For nearly 30 years, I have represented borrowers and lenders in commercial real estate transactions. During this time it has become apparent that many Buyers do not have a clear understanding of what is required to document a commercial real estate loan. Unless the basics are understood, the likelihood of success in closing a commercial real estate transaction is greatly reduced.

Throughout the process of negotiating the sale contract, all parties must keep their eye on what the Buyer’s lender will reasonably require as a condition to financing the purchase. This may not be what the parties want to focus on, but if this aspect of the transaction is ignored, the deal may not close at all.

Sellers and their agents often express the attitude that the Buyer’s financing is the Buyer’s problem, not theirs. Perhaps, but facilitating Buyer’s financing should certainly be of interest to Sellers. How many sale transactions will close if the Buyer cannot get financing?

This is not to suggest that Sellers should intrude upon the relationship between the Buyer and its lender, or become actively involved in obtaining Buyer’s financing. It does mean, however, that the Seller should understand what information concerning the property the Buyer will need to produce to its lender to obtain financing, and that Seller should be prepared to fully cooperate with the Buyer in all reasonable respects to produce that information.

Basic Lending Criteria

Lenders actively involved in making loans secured by commercial real estate typically have the same or similar documentation requirements. Unless these requirements can be satisfied, the loan will not be funded. If the loan is not funded, the sale transaction will not likely close.

For Lenders, the object, always, is to establish two basic lending criteria:

1. The ability of the borrower to repay the loan ; and

2. The ability of the lender to recover the full amount of the loan, including outstanding principal, accrued and unpaid interest, and all reasonable costs of collection, in the event the borrower fails to repay the loan.

In nearly every loan of every type, these two lending criteria form the basis of the lender’s willingness to make the loan. Virtually all documentation in the loan closing process points to satisfying these two criteria. There are other legal requirements and regulations requiring lender compliance, but these two basic lending criteria represent, for the lender, what the loan closing process seeks to establish. They are also a primary focus of bank regulators, such as the FDIC, in verifying that the lender is following safe and sound lending practices.

Few lenders engaged in commercial real estate lending are interested in making loans without collateral sufficient to assure repayment of the entire loan, including outstanding principal, accrued and unpaid interest, and all reasonable costs of collection, even where the borrower’s independent ability to repay is substantial. As we have seen time and again, changes in economic conditions, whether occurring from ordinary economic cycles, changes in technology, natural disasters, divorce, death, and even terrorist attack or war, can change the “ability” of a borrower to pay. Prudent lending practices require adequate security for any loan of substance.

Documenting The Loan

There is no magic to documenting a commercial real estate loan. There are issues to resolve and documents to draft, but all can be managed efficiently and effectively if all parties to the transaction recognize the legitimate needs of the lender and plan the transaction and the contract requirements with a view toward satisfying those needs within the framework of the sale transaction.

While the credit decision to issue a loan commitment focuses primarily on the ability of the borrower to repay the loan; the loan closing process focuses primarily on verification and documentation of the second stated criteria: confirmation that the collateral is sufficient to assure repayment of the loan, including all principal, accrued and unpaid interest, late fees, attorneys fees and other costs of collection, in the event the borrower fails to voluntarily repay the loan.

With this in mind, most commercial real estate lenders approach commercial real estate closings by viewing themselves as potential “back-up buyers”. They are always testing their collateral position against the possibility that the Buyer/Borrower will default, with the lender being forced to foreclose and become the owner of the property. Their documentation requirements are designed to place the lender, after foreclosure, in as good a position as they would require at closing if they were a sophisticated direct buyer of the property; with the expectation that the lender may need to sell the property to a future sophisticated buyer to recover repayment of their loan.

Top 10 Lender Deliveries

In documenting a commercial real estate loan, the parties must recognize that virtually all commercial real estate lenders will require, among other things, delivery of the following “property documents”:

1. Operating Statements for the past 3 years reflecting income and expenses of operations, including cost and timing of scheduled capital improvements;

2. Certified copies of all Leases;

3. A Certified Rent Roll as of the date of the Purchase Contract, and again as of a date within 2 or 3 days prior to closing;

4. Estoppel Certificates signed by each tenant (or, typically, tenants representing 90% of the leased GLA in the project) dated within 15 days prior to closing;

5. Subordination, Non-Disturbance and Attornment (”SNDA”) Agreements signed by each tenant;

6. An ALTA lender’s title insurance policy with required endorsements, including, among others, an ALTA 3.1 Zoning Endorsement (modified to include parking), ALTA Endorsement No. 4 (Contiguity Endorsement insuring the mortgaged property constitutes a single parcel with no gaps or gores), and an Access Endorsement (insuring that the mortgaged property has access to public streets and ways for vehicular and pedestrian traffic);

7. Copies of all documents of record which are to remain as encumbrances following closing, including all easements, restrictions, party wall agreements and other similar items;

8. A current Plat of Survey prepared in accordance with 2005 Minimum Standard Detail for ALTA/ACSM Land Title Surveys, certified to the lender, Buyer and the title insurer, including items 1 through 4, 6, 7(a), 7(b)(1), 8 through 11(a) and 14 from the Surveyor’s “Optional Survey Responsibilities and Specifications” referred to as “Table A”;

9. A satisfactory Environmental Site Evaluation Report (Phase I Audit) and, if appropriate under the circumstances, a Phase 2 Audit, to demonstrate the property is not burdened with any recognized environmental defect; and

10. A Site Improvements Inspection Report to evaluate the structural integrity of improvements.

To be sure, there will be other requirements and deliveries the Buyer will be expected to satisfy as a condition to obtaining funding of the purchase money loan, but the items listed above are virtually universal. If the parties do not draft the purchase contract to accommodate timely delivery of these items to lender, the chances of closing the transaction are greatly reduced.

Planning for Closing Costs

The closing process for commercial real estate transactions can be expensive. In addition to drafting the Purchase Contract to accommodate the documentary requirements of the Buyer’s lender, the Buyer and his advisors need to consider and adequately plan for the high cost of bringing a commercial real estate transaction from contract to closing.

