All Forum Posts by: Gabriel Graumann

@Alex Sarnoff I like what Evan and Henry have already shared. Going from MFH to NNN retail or industrial, you are trading one set of issues for another, though presumably easier issues. MFH carries all of the emotional issues and local governance that tends to favor tenants over landlords because you're dealing with "people's homes", not an investment property. From a management position, Evan is correct in that most issues are dealt with on a business hours timeframe vs. 24-7 for anything residential in nature. If you intend to self-manage, you will appreciate this difference long-term.

For the rest of your question, as Henry already stated, don't trust someone else's numbers. Perform your own investigation and build your own rent roll/spreadsheets to confirm everything. Draw your information straight from the leases on a tenant-by-tenant basis. Work hand-in-hand with your broker and leasing agent to confirm what market rates are doing compared to what is being paid currently. It's easy to say you'll raise rents to market rate but pulling that off can be difficult in softer markets with supply/demand dynamics without causing temporary vacancies, which leads to new TI's and other lease incentives to refill the space.

I'm sure you have an investment strategy for the replacement property, and that should include which markets you are looking to reinvest in. That is perhaps the most important question if you're considering multi-tenant NNN retail like a strip mall instead of single-tenant net lease deals. Based on your purchase price I would assume the latter. In theory, you should only be considering the strongest of markets, buildings in the best locations, with high demand and high barrier to entry for new retail developments. Where do the people (and business by default) want and need to be? Buy there, even if lower cap rates. A strong location with solid tenant mix, with strong market dynamics will trump a higher cap rate opportunity in a secondary market over the long-run 100% of the time. One vacancy in a lower tier market, could take 1+ years to fill, compared to a prime retail location that has a tenant waiting list just hoping a vacancy appears at a center. More demand equals less TI, rent abatement, or other LL concessions to provide when a vacancy does occur, so select accordingly. Your overall return on a 10-20 hold period will show the merits of this approach.

@Alex Sarnoff I like the transition out of MFH to NNN retail properties. More control over expenses, including what would've been a cap ex in MFH becoming a NNN expense that tenant's cover, or at least a percentage of them if leases are properly structured. To your questions though, my clients have not experienced the dramatic loss of negotiating ability that you have illustrated. Perhaps that is based on our strategy and method for initial exploration of replacement properties.

* We do not advertise that we are in a 1031 on the front end.

* We request as much due diligence material as possible in the beginning.

* We get as close as possible to ironing/feeling out deal terms that would be agreeable to the seller in advance of submitting an offer, including site visits if they are located in the same market we are vs. out of state/market.

All of the above data provides us with enough of an analysis to know what our deal parameters are going to be, at least to within a few percentage points. Knowing this on the front end limits any exposure to major fluctuations on deal terms once submitted. If anything, we tend to have a higher success rate in closing deals close to our original ask because we don't have as many unknowns going into the deal. If you're working with a great (not good) broker to assist you on finding the replacement deal, they should be providing you with the insights I've highlighted above (and more) to help you along the way. If they aren't, and you're having to manage this, you're not working with the right broker(s). Feel free to connect if you deem it helpful!

@Philip Hong I love this product type, it's in short supply nationwide. Primary reason is that it's not economical to building in today's market compared to a larger industrial building with only 1-2 tenants to manage instead of 30 smaller ones. However, the average rent PSF is often considerably higher as a result, at least in the markets I work in (Seattle and Phoenix). Yes, management is more intensive, and 50 units is nearing the size of facility that having a small on-site manager could be a benefit for oversight, management and leasing. Not required of course. One-year leases are very common in smaller spaces, as you're most often working with tenants in the trade industry that need a garage styled space for tools and equipment, some with a small 1-person styled office adjacent the shop. If possible, I would look at the building to see how easily I could merge 2 spaces together, providing a tenant a 1,400-1,500 sf space complete with a small 150-200 sf office w/bathroom, and the rest shop space. Having a minimum 10' bay door and adequate power throughout is helpful as well. What market is this property in and what is the population density surrounding it? Easy access to major HWY's and businesses?

