Commercial Strip Mall: What Am I Missing?

[Brian Ellison]

Hello! Here's the deal: I found a strip mall listed for $900k, 4-unit (fully-leased). Looking to approach the seller with a rent-to-buy option or seller financing at a 10% APR.

• List Price: $900,000
• Tenant 1: Chiropractor, $1,000/mo, 2,000 SF
• Tenant 2: Dentist, $4,000/mo, 3,000 SF
• Tenant 3: Salon, $900/mo, 1,000 SF
• Tenant 4: Individual Business, $650/mo, 1,000 SF

Tenant 1's lease is technically expired and are working off a 'handshake' agreement. Tenant 2's lease runs out in 9 months. Tenant 3's lease goes out 25 additional months, and Tenant 4 is month-to-month.

This is not an NNN property, so I'm accounting for $10,000/year in taxes (based off most recent assessment of $550k * 2 multiple to round to purchase price). Keeping a 10% vacancy reserve of $7,900/year, Property Mgmt of $7k/year, Main't of $7,800/year, and CapEx of $4k/year.

Still with all of these variables, the $3,350/month with a cap rate of 5.8%. 

I am thinking of asking the seller to consider a rent-to-own option where I can come in and work to lock down the handshake leases. From there, I estimate that I'll need to put in work on the exterior to repaint.

After this, I know leases in the area are going for about $14-15/SF (yearly) versus the $11/SF that's currently rented. I feel I could increase this value over time and have a nice monthly income going here.

Punchline: Am I crazy - This seems WAY too good to be true and I cannot help but feel I'm missing something here.

Thank you!

[Jonathan R McLaughlin]

@Brian Ellison 2/3 of your revenue on an expiring and long-time-to-fill lease is dangerous. How old is the dental practice. The other tenants are highly mobile.

[Steve Morris]

"I know leases in the area are going for about $14-15/SF (yearly) versus the $11/SF that's currently rented."

Think you need to verify that first.  Chiro is at $6/SqFt/year Full Service which is really cheap, so I don't know if cranking up his lease will work.

You also forgot to include utilities and insurance.  Utilities are major chunk of change if the tenants aren't individually billed.  I'll take your word on the prop tax assessment since we do prop taxes diff in OR, but would still ask a 3rd party.

You ask the owner why he's not getting more?

[Brian Ellison]

Great comments and questions, @Jonathan R McLaughlin and @Steve Morris, thank you!

The dentist office has been a tenant for 4 years, do not know appetite for moving at this point. Sounds like I have some homework to do there. 

@Steve Morris great call-out on utilities - these are paid for by the tenants. 

Seller is happy collecting a check every month for the property without having to put in any extra work to find tenants, increase rents, or maintain the property. Currently, the seller is self-managing the properties here (meaning the property management cost is also an estimate). 

[Jonathan R McLaughlin]

@Brian Ellison check to see the policy for revaluation of taxes. Lots (most) places will reassess on sale and at that asking price you will essentially double your tax costs. No need to ask me how I know :)

Your capex number is way too low. Replacing a parking lot can run into the mod 5 figures, roofs expensive etc. thinking lots of deferred maintenance with that tenant mix.

I don’t mean to crush your hopes, but it actually sounds really expensive for what it is, which is a smaller and low end retail c property. Check the cushman and Wakefield report for that sector and your region. Without looking I bet you are going to find those assets trading about 7.5-8.5. Just a guess, could be wrong.

[Jonathan R McLaughlin]

@Brian Ellison oops! Nice job you did do the math on the taxes, reading too quickly. Probably 5K for insurance. Lots of dentists retiring these days...

Still don’t see it as a money maker. Even if you could finance the whole thing you don’t have too much of a spread there.

[Michael C.]

Total rents = $6,550

$900k loan 30 year @10%= $7,832  monthly payment  

Negative $1300 a month without taxes maintenance capex…

Did you even run the numbers you are proposing?

also $3350 x12= $40,200/$900,000 = 4.47% cap??
debt service is way more than your $40k a year ‘profit’. Even at 3% apr yearly debt service is $45k. 
Did you forget about the mortgage payment??

[Brian Ellison]

@Michael C. - WOW, great catch here! I had my financing numbers input incorrectly, which was making the mortgage payment way less than needed. Agreed even with seller financing, the deal is over-valued for what's inside. Went back and updated the numbers and got the same thing you did. 

@Jonathan R McLaughlin - Awesome advice here, and no hopes crushed! The Cushman & Wakefield report shows about $14/SF for the Atlanta area, which is a huge geography. Really valuable information here, though. I appreciate the insight!

@Steve Morris Interesting tidbit for you: I did some research into an adjacent building and wouldn't you know, the rent is slated at $11/SF, not the $14-15/SF quoted. Great call-out on double-checking the information.

As a newbie to this, I cannot thank you all enough for the insight! Some things I've learned today: 

• Double-check your numbers! Do some back-of-the-napkin math to see if your math makes sense.
• Cushman & Wakefield = invaluable for estimating inputs in your model.
• Don't take 'value-add' estimates without doing some homework.
• Parking lots can be expensive!

I don't think this deal will work out.... On to the next deal! Thanks again, all!

[Jai Reddy]

@Brian Ellison

You should be able to manage a 4 Tenant property and eliminate Property Management fees, especially if its not recoverable from Tenants. Use a Leasing Broker to fill vacancies or negotiate new Leases when needed. They work of commission so there’s no ongoing ‘fees’.

[Jai Reddy]

@Brian Ellison

Landlord Insurance is another expense.