NJ Commercial Property Dilemma

[Marco Y.]

Hello Everyone! I've been on BP now for almost a year and have posted some suggestions but this would be my first question on the site. 

I was wondering if you guys could give me your opinions/analysis on a comm prop i found in NJ recently. For the past 2 years I have been trying to enter the commercial real estate market but either i find something good and someone quickly out bids me or the listing price is insane. Sadly this seems to be the norm here in Jersey.

But luckily i recently found a property that might work. PLease let me know if you guys think these numbers are a little off or if Im missing something. This info was provided by the Seller.

Sale Price 1,199,000.00

Income Monthly                                              Annual

8 units (8,000.00) and 2 retail (3,500.00)

Monthly rental Income 11,500.00                  138,000.00

Expenses

Taxes 34,000.00

Insurance 5,000.00

Utilities 3,000.00

Repairs 6,000.00

Vacancy: 8%(rounded to 11k) 11,000.00

Total 59,000.00

Net Operating Income 79,000.00

Cap Rate 6.5%

Cash-on-cash

Down Payment 30% 360,000.00

Amount Financed 70% 840,000.00

Monthly payments / 25 year amort @ 4.6% (4,716.80) x 12= 56,601.60

NOI 79,000.00

Less Debt Service (56,601.60)

Cash Flow per Annum $22,358.40

My questions are: Is this even worth pursusing or do you think the asking price is too high? IM hoping to be able to purchase it for $1.1 if im lucky.

Also the apartments in the area would not be a problem to rent but the two retails are what I am a little worried about. Thats why I put the 8% vacancy.

Let me know what you guys think Thanks

[Joel Owens]

You are claiming expenses of only 43% for your NOI projections. There is no management projections. The lender will underwrite the expenses with management in there to be safe. You might say you will manage it one day and the next you want to get a PM. If you do not count upfront you will lose money.

What is the age of this building?? Probably lot's of capex you are not counting that will affect ongoing cash flow more than anticipated.

The debt you are talking about how many years is that loan for?? 5,7,10 year term??

The debt affects the cash flow so I don't like really short term loans in commercial or ones where it is fixed for five years then goes variable with  a high ceiling each year to go up.

I only consider using those types of loans for turn around properties where I will be selling in 2 to 3 years to 1031 into something else or refi the equity out. Typically on those turn around properties you use short term debt that is interest only so you take the extra cash flow and put into the property to get it stabilized faster. You have to make sure there is not a prepayment penalty as well. 

For instance some will start small in the 4's and then say after 5 years it can go up 2% max a year until It hits 12%. I would rather have a 10 year term at a rate at high 4's to 5.0 and know it's not going up. I can price in the higher interest rate in my offer price.

Mixed use such as what you are looking at is harder to get good debt on.

The retail you would need to look at TI needed to land a tenant and required lender reserves which will vary based on the retail spaces.

5 levels of retail tenants from least risky to most risky for lender underwriting purposes.

Taco Bell as an example.

Lease guaranteed by all corporate stores - thousands from parent company

Subsidiary of corporate - ex. 300 Taco Bells in one state

Large franchisee with track record of 15 years in biz and 100 stores etc.

Small Franchisee with one to two locations and little experience and assets.

Lowest is non- taco bell but just a persons starting up a taco place with no support just a name and a dream etc.

Most of my clients buying strip centers into the multi millions are using non-bank debt.

10 year term, 30 year amort., high 4's fixed, non-recourse loan with a first 2 years interest only option to push cash on cash another 250 to 300 basis points. Typical cap rate is 7.5 to 8 cap. COC in mid teens or higher.

The strip centers are NNN with CAM re-imbursement so passive for landlord with management versus what you are looking at. You would need to complete a "void analysis" for your area for the retail spaces and see what would go there and rent credits with TI to get them in.