All Forum Posts by: James Storey

I recently got back into adding more commercial real estate training content on my YouTube and TikTok and thought I would share as it might help someone moving into commercial real estate investing and/or brokerage.

Everyone talks about CAP rates and how they compare to other properties, but I rarely see people describing algebraically what CAP rates are made of from market driven metrics. Furthermore, how to you come up with a CAP rate valuation when you have no reliable comps? Believe it or not, there is a method to the madness, and it is by using the underrated and underutilized Band of Investment method. I use this many times to value commercial property that is even completely vacant! Another video to come on that one later!

The Band of Investments calculates the cost of debt and cost of equity on an asset that has been stabilized that is driven from market to market and economy to economy. I've put together a detailed video just for you! Hope you enjoy!

ESRI as some of that data but they don't seem to update it every year.

 I always ask within 6 months before the renewal notice. That way it gives me ample time to figure out what I need to do with the property. Most National Tenant have am overall corporate understanding of how they are going to move their real estate portfolio for the given year so you should know