apartment

Analysis

City Capital Realty 310-714-5616

7

Repayment Method Periodic Payment Loan Balance at Maturity Date
Fully an amortized loan Principal + interest Zero balance
Partially an amortized loan Principal + interest Outstanding principal balance
Interest only loans
Periodic interest payment An original loan amount

Commercial Real Estate Loan Underwriting Guidelines

Underwriting is the analysis of the risk and creditworthiness of both the property and
borrower to determine the appropriate loan amount.

Underwriting Criteria

Underwriting ratios, including a loan-to-value ratio, (loan divided by property value) and
a debt coverage ratio, (Net operating income divided by annual loan payment) for the
requested loan amount. Remember the holding period. Amortization period and maturity
date represent different time periods.

Amortization Methods
Loans maybe amortized in different repayment methods.
These types of loans include:
Interest Only Loan Program
Periodic payments are equal to the periodic interest, since the payment covers only
interest with no periodic reduction in principal

Fully Amortized Loan
The loan term and the amortization period are of equal length. The loan amount is
completely paid off at the end of the loan term through periodic payments.

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Partially Amortized Loan

The loan has a longer amortization period than an original loan term.

For example: 25 year amortized due in 10 year

Start 25-year Amortization

10 yr.

Maturity Date

Most of the commercial property loans are offered on this basis.

Type of Property, including

Use of Property: gas station, car washes, apartments, office

Size of Property: small building, one story

Age: old, new construction

Quality: excellent, good, fair, poor

Style: an enclosed garage, extensive amenities

Lease Schedule: long term, short terms, month-to-month

Tenant Mix: anchor, credit tenants, franchises, mom & pop

*Creditworthiness of the borrower is as well as important.

Good credit, sufficient down payment, management experience, reasonable cash liquidity
and six months PITI (principal, interest, taxes, insurance) reserves.

*Lending Criteria

Banks have different loan restrictions and make decisions of how much to lend on any
real estate request.

Definition: “Subject” refers to the property under analysis

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* INTRODUCTION TO INCOME CAPITALIZATION APPROACH *

The subject property is representative of income producing real estate purchased for the
purpose of generating net annual income or cash flow to ownership. Net income or cash
flow is considered to be a primary benefit of ownership and its relationship to value can
be used for determining value of the subject property.
Direct Capitalization Analysis
Reimbursement income - The market rental rate is based on a triple net lease; the tenant
is responsible for paying for the utility expenses, general repair & maintenance expenses,
and cleaning expenses directly to the providers. The tenants are responsible for
reimbursing the landlord for the property taxes, insurance expenses, professional
management fees, gardening, cleaning, and trash pick-up.

Vacancy & Collection Loss - Most lenders use a minimum 5% - 10% loss factors when
purchasing or refinancing commercial real estate properties.

Effective Gross Income - The effective gross income is the result of gross rental income
and reimbursements, less vacancy and collection loss.

Insurance - Most insurance premiums for commercial property charge in the range of
$0.20/SF to $0.35/SF depending upon the quality of the improvements and amount of
coverage considering the subject’s actual insurance expense.

Real Estate Taxes - are based on an estimated stabilized market value derived from the
capitalization approach, at the most current tax rate of typically 1.25%.

Professional Management’s - A management fees must be considered for the
commercial property in that someone is responsible for overseeing operations of the
building. A management fee is calculated based upon a percentage of effective gross
income range from 3% to 5%.

Replacement Reserves - This treatment of replacements usually results in areas of
deferred maintenance that is then reflected in the anticipated sales price. Considering the
improvement condition, effective age, construction quality, and a reserve rate of
$0.20/SF is deemed adequate for the commercial properties.

Net Operating Income - Net operating income (NOI) is estimated by deducting total
expenses from effective gross income.

Cap Rate - is an estimated capitalization rate (based on market rents) considered
appropriate for the subject property based on local market area currently in range of
7.0% to 10.0%.

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* SHOPPING CENTER CASH FLOW EXAMPLE *

The annual operating expenses provided by the real estate agencies in the market are 10%
to 20% lower than the normal standard rate. Sometimes even the actual expense given to

the buyer is 30% lower than the one given in the prior information in comparison to the
similar commercial buildings.

However, all banks, appraisals, and lenders know the necessary formulas to estimate the
different expenses of these buildings, and request for the loans accordingly. Remember if

the given information from both sides (the owner and the broker) regarding operating
expenses is not correct, the buyer gets involved in a deal which is fruitless. It will be a

waste of time and money for both the buyers and the brokers.

All requested loans are governor, according to the net operating income. When they
don’t go with each other, the other formulas won’t match. Consequently, the loan

amount, the down payment, and the net profit will change.

Basically, in order to reach the real value of a commercial building, you need to ask for
an appraisal to provide you with a complete written appraisal report.

Due to a misinformation given by the sellers to the buyers, each day a lot of accepted
offers for commercial buildings are canceled.

We can help you get commercial loans and reach your business goals. We will provide
you with all prior calculations before. Any deal gets started!

