Whats the best course of action?

[Michelle Lutz]

Lets say hypnotically that there's a 1.3 acre commercial parcel on an increasingly busy Hwy in Nebraska. Its next door to two other strip malls that are fully leased. An offer comes in for $400k for the parcel. Do I:

A. Sell it for 400k and try to find something to 1031 it into that would give a decent rate of return.

or 

B. Keep it and build a strip mall of approx 8,000 sq ft for about $900k with no money down and a 15 year 4.5% loan. Triple net rents would average about $10-12 per foot with low vacancy in the area.

What say you?

[Joel Owens]

The other 2 strip malls from 12 and 16 years ago next to the land did you said you built them.

If you built them you should know as a retail developer that a lender for a spec build today will want certain percentage of pre-leasing before they give you a construction loan.

They generally loan to value or loan to cost whichever is less.

I know some developers who do not have the pre-leasing requirement but they build 20 or more a year for decades now and the lender knows they will perform but most lenders will only do that for the extremely experienced developers.

It sounds like you might own the land free and clear.

Building another strip center with regional to mom and pop tenants tends to be non-optimal and a third choice. In regards to ground leases there are only a handful of tenants that agree to ground leases versus NNN or NN requirements. NNN absolute STNL depending on tenant,location,etc. usually dictates selling cap rate.

Generally gas stations, pharmacy, banks pay the most money if it is a corner site.

Other option is  a 2 to 3 top strip such as Aspen Dental, T-mobile, and a Starbucks in one spot.

Overland Park generally has a low end area and then on the other side a high end demographic  over 100k income on the other side. I have looked in those areas before.

Also keep in mind average rents for mom and pop to regional tenants are different than national credit tenants. Those average rents tend to be much higher as the national tenants generally drive much more sales per sq ft.

125 a foot sounds about right. It will depend on the city or counties architectural requirements for gingerbread exterior finish to approve site plans. If they want fancy,schmancy it can get expensive. TI on the inside is generally about 35 a foot for new builds.

So it might look something like this.

National tenants 3-top:

Land: Own it zero cost

Construction Exterior: 125 a foot X 10,000 foot = 1,250,000

Construction Interior: 35 a foot X 10,0000 ( Starbucks can be 50 a foot sometimes) = 350,000

Rents say conservatively 25 a foot national tenants X 10,000 = 250,000 NOI

There will be base rent plus cam reimbursements and then backing down of some cap on cam with leakage and market vacancy. 

So let's say 10,000 sq ft and market vacancy of 5% so 500 foot.

9,500 sq ft X 25 a foot = 237,500 NOI

Say they are 10 year primary leases with 10% increases every 5 years.

Leasing commissions are 4% say for example:

250,000 X 5 years = 1,250,000 X .04 = 50,000 LC first 5 years

250,000 X .10 percent increase in rent years 6 to 10 = 275,000 X 5 years = 1,375,000 X .04 = 55,000 in LC

Total leasing commissions paid at time of leasing 105,000

Legal and site work say 500,000

1,250,000+350,000+ 105,000 + 500,000 = 2,205,000 all in

3,600,000 is about a 6.6 cap rate for resale

3,600,000 X .06 = 216,000 broker resale commissions

100,000 legal costs to close and providing owners title policy to buyer

So 2,505,000 all in - 3,600,000 = About 1,095,000 profit 

If you are getting 10 to 12 rent per sq ft only for a new build with construction and labor costs the project does not pencil.

Again this is just  a broad example. You would have to run a deep analysis to see what make sense.

At 2,505,000 all in your cap rate to cost on 237,500 NOI is about 9.48 which is about right. Developer aim for about a 9 and up cap rate to cost.

If you could ground lease or get a STNL national tenant with advanced lease in place before you build that would be optimal. The STNL could feed off the other tenants in the 2 centers for cross traffic without having to go back out into the main road.