If competent Buyer’s counsel and competent lender’s counsel work together, each understanding what is required to be done to get the transaction closed, the cost of closing can be kept to a minimum, though it will undoubtedly remain substantial. It is not unusual for closing costs for a commercial real estate transaction with even typical closing issues to run thousands of dollars. Buyers must understand this and be prepared to accept it as a cost of doing business.

Sophisticated Buyers understand the costs involved in documenting and closing a commercial real estate transaction and factor them into the overall cost of the transaction, just as they do costs such as the agreed upon purchase price, real estate brokerage commissions, loan brokerage fees, loan commitment fees and the like.

Closing costs can constitute significant transaction expenses and must be factored into the Buyer’s business decision-making process in determining whether to proceed with a commercial real estate transaction. They are inescapable expenditures that add to Buyer’s cost of acquiring commercial real estate. They must be taken into account to determine the “true purchase price” to be paid by the Buyer to acquire any given project and to accurately calculate the anticipated yield on investment.

Some closing costs may be shifted to the Seller through custom or effective contract negotiation, but many will unavoidably fall on the Buyer. These can easily total tens of thousands of dollars in an even moderately sized commercial real estate transaction in the $1,000,000 to $5,000,000 price range.

Costs often overlooked, but ever present, include title insurance with required lender endorsements, an ALTA Survey, environmental audit(s), a Site Improvements Inspection Report and, somewhat surprisingly, Buyers attorney’s fees.

For reasons that escape me, inexperienced Buyers of commercial real estate, and even some experienced Buyers, nearly always underestimate attorneys fees required in any given transaction. This is not because they are unpredictable, since the combined fees a Buyer must pay to its own attorney and to the Lender’s attorney typically aggregate around 1% of the Purchase Price . Perhaps it stems from wishful thinking associated with the customarily low attorneys fees charged by attorneys handling residential real estate closings. In reality, the level of sophistication and the amount of specialized work required to fully investigate and document a transaction for a Buyer of commercial real estate makes comparisons with residential real estate transactions inappropriate. Sophisticated commercial real estate investors understand this. Less sophisticated commercial real estate buyers must learn how to properly budget this cost.

Conclusion

Concluding negotiations for the sale/purchase of a substantial commercial real estate project is a thrilling experience but, until the transaction closes, it is only ink on paper. To get to closing, the contract must anticipate the documentation the Buyer will be required to deliver to its lender to obtain purchase money financing. The Buyer must also be aware of the substantial costs to be incurred in preparing for closing so that Buyer may reasonably plan its cash requirements for closing. With a clear understanding of what is required, and advanced planning to satisfy those requirements, the likelihood of successfully closing will be greatly enhanced.

R. Kymn Harp represents investors and developers of commercial and industrial real estate, primarily in Illinois and Indiana. He has been practicing law for nearly 30 years and is currently a partner in the Chicago, Illinois office of Arnstein & Lehr LLP, one of the oldest law firms in the Midwest. Mr. Harp is a frequent speaker at educational forums involving the development, financing, and sale of commercial real estate, and has written and published numerous articles on a wide range of real estate topics. He also frequently writes for the Illinois Institute of Continuing Legal Education. R. Kymn Harp can be contacted at Arnstein & Lehr LLP, 120 S. Riverside Plaza, Suite 1200, Chicago, IL 60606 Dir. Ph. 312-876-6907; email: rkharp@arnstein.com For more information go to http://www.realestate-law.com

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Planning to purchase or finance Commercial or Industrial Real Estate? Shopping Center? Office Building? Restaurant/Banquet property? Parking Lot? Storefront? Gas Station? Manufacturing facility? Warehouse? Logistics Terminal? Medical Building? Nursing Home? Hotel/Motel? Pharmacy? Bank facility? Sports and Entertainment Arena? Other?

A KEY to investing in commercial real estate is performing an adequate Due Diligence Investigation to assure you know all material facts to make a wise investment decision and to calculate your expected investment yield.

The following checklists are designed to help you conduct a focused and meaningful Due Diligence Investigation.

Basic Due Diligence Concepts:

Commercial Real Estate transactions are NOT similar to large home purchases.

Caveat Emptor: Let the Buyer beware.

Consumer protection laws applicable to home purchases seldom apply to commercial real estate transactions. The rule that a Buyer must examine, judge, and test for himself, applies to the purchase of commercial real estate.

Due Diligence: “Such a measure of prudence, activity, or assiduity, as is proper to be expected from, and ordinarily exercised by, a reasonable and prudent [person] under the particular circumstances; not measured by any absolute standard, but depending upon the relative facts of the special case.” Black’s Law Dictionary; West Publishing Company.

Contractual representations and warranties are NOT a substitute for Due Diligence.

Breach of representations and warranties = Litigation, time and money.

WHAT DILIGENCE IS DUE?

The scope, intensity and focus of any due diligence investigation of commercial or industrial real estate depends upon the objectives of the party for whom the investigation is conducted. These objectives may vary depending upon whether the investigation is conducted for the benefit of (i) a Strategic Buyer (or long-term lessee); (ii) a Financial Buyer; (iii) a Developer; or (iv) a Lender.

If you are a Seller, understand that to close the transaction your Buyer (and its Lender) must address all issues material to its objective - some of which require information only you, as Owner, can adequately provide.

GENERAL OBJECTIVES:

(i) A “Strategic Buyer” (or long-term lessee) is acquiring the property for its own use and must verify that the property is suitable for that intended use.

(ii) A “Financial Buyer” is acquiring the property for the expected return on investment generated by the property’s income stream, and must determine the amount, velocity and durability of the revenue stream. A sophisticated Financial Buyer will likely calculate its yield based upon discounted cash-flows rather than the must less precise capitalization rate (”cap rate”), and will need adequate financial information to do so.

(iii) A “Developer” is seeking to add value by changing the character or use of the property - usually with a short-term to intermediate-term exit strategy to dispose of the property; although, a Developer might plan to hold the property long term as Financial Buyer after development or redevelopment. The Developer must focus on whether the planned change is character or use can be accomplished in a cost-effective manner. A developer conducting due diligence will focus on issues involving market demand, access, use and finances.

(iv) A “Lender” is seeking to establish two basic lending criteria:

1. “Ability to Repay” - The ability of the property to generate sufficient revenue to repay the loan on a timely basis; and

2. “Sufficiency of Collateral” - The objective disposal value of the collateral in the event of a loan default, to assure adequate funds to repay the loan, carrying costs and costs of collection in the event forced collection becomes necessary.