1-Gross Income $230,000 8-Down Payment (30%) $525,833

2-Vacancy Rate (7.5%) -17,250 9- Required Loan Amount 1,226,943

3-Effective Gross Income 212,750 10- Annual Loan Payment 93,070

4-Expenses -55,000 11- Cash Flow After Debt 64,680
5-Net Operating Income 157,750 (NOI - Loan Payment) 1.69

12- Debt Coverage Ratio

6-Cap Rate 9% 13- Loan-to-Value 70%

7- Market Value = 1,752,777 14- Return on Investment 12.3%

Based on 5.8% interest Amortization of 25 years

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* FORMULA FOR PURCHASING AND SELLING COMMERCIAL PROPERTY*

*Potential Gross Rent is the amount of rental revenue a property would generate is

$230,000
Below is the vacancy rate divided by gross income.

1- Vacancy space income = $17,250 = 7.5% Vacancy Rate

Gross Income $230,000

2- Subtract the vacancy from gross income, we will arrive at the effective gross income
of $212,750.

3- In order to arrive at NOI, The total expense of $55,000 is deducted from effective
gross income and the result is $157,750

4- Banks and appraisers capitalize the income stream of a property to estimate property
value. The cap rate is the ratio between purchase price and net operating income.

4a- Property Value = Net Operating Income = $157,750 = $1,752,777

Cap Rate 9%

4b- Cap Rate = Net Operating Income = $157,750 = 9%

Market Value $1,752,777

5- Cash-on-Cash Return

Cash on cash return is method to determine property value or measure investment
performance? Many investors are cash-oriented. (Net income after loan payment)

First Year Cash Flow = $64,680 = 12.3% Cash-on-Cash Return

Down payment $525,833

6- Debt Coverage Ratio

The DCR Formula represents Bank’s “margin of safety.” Banks usually request a ratio
greater than 1.1, e.g., (1.15, 1.20, 1.25, 1.30)

Debt Coverage Ratio = Net Operating Income = $157,750 = 1.69
Annual Debt Services $93070

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7- Loan-to-Value Ratio

Is the loan amount borrowed in relation to appraisal value of the property?

Loan-to-Value Ratio = Loan Amount = $1,226,943 = 70%
Market Value $1,752,777

8- Gross Income Multiplier

Is relationship between property value and its gross annual income?

Gross Income Multiplier = Market value______ = $1,752,77 = 7.62
Gross annual Income $230,000

9- Operating Expense Ratio

The percentage of gross annual income consumed by operating expenses is expressed as
an operating expense ratio.

Operating Ratio = Operating Expenses = $55,000 = 26%
Effective Gross Income $212,750

10- Break-Even Ratio

This is a relationship between cash inflows and cash outflows. The lower the break-even

ratio, the greater the decline in gross revenue. Low break-even ratios allow for more
margin downward swing in effective gross income.

Break-even Ratio = Operating Expenses + Debt Services = $55,000 + $93,070 = 69%

Effective Gross Income $212,750

11- Payback Period

Is the time required for cash inflows from an investment to equal the original cash
investment?

Payback Period = Down Payment $525,833 = 8.12
Annual Cash Flow $64,680

This ratio does not take into consideration the time value of money and most investors do
not use this analysis.

14

12- Broker’s Rate of Return

Real Estate Brokers sometimes argue that cash-on-cash ratio of a return should be
modified to reflect the build up of an investor’s equity, management fee, and vacancy
rate.

A broker’s = Cash Flow + Equity Build-up + Mgt. Fee + Vacancy Rate

Return Initial Equity

= $64,680 + 22,500 + 11,500 + 17,250 = $112,689 = 22%

$525,833 $525,833

Based on the assumption that there is no vacancy and property managed by the owner,
this would be the maximum return.

13- Sales Comparison Approach

In order to draw comparisons between properties, this formula may also be used for “per
unit costs” of the subject property.

Purchase Price = $1,752,777 = $175/sf

Square Feet of Bldg. $10,000 sf.

14- Parking Ratio

The subject property has 20 “parking spaces” which indicate the parking ratio of two
spaces per thousand.

Parking Ratio = Number of Parking Spaces = 20 = 2/1000

Building Size 10.000

15- Building Expense Per Square Feet

Building Expense = $55,000 = $5.50/sf = $0.46 per month

Building Size 10,000 12

15

16- Loan Constant

The mortgage constant is generally defined as:

16a- Mortgage Constants = Debt Service = $93,070 = .0758551
Loan Amount $1,226,943

16b- NOI = Annual Debt Services = $157,750 = $93.070 = $7755

DCR 1.69496 12 Monthly Payment

16c- Annual Debt Services = Loan Amount = $93,070 = $1,226,944

Mortgage Constant .0758551

17- Load Factor

Load Factor = Rentable square feet
Useable squares feet

This formula is typically used for office and medical buildings.

18- Floor Area Ratio

Building Ratio = Total Building Sq. Ft. = 10,000 sf. = 50% or 0.50:1

Total Land Sq. Ft. 20,000 sf.

19- Net Income Multipliers = Market Price = $1,752,777 = 11.11

Net Operating Income $157,750

Net Income Multiplier express the relationship between value and net operating income.

