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[Music] welcome back and there's three part 5-minute fundamentals video miniseries we're going to talk about how to prequalify a commercial income producing deal in 90 seconds or less when you get more acclimated to this business it's going to be critical for you to leverage our systems to pour through your deal flow separating the real deals from the overhyped duds here I demystify the myth that too much information is good remove all confusion and show you what you really need to prequalify any deal are these five data points so get your deal book out and start taking notes and discover how easy it is to really weed through your deal flow let's get started alright welcome let's get right into it these are the five data points that I use to qualify any income producing deal that comes on our desk when you become a deal junkie and you start aggregating a lot of deal flow so you're going to need a system to really make sure that you separate the wheat from the ship here we go with it this is the most important part I have here what we call the affection what we affectionately call the five data points these five data points are for any income producing deal income producing deals are as follows we call them the four food groups one retail to multi-family three office of four warehouse or industrial so let's get started current Noy current Noi is the most important number when you're pre-qualifying a deal whether you're funding or whether you're buying whether you're borrowing money you need to know exactly what the current noi is because that tells you how the asset is working today how much cash is it throwing off today a lot of lenders will only base how much they will fund you based off of the current Noy as we've said before the reason why this is important because it tells you how it is producing today how are you gonna find this you're gonna have to it's not going to be easy to find in this 200 page investment memorandum so the broker gives to you you're gonna have to ask for it it's not usually found on the financial statement although sometimes it is if you know how to read them the financial statement is usually seen as being the soul of the asset so you'd have to look for it kind of deeply but it's in there I usually just asked a person who's representing the deal what's the current oh I give me an exact number nothing you know such as Oz and nuns will also Tice why do we like this it's not a made-up number it's not something that a sales professional can artificially make up it's always expressed as an annual figure so you'll see a say it's throwing off one hundred and sixty thousand dollars as a current Noi that's great second what we look for is the pro forma Noi this is important here why do we care about this well first of all it's called the target Noi and what we're looking over here it's a number that you're always going to find it's always going to be on the front of loopnet it's always something that a sales professional or a broker is going to use because they're trying to make sure that you're seeing the future value of it not the value of what it is today a lot of people during the last credit boom got into a lot of trouble because they were based off of the target Noi they were based off of the pro forma Noi and that's trouble because now you're betting on something to come you're speculating at that point why is it something that we need to know well gives us an idea if it's a value added real-estate deal if it's a fixer-upper a rehabber buying this it tells us exactly words than where they're trying to go it's usually made up and usually what happens is is that investment professionals and brokers will show that there's a pro forma over ten years and what they do is quite frankly as they take the current or what they think it should be today and its best in highest use and then they put it into an Excel spreadsheet and multiplied by ten over a ten percent increase over the next five or ten years to give a pro forma that's really BS if you think about it because you can't increase rents ten percent per year and this is always expressed as an annual figure too as well and that's important to understand here number three existing debt current equity what's going on we call this the current capital stack what's going on with this sometimes you'll see in problematic commercial real estate deals that the existing debt is stressed it's coming due or maybe the property will be over leveraged here this is expressed by what we talked about is the number of loans we have a first lien on here and it also gives us the U P b2 as well we also find this on the financial statements if you're dealing with an individual seller you're going to have to ask them that the reason why we want to know this is because it'll tell us if the asset is over leveraged or not and that's important and it's expressed as first trust deed mez it's usually listed out in the spreadsheet and will tell us that there's a first trust deed on here and there's a meds and then there's some equity for three million the mez is two million the first trust deed is five million and it also tell us the terms two as well the terms on this is important because it tells us that the loans are coming due sometimes in commercial real estate and most of them special loans called conduit loans you can assume you can assume those loans and so if you're looking to buy this for your own account that's very important to know if these first trust deeds have a fuse on them or not forth sources and uses this is important this is the IQ test for your borrower or for your investor why is this important it's going to tell you how the funds will be used and where those funds are coming from I don't want to see you know funds you know sources but funds is coming from the investor and then the uses is to buy an apartment complex it should be kind of detailed to the level of granularity where you can actually see well here's the acquisition here the repairs here the taxes here's the you know closing cost and everything associated with it usually these are put together in an Excel spreadsheet what we call sources and use of statement and that's something you can google and find online quite easily but this is something where you would find from a very intelligent think very experienced operator or sponsor they'll be able to give this to you why this is important is detailed in itemized we want to know where every dollar is going in commercial real estate Value Added deals are important and sometimes you can run into expense overages if your borrower does not know what they're doing because sample anybody who moves into an apartment complex expects to have light bulbs and toilet seats those aren't really true value-added type of rehab deals or value-added repairs that add a lot of value to the real estate instead people are looking for things such as you know two-and-a-half whirlpool tub in the bathroom and maybe a brand new parking lot freshly paved maybe also a part-time concierge too as well to handle some of the groceries and packages that come in on a day to day basis so that's very important here and this is always expressed in Excel spreadsheet again I'm going through a lot of this very quickly I just want to make sure you understand the basics of this last but not least number five the exit strategy when you're looking at a deal how are we going to be taken out that's the most important part the most important part about this is that if you're partnering a deal and you're using bridge loan or short-term equity or short-term debt you want to know how you're going to be cashed out and that's the most important part that's why I mean that's why we're in this business after all correct this is clearly detailed on the executive summary there's only two exits in commercial real estate that's a cash out refinance or that is a sale so we have to figure out okay what are we buying this asset for how we're gonna get cashed out what's the key event that needs to happen for us to be able to get out of this deal and get our money back why do we need to know this well it's going to tell us if it's viable or not some deals by their nature are just not really bankable if you look at some some of these stranger deals as it relates to perhaps development deals things outside of the four food groups they're not really bankable they're sellable but you're not going to be able to get a cash out refinance from a life company for example or a portfolio lender and then this is usually expressed as a narrative Phil just explained this is our this is our plan a this is our plan B we have great relationships with local brokers we've seen a lot of these assets move very quickly in the past especially in the current market this is why we feel as though this is a good asset and this is why we think our exit strategy is very meaningful to us so that explains to you hopefully in five minutes exactly how to qualify any deal in 90 seconds or less using our formula of the five data point I look forward any questions you have I look forward to talking to you and working with you guys in the future thank you very much for watching this