@Margot Weatherford current NOI trumps potential every day, and is the best indicator of where the market is for the asset. Why isn't the property currently 100% occupied? What is the historical occupancy? If the seller is considering a change of use, why? Likely due to low occupancy and the perception a different use has more demand. However, mixed-use properties can create new issues depending on the construction and structure, access, and tenant mix. I've witnessed several "historic" buildings try the residential above and office/retail below and have major tenancy issues. Noise and smells, hours of operation, and access issues are very common, and many commercial tenants have conflicting needs with residential. Based on the size of the building, it sounds like an older residential building that has converted back and forth several times over the years, making it more likely to encounter the issues mentioned above. I stay away from historical buildings in general for all of the above reasons and more, unless it's a larger scale commercial building with concrete floors and great "bones" that can separate the uses/tenants better.

@Arya Chen despite limited reversal in a few select markets with oversupply, the general demand for this product type is very high, leading to lower cap rates that likely won't change much in the near term. Compared to other commercial asset classes, storage remains one of the strongest performers in the market. If you can find one with a true net 10% cap rate, you should be asking "why" is there such a large discount. Likely tied to supply/demand issues, aging facility with high cap ex, and operating costs increases. As you're new to this space, I would recommend partnering with an experienced investor/operator in this space that has several facilities under management create a strategy for investing in this space.

 As Jay mentioned, massive power requirement that will not get cheaper in time, and along with large water requirements for cooling the rack systems, so targeting locations that provides these necessities is key. Equally important are looking in areas where the municipalities have ALREADY approved of them and provide benefits to the continued development of them. Have friends working in this space along the Columbia River in WA/OR that oversee the data centers, and working with friendly government was key to their growth.

 @Wiley Strahan thanks for the update. Transitioning to newer product is a great step in rebalancing the portfolio and reducing liability on cap ex issues. You are right, many investors overlook the cap ex side of SFH product, when a roof or HVAC can run you $10K+, re-piping $15K+, and even smaller issues like windows and siding in the thousands. It takes months to years to recapture those expenses, and it draws the true annual ROI far lower than many account for. Buying a new, or nearly new property, even when at a 10% premium to the market, typically allows for higher rents to be achieved, provides for warranty transfer on items like appliances, roof, windows, and general construction, and prevents cap ex issues to impact annual ROI for the first 10-20 years. Equity grows the same, sometimes better, on the property too, so no downside to buying new.

@Wiley Strahan Update please. What did you end up deciding to do to resolve the issues? Did you hire a PM that actually managed well, quit your day job, sell properties? 

@John McKee Why did the tenant move out? Business issues or simply too high of a rent demand for the space provided? If market is $6K then you're not going to get a new tenant to pay 23% above market value for it, and I don't know any market in the nation growing rents at 23% annually. It would take several years to achieve that rate and you would have lost a ton of cashflow waiting for it to arrive. All said, drop the rate to market or slightly below (if you're in a tougher market) to attract a quality tenant, then pursue the refinance or sale as some have suggested already. Simultaneously, if this vacancy is a high percentage of the buildings total SF, I would market the property for sale to an owner-user who may be able to fill the vacancy at preferred rates while gaining investment income off the other tenants. A challenge that may arise, depending on the other tenant leases, is that they are all paying above market rates and will see the new rate being marketed and will want a discount at renewal. This is where a sale may benefit you long-term if you can find an investor to take it before the increased rate and pending rent decreases impact the value of the property further.

@Rob Ibarra No matter where you look, start with the zoning and make sure you can have a food oriented business at the property. I would start by finding a property with a kitchen in place instead of a full conversion from a different use. An older mom-and-pop restaurant or a stand-alone would suffice if you could find one.  There is a high cost to renovating a non-restaurant space into a kitchen, especially if you need everything like grills, hood vents, walk-in coolers and grease traps in floors, not to mention the utilities to service all of the above. Working with an existing space helps both expedite the process and save money. Good luck.