16

Net Operating Income identifies amounts of cash to an investor a property can generate.
NOI differs for every property. (NOI) should cover the loan payment and profit to the
owner.

1. Components of Net Operating Income:

§ potential rental income
§ vacancy and credit losses
§ operating expenses
§ other income

2. Capitalization Rate used to determine the rate of return on investment, The higher
the purchase price, the lower the cap rate.

§ used in a real estate appraisal as the basis for establishing value
§ similar in popularity as the gross-rent multiplier

3. Components of the Cash Flow Model
The cash flow model consists of:

§ an investment holding period
§ an initial investment
§ cash flow from operations

4. Debt Coverage Ratio measure project feasibility, cover debt service and provide a
lender margin of safety. Lenders typically request a ratio greater than 1.1

Components of DCR:
§ annual debt services
§ amortization period
§ an interest rate
§ a maximum loan amount

5. Cash-on-Cash Method is easy to use.
It takes into account:

§ vacancy and credit losses
§ operating expenses
§ financing

17

6. Loan-to-Value Ratio:
Different banks may require different loan-to-value ratios on each type of loan that they
approve. A lender may also apply a lower loan-to-value ratio for a specific loan.
7. The Sales Comparison Approach may be used to determine a buyer’s property
purchase at a given price per square foot.
8. Gross Rent Multiplier is another method investors may use to determine the
investment value. A principal advantage of using a gross-rent multiplier is its simplicity.
The gross-rent multiplier indicates how many times the purchase price is multiplied by
the first year of potential rental income.

9. Loan Constant is the ratio of debt service to the loan amount and can be calculated
on either an annual or monthly basis.
10. Parking Ratio is the figure representing the number of parking spaces available per
1000 square feet of a gross building area.

11. Load Factor is rentable square feet divided by useable square feet plus a percentage
of common areas on the floor, hallways, bathrooms, telephone closets, main lobby and
stairs.
* CONCLUSION *

Real estate is the best vehicle for building and creating financial security.
The biggest factor on which the value of commercial property is based is its net income.
Before you enter into a real estate investment, you may want to set your own percentage
of income as needed from the investment.
A deal should never look too good or too bad. You should know whether it is good for
you.
The above stated real any investor could use estate formulas globally in order to analyze
different investment options.

18

CHAPTER TWO

Commercial
Real Estate Loan



Shopping Center
Industrial
Medical
Office
Warehouse

Self-Storage

City Capital Realty 310-714-5616

19



Assumable Loans

Some of the commercial property loans have exceptional provision that gives you the
right to transfer the existing loan. While transferring, one percent of outstanding loan
balance should be paid to the bank.
Here are the steps to obtain commercial real estate loans:

First step is to appraise the commercial property.

Appraising a commercial property is usually calculated on the basis of cap rate. It should
be noted that cap rate is commonly referred to as evaluation and rate of return of a
commercial property in a particular area. Also there are two other methods.

Second step is the tenant’s obligation.

In addition to the property appraisal, banks consider the common area expense that
should be committed by each individual tenant. The lender then reviews the common area
expense history over the past three years. Older properties therefore, carry a higher
common area expense and consequently drop the amount of loan. The more newly built
properties carry a less common area expense and get approval for higher loan amount.

Third step: verify non-contamination of the designated lands.

Good environmental condition is another factor in applying a commercial property loan.
Therefore, a report should be prepared on the property verifying non-contamination of
the property in question. The report needs to be in two separate phases.

First phase-There are specially licensed environmental companies which examine the
commercial property to verify if it is contaminated or not. The charge is about $1800.

Second phase-There are some properties which have previously been used as hospital,
gas station, or dry cleaning establishment within the past fifty years. In such cases, the
environment specialists should examine the soil of the property. Once the findings reveal
that there are no environmental hazards, you are able to get approval for the loan. The
second phase process may cost approximately $4000 to $5000. While proceeding to
make a purchase of commercial property, you should act very carefully and cautiously
with diligence.

21

Personal Guarantee

Personal guarantee, in commercial loans, means the obligation that each partner takes
against the loan is separate.

Non Recourse

When a loan does not carry a personal guarantee, it is called “non recourse”. While
acting on this type of loan, you will need to pay more down payments exceeding the
banks regular terms and then you are entitled for non-recourse loan.

Pre-payment Penalty

A fine will be imposed, when a loan is paid off, before it comes due. The fine includes
the difference of the interest rate with consideration of the due date. It should be noted
that such fines are substantial, and you need to take this into consideration before
applying for the loan. Sometime ago, one of Los Angeles’ prominent businessman
obtained a $10,000,000 loan based on yield maintenance. If he decided to pay off the loan
before it became due he would have to pay $3,000,000 as penalty.

What is Lock-In in Commercial Real Estate Loan Provision?

When you obtain a commercial loan that has the exceptional provision which does not
give you the right to pay off your loan balance in the first three or five years, this type of
provision can be found in some of commercial real estate loan which is called Lock-in.