The amount of diligent inquiry due to be expended (i.e. “Due Diligence”) to investigate any particular commercial or industrial real estate project is the amount of inquiry required to answer each of the following questions to the extent relevant to the objectives of the party conducting the investigation:

I. THE PROPERTY:

1. Exactly what PROPERTY does Purchaser believe it is acquiring?
(a) Land?
(b) Building?
(c) Fixtures?
(d) Other Improvements?
(e) Other Rights?
(f) The entire fee title interest including all air rights and subterranean rights?
(g) All development rights?

2. What is Purchaser’s planned use of the Property?

3. Does the physical condition of the Property permit use as planned?
(a) Commercially adequate access to public streets and ways?
(b) Sufficient parking?
(c) Structural condition of improvements?
(d) Environmental contamination?

(i) Innocent Purchaser defense vs. exemption from liability

(ii) All Appropriate Inquiry

4. Is there any legal restriction to Purchaser’s use of the Property as planned?
(a) Zoning?
(b) Private land use controls?
(c) Americans with Disabilities Act?
(d) Availability of licenses?

(i) Liquor license?

(ii) Entertainment license?

(iii) Outdoor dining license?

(iv) Drive through windows permitted?
(e) Other impediments?

5. How much does Purchaser expect to pay for the property?

6. Is there any condition on or within the Property that is likely to increase Purchaser’s effective cost to acquire or use the Property?
(a) Property owner’s assessments?
(b) Real estate tax in line with value?
(c) Special Assessment?
(d) Required user fees for necessary amenities?

(i) Drainage?

(ii) Access?

(iii) Parking?

(iv) Other?

7. Any encroachments onto the Property, or from the Property onto other lands?

8. Are there any encumbrances on the Property that will not be cleared at Closing?
(a) Easements?
(b) Covenants Running with the Land?
(c) Liens or other financial servitudes?
(d) Leases?

9. Leases?
(a) Security Deposits?
(b) Options to Extend Term?
(c) Options to Purchase?
(d) Rights of First Refusal?
(e) Rights of First Offer?
(f) Maintenance Obligations?
(g) Duty on Landlord to provide utilities?
(h) Real estate tax or CAM escrows?
(i) Delinquent rent?
(j) Pre-Paid rent?
(k) Tenant mix/use controls?
(l) Tenant exclusives?
(m) Tenant parking requirements?
(n) Automatic subordination of Lease to future mortgages?
(o) Other material Lease terms?

10. New Construction?
(a) Availability of construction permits?
(b) Utilities?
(c) NPDES (National Pollutant Discharge Elimination System) Permit?

(i) Phase 2 effective March 2003 – Permit required if earth is disturbed on one acre or more of land.

(ii) If applicable, Storm Water Pollution Prevention Plan (SWPPP) is required.

II. THE SELLER:

1. Who is the Seller?
(a) Individual?
(b) Trust?
(c) Partnership?
(d) Corporation?
(e) Limited Liability Company?
(f) Other legally existing entity?

2. If other than natural person, does Seller validly exist and is Seller in good standing?

3. Does the Seller own the Property?

4. Does Seller have authority to convey the Property?
(a) Board of Director Approvals?
(b) Shareholder or Member approval?
(c) Other consents?
(d) If foreign individual or entity, are any special requirements applicable?

(i) Qualification to do business in jurisdiction of Property?

(ii) Federal Tax Withholding?

(iii) US Patriot Act compliance?

5. Who has authority to bind Seller?

6. Are sale proceeds sufficient to pay off all liens?

III. THE PURCHASER:

1. Who is the Purchaser?

2. What is the Purchaser/Grantee’s exact legal name?

3. If Purchaser/Grantee is an entity, has it been validly created and is it in good standing?
(a) Articles or Incorporation - Articles of Organization
(b) Certificate of Good Standing

4. Is Purchaser/Grantee authorized to own and operate the Property and, if applicable, finance acquisition of the Property?
(a) Board of Director Approvals?
(b) Shareholder or Member approval?
(c) If foreign individual or entity, are any special requirements applicable?

(i) Qualification to do business in jurisdiction of the Property?

(ii) US Patriot Act compliance?

(iii) Bank Secrecy Act/Anti-Money Laundering compliance?

5. Who is authorized to bind the Purchaser/Grantee?

IV. PURCHASER FINANCING:

A. BUSINESS TERMS OF THE LOAN:

What loan terms have the Purchaser, as Borrower, and its Lender agreed to?

(a) What is the amount of the loan?

(b) What is the interest rate?

(c) What are the repayment terms?

(d) What is the collateral?

(i) Commercial real estate only?

(ii) Real estate and personal property together?

(e) First lien? A junior lien?

(f) Is it a single advance loan?

(g) A multiple advance loan?

(h) A construction loan?

(i) If it is a multiple advance loan, can the principal be re-borrowed once repaid prior to maturity of the loan; making it, in effect, a revolving line of credit?

(j) Are there reserve requirements?

(i) Interest reserves?

(ii) Repair reserves?

(iii) Real estate tax reserves?

(iv) Insurance reserves?

(v) Environmental remediation reserves?

(vi) Other reserves?

(k) Are there requirements for Borrower to open business operating accounts with the Lender? If so, is the Borrower obligated to maintain minimum compensating balances?

(l) Is the Borrower required to pledge business accounts as additional collateral?

(m) Are there early repayment fees or yield maintenance requirements (each sometimes referred to as “pre-payment penalties”)?

(n) Are there repayment blackout periods during which Borrower is not permitted to repay the loan?

(o) Is there a Loan Commitment fee or “good faith deposit” due upon Borrower’s acceptance of the Loan Commitment?

(p) Is there a loan funding fee or loan brokerage fee or other loan fee due Lender or a loan broker at closing?

(q) What are the Borrower’s expense reimbursement obligations to Lender? When are they due? What is the Borrower’s obligation to pay Lender’s expenses if the loan does not close?

B. DOCUMENTING THE COMMERCIAL REAL ESTATE LOAN

Does Purchaser have all information necessary to comply with the Lender’s loan closing requirements?

