All Forum Posts by: Joel Owens

I think it comes down to the WHY you are doing something.

I can give example of Chick Fil A. Their restaurants average about 5 million minimum in sales and some do 10 million annually which is staggering as it compares to a dine in Cheesecake factory with much larger tickets per person.

They give employee chance from within to partially own and operate ONE store. The employee see it as a chance of a lifetime to make 300k,400k,500k a year with share of the profits. They want to run the location to perfection.

On the flip side the private equity companies tend to just want to hit a number kind of like the fund managers.

So it's an approach of only buy when the syndicator feels really awesome about a property OR they just keep scaling and hoping some work out.  

I think you have to look beyond the company and look at the GP as a core. I am talking in generalities but on the commercial real estate broker side I am always blown away by investors that want to own direct themselves and get talked into crap deals. You are talking about people's legacies, their life savings, all their blood, sweat, and tears of work for their profession or their business built up often after many decades of time.

How can someone take something like that so lightly? 

I see some syndicators that have to do deals because of high carrying costs with lots of employees. So to make payroll they have to keep churning over deals OR they might be a good person but simply have limited knowledge. I see some stuff syndicated in the NNN space that I would not touch with a ten foot pole but I have been in commercial about 20 years and reviewed millions of properties in that space. It becomes like breathing air you just know how to do it optimally without thinking about it.

I have seen syndicators take on loan assumptions with marginal terms and high fees or they used floating debt just to massage the numbers so they could hit a certain projected pref (hopefully) to the investors to entice investment of capital. I just personally do not think that is a good way to do business. I like pay all cash with the raise and then you can exit at optimal time of the cycle because you do not have the lender or banking situation environment causing potential waves with your investment.  

Check if the roof has rocks. If the flat roof has lots of rocks to suck off then can add a few more cost per sq ft to the bid because of added time, labor, disposal.

First I want to say that multifamily was on a cycle high 5 years ago. Now a lot of that is tapped out. If you look at projections many outfits are paying almost nothing in the hopes of a return years down with the pro-forma.

I personally would be very skittish of those type of deals right now.

My syndications I focused on value add dark retail NNN buildings to re-purpose. They have higher growth equity multiple potential.

Currently I am more focused on core plus NNN buying all cash. High profile locations with investment grade credit tenants or strong private credit if available. 5% preferred return annually plus splitting of cash flow over that mark. I like buying all cash because we are not controlled by the debt market or what interest rates are. Those large debt deals you can win big or lose your %ss.

My deals aren't super sexy for returns by they do not have to be. Occasionally you can achieve cap rate compression for growth or the building comes with extra land for some value add but that's not a given. Multifamily on the other hand is heavily economic cycle, debt cycle dependent on exit. 

Why do syndicators take on debt? So they have to raise less capital and can buy quicker and faster leveraging debt. In low interest rate times they can look like champions if they buy right but they can also lose it all in turbulent rate times.

( I am not talking about this company but in generalities ). I think it's good they are communicating. Lots of syndicators got mentored up with these multifamily type properties and were buying anything anywhere. That time is gone now nationally for multifamily. You better make darn sure you have a stellar location with tons of demand to rent so that the rehab matches the rent growth to NOI with what jobs are paying in the area. The rest are likely to get hammered hard in coming years.

Some of my friends that are long time with multifamily have pencils down right now unless a loan to assume in the 3's or 4's with rate and those get like 10 offers from syndicators when they hit the market. 

Hi Ross,

I have been in NNN about 20 years now as a principal commercial broker, investor, syndicator, etc.

I stay mainly on the buyer broker side working with clients nationally. I am not pitching myself but mentioning this because very few high level commercial brokers work the buyer side. Instead they focus on the listing side for volume. Their splits are so bad making maybe 10k or 20k out of 100k payout that they run hard on the hamster wheel and are not wealthy. The senior director have the VP's and newer agents do more of the grunt work while they land more portfolio's to sell.

So because most live by the deal they sell whatever is available to them from their sellers. That could be bad, mediocre, or a good property. Most of the time the good stuff sells pre-market and then the scraps are sold off to uneducated buyers to the space. The listing brokers do a solid for the seller dumping the dog properties at a premium and the seller rewards those listing brokerages with more business.

Owning single tenant NNN is easy the HARD part is the process reviewing lots of properties to find the gems to buy. It's just like any other asset class lots of junk out there. I do not post on here as often anymore just because I am so busy with clients and my own investments these days. So make sure whoever you work with they know what they are doing and they do not need the money to live. Often those types can tell you what they really think about a property.

On my website and on Amazon I think is a free book on NNN I wrote that goes in depth. Hope it helps.