Investment Risk

Now let’s take a closer look at purchasing and selling commercial properties.
The first thing in business is investment risk, which is the amount of down payment
considered when purchasing a commercial property. If you want the least risk, you
should avoid putting all of your eggs in one basket. In other words try to lower the level
of your down payment. Paying a minimum down payment demands expertise and
experience.

22

Factors to Consider when Investing in Real Estate

1. Seek and shop newly constructed properties.
2. The more spacious the parking area, the greater opportunity for investment.
3. A single story shopping center is always better than a multi-level shopping center.
4. Look for properties located on the corner of crowded intersections.

Choose those properties occupied by fast food and convenient stores. Such as:

Jack in the Box, Burger King, El Pollo Loco, Subway and Seven
Elevens.

If you have a property that one of these well known tenants occupies, your property is
considered to be a good investment.
If the tenants are paying the common area expenses, the value of the property tends to go
up.

Before Purchasing Commercial Property

Ask the seller to provide you with a three-year profit and loss statement of the subject
property.
1. An inquiry should be made of the tenants. It is better if they are committed to their
obligations.
2. You need to know the vacancy percent during the past three years.
3. Meet each tenant to ensure that they are satisfied with their business. Otherwise your
investment would be at risk.

23

Number of Tenants as a Function of the Type of Building

Commercial properties fall into four categories in terms of the number of the tenants. It
is helpful to evaluate risk-results of adverse changes from the base case.

1. Single tenant occupancy retail centers are more risky a business because when the
tenant leaves, 100% of your property is vacant.
2. A retail center occupancy containing two tenants, presents lesser risk, because when
one tenant vacates, 50% of property remains occupied.
3. Obviously, if you have four tenants and one tenant leaves, you have lost only 25% of
occupancy.
4. Finally if you have ten tenants and one tenant leaves, 90% of the property remains
occupied.

**These figures are under the assumption that each tenant share equal
proportions.

Cap Rate

Simply stated, cap rate is the value and rate of return of commercial property in a certain
area. This means, with a quick look at the average selling prices of properties located in
Beverly Hills and the Santa Monica areas, rank first in terms of highest price. However,
the selling prices of those properties located in Los Angeles suburban areas are lower.
The selling prices of properties located in the San Fernando Valley, are an average of
the two above-mentioned areas. The cap rate should be considered as one of the key
factor that can influence rate of returns and risk elements.
Presently, the Los Angeles area cap rate ranges from 7 to 10 percent. Therefore, the cap
rate calculation demands knowing a precise technique and expertise. We have already
prepared special cap rate formulas for our customers, which will enable quick access to
final prices.

24

Partial Release Clause

If you intend to purchase land for building condominium projects, you should insure that
the Partial Release Clause is included in the loan documents that you will sign. When
you receive this type of loan, you are able to sell each unit separately.

25



CHAPTER THREE

SBA

Loan Procedure
Policy
And

Underwriting
Guidelines

City Capital Realty 310-714-5616

27

The 504 program

The Certified Development Companies (CDC)

Projects involving 504 loans require long-term fixed-asset financing for small business.
A certified development company (CDC) provides the final portion of this financing with
a 504 loan made from the proceeds of a debenture issued by the CDC/SBA and sold to
investors.

Can a 504 Loan be Prepaid? Yes

The borrower may repay the 504 loans if they pay the entire principle balance, any
unpaid fees, and any prepayment premium established in the note. The declining
prepayment is for the first half of the term of the note. Prepayment requires a 45 days
written notice to CDC. However, debentures are assumable.

Project Size

A 504 Project can be obtained up to $10,000,000
CDC / SBA debenture cannot exceed 40% of the project cost or $5,000,000 (including
fees) whichever is lower.

504 Loan Terms

10 years for equipment with minimum life expectancy of 10-years.
20 years for real estate, typically.
The bank provides interim funding until the project is complete. SBA charges half point
on first trust deed loan as participation fee. Banks are allowed to collect this fee from
borrowers.

Split Interest Rates

The lenders may use different or “split” interest rates, fixed or variable, on their first trust
deed portion of the loan.

Assumption Fees

When a loan is assumed by another concern, the CDC may, with SBA’s prior written
approval, charge an assumption fee not to exceed of the outstanding indebtedness.

29

Guidelines to Defining a Single Purpose Building in a 504 Project

Minimum down payment of the borrower’s equity must be at least 10 percent of the total
project costs. In this case a 504 loan could provide no more than 35 percent or
$5.000,000, whichever is lower of the total project costs.

Example How a Typical 504 Loan is structured

First Mortgage (Bank) 50% 50%
35%
504 Net Proceeds (CDC) 40% 15%

Borrower Equity 10%

Total Financing 100%

Purchase of Land and Buildings

A special purpose property is a property that is appropriate for one use or for a limited
use: a building that cannot be converted to another use without large capital investment.
Examples of special-use-properties include:

Theaters, Sports Arenas, Golf Courses, Gasoline Service Stations, Automatic Car
Washes, Historic Properties, Hotels and Motels, etc.

What is The Role of Certified Development Companies?

Community based development companies approved by SBA administer loans made
under the 504 program. CDC market, process, underwrite and service 504 loan (second
trust deed position only). Applicants must apply the loan through a CDC.