Not all loan documentation requirements may be known at the outset of a transaction, although most commercial real estate loan documentation requirements are fairly typical. Some required information can be obtained only from the Seller. Production of that information to Purchaser for delivery to its lender must be required in the purchase contract.

As guidance to what a commercial real estate lender may require, the following sets forth a typical Closing Checklist for a loan secured by commercial real estate.

Commercial Real Estate Loan Closing Checklist

1. Promissory Note

2. Personal Guaranties (which may be full, partial, secured, unsecured, payment guaranties, collection guaranties or a variety of other types of guarantees as may be required by Lender).

3. Loan Agreement (often incorporated into the Promissory Note and/or Mortgage in lieu of being a separate document)

4. Mortgage [sometimes expanded to be a Mortgage, Security Agreement and Fixture Filing]

5. Assignment of Rents and Leases

6. Security Agreement

7. Financing Statement (sometimes referred to as a “UCC-1”, or “Initial Filing”)

8. Evidence of Borrower’s Existence In Good Standing; including

(a) Certified copy of organizational documents of borrowing entity (including Articles of Incorporation, if Borrower is a corporation; Articles of Organization and written Operating Agreement, if Borrower is a limited liability company; Certified copy of trust agreement with all amendments, if Borrower is a land trust or other trust; etc.)

(b) Certificate of Good Standing (if a corporation or LLC) or Certificate of Existence (if a limited partnership) or Certificate of Qualification to Transact Business (if Borrower is an entity doing business in a State other than its State of formation)

9. Evidence of Borrower’s Authority to Borrow; including

(a) a Borrower’s Certificate;

(b) Certified Resolutions

(c) Incumbency Certificate

10. Satisfactory Commitment for Title Insurance (which will typically require, for analysis by the Lender, copies of all documents of record appearing on Schedule B of the title commitment which are to remain after closing), with required commercial title insurance endorsements, often including:

(a) Affirmative Creditors Rights Endorsement (extending coverage over policy exclusion 7 and policy exclusions 3(a) and 3(d) as they relate to creditor’s rights matters)

(b) ALTA 3.1 Zoning Endorsement modified to include parking

(c) ALTA Comprehensive Endorsement 1

(d) Location Endorsement (street address)

(e) Access Endorsement (vehicular access to public streets and ways)

(f) Contiguity Endorsement (the insured land comprises a single parcel with no gaps or gores)

(g) PIN Endorsement (insuring that the identified real estate tax permanent index numbers are the only applicable PIN numbers affecting the collateral and that they relate solely to the real property comprising the collateral)

(h) Usury Endorsement (insuring that the loan does not violate any prohibitions against excessive interest charges)

(i) other title insurance endorsements applicable to protect the intended use and value of the collateral, as may be determined upon review of the Commitment for Title Insurance and Survey or arising from the existence of special issues pertaining to the transaction or the Borrower.

11. Current ALTA Survey (3 sets), [typically prepared in accordance with 2005 Minimum Standard Detail for ALTA/ACSM Land Title Surveys, certified to the lender, Buyer and the title insurer, including items 1 through 4, 6, 7(a), 7(b)(1), 8 through 11(a) and 14 from the Surveyor's "Optional Survey Responsibilities and Specifications" referred to as "Table A"].

12. Current Rent Roll

13. Certified copy of all Leases (3 sets)

14. Lessee Estoppel Certificates

15. Lessee Subordination, Non-Disturbance and Attornment Agreements [sometimes referred to simply as "SNDAs"].

16. UCC, Judgment, Pending Litigation, Bankruptcy and Tax Lien Search Report

17. Appraisal (must comply with Title XI of FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended)

18. Environmental Site Assessment Report (sometimes referred to as Environmental Phase I and/or Phase 2 Audit Reports)

19. Environmental Indemnity Agreement (signed by Borrower and guarantors)

20. Site Improvements Inspection Report

21. Evidence of Hazard Insurance naming Lender as the Mortgagee/Lender Loss Payee; and Liability Insurance naming Lender as an “additional insured” (sometimes listed as simply “Acord 27 and Acord 25, respectively)

22. Legal Opinion of Borrower’s Attorney

23. Credit Underwriting documents, such as signed tax returns, property operating statements, etc. as may be specified by Lender

24. Compliance Agreement (sometimes also called an Errors and Omissions Agreement), whereby the Borrower agrees to correct, after closing, errors or omissions in loan documentation.

It is useful to become familiar with the Lender’s loan documentation requirements as early in the transaction as practical. The requirements will likely be set forth with some detail in the lender’s Loan Commitment – which is typically much more detailed than most loan commitments issued in residential transactions.

Conducting the Due Diligence Investigation in a commercial real estate transaction can be time consuming and expensive in all events.

If the loan requirements cannot be satisfied, it is better to make that determination during the contractual “due diligence period” – which typically provides for a so-called “free out” – rather than at a later date when the earnest money may be at risk of forfeiture or when other liability for failure to close may attach.

CONCLUSION

Conducting an effective due diligence investigation in a commercial real estate transaction to discover all material facts and conditions affecting the Property and the transaction is of critical importance.

Unlike owner occupied residential real estate, when a house can nearly always be occupied as the purchaser’s home, commercial real estate acquired for business use or for investment is impacted by numerous factors that may affect its use and value.

The existence of these factors and their affect on a Purchaser’s ability to use the Property for its intended use and on the Purchaser’s projected investment yield can only be discovered through diligent investigation and attention to detail.

The circumstances of each transaction will determine what degree of diligence is required. The level of diligence required under the circumstances is the diligence that is due.

Exercise Due Diligence.

R. Kymn Harp represents investors and developers of commercial and industrial real estate, primarily in Illinois and Indiana. He has been practicing law for nearly 30 years and is currently a partner in the Chicago, Illinois office of Arnstein & Lehr LLP, one of the oldest law firms in the Midwest. Mr. Harp is a frequent speaker at educational forums involving the development, financing, and sale of commercial real estate, and has written and published numerous articles on a wide range of real estate topics. He also frequently writes for the Illinois Institute of Continuing Legal Education. R. Kymn Harp can be contacted at Arnstein & Lehr LLP, 120 S. Riverside Plaza, Suite 1200, Chicago, IL 60606 Dir. Ph. 312-876-6907; email: rkharp@arnstein.com For more information go to http://www.realestate-law.com

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Commercial second mortgages have historically been a very rare financing tool reserved for extremely strong borrowers, divided into two general segments.