When we buy commercial properties we reach out to about 3 different leasing companies to see what their vision would be for the property and compare that with current use, to highest and best use, to zoning allowed use.

There are many restrictions to check on.

1. Zoning restrictions

2. Current tenant lease restrictions

3. Deed restrictions

4. Co-tenant adjacent restrictions for commercial association.

We set up a 90 day initial review period post closing to see what interest level there is from developer buyers, end user buyer, leasing tenants  and quality of tenants inquiring.

Then we go from there.

You need to know the roof quality, A/C units, parking lot, and if any association current assessments or special assessments coming soon.

15,000 sq ft building typically 10 bucks a foot so 150,000 for roof about. Parking lot depending on size could be 25k to 100k to resurface. If they have to mill it down because too many black coats done already then could be hundreds of thousands. So you could spend 1/2 a million before even doing attorney costs, leasing commissions, interior tenant improvements buildout credits.

The question becomes WHAT tenant and quality do you get? If you get large national private credit well known or investment grade than exit cap rate could be much lower. If it's a weaker tenant the rate could be 300 to 400 basis points higher on exit. 

I have been in real estate about 20 years now and invested in multiple asset types. You have to KNOW YOUR MARKET where you are investing. Take a 4 unit out of the equation for a second.

What is the market doing? The 650 rent how fast is the rent growth there weekly, monthly, annually? You have to know supply and demand for that micro market before making moves.

I see this often where people buy a sizeable apartment complex of like 100 units and start renovating the crap out of it and then everyone leaves or the rent is raised for a bit and then tenants trash the newly rehabbed units and the operators lose millions of dollars. Conversely in a strong rent growth market with mainly well educated and financially sound tenants the proper rehabs might yield stronger rents that tenants can absorb and keep paying over time. Eventually they will hit a ceiling for the big jumps. 

The tenants being there and paying on time is the LOYALTY factor as we call it. The longer they have stayed, paid on time, and kept the place clean and livable often the more valuable they are. The reason is you KNOW what you are getting versus a new tenant that might pay 50 bucks a month more you know nothing it's a roll of the dice based on their past history elsewhere. So if you can get higher rent but not that high to where they stay might be better off than renovating the whole thing and taking a chance with a new unknown tenant.

What I often see from 30 to 40 year apartment owner investors is they might raise 3% a year where they are still in the bottom 50% or less of market rents in the area. This has tenants not make waves or complain much because they know the rent is a good deal in the market. Conversely if you charge top market rents the tenants tend to complain about everything or as soon as another place comes open that is nicer for close to the same money they move which causes more turnover.

So it's really about your goals with the property and how long you plan to hold. With a 4 unit 1 vacancy is 75% occupancy and 2 vacancies you have 50% occupancy. Most investors over extend themselves with debt to get going and losing a tenant they can't (float the note) to the bank. Once you get millions to tens of millions or more in wealth you do not care about max yield you want to avid max headache and basically keep pace with inflation. If you make millions per year you typically do not spend millions to live so keep rolling that into more investments. There is often a different process and decision making for an investor due to age, wealth at a certain point in time in life etc.  

You should have answered this question before closing on the property. You should have had a plan in place pre-closing.

What age elderly 60's, 90's?

Care tends to increase as they age.  Some section 8 areas have waiting list of YEARS to get approved. Same thing with lower income places they can have years of waiting list. It's not like ( hey I want to double your rent and you have 30 days to get them out ).

Care facilities most of them suck. Post corona they have limited staff and charge like 4,000 to 7,000 a month depending on what they ask for and is needed. Someone could literally hire a full time nurse to live in for cheaper with much better care on a day to day basis. How do I know this? I explored all options with my mom who is 80 years old. She lives with her brother who is 72 in and older apartment building complex that is not technically a senior community but has 84 ranch like units and 90 plus percent or older people living there.

One time the seller tried to sell the dirt to ALDI which would have displaced lots of seniors. The property was in the city limits so the city crushed the application to not approve and ALDI went away.

Make sure this 600 plus market rent you are talking about is comparable to your property. Are you comparing your property to a large complex that has elevators and amenities or other 4 units in same area and not better area? Does your comparable units have granite counters, stainless appliances etc. or old units worn out?

You have to calculate lost rent for downtime of 1 to 2 months and make ready cost.

So if unit takes 5,000 to completely reno with down rent costs would take about 2 years with a good tenant paying on time with no capex issues to break even. After that sure the rent NOI likely jumps a lot. How old is the roof on the building, sidewalks, interior guts, landscaping large trees to close to building, etc.?

