Advice or opinion on first Commercial Deal

[Brian Pinckard]

I'm evaluating a retail commercial deal. This is my first dive into the commercial side and to be quite honest I had no intention to be moving this direction after only 3 residential SFH under my belt but the more I look into it the better it sounds.

The property I'm looking at has 5 retail units totaling 6418 sqft. Monthly gross rents are $4770. Other monthly expenses given to me by the listing agent are:

Insurance: $3,000

Taxes: $2862

Landscaping: $600

Misc repairs: $2391

Tenants pay for their own water/sewer and electricity

I talked to a local appraiser and he told me that the rough CapRate in this area is 9. If I add to the supplied expenses another $100 a month for vacancy (I know this is low but it looks like I may be able to get a 10yr lease from the 3 largest units and the location is pretty good) and $200 a month for CapEx (perhaps also low but HVAC is relatively new and there is a metal roof which is relatively new). Using all the numbers above I get a CapRate value just under $500,000. The current asking price is in the high $500,000 range.

I've only spoken with two commercial lenders but one is offering terms of a 25 yr, 10 yr balloon, with 20% down at 5.34. This sounded pretty good and way better than the other lender I spoke with. If I can get it for around $500,000 (and that may be a big if) at the financing terms I mentioned I'd be looking at about $1080 a month cash flow after all expenses and a 12.5% ROI. The DCR would be about 1.45 which also seems pretty solid to me. I did ask the seller if they would consider owner financing to improve the financing even more but that did not fit into their needs.

This all sounds pretty good to me. Would love to hear any advice or comments particularly on the finance terms and if I am missing anything.

Thanks,

Brian

[Joel Owens]

You need to see what kind of leases are in place for NNN or gross leases, hybrid,etc.

Biggest expenses on retail centers tend to be roof, parking lot re-coat and seal, and heating and air units. You need to look into the leases to see who maintains what.

At 500,000 these almost have to be mom and pop tenants.

I work in the larges spaces for many millions of dollars and national type tenants. This sounds more of an older building mom and pop type stuff which might be a 9 cap who knows. Higher quality stiff with national tenants gets developed for 9 plus caps break even so they do not sell for that more in the 6's.

Key with these small mom and pop tenants is if they pay at,under, or above market rents? Are they single unit or multi unit operators? Is there a corporate guarantee on the lease and if so is it one store or all their stores? If just one store then they might can do a remote  bankruptcy of the entity and without affecting themselves and screwing the landlord.

Ideally with small mom and pop tenants you want them on the hook for everything. You want personal guarantee and full corp all stores guarantee with quarterly reporting of business sales and financials as well as personal. Instead of them telling you they are doing well you can see in real time how the business is either growing or declining.

Check to make sure personal guarantee does not burn off early in the primary lease term or that they have early termination clauses if certain sales levels are not met.

Tons and tons of other items to look for. Good luck.