ISO Resources for Newbies. I think I Just Closed a good deal, What's Next?

Question

Hi all,

I've been investing in real estate for 10 years, mostly BRRRR in Midwest and Georgia, STR in TN/NC, and recently bought an industrial warehouse in GA. I got it by accident and not really sure what I'm doing next. I want to learn it more systematically so I can feel more confident. Any books, courses, strategies, suggestions will be appreciated.

Deal:

It's a 3-units M1 property listed at $2M, bought it for $1.75M three months ago. Leased it out prior to closing. Appraised at $2.4M after leasing, so instant value add of almost $700K.

Financing from a regional bank, $620K downpayment, 5.99% rate, 20 years amt, lock for 3 years w/ personal & business guarantee. It's been cash flowing nicely - rent comes in at $180K NNN, mortgage is $98K. That cash flows better than my SFH deals and it seems to be easier than SFH LTR.

I'm managing the property myself. Honestly so far I've done nothing besides just paying the TI to my tenants and collecting CAM each month in addition to rent...My CAM estimate is way off, so what I collect is low. The tax & increase bill increased a ton this year from what I got quoted to what it ends up with. I also didn't realize how much hassle it's going to take for simple things like adding a water meter...

My goal is to get into development - building industrial warehouses each 3K-10K sqft, very similar to this deal.

Questions:

1. What should I be aware of? Is it really little to no work like now?

2. Is there any crush course/in person program trainings for me to learn, so I can do it more systematically?

3. I'm searching for my next deal. Since I'm really new to Commercial Real Estate, I want to find a broker that has investment experience that's able to guide me through...what is the best way to find these brokers? I'm in North GA area.

Henry Clark · Answer

Start a checklist.  Keep adding to it. As you have time start learning about each one.

Congrats on your deal. Here are some bullet points to add to your checklist to learn.

Zoning

Planned zoning

EPA

Abestos

Dissect your contract.

NNN- what are they or you responsible for? Hvac

Roof

Driveways

Parking

Just like housing, you need to set aside or budget for Capex.. Your $180k cashflow is not true cashflow if you don't factor in Capex. Get quotes on all your Capex items. Get replacement age on each.

Lease-  have a commercial realtor review.  Your property is worth what it leases for and for how long.  By itself it loses money.  Key is your lease.

Evaluate the type of customer.

Do a stress test.  If you have 3 tenants take each by themselves out for 1 year. 2 years.

Insurance-  what coverage do you require tenants to have?  Are you listed as additional insured?  Has to be renewed every year.  Have your insurer review their coverage.  What is your exposure.  If I slip in the shared parking lot who is responsible?

Insurance- personal property coverage

Insurance- clean up cost

Insurance- both you and tenant, Business income loss coverage

Fire systems- joint systems, who is responsible?

Signage?

Billboards?

Exterior lighting?

Security systems?

Easements?

Flood zone?

Sit down with a Commercial realtor and go through a normal due diligence process.

Look at your three tenants.  Develop a value add plan by unit.  Example is o e side on a retail road, or can you slice into 2,000 sqft spots for $1 per sqft per morning or more?

Michelle Mercer · Answer

Also, since you are a builder, i want to ask for some suggestions. I really hope to be a builder, for industrial multi units properties…we have such shortage of those, my network has a lot of business owners I can rent these to. in the immediate term, I want to buy land and build one for my own business. any good ideas how should I start to learn about new construction or being a builder?? I have a commercial contractor with connections in the county that already did some great work for this warehouse

I do have another question also about CAPEX and reserves…building has a new metal roof, it’s industrial mental frame, metal beam, shell condition flex/warehouse, no HVAC, NNN leases, new septic. I’m paying to converting it from well water to city water and fixing the parking lot broken concrete. But after that, I have a hard time thinking how much money I need to save for capex? Those mental beams should last longer than my life, those new metal roof should have 50 years on them? And how much money I need to set aside for reserves in case of vacancy. Again, as long as  2/3 of units get rented, our mortgage is covered. And our leases ending for three tenants are 1 year; 3 year and 5 years. So not at the same time. Currently on the market there’s low vacancy rate but who knows if we go into a huge crush and all three of them went belly up (they all have been in business for over 10 years

At first I thought 12 months worth of mortgage as reserve but my banker said he thinks 6 months. Thoughts?

Evan Polaski · Answer

@Michelle Mercer: first, congrats on taking what sounds like a slightly blind leap. It sounds like it is paying off in many ways.  Your experience with commercial vs residential is something I have heard over and over again.  Residential is all fine and good, and more approachable to many people, but also very management intensive, and often times lower returns.  But there are their own risks.

What should you be aware of? - you are seeing one such item: simple things in commercial arena can become much harder to handle.  You are now getting into commercial building code, which can be its own can of worms.  This is clearly jurisdiction dependent, but simple things like changing out a rusted/rotting door can become a long process if you are pulling permits.  Leasing will be more challenging, typically, as there are far fewer people looking for industrial space versus a place to live.  Leases can carry caps on the tenant portion of NNNs or annual increases on NNNs.  I.e. your large tax bill, while you can pass on to your tenants through their NNNs, you may be stuck with some if they have terms that only allow Taxes to increase no more than 5% per year and no more than 20% over life of lease (or something along those lines).  And on the same note, you need to cognizant, just like residential, if your tenants can actually afford those increases.  From the tenant's perspective, it is still dollars and cents.  If your NNNs get out of hand, they will start looking for new places as soon as their lease is up.

But, from my experiences in retail vs multifamily, the management on commercial is much lower from a day to day standpoint.  But when something comes up, the costs are much higher, typically.