1. Owner occupant property owners with outstanding business finances.
2. Large sophisticated commercial real estate developments with minimum loan amounts beginning at $5 million. Typical project size would be $15 million plus.

Both of these types of loans have been out of reach for the vast majority of commercial real estate investors and users. Owners have had no reliable or efficient way of accessing their equity without refinancing their current first position loan or taking on the “dreaded” equity partner.

A few national lenders have recently started offering fixed rate commercial second loans; much to the industries surprise. This loan structure can dramatically change the illiquidity that so many property owners complain about.

The terms of the loan program include fixed periods ranging from 5 -10 years with amortization schedules between 25 -30 years. Loan amounts are small ranging from $50,000 -$500,000 with max Combined Loan to Value of 70 - 75%, among other details. Rates are strong for borrower with excellent credit, yet increase steeply for borrowers with good to decent credit scores. As of this writing, the lowest rate would be 8.15% for a borrower with 720 + credit and a loan amount between $400,000 - $500,000.

It is interesting to witness what our clients use the Commercial Second Mortgage for. Among the more creative scenarios include:

Use Commercial 2nd Loan Proceeds as Down Payment on New Acquisition.

For example, borrower could pull equity out of an existing property and use that capital as the down payment/closing cost on a new commercial property purchase. Essentially maximizing the overall leverage of the property owner’s portfolio and limiting out of pocket cash.

The underwriting of the second loan would be off the existing property and would not negatively affect the cash flow and or Debt Coverage Ratio of the property being purchased.

Use Commercial 2nd Mortgage as Rehab Capital.

Unfortunately commercial rehab loans are as daunting and cumbersome as ground up financing, requiring extensive underwriting and reporting. By tapping the equity in another property via a commercial fixed rate second mortgage the borrower can avoid the “process” of a traditional commercial rehab/construction loan. The borrower in this example would simply receive a lump sum of capital and can spend this money as he sees fit. There are no draws or city permit review/approval.

At the end of the project the borrower could refinance the loan of the property being renovated and use those proceeds to pay off the commercial second mortgage with better loan program tied to the rehabbed building.

Use Commercial Second Loan as Working Capital for Day to Day Business Activities.

Many borrowers do not like the idea of a floating rate line of credit. Many business owners prefer having the security of a fixed rate loan that enables them to better predict/manage their costs of capital. Business owners have virtually no restrictions on the use of loan proceeds. Common uses include, purchasing equipment, launching advertising campaigns, investing in new technology, etc.

Whatever the use or intent of the borrower, this new commercial second mortgage provides a solid option and an additional financing tool for commercial property owners.

Jeff Rauth is President of Commercial Finance Advisors, Inc out of Bloomfield Hills. He specializes in Commercial Real Estate Loans between $100,000 - $5,000,000. Offers unique loan programs such as Commercial 30 Year Fixed and 90% non SBA financing, Commercial Private Money, Commercial Equity Lines. He can be reached at 248 990-7602. jrauth@cfa-commercial.com and http://www.cfa-commercial.com

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According to Pricewaterhouse Coopers, investment by institutional venture capitalists in startups grew from less than $3.0 billion at the beginning of the 1990’s to over $106 billion in 2000. Although venture capital volume has retreated significantly since the economic “bubble” years of the late 1990’s, the present volume of around $ 19 billion per year still represents a substantial rate of growth. Venture capitalists will fund more than 2,500 high growth startups in the U.S. this year.

The growth in venture capital investing has given rise to a relatively new and expanding area of equipment leasing known as ‘venture leasing’. Exactly what is venture leasing and what has fueled its growth since the early 1990’s? Why has venture leasing become so attractive to venture capital-backed startups? To find answers, one must look at several important developments that have bolstered the growth of this important equipment leasing segment.

The term venture leasing describes equipment financing provided by equipment leasing firms to pre-profit, early stage companies funded by venture capital investors. These startups, like most growing businesses, need computers, networking equipment, furniture, telephone equipment, and equipment for production and R&D. They rely on outside investor support until they prove their business models or achieve profitability. Fueling the growth in venture leasing is a combination of several factors, including: renewed economic expansion, improvement in the IPO market, abundant entrepreneurial talent, promising new technologies, and government policies favoring venture capital formation.

In this environment, venture investors have formed a sizeable pool of venture capital to launch and support the development of many new technologies and business concepts. Additionally, an array of services is now available to support the development of startups and to promote their growth. CPA firms, banks, attorneys, investment banks, consultants, lessors, and even search firms have committed significant resources to this emerging market segment.

Where does equipment leasing fit into the venture financing mix? The relatively high cost of venture capital versus venture leasing tells the story. Financing new ventures is a high risk proposition. To compensate venture capitalists for this risk, they generally require a sizeable equity stake in the companies they finance. They typically seek investment returns of at least 35% on their investments over five to seven years. Their return is achieved via an IPO or other sale of their equity stake. In comparison, venture lessors seek a return in the 15% – 22% range. These transactions amortize in two to four years and are secured by the underlying equipment.

Although the risk to venture lessors is also high, venture lessors mitigate the risk by having a security interest in the leased equipment and structuring transactions that amortize. Appreciating the obvious cost advantage of venture leasing over venture capital, startup companies have turned to venture leasing as a significant source of funding to support their growth. Additional advantages to the startup of venture leasing include the traditional leasing strong points — conservation of cash for working capital, management of cash flow, flexibility, and serving as a supplement to other available capital.

What makes a ‘good’ venture lease transaction? Venture lessors look at several factors. Two of the main ingredients of a successful new venture are the caliber of its management team and the quality of its venture capital sponsors. In many cases the two groups seem to find one another. A good management team has usually demonstrated prior successes in the field in which the new venture is active. Additionally, they must have experience in the key business functions—sales, marketing, R&D, production, engineering, and finance. Although there are many venture capitalists financing new ventures, there can be a significant difference in their abilities, staying power, and resources. The better venture capitalists have successful track records and direct experience with the type of companies they financed.

