Zero Down Deal....Tight Cash Flow...Thoughts?

Question

Hey guys!

So I'm looking to acquire a seller financed large commercial property. Single occupant...but is a solid tenant (national flagship bank) and has been there for 10 years and custom built out this large facility to meet their needs. They have 4 years left on their new 5 year lease (Triple Net) with option to extend for another 5 years.

I can acquire it for $5.8 Million and seller is willing to finance it for zero down. My concern is Net Cash Flow after everything is said and done is $20k a year. Which seems very tight for a 5.8 Million property. This is my first large deal and I will have a partner or two on it. I think the cap rate is around 6% for it and cap rates for this kinda building is around 5.5% so there is a small amount of equity built in.

Building was built in the early 2000's so it's not terribly old.

After 5 years, with debt pay down and appreciation it will be worth around 6.35 Million so it would get some good equity in it.

Feel free to poke holes in this at your leisure. I want to get into bigger deals like this...but can't afford for this to go badly either!

Kyle

Simcha Davidman · Answer

@Kyle Davis a couple thoughts jump out at me.

Is seller requiring some sort of personal guarantee? In other words, if the tenant vacates now or after the lease in 4 years, can seller only go and take the property back or can they go after you and your partners personally? I'd be very wary of the latter.

During due diligence, try to speak with high-ups at the bank, the people in the real estate/lease department and figure out if they've determined that they are moving out of this location. It's entirely possible that the seller has information that you don't. And banks as a very general rule are moving toward less brick-and-mortar.

It's hard to say that the building will appreciate almost 10% in 4 years. Does the lease have rent escalations? But that's only part of the equation. On these buildings, your income is only as safe as the tenant. If the lease expires and they move out, your building is worth pennies compared to the $5.8m. Of course, a renewed lease or a new tenant would change all that. I simply mean that just because the tenant is paying X amount in the last year of a lease does not mean that the building is worth the typical cap rate multiple.

Good luck!

Zero Down Deal....Tight Cash Flow...Thoughts?

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