Crash Courses - often times your best bet is in industry groups, i.e. NAIOP, which used to be industrial focused and now is more commercial development.  There is also ULI, CMCP, etc.  The masterminds and gurus tend to be more focused on residential, since (look at these forums) that is where a larger pool of possible customers lies.  You can find some, but I have not really seen any.

Typically in true commercial (and large multifamily) the brokers only represent sellers.  That being said, I have never had an issue getting coffee meetings with brokers to pick their brains (they are in the business of networking).  I would get on Loopnet and Crexi and just reach out to the brokers you see listing properties that are the scale and general areas you are interested in.  They will ultimately be representing the seller, but since there are far fewer buyers and sellers of industrial buildings, they always like to send out deals to the people they think would buy one of their listings.

Henry Clark · Answer

If I misstate something or don't couch the statement in softer terms, I apologize ahead of time.  Don't know your full background.  I won't dance with my terminology.  Going to do this in bullet format.

1.  SFH/MFH valuation is different than Commercial non residential.  SFH/MFH is very much sales Comp based.  Commercial non residential is more Cap rate based (which we don't use) and lease contract based (terms N/NN/NNN; term length and remaining; etc).

Action- as noted above, have your lease contracts reviewed by an attorney or Commercial broker.  Understand their weaknesses and strengths.  Your commercial asset is truly worth only what your lease contracts contain and the strength of the lessor.  Not the cost of the building.  Understand the strength of your lessors.  For an SFH/MFH you potentially have 1,000 potential renters or buyers.  For Commercial you might only have 5.  Your vacancy exposure is far greater.  Perform stress tests on your business model.  Dropping 1 of the tenants for a year or lost revenue.  Have a commercial Realtor review those three tenants as far as their strengths.

2.  Bank terms SFH/MFH is usually 15/20/25/30.  Commercial has amortization periods of those terms but usually a 5 year balloon period.  If you're on real good terms with your bank and both your personal and business guarantee is highly positive, they may give you 7 year period.  3 year balloon payment, your Bank has a question or wasn't being friendly. Ask them why they only gave you 3, they should give you 5 without you asking.

Action- find out why they only gave you 3 years.  Stress test.  Wait till you have 3 months before your 3 year period is up.  How much bandwidth do you have or bargaining strength to move banks or refi with your current bank.

3.  Use the lookup functions.  Read everything with @Joel Owen.

4.  Financing- Understand why you got 6% from a business approach.  If you're going to do Commercial Syndications as noted in your Personal profile, you don't want your financing based on your personal assets or businesses.  Maybe to get started but not long term.

5.  Financing- per your personal profile, your sourcing funds from overseas.  Make sure there is a hard Vetting process for your deal or buy box strategy.  There is no one on BP or myself, if we didn't have previous CRE experience I would trust with a $1.75mm deal.  Realize the original point of your post is to develop that background.  But I question your ease of funding source at this stage of your entry.  So, this is not taken personal, I wouldn't trust myself on my first CRE deal for more than $200,000.  There are a lot of things that can go wrong Big and fast in Commercial versus SFH/MFH.

6.  Buying at 11 cap.  Understand why.  What are terms of leases?  What are Capex items coming up?  EPA/Abestos/Brownfield issues?  Property Tax impacts?

Congrats. Your deal and financing are truly great.  Just understand why.  That is part of your future deal analysis.

Henry Clark · Answer

You should be adding each concept to your checklist:

Tenants:

By tenant what is the square footage?

No names, but what type of tenant by the square footage above?

The property value is based on the leases, as you're noting above.

Value Add:

Resizing unit sizes.  Moving to 2,000 to 3,00 square feet.  What is your current rental $$/sq ft by tenant.  You want to look at improving.

What space is available outside?  Parking revenue, food truck space, Ice Machine space rental, Billboard potential,

Go to month to month on part of your square footage.

Do you have docks, check on Frito lay, power drink, flower, tortilla, Snap on Tool, etc distribution center.

Solar panels for non NNN usage

Expense reduction- hardscape landscaping, have your insurance company do a review,

U-Haul- self rental location.  You don't do anything, or rent out lot space to someone.

Capex:

Have an annual PM list, like for your rentals.

Add annual Additional Insured to that list.

Reserves:

Lessor personal guarantees?

Insurance- Business income loss coverage.  Shoot for 18 months for each to have.

Basically, you don't want me or someone to itemize items to review.  Make a checklist, have people look at the checklist.  Then hit every item.

Michelle Mercer · Answer

So far so good from the tenants. The one year tenant (seller leaseback) is NOT going to renew, but seems we have very high demand for this type of property - we got 3-4 interested parties without marketing, but their lease will not end until September of 2024. I'm not too too concerned about it - even if we have vacancies, we have about 6 months of expense, the other two tenants' rent can cover the debt service with some surplus.

Ronald Rohde · Answer

Figure out your buy box. Then keep that narrow and keep buying. Its fun and simple.

I own 5 properties and self manage it all (I have staff, but still very easy) Single tenant NNN, just random needs, but never a headache.

What does your legal team look like?

Michelle Mercer · Answer

Would love to learn about your legal service - like mentioned above, I have a syndication attorney that helped with the syndication process, and a local closing attorney. Would love to know more about what's needed for my legal team.

Henry Clark · Answer

At your next refi you want 5 year or 7 year period not 3.  Too much risk with a 3 year term.  If your lease tenants leave, appraisal goes down, or interest rates go up, this puts stress on your refi.

At year 2 I would refi.  Don't wait.

John McKee · Answer

you have to speak to a developer. You might want to check the X platform as it has a bunch of industrial guys that do this all day long

ISO Resources for Newbies. I think I Just Closed a good deal, What's Next?

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