The best VCs have industry specialization and many are staffed by individuals with direct operating experience within the industries they finance. The amount of capital a venture capitalist allocates to the startup for future rounds is also important. An otherwise good VC group that has exhausted its allocated funding can be problematic.

After determining that the caliber of the management team and venture capitalists is high, a venture lessor looks at the startup’s business model and market potential. It is unrealistic to expect expert evaluation of the technology, market, business model and competitive climate by equipment leasing firms. Many leasing firms rely on experienced and reputable venture capitalists who have evaluated these factors during their ‘due diligence’ process. However, the lessor must still undertake significant independent evaluation. During this evaluation he considers questions such as: Does the business plan make sense? Is the product/ service necessary, who is the targeted customer and how large is the potential market? How are products and services priced and what are the projected revenues? What are the production costs and what are the other projected expenses? Do these projections seem reasonable? How much cash is on hand and how long will it last the startup according to the projections? When will the startup need the next equity round? These, and questions like these, help the lessor determine whether the business plan and model are reasonable

The most basic credit question facing the leasing company considering leasing equipment to a startup is whether there is sufficient cash on hand to support the startup through a significant part of the lease term. If no more venture capital is raised and the venture runs out of cash, the lessor is not likely to collect lease payments. To mitigate this risk, most experienced venture lessors require that the startup have at least nine months or more of cash on hand before proceeding. Usually, startups approved by venture lessors have raised $ 5 million or more in venture capital and have not yet exhausted a healthy portion of this amount.

Where do startups turn to get their leases funded? Part of the infrastructure supporting venture startups is a handful of national leasing companies that specialize in venture lease transactions. These firms have experience in structuring, pricing and documenting transactions, performing due diligence, and working with startup companies through their ups and downs. The better venture lessors respond quickly to lease proposal requests, expedite the credit review process, and work closely with startups to get documents executed and the equipment ordered. Most venture lessors provide leases to startups under lines of credit so that the lessee can schedule multiple takedowns during the year. These lease lines typically range from as little as $200,000 to over $ 5,000,000, depending on the start-up’s need, projected growth and the level of venture capital support.

The better venture lease providers also assist customers, directly or indirectly, in identifying other resources to support their growth. They help the startup acquire equipment at better prices, arrange takeouts of existing equipment, find additional working capital funding, locate temporary CFO’s, and provide introductions to potential strategic partners— these are all value-added services the best venture lessors bring to the table.

What is the outlook for venture leasing? Venture leasing has really come into its own since the early 1990s. With venture investors pouring tens of billion of dollars into startups annually, this market segment has evolved into an attractive one for the equipment leasing industry. The most attractive industries for venture leasing include life sciences, software, telecommunications, information services, medical services and devices, and the Internet. As long as the factors supporting the formation of startups remain favorable, the outlook for venture leasing continues to look promising.

George Parker is a Director and Executive Vice President of Leasing Technologies International, Inc. (“LTI”), responsible for LTI’s marketing and financing efforts. A co-founder of LTI, Mr. Parker has been involved in secured lending and equipment financing for over twenty years. Mr. Parker is an industry leader, frequent panelist and author of several articles pertaining to equipment financing.

Headquartered in Wilton, CT, LTI is a leasing firm specializing nationally in direct equipment financing and vendor leasing programs for emerging growth and later-stage, venture capital backed companies. More information about LTI is available at: http://www.ltileasing.com.

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Many of today’s new ventures, particularly Internet startups with their enormous cash requirements, high risk, and high potential return, require approaching the venture capital marketplace. Venture capital investors are difficult to characterize, but we can discuss what venture capital firms generally look for when they analyze a company and its proposal for investment.

What Venture Capital Firms Look For

One way of explaining the different ways in which banks and venture capital firms evaluate a small business seeking funds, is expressed by LaRue Hosmer as: “Banks look at its immediate future, but are most heavily influenced by its past. Venture capitalists look to its longer run future.”

Venture capital firms and individuals are interested in many of the same factors that influence bankers in their analysis of loan applications from smaller companies. All financial people want to know the results and ratios of past operations, the amount and intended use of the needed funds, and the earnings and financial condition of future projections.

Banks are creditors. They look for assurance that the business service or product can provide steady sales and generate sufficient cash flow to repay a loan. Venture capital firms are owners. They hold stock in the company, investing only in firms they believe can rapidly increase sales and generate substantial profits.

Venture capital is a risky business, because it’s difficult to judge the worth of early stage companies. So most venture capital firms set rigorous policies for venture proposal size, maturity of the seeking company, requirements and evaluation procedures to reduce risks, since their investments are unprotected in the event of failure.

Size of the Venture Proposal

Few venture capital firms are interested in investment projects of less than $1,000,000, and this threshold is even higher for the major firms. Projects requiring less are of limited interest because of the high cost of investigation and administration.

The typical VC firm will quickly reject on the order of 90% of the proposals received, because they don’t fit the established geographical, technical, or market area policies of the firm, or because they have been poorly prepared. The remaining plans are investigated with care. These investigations are costly, and generally reduce the candidate pool even further.

Maturity of the Firm Making the Proposal.

Most venture capital firms’ investment interest is limited to projects proposed by companies with some operating history, even though they may not yet have shown a profit. Companies that can expand into a new product line or a new market with additional funds are particularly interesting.

Companies that are just starting or that have serious financial difficulties may interest some venture capitalists, if the potential for significant gain over the long run can be identified and assessed. If the venture firm already has a large risk concentration, they may be reluctant to invest in these areas.

A small number of venture firms specialize in “start-up” financing. The small firm that has a well thought-out plan and can demonstrate that its management group has an outstanding record (even if it is with other companies) has a decided edge in acquiring this kind of seed capital.

John B. Vinturella, Ph.D. has almost 40 years experience as a management and strategic consultant, entrepreneur, author, and college professor. For 20 of those years, Dr. Vinturella was owner/president of a distribution company that he founded. He is a principal in business opportunity sites jbv.com and muddledconcept.com, and maintains business and political blogs.

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Welcome News for Small Businesses

Publicly traded companies typically receive clearly established benefits that include the ability to:

* raise capital quickly and more easily;

* use stock to acquire other businesses and assets (mergers and acquisitions);

* provide employee stock options, as an incentive and/or compensation;

* create wealth and liquidity for investors;

* obtain loans from financial institutions using their stock as collateral;

* gain prestige and respect;

* reduce the need for expensive venture capital and bank financing; and

* formalize estate planning.