You knew going in there were older people living there if proper due diligence pre-closing was done. Elderly are on fixed incomes and barely survive. Not all of them but a huge majority are. They can't afford a 75 or 100% increase in rent.

They could have family move in with them to help cover the extra cost possibly but you would have to qualify the additional people. 

It's probably why the rent is so low the landlord had a great heart and could not sleep at night displacing the elderly like that.

If they absolutely have to move then it seems like a better thing to do would give them some reasonable time to figure it out like 4 to 6 months. If you are holding the investment for a long time giving them time to see how much more they can pay is not the end of the world.   

Yes I know the companies.

Be careful who you lease up as tenants. Some leasing brokers like to (fill them fast) with weak tenants that are not properly vetted so they get paid quick. You have pre-lease to show the lender and they give the construction loan. You finish the project out in 12 to 18 months and the tax assessment is orginally low because dirt value only, then building 50% occupied, then 90 to 100% occupied (hopefully) but then gets fully reassessed.

The reassessment pushes your base rent plus CAM super high and shocks your mom and pop to local tenants. They start defaulting or wanting help from the landlord with adjustment period. Meanwhile you have to fight the high tax assessment.

When you are new developer the lenders want at least 50% pre-leased to start funding. When you are developer that has done it long time and proven yourself they often do not require this because of track record and experience with strength of net worth and liquidity compared to the project being built.

You have to determine if rents are even viable with a strip center. Often those tenant cannot pay much rent per foot versus a single tenant business model.

Example a 3,000 sq ft Chick Fil A might pay 150k to 200k ground rent for strong sites and construct building on their own dime for 1 acre site. Even if you need to build single tenant maybe 200 a foot to 250 a foot so 600 to 700k costs before TI, leasing fees, and legal fees, etc. 

9,000 sq ft center likely 2 million plus to construct. All fees in maybe around 2.6 to 3 million. Let's be generous and say you get 35 a foot before cam costs.

315,000 NOI - 10% vacancy underwriting = 283,500 NOI

283,500 / 4,350,000 = 6.5 cap 

3,000,000 / 4,350,000 = About 31% gross Margin

These are very loose numbers and not at all meant to be absolute there are tons of other things that go into development. Developers can charge fee for development services where they handle the building and everything but can add 100k to 200k or more with fees to the project versus doing it yourself but without experience you can make tons of mistakes whereas the experienced developer hopefully just makes a few tiny mistakes that impacts the projects very little so it's still a success.

The developers have construction crews and processes proven over time and because they do volume can often get costs lowered for the project which can sometimes negate their fees you have to pay.

It's really about what life you want to live. Personally I did not want to be a full time retail center developer. Instead I like brokering as a principal broker and owner of my company clients buying existing properties and then I buy value-add to reposition myself mainly single tenant.

Doing that I make 7 to 8 figures a year profit to myself. Depends on equity upside positions in my properties after stabilization and also how many broker deals I do that year. One is immediate income to the bank and the other is upside equity and some of the cash flow ongoing.

If there is not an association you are part of or deed restrictions it can help make it easier to develop the land because then you are getting county or city approval for zoning type and site type. Some parts of Texas do not have zoning but other hurdles to cross.   

I am own retail properties also nationwide. I am principal broker specializing in the space for almost 20 years.

First question is to determine your properties highest and best use which may be different from it's current use. Then you have to see what zoning would approve in the area along with any association restrictions, other tenant lease restrictions, or deed restrictions that run with your property.

Then you have to do a void analysis to see saturation brand levels and tenant types for the area and what is missing and who is there and expanding, moving from current place, and just entering the market.

After you have all of that you have to make the decision if you want to sign a lease listing agreement for your property with a retail firm. We have our custom agreement and outlay expectations of what we require of them for communication and updates in advance.

You have to remember leasing brokers get paid when they close so they are often the most motivated to put whatever tenant in your property you say yes to. Not all but many act this way. So on some of our properties we use a leasing broker on our side and other time we offer a higher leasing fee total and call around to the leasing brokers to see who will bring us the best tenant we like.

The bigger the box space 20k sq feet plus in size the LONGER it takes to generally find a tenant because there are less of them looking and in a market. A bigger footprint business can often be harder to relocate than a smaller shop.

Are the buildings you own free standing or do you have smaller stores to left and right of the big box?

We do not do leasing for people my time is worth about 3,000 an hour and climbing. 

The big box tenants often pay very little rent per foot because they drive foot traffic to smaller tenant connected to them or close  by. If your buildings need new roof and parking lot that could be 500k to millions of dollars before the inside TI credits, leasing commissions, attorneys fees.  

Good luck