05.15.08
Finding funding. Franchisee guide on real estate financing.

By Michael Vallorosi

The residential real estate market is in a downward spiral, credit markets are in turmoil, structured finance vehicles are imploding, private equity deals are unraveling, and Wall Street is laying off professionals in droves. With each passing day of volatility in bond and equity markets investors are fleeing to the relative safety of government securities and harder assets like gold and crude oil. In addition, while residential real estate prices retreat, capitalization rates return to more normalized levels, and the Federal Reserve attempts to stimulate the economy with interest rate cuts, the “perfect storm” is gathering for franchisees to increase their allocations in single tenant, operationally essential, commercial real estate over the next 12 months and beyond. Where else are they going to invest their excess cash flow?

If you are one of those folks that is seeing commercial real estate opportunity through the cloudy patches of that Wall Street sky, then perhaps our Franchisee Guide on Real Estate Financing can guide you through the morass to real estate heaven.

 First and foremost, experience counts. When acquiring and financing commercial real estate, make sure to hire an attorney with commercial real estate experience and allow them to do their job. In the long run, it will save you time and money and allow you to focus on what you do best, operate restaurants. Further, if you designate a staff member to manage the real estate process for you, make sure that he/she has commercial real estate financing experience as well. Your nephew that just graduated summa cum laude with a degree in psychology just won't cut it.

Finally, if you acquire land and build a restaurant property, make sure to select a contractor that has experience using American Institute of Architects’ forms and procedures. If your contractor does not follow proper procedures and complete forms in an acceptable manner, then your project most likely will incur cost and time over runs.

Second, be pro-active. Make sure corporate or limited liability company good standing certificates are current. If not, then request a new one immediately. Prior to commencing the commercial real estate financing process, determine your ownership and borrower structure. In addition, establish company operating agreements and by-laws and make certain that all invoices are made out in the proper name based upon where property title resides. If you leave any of this to chance, Murphy's Law will reign supreme. When you are not pro-active and changes need to be made during the middle of the process, then documents will need to be re-created and re-filed and the time and cost of your project will grow.

 Third, make sure there are no surprises. Outside of birthday and other parties, nobody likes surprises. Coordinate with your lender and your/their counsel to establish a meaningful timeline so all required deadlines are met. Confirm your targeted opening dates with your lender and your/their counsel and make sure everyone is aware of any firm dates associated with Purchase and Sale Agreements. In addition, make sure to return all signed documents and requested information in a timely manner.

Communication is critical; make all parties aware of any date changes, if any occur. Moreover, notify the lender immediately if there are any cost overruns on the construction of new properties. If you forget to do so, and wait until a contractor invoice needs immediate payment, then you will run the risk that you have to cover the payment until all the paperwork is processed. Stay out in front of the issues before they get out in front of you.

Finally, here are some critical items to focus on:

Make sure to touch base with your local zoning board to ensure that your property is zoned for its intended use; especially if you intend to construct or add a drive-thru window. If you miss the typical monthly zoning board meeting then it is likely your project will get delayed another month.

 If you are entering into a ground lease, it is critical that you conduct your own title search on the property to ensure that the proposed lease contains the correct legal description and property owner name.

 If at all humanly possible, incorporate all third party agreements in to your ground lease (such as Landowner/ Lender Non Disturbance Agreements and Fee Mortgagee/Leasehold Mortgagee Agreements). This will eliminate any postlease negotiations, which are costly and time consuming.

Make certain to record a memorandum of lease with the clerk in the county where your property is located. Your lease will then be reflected in the chain of title. This will allow for the filing of a leasehold mortgage and title insurance that protects both the owner and the lender.

 Upon commencement of your project, your surveyor will complete a boundary survey for you. Keep your surveyor apprised of the restaurant’s opening date so that he/she can complete the required ALTA "as built" survey within days of the project's completion.

Michael Vallorosi is Senior Vice President of Sales & Marketing for Irwin Franchise Capital Corporation. Bernice Carr, SVP of documentation for Irwin contributed to this article.