In addition, companies that go public typically see higher valuations, meaning that the market value of a public company is, on average, substantially higher than the same private company. This increases the investors’ wealth, allowing one to use stock for acquisitions. It can also increase the company’s value if one in considering selling the business.

Some consider a public company the ultimate status symbol. For companies that may want to be public for the many advantages it has, such as the increased market value of the stock to acquire other companies, the ease of raising capital, the ability to attract key personnel and to provide an exit strategy for investors—the fact that any company that wants to go public can go public, is very empowering.

More significantly, the company gains prestige and respect, because a public company is more often perceived as stable and competitive. This perception can lead to expanded business relationships and added confidence for the consumer. Prestige can assist in recruiting key employees, marketing products and services, gaining additional exposure and enhancing the company’s overall reputation. Often, suppliers and consumers become shareholders as well as joint venture partners, which may encourage continued or increased business. Once public, lenders and suppliers may perceive the company as a safer credit risk, which can enhance opportunities for favorable financing terms.Clearly, small companies receive many of the same benefits as large public companies, including increased company value, the ability to use stock for mergers and acquisitions, and liquidity for investors.

Raising Capital

Typically, in this scenario,a public company will sell stock to private investors through a private placement at a substantial discount to the price it is trading at on the open market. In this scenario the company is able to raise capital more easily because investors know they can call any broker worldwide or go on the Internet and buy a company’s stock. When a public company makes stock available to private investors at a substantial discount to the market (typically 20-50 percent, usually with the stipulation they do not sell the stock for 12 months), investors are compelled to buy. The large price incentive and the fact that the stock price can be monitored daily and sold through any online brokerage firm gives investors incentive and confidence to invest in even the smallest public company.

A Needed Strategy

Many small corporations have been routinely overlooked and denied by investment bankers. But there are options for these underrepresented size firms. For example, a customized registration process, which is gaining a great deal of popularity among small corporations as well as minority- and woman-owned firms, is an easier method of going public that does not require an underwriter or an investment bank. Since most underwritten initial public offerings through an investment bank require a long and stable earnings history and significant assets, smaller enterprises may prefer this customized registration process because the only requirement is the desire to go public.

The customized registration process is ideal for small businesses run by entrepreneurs and corporate executives with great vision.Going public using this method enables executives and business owners to take matters into their own hands and control their own destiny, and many do not realize it. Any company can become public if they have the will to do so.

When most people talk about going public they think of an initial public offering (IPO). In an IPO, two things are done simultaneously: raising capital and going through the process of becoming publicly traded. Alternatively, the customized registration process separates these two actions to enable a company to go through the procedure of going public alone—filing with the SEC, preparing the listing application to the trading market, filing with the NASD and having a market maker as a sponsor.

The customized registration process is less expensive, and gives the business owner greater access to capital. With this method a private company becomes publicly traded at a lower cost, in a shorter time frame, and with less stock dilution than through an IPO. In essence, these methods separate the process of going public from the process of raising capital.

Ultimately, it is important to remember that you have the power to decide to be a public company. Before concluding that your company is too small to go public, consider all of the benefits. The increased prestige of a stock symbol and a benchmark trading price makes it easier to raise capital and gives a company instant credibility. The benefits can enable a company to grow to the next level, regardless of the company’s size or ownership concerns. Explore your options and reconsider them—you might just be able to go public.

Tiber Creek Corporation is located in Beverly Hills, California. . To learn more about Tiber Creek Corporation’s customized registration process, and to receive a free report on going public, visit http://www.TCC5.com Our technique is better then a Reverse Merger or Public Shell.

info@tcc5.com For questions

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We have compiled a list of some practices which seem sure to kill your chances to attract investors. Ignore these lessons at your peril.

* Poor market research, weak business plan

* An unfocused, “shotgun,” approach to which venture capital sources to approach

* Does not have enough seed capital dedicated to the capital raising effort

* Does not allow ample time for raising the capital

* Seeks too much capital, or sets too large a minimum initial investment for the project or company.

* Does not have enough of their own capital committed to the project.

* Does not have a clear picture on the use of proceeds.

* Does not have a rate of return projected on the investment

* Does not guarantee an exit strategy for the investor

* Does not have a solid management team put together

Even when early funding is secured, the entrepreneur can make strategic errors that make follow-on investment less likely

* Does not raise sufficient capital early enough in the game.

* Engages in spending capital before adequate capital is secured.

Denied traditional routes to venture funding, many entrepreneurs will turn to techniques that are often called “guerilla” financing:

Business Opportunity ads. Place advertising in a local newspaper or a national publication featuring such ads. State the amount of money requested, the type of business involved, and the kind of return being projected.

Investment “party.” Give a party to explain to friends your business plan, the profit potential, and how much you need. Give them each a copy of your prospectus and ask that they pledge a thousand dollars as a non-participating partner in your business. Check with the current tax regulations.

Occupational investment groups. The next time you talk with your doctor or dentist, give them a prospectus and explain your plan. They may invest or perhaps make an appointment for you to talk with the manager of their investment group.

Non-Profit assistance groups. Many areas have Small Business Investment Companies, and Business Development Commissions whose goal is to assist in the establishment and growth of new businesses. Many offer money or facilities to help a new business get started.

Money brokers. These circulate your prospectus to various known lenders or investors. They generally require an up-front or retainer fee, then take a percentage of the gross amount that’s finally procured for your needs. There are no guarantees of success.

Strategic partners. Consider the feasibility of merging with a company that’s already organized, and with facilities that are compatible or related to your needs.

The person with determination to succeed, will make use of every possible approach.

John B. Vinturella, Ph.D. has almost 40 years experience as a management and strategic consultant, entrepreneur, author, and college professor. For 20 of those years, Dr. Vinturella was owner/president of a distribution company that he founded. He is a principal in business opportunity sites jbv.com and muddledconcept.com, and maintains business and political blogs.

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Business plan preparation is not as complex as it may seem to the new entrepreneurs. Begin by asking yourself a few core questions.