What is interim financing?

Interim financing is disbursement of funds to finance eligible costs after SBA approves
the loan but before the debenture is sold.

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Permanent Financing Structure

First Mortgage (Bank) 50%
504 Net Proceeds (CDC) 40%
Borrower Equity 10%
Total Financing 100%

How a Typical 504 Loan is structured

Purchase of Land and Buildings

50%
40%
10%

Advantages of a 504 Loan For the Borrower

§ Lower down payment
§ Fixed interest rate second mortgage loan
§ Long-term financing up to 20 years
§ Collateral usually limited to project assets
§ Low loan to value ratio structure guidelines

*Eligible properties
*51% owner occupied
*Subject to credit approval
*Some restrictions may apply
*Call to verify the availability of loan programs

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How Much Can You Expect From the Bank?

The bank determines the amount, rate, and term of a loan by analyzing the risk involved.
The risk is measured by multiple components. These include:

1. The quality and value of the collateral available to support the loan.
2. The amount of profit and risk determined by the bank.
3. The predicted longevity of the assets as represented by the loan term.

The Three Components of the Lending Decision

1. First, the bank must analyze and approve the equity of the client.
2. Secondly, the bank must assure the client’s ability to repay the loan.
3. Thirdly, the bank must calculated and approve the loan amount.

The Three Determining Factors that affect the Interest Rate of a Loan

1. The bank’s cost of funds
2. The risk assessment of the client, based on credit.
3. The spread that the bank needs to earn as a profit.

What Determines the Bank’s Loan Term

1. The bank’s valuation of the assets.
2. The longevity of the assets.

Bank Financing Analysis

1. Once the bank has determined a financing amount, a debt service is established.
2. Debt service determined by the total monthly principal, interest payment of the
loan, and the term of the financing.

Cash

1. The business must be able to supply the down payment required.
2. Have the funds been expanded?

§ Where will the cash come from?
§ Personal assts
§ Business assets
§ Sale of business assets

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Cash Flow

1. The business must be able to pay the monthly debt service on all debt.
2. Ancillary revenue can increase your credibility.
3. The company must also have enough working capital to finance its growth during

expansion.

Analyzing Cash Flow Coverage

1. A debt coverage ratio of 1/15 means:
-The business must pay $1.15 for every $1.00 debt services.

2. The goal for debt coverage ratio (DCR) is 1.25
- $ 1.15 in cash flow for every $ 1.00 in debt services.

Steps Involved with the SBA 504 Lending Decision
1. Structure “bank only” financing.
2. Determine the amount of the bank loan.
3. Determine the amount of cash equity required.
4. Determine the debt service requirements.

Structure the SBA 504 Financing
Ask the lending questions.

- Does the business have the cash equity?
- Can the business make all of the debt service payment?
- Does the business have the sufficient cash and /or cash flow for

working capital needs?

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7(A) SBA LOAN PROGRAM

7(A) SBA Loan Program

7(A) guaranteed loan is actually a lender approved and funded loan, guaranteed by SBA, and
subject to regulations and policies applicable to all 7(A) loans. Even though commonly called an
SBA loan, it is actually a lender its own money with an SBA guarantee. Minimum equity
injection is usually 10%.

1 – Commercial property must be at least 51% owner-occupied
2 – Term: Up to 25 years, fully amortized
3 – Fee: Standard one time SBA guarantee fee
4 – Recourse: Personal guarantee by all principals
5 – LTV: Maximum 90%
6 – DCR: 1.15 typically
7 – Pre-payment: First year 5% - Second year 3% - Third year 1%
8 – Collateral: On all business and personal assets until loan is secured 100%
9 – Interest Rate: Is based on wall street journal prime rate plus a margin.
10 – Purpose: You can use the SBA 7(a) loan to purchase equipment , machinery, business
acquisitions, working capital and the purchase of commercial land and building.

Maturity

Maturities are based on the shortest feasible term commensurate with the repayment
ability of the borrower. The maximum maturity allowable for any SBA loan must never
exceed twenty - five years. If multiple uses are involved with varying maturities, then use
the weighted average approach to establish maturity. The SBA will not allow rounding
up, as a result, either round down or use actual time.

Use of proceeds Maturity

Purchase money real estate 25 years
Working capital 7 –10 years
Machinery and equipment
Leasehold improvements 10 years
10 years

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The Seven C’s of Commercial Real Estate Lending Business

Lenders are in business to make money. When lenders loan money they expect it will be paid
back on time. Lenders must consider seven C’s.

1 – Capacity to Repay Loan

The lender will consider the cash flow from the business to determine its repayment ability,
payment history, and credit relationship are considered an indicator of future payment
performance.

2 – Capital

The borrower is required to have adequate capital injection. Initial investments are very
important factors when lenders want to get involved in any loan transaction. Different lenders
have different requirements.

3 – Collateral or guarantees are additional forms of security you can provide the lender. If

you can’t repay the loan, the bank wants to know if there is a second source of repayment. Some
lenders may require guarantee in addition to collateral as security for a loan.

