Components of private real estate ventures.

Given today's real estate market conditions of rapidly rising rental rates, attractive rates of return and potential appreciation of the property, private real estate ventures are providing investors with opportunities to diversify their investments. Most prudent financial planners recommend asset allocation between stocks, bonds and recommend 5% to 10% invested in real estate investments.

Private real estate ventures provide investors, who are also businessmen and decision makers, an opportunity to actively participate in their real estate investments. This allows more control over their investments which may provide better returns than passive investments in real estate partnerships or REIT's.

The initial step in a private real estate venture is the selection of a real estate brokerage firm to assist in finding potential real estate acquisitions. A Certified Public Accountant (CPA) who practices in the real estate industry is a good source of referral for investors engaging a real estate firm.

Before the real estate firm's search for potential acquisitions, the investors should furnish the real estate firm with such information as:

* Cash available for investment.

* Region or location of the property.

* Acceptable rate of return, ie., cash on cash and total returns.

* Types of investments, commercial office building, residential rental, warehouse, etc.

When engaging a real estate firm, the investors should reach an agreement, preferably in writing, as to how the real estate firm is compensated. This includes the fee for selection of property, broker commissions for tenants, management services or any other technical services provided.

As to potential acquisitions, in addition to the purchase price, an offering brochure should be obtained from the seller's brokers. This brochuer should include information about the physical descriptions of the property, capital improvement programs, property information, historical and budgeted operations, prospective cash flows and net operating income, and tenant information (including background and tenant lease information).

At the point in time when it appears a bid will be made on a particular real estate property, it is important to engage a real estate lawyer who practices in the state and region where the property is located. A CPA may be a good source of referral for a real estate lawyer. When selecting the lawyer, it is important to asses that he/she be not only knowledgeable in real estate law but have the skills to provide advice to the real estate team. The attorney is important in negotiating the terms of the real estate contract and also the mortgage loan agreement.

Due to the fact that usually all the good deals go fast, it is important that the financing be obtained through a real estate financing firm because they have a faster turnaround than a general financing firm. The contract usually provides no more than 60 days to close; therefore time is of the essence. The real estate financing firm screens potential lenders, relying on prior experience when evaluating them. The lender is an important player in closing the deal because of his/her ability to close it at terms acceptable to the buyer. This is crucial in determining the quality of the deal (i.e. a good deal doesn't have a contingency clause in the contract).

The fee charged by the real estate financing firm is usually between 3/4% and 1% of the loan.

The contract provides for a due diligence period after the signing, during which the buyer has to inspect, examine and/or investigate the premises, and all physical, environmental, financial, leasing, municipal and legal aspects thereof. In the event that the buyer, after performing all diligence procedures, determines that the premises are not acceptable to the buyer, he/she shall have the right to terminate the agreement by written notice to the seller at any time prior to the expiration of the due diligence period. The written notice has to be stating the reasons that the premises are unacceptable, together with copies of any applicable reports or information.

A CPA firm specializing in real estate can perform the due diligence on behalf of the buyer. A due diligence checklist, Exhibit 1, is provided.

Due Diligence Check List

* Obtain and evaluate current marketing reports effecting the region and county when the property is situated.

* Obtain an engineering report, environmental phase 1 report and an appraisal of the property by firms acceptable to the lender.

* Obtain a title search and updated survey.

* Obtain certificate of occupancy of all tenants

* Obtain estoppel certificates for at least 75% of tenants.

* Obtain and review all tenant leases and service contracts.

* Inquire about commissions due.

* Satisfy the buyer as to the income and expenses for the property, both historical and prospective, by examining underlying documentation.

* The foregoing, is an illustration of the components of a hypothetical private real estate venture.

Eisner & Lubin LLP is an accounting and consulting firm that specializes in real estate. In addition to tax and audit services, we help clients with cost segregation studies, due diligence, lease consulting, recognizing new trends in the industry and much more. Many of our firm's high-net worth clients have invested in numerous private real estate ventures in which we have been advisors and accountants for the ventures.