• Which product or service are you going to make available? (Name the needs they will fulfill.)

• Who all form your customer base? Why will they be willing to purchase your good or service?

• What are the means to reach this identified customer base?

• From where will you get the initial funding for the business?

• What other resources will be required to accomplish the stated goals?

Business plan preparation calls for a settlement of these issues in an honest and realistic manner. Besides these central questions, you will also need the answer to some short-term questions.

• What kind of customer base are you looking for: wide or steady?

• What are the methods employed by your competitors?

• Does advertising have a big role to play in your business? Will it greatly affect your profit margins?

• If yes, which form of advertising suits your business? Which media will you employ for the publicity of your product or service?

Use of the appropriate information and a detailed analysis will help in systematic business plan preparation. After organizing your thoughts and concerns, pen down the answers to the raised questions. If available, make good use of relevant financial data. Record your income and expenditures in the plan; this will serve as a benchmark when you review your performance at a later date.

Maintain a fluid mindset that allows you to accommodate the changes as it is not wise to commit yourself totally in the beginning. Aggressive revisions dictated by the changing circumstances, and an increase in the knowledge and experience make the plan a living document. A dynamic plan lends great momentum to the business.

Since its inception, Growthink Business Plan Development has developed over 350 business plans. Growthink clients have collectively raised over $750 million in financing, launched numerous new product and service lines and gained competitive advantage and market share. Growthink has become the firm of choice for venture capital firms, angel investors, corporations and entrepreneurs in the know.

For more information on this topic please visit http://www.growthink.com/businessplan/ or visit our venture capital placement site at Growthink Venture Capital.

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Many people ask how many graphs or charts they should have in their business plans. As with most other business planning questions, the answer is “it depends.” This article discusses the key factors influencing the number of graphs and charts to include in your business plan.

To begin, the key point to consider in developing your business plan is the time restraints of your audience. If your audience is a retired angel investor, he may have few obligations and can spend an hour reviewing your business plan. However, the more likely scenario is that a venture capitalist, corporate investor or loan officer will review your plan while sitting at a desk topped with fifty other business plans. As such, it is critical that your plan conveys its key points quickly and easily – this is where graphs or charts come in.

In determining whether to use a graph or chart, consider the old adage, “a picture is worth a thousand words.” The point here is that the picture should save a thousand words. That is, the graph or chart should supplement the text; it should not be explained ad naseum in the text, or that defeats its purpose. Likewise, the graph or chart must be relevant and support the text, rather than detract from it.

In addition to respecting the time constraints of the audience, the business plan must respect the audience’s energy level. That is, after reading seven business plans, an investor is likely to skip a page with 400 words of straight text. Even if no charts are applicable to support the page, Growthink suggests using appropriate spacing and/or callout boxes (e.g., key text phrases highlighted in boxes) to make the page more readable.

Clearly, technical drawings and operational designs need to be visually presented in the business plan. Without them, huge volumes of text are often needed to explain relatively simple processes. Importantly, when the text references these charts, the charts should be easily accessible. That is, the chart should be on the same page as the text, rather than forcing the audience to continually turn to an appendix. If the chart is referenced on numerous pages, each page should show the piece of the chart that reflects the text, with the full chart appearing only once in the plan.

Finally, if the business plan is being presented to one or few investors, the amount of graphs and charts should reflect the wants, needs and sophistication of those few readers. For instance, if the plan is being presented only to strategic investors who understand the market, more graphs may be appropriate to convey information for which these investors already have background knowledge.

Conversely, always keep in mind that the plan is not a slide presentation, and too many graphs and charts may position the company as one that is too lazy to complete the process of developing a formal business plan.

To summarize, the amount of charts and graphs used in the business plan must reflect the audience for the plan; an audience that is usually time and energy constrained. The charts and graphs must complement the text, enable the audience to quickly and easily digest the information, and as always, interest the audience in taking the next step (e.g., scheduling an in-person meeting) in the investment process.

As President of Growthink Business Plans, Dave Lavinsky has helped the company become one of the premier business plan development firms. Since its inception, Growthink has developed over 200 business plans. Growthink clients have collectively raised over $750 million in financing, launched numerous new product and service lines and gained competitive advantage and market share.

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You need to secure money for your project. You visit venture capitalists to see if you can get that money. A venture capitalist views your project as a pure investment. A venture capitalist has no emotional attachment unlike you. You need to write a proposal that is structured around a venture capitalists needs, not yours. What may interest you may have no relevance to your potential funder. You need a business plan that is ‘investor-focused’.

An investor focused business plan contains relevant information about your project. It addresses concerns, questions and should allay fears that any potential venture capitalist may have. It should meet their needs exactly. Venture capitalists exist to make substantial gains. They want to see a good return on investment. By compiling an investor focused business plan, it will be clear to Venture Capitalists that you are focused, prepared and competent.

There are four areas that need to be addressed:

Management Responsibility
Know Your Markets
Know Your Product
Know How Management, Markets and Product Make Money

Management Responsibility

The strength of management assigned to the project can make or break your proposal. Venture Capitalists need reassurance that you can manage their money. They will want to see a demonstrable track record in areas specific to the project you are pitching. The ability of management will be tested so be very prepared.

Know Your Markets

Venture Capitalists will need to see where your income will be coming from. Your company must demonstrate a strong understanding of your customer base and be able to fulfil their needs. Your plan also must address any potential new or growth markets. Illustrate any research you have conducted to emphasise this.

Know Your Product

Venture Capitalists will want to fully understand your product. They will want you to demonstrate how the product that they are funding will attract customers. The information in this section must be extensive and also feature any potential expansions or upgrades that your product will feature. This will show that you have thought about long-term growth.

Know How Management, Markets and Product Make Money

It must be demonstrated that management can create links and paths between customers and product. This element must be very strong as ambiguous information, or an assumed relationship will scare off any potential funder. Create a step-by-step guide of how their money will be processed and how the customers money will be received. This has to be clearly shown.

Tie in these points together and you are already in the top 3% of all venture capital submissions. Good Luck!

Dominic Dirupo survived the Tech Boom and Crash with Goldman Sachs and Deutsche Bank after graduating with Honours at London’s City University. Now, he is Managing Director of IMI Trust, a specialist company supplying support services to financial groups.

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