4 – Conditions focus on the intended purpose of the loan; will the money be used for working

additional equipment or inventory?

5 – Credit

The lender will evaluate the borrowers previous experience and management expertise to study
the ability to repay and past credit history.

6 – Character

Is the degree to which a borrower feels a moral obligation to pay his loan on time? It will
be measured by their credit and payment history. The quality of your references and
background are very important.

7 – Confidence

A successful borrower instills confidence in the lenders concern. Their loan application,
credit, resume expertise and presenting themselves send the degree of professionalism
with a good reputation, reasonable financial statements, good capitalization and adequate
collateral.

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Business Plan

The following outline of a typical business plan can serve as a guide. You can adapt it to
your specific business. Breaking down the plan into several components helps make
drafting it a more manageable task.

Introduction

1. Give a detailed description of the business and goals.
2. Discuss the ownership of the business and the legal structure.
3. List the skills and experience you bring to the business.
4. Discuss the advantage you and your business have over your competitors.

Marketing

1. Discuss the production /services offered.
2. Identify the customer demand for your product/service.
3. Identify your market, its size and locations.
4. Explain how your product/services will be advertised and marketed.
5. Explain the pricing strategy.

Financial Management

1. Explain your source and the amount of initial equity capital.
2. Develop an expected return on investment and on monthly cash flow for the first

year.
3. Provide projected income statements and a balance sheet for a two-year period.
4. Develop a monthly operating budget for the first year.
5. Discuss your breakeven point.
6. Discuss who will maintain your accounting records.

Operations

1. Explain how the business will be managed on a day-to-day basis.
2. Discuss hiring and personnel procedures.
3. Discuss insurance, lease or rent agreement.
4. Account for the equipment necessary to produce your products or services.
5. Account for production and delivery of products and services.

Concluding statement

Summarize your business goals and objectives and express your commitment
to the success of your business.

Once you have completed your business plan, review it with a friend or
business associate.

When you feel comfortable with the content and structure make an appointment
to review and discuss it with your lender.

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All SBA Loans Have a Personal Guarantee Provision

SBA normally requires the following requirements for all loans: a personal guarantee, holders of
at least a 20% ownership interest generally must guarantee the loan.

Guarantee Considerations

A guarantee may be either secured or unsecured but unsecured guarantees are generally of little
value.

Rentable Property

Rentable Property is the total square footage of all building or facilities used for business
operations. By policy “rentable space” is only “interior space”.

Life Insurance

Life insurance provides lenders with a hedge against the loss of key management personnel,
which adversely impacts repayment. Life insurance should be required when there is concern for
the continuation of the adequate management due to lack of depth and experience.

Principals (Owners)

Must be citizens or registered aliens with a green card verified by the IRS.

Tax Return Requirements –Including Verification

SBA has established a policy that the tax returns of both seller and applicant shall be
verified. The process of conducting this verification is known as the tax verification
process. Its purpose is to verify the accuracy of the financial information.

Rule of Thumb

There is a mathematical relationship between or among a number of financial variables and a
selling price of a business. This rule is based on, rumor, hearsay, experience, observation, or a
combination of all of these for a particular industry or type of business.

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Loan Decision - Approval or Denial

Applicants receive notice of approval or denial by the lender.

Reasons for Decline

1 – Collateral considered along with other factors were not deemed sufficient to protect the
interest of the SBA.
2 – Lack of reasonable assurance that the business can be operated at a rate of profit sufficient to
repay the loan from earnings.
3 – Lack of reasonable assurance of ability to repay loan from earnings.
4 – Inadequate working capital after loan.
5 – Not eligible because of size.
6 – Not eligible because of policy reasons.
7 – Unsatisfactory experience on existing loan.

Collateral

Using residential equity is the lenders way of reminding the borrower of a personal commitment
to repaying the loan.

Loan Documents

Read the loan agreement and all covenants carefully. Understand all the restrictions implied and
consider how they will impact business. Anticipate problems by maintaining the progress of the
lender, attorney, and other professional regularity. Private banks and lenders fund SBA loans.
The SBA provides a credit enhancement to the lender that encourages the acceptance of more
risk.

What SBA Looks for In Approving a Business Loan Request

1 – Good Character
2 – Management Expertise
3 – Sufficient Funds
4 – Feasible Business Plan
5 – Adequate Equity
6 – Sufficient Collateral
7 – Ability to Repay the Loan in a Timely manner

It is a good idea to have a strategy on how to accomplish your goals using fewer dollars.
Learn from lender rejection, it will be a useful lesson when managing future loan
requests. Some lenders will announce their decision and will not be open to further
discussion. Continue to build your proposal with fresh information and new data as it
becomes available. Do not let the failure of the loan proposal discourage the effort to get
a loan.

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“Those with the gold make the rules” - Banker’s Golden Rule

We’ve all heard these words before when dealing with any type of loan program. The
bank has the gold, so they make the rules. But don’t let this scare you, for there are many
methods you can use to help prepare you for the SBA loan process. And, in some cases,
preparedness triumphs over qualification.

