What information do I need to get before buying a commercial prop

Question

I am helping someone out that is looking to buy a commercial property. It is a strip mall with about 14 units with a cap rate of 8.37%. I am doing all the calling around to get all the numbers. I will be a property manager for him once he buys something. I have never bought a commercial property and don't know what information I need to get to relay to my buyer. Anything helps, thanks in advance.

Joel Owens · Answer

Cap rate of 8.37 is likely mom and pop tenants to maybe a few regionals.

14 tenants in a retail center is a TON of work.

Check if you are allowed to be a property manager for him in your state without being licensed. Some places have it where if not licensed you have to be an employee of the owner ( no legal advice given).

A lot of those tenants you do not know if they will survive mid to post covid. The national tenants usually tend to have reserves and very deep pockets to make it through cycles or adverse events and be okay still.

Check in place rents and see if they are below current market by a good margin. At least that way there might be some upside for the landlord in eventually re-renting the spaces.

Your buyer is getting into deep water if they are not an expert in the retail space. The buyer would need to assess their risk factor. If they are worth say 8 million and buying center for 3 million with 1 million down then if a couple tenants roll out the dip in cash flow likely to still be sustainable by buyer personal guarantee. There are literally almost hundreds of items I look at when my clients purchase retail properties when I am the commercial broker.

If both you and the buyer are inexperienced in retail this can be a recipe for disaster. Example you have 14 tenants at an 8.37 cap rate. 3 to 4 of them go out. Now the in place cap for NOI is 6.25. Now you have to look at lost rent downtime, tenant improvements, attorney legal costs, negotiating new leases, tenant rep leasing commissions, etc. to get refilled possibly at the same NOI or LESS than you has before.

The buyer instead now for the 6.25 cap could have just bought a 3 tenant Aspen Dental, Starbucks, T-mobile type center with corporate tenants and 10 year leases with 10% RENTAL increase every 5 years. The high cap rate mom and pop centers can throw off higher yield but you REALLY have to know what you are doing to extract that value. Often buyers just see a higher cap rate and think they can't lose.

Good luck

Spencer Vickers · Answer

@Cory Sparks

This is a great starting place for you in Commercial Investing and an incredible thing that you are taking the time to understand the intricacies of the deal on behalf of your buyer. I can already tell you will be a good property manager for them.

If you are looking for the basics, here are a few:

Average Occupancy

“T-12” Revenue, Expenses, and net operating income (Trailing or most recent 12 months)

First-Year Returns: CAP Rate is unlevered yr 1 yield. Understanding the yr 1 levered yield gives a good indication on how an asset will perform going forward (yr 1 is a whole lot more certain than year 5)

Here are a few things that may also be helpful but are really the investors’ job:

MSA (Metropolitan Surrounding Area) Drivers: Pop and Job Growth

Holding Period Returns: IRR, Cash-on-Cash, NPV (A quick Google search will give insight into these

This is probably a good starting place. Let me know if you would like more info.

Nick Robinson · Answer

@Cory Sparks

If you are going to be the property manager I would read some books and look up information on being an office property manager. It is going to be a little different than a property manager for a multifamily deal. Contracts are usually a little longer- May have built in rent increases yearly

Rents are based on square footage

Make sure you have solid contacts for your tenants to sign

If there are vacant units it will be harder to fill than multifamily

Want to look into how to attract small business into your strip mall

Congrats on working with your friend and starting your real estate journey.

What information do I need to get before buying a commercial prop

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