Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Sixty to Eighty Percent of the Game

It is crucial to understand real estate financing for a very compelling reason: Often 60 to 80 percent of a transaction is debt. I have seen projects achieve great success through a well-thought-out financing structure, and I have witnessed disastrous results when an owner or buyer does not structure the financing so that it is in tune with his financial goals.

For example, if you intend to sell a $20 million office building in the near future, it might be a mistake to originate a $10 million long-term first mortgage. If the new debt prohibits secondary financing, which is usually the case, your buyer will have to come up with $10 million to acquire the asset. If, on other hand, the seller allows the buyer to place his own financing on the property at acquisition, the buyer can seek a 75 percent loan-to-value (LTV) mortgage, a $15 million first-trust deed. The result is that the buyer's up-front equity commitment has been cut in half, from $10 million to $5 million. This factor could have a dramatic effect on the number of available buyers. Additionally, depending on the debt cost, the amount of financing encumbering the property might significantly affect the return on equity and therefore, again, affect the number of interested buyers.

The above example must be tempered with the knowledge that the financial crisis of 2008 to the present has resulted in lenders taking a conservative debt posture, so that as I write this, the standard LTV is ...