Preparing for all Possibilities

A well-prepared applicant may have an easier time receiving a loan approval than an
unprepared more qualified applicant. For example, providing a lender with a strategy, list of
goals, intended financial budget, as well as all of the other pertinent information they will need,
helps lenders act quicker on a loan and with more enthusiasm. Nonetheless, all applicants must
be prepared for denial of funds as well as approval.

Dealing with Denial

Getting denied a loan is inevitable. We have all been denied a loan of some sort at one
time or another. The most important thing is how you respond to the denial, and move on to the
next deal. For instance, immediately following a denial, a lender will give you advice on how to
improve your chances the next time out. Listen, and use this information to help close your next
deal. This also gives you more time to add fresh information and data as it becomes available.
Remember, it’s NOT your fault! The lender is in the business of renting capital, and just like in
real estate, applicants get denied. So be sure to come prepared.

Don’t let your past come back to haunt you.

The SBA loan will also require much personal preparation. In fact, the SBA loan will
require more in-depth personal information than a conventional loan. This information will also
include detailed accounts of business history and IRS verification of tax returns to help establish
eligibility. The most important information that the loan applicant will have to provide is
financial performance history.

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Positive performance history of the applicant helps to assure the lender that their
investment will be safe and secure. Also, the less risk accepted by the lender, the lower the
interest rate will be on the loan. Remember, in a lender’s eyes, the only good loan, is one that’s
paid back.

The reason SBA loans require more in-depth personal information is because of its
distinct benefits, particularly versus the conventional loan. The SBA loan not only has a longer
repayment period than the conventional loan, but also has a more competitive interest rate and
offers financing to specialized industries.

Although SBA loans are a bit more extensive regarding approval qualifications, the
process can run much more smoothly simply by preparing for all circumstances. Have a strategic
financial plan available so that the lender will feel more comfortable with the transaction. The
less risk involved, the more likely a lender will be to approve a loan.

Shawn Rabban 310-714-5616 [email protected]
www.citycapitalrealty.com

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SBA LOAN CHECKLIST
310-714-5616
Borrower:_________________________________________________

Subject property:____________________________________________

q Three year business income tax returns
q Interim business financial statements
q One year cash flow projection
q Business license / or seller’s permit
q Business plan for newly established / Business history
q Aging / debt schedule
q Business bank statements for three months
q Business organization documents
q Articles of Incorporation, corporate by laws
q Limited liability company / membership agreement
q Partnership agreement
q Trust agreement / trust certification
q Fictitious business name filing statement

q Three year personal tax return
q Personal financial statement
q Resumes of all borrowers, and all key management personnel
q Driver’s license and / or permanent alien registration card

q Purchase & Sale agreement
q Escrow instructions and / or certified escrow
q Three year return for seller and interim business financial statement
q Franchise agreement
q Business debt schedule
q Existing appraisal report and / or phase I, II, II report
q Business insurance policy
q Life insurance policy
q Tax verification (form 4506)
q Lease agreement on business premises
q Photos of subject property
q Property tax bill
q Preliminary title report
q Environmental questionnaire

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CHAPTER FOUR

Business Loan

Car Wash
Gas Station
Manufacturer

Franchise Restaurant
Hotel and Motel

310-714-5616

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SBA Loan Program

What kind of lifestyle do you want for yourself and your family? What sort of business
are you planning to start? The first step is tough because you don’t know what the second
step will be. Here are some simple steps anyone can take toward a successful financial
future:

-Investing your money in a stable marketplace could entail a low risk.
-Investing your money in active and profitable businesses would be wise for a
better financial future. To purchase a business, you need cash up front. We will
provide you with our broad range of loan plans and strategies and will also help
you obtain a loan that fits your needs.
-Investing in an active business means, to invest in different brand name
companies: Franchises include, gas stations, convenience and fast food stores.
Here are some of brand name companies:

Shell, Arco, Chevron, Texaco, Mobile. Union 76, Seven-11,
Burger King or Subway.

Advantages of Different Brand Name Companies

1. Popularity recognized
2. The mother company would cover their marketing
3. The banks show more willingness to grant loan.

We can provide you with key factors in purchasing this type of business. Just call us and
benefit from our gracious expertise.

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Guidelines for Obtaining SBA Business Loans

You can benefit by paying a twenty percent down payment on the new business loan. The
bank for the business loan would pay the remaining eighty percent. For Instance, when
you are going to purchase a gas station at $1,000,000, you pay $250,000 and the bank
would cover $750,000 as a business loan.

Prepayment Penalty for 7A SBA Loan

A fine is imposed when a business loan is paid off before it comes due. The fine is five
percent for the first year, three percent for the second year and one percent for the third
year.

Personal Guarantee

When you obtain a loan, you are in fact under an obligation against the loan that is
referred to as a personal guarantee.
For example, in a partnership, if you obtain a loan for $5,000,000, each partner is under
an obligation of the entire outstanding balance. This type of loan is called ‘Jointly and
Severally.’ *Call for availability of loan programs.

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Guidelines for Obtaining SBA Loan Program

10% down payment

Demand for urban office space has grown for decades. With a down payment of ten
percent you will own commercial property selling at up to $ 5,000,000. Commercial
properties include: Industrial, Medical, Warehouses, Office buildings.
For instance, if a commercial building is selling at $5,000,000, you pay $ 500,000 as a
down payment, and the bank will cover the remaining $ 4,500,000.
.

15% down payment

With a down payment of fifteen percent you are entitled to purchase a commercial
building, provided that the property is used for a single purpose, such as a theater,
school, dormitory, hospital, Hotel /Motel, or Historic property.

20% down payment

With a down payment of twenty percent you are entitled to purchase a commercial
building including business.

25% down payment ( for business only )

With a down payment of twenty percent you are entitled to purchase a gas station, car
wash or brand name restaurant, selling for up to $2,000,000.
For instance a gas station selling for $2,000,000, can be purchased with a down payment
of $500,000 and the lender will cover the remaining $1,500,000.
1. This type of loan has a ten-year length.
2. The interest rate is calculated on the basis of the prime rate.
3. In the above example the property (building and loan) is not included.
*Call to verify the availability of loan programs.
Rates and terms are subject to change without notice. Some restrictions may apply.

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Prior to Purchasing a Business Consider the Following Items:

§ Car wash Restaurant Liquor stores
§ Gas station Market Manufacturing

A well thought out operations and management practice has to be determined in advance
for future success. Lack of good management and miscommunication could result in

unsuccessful business and weaken your market share.

Review the following items in order to evaluate the value and future success

1. How much time can you dedicate to everyday operation?

2. How much is the value of existing equipment, machinery, and goodwill?

3. Typically, the selling price of small business is calculated by its gross volume

Or net income plus inventory as a “Rule of Thumb” formula.

4. Parking facilities, accessibility, visibility, customer list, license, patent, copyrights

and location are also important elements of profitable business.

5. Identify your competition. Small companies, franchise, chain operation.

6. What is the possibility of increasing the sales volume?

7. Is working capital sufficient to ensure a successful venture?

8. What is the seller’s motivation for selling?

Retirement Health problem

Insufficient profits Burnout

Family problem Under capitalization

9. How many times has the subject business changed hands in the past five years?

10. How much is the profit margin? Is it below or above standard?

11. In order to recoup your initial capital investment and insure your steady income, it

is suggested to have a minimum ten-year lease, with a five-year option, if your

business is location driven.

12. Typically rent should not be more than 11% of the gross sales.

Average Rent as a Percentage of Gross Sales

Manufacturing 5.5% Wholesale 5.0%

Convenience store 5.5% Gas station 5.0%

Restaurant 7.0% Auto repair 8.0%

Retail 9.0% Office 10.00%

Food service 10.00% Day care center 11.00%

Restaurant/cocktails 11.50% Tune-up 12.00%

Sometimes real estate appraisers forget that every business has a ceiling on how much
rent can be paid. Every business has a maximum amount that they can afford to pay for

overhead expenses.

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Escrow Period

Letter of Interest

We can issue a Letter of interest upon receiving your complete personal
and business information, and also will conduct a credit check in order
to underwrite your loan request.

Please pay attention to the following items when you open escrow

1. Always pay the good faith deposit directly to escrow.

2. Never release any portion of down payment before close of escrow
.
3. Ask your attorney to review the escrow instructions and the lease agreement.

4. Observation period is the most crucial time for purchasing a business

5. Keep track of all transaction activities; be present from opening to closing.

6. Check utility bills such as:(gas, electricity and water statement).

7. Check with local government authorities: building and safety and health dept.

8. Make sure the seller trains you for at least 30 days before closing.

9. Always ask the seller to carry back part of the purchase price.

10. Use the special clause that states that the seller will not compete in the same line
of business, after the close of escrow, within 15 miles of the subject for next 10
years.

11. Make sure you have the list of machinery and equipment, including the serial
numbers and purchase invoices, warranties and service agreements.

12. What is goodwill? Both the buyer and seller can have tax problems if the
goodwill is not analyzed. Preferably, this will occur before the sale transaction is
consummated.

13. File fictitious names; apply for a business license and open a bank account.

14. Be sure to request an insurance quote for business & liability insurance,
workman’s compensation, and automobile insurance.

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CHAPTER FIVE

Environmental Report
Phase I
Phase II
Phase III

Site Assessments

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Why perform a Phase I?

The purpose of Phase I is to evaluate the potential for environmental concerns or
liabilities due to past and/or current land use at the subject site or nearby properties.
Most often these evaluations are performed to protect property owners, operators,
managers, engineers, architects, real estate brokers, lenders, etc., from poor investigation
due to environmental hazards, and to fulfill one of their requirements to qualify for the
“innocent landowner defense”, provided by the comprehensive Environmental Response.
A Phase I can be used as innocent landlord defense to receive Superfund for
contamination cleanup on your property.

The Historical Use Research Includes:
§ Historical USGS Topographical Maps
§ Government Database Records Search
§ Historical Building / Planning Records Search
§ Hazardous Material Records Search
§ Historical City Directory
§ Historical Oil and Gas Maps
§ Historical Aerial Photos
§ Sanborn Fire Insurance Maps
§ Environmental Questionnaire

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