Need help analyzing this deal - strip mall

[Kishore Ginjupalli]

Hello all,

Need advice on below, would like to know from experts if we are missing anything and how is this deal overall.

We just started researching about investing into commercial real estate and stumbled upon this property. It is a retail strip mall - amazon proof tenants.

Below are the financials 

List price: $3.5MM

Total leasable area: 9000 SFT

NOI: $239K (if fully occupied)

Total Units: 4

Occupancy: 83%

Land: 1.5acre

Parking spaces: 80

• 1. One of the unit is occupied by a national known sandwich shop (corporate lease) - this is 17% of total space and they are in the building from 2006 and their lease is till 2026
• 2. 53% is occupied by a (local to state) bar and grill - their lease started in 2007 and expiring in 2022 - next 5yr extension option with 10% increment. - They have around 25 - 30 locations in the state.
• 3. CBD shop occupying - 13% - start in 2019 and initial lease till 2025
• 4. Vacant

All NNN lease with expenses reimbursement from the tenants.

seems like a good location as it is just off of freeway and there is Chuck E Cheese, Apple Bees, Raising canes and other  good retail around the location.

We are trying to get the latest income statements from the realtor to assess if the tenants are doing good (mainly from the bar which is occupying 50% of the space and lease coming to an end in 2022)

According to our calculation cash-on-cash is around - 8.5% if the building is 100% occupied 

Assumptions: 25% down payment and 75% loan from the bank @4% interest rate 30year amortization 

Operating expenses included - Property taxes, Insurance, CAM, Management fee.

Are we missing anything from the calculation ? Do we need to consider any other expenses ? What is the % used to calculate the unforeseen expenses ? (we haven't reviewed the lease terms yet so not sure if HVAC is a LL expense or tenants) 

One more thing, in addition to above property the same owner has a 1acre+ land which they want to sell along with it .. they are ready to cut almost 30% off of land price (I did quick research on the surrounding land postings online and this property listed for substantially lower price already)

If we get a good deal along with the land may be around 3.75MM (include the land as well into same loan ??) and even with current occupancy rate we will be able make debt payments and save around 5% or more (cash-on-cash), our plan was to ground lease the empty land or build a storage units or something after few years.

Please suggest if we are missing something here in our calculation.  

[Tim Delaney]

@Kishore Ginjupalli it appears to be a pretty good deal as long as you can withstand the negative cash flow with the vacancy. One thing that is not entirely clear though is you said leases are NNN but then you mentioned operating expenses later - in a NNN the tenants pay for taxes, insurance, maintenance, etc.

You should also examine the other vacancies in the area - how does your space compare? Are you going to be able to get a solid tenant in? I’d be looking at salon, spas, tanning, or dance/gym type studios to see if there is room in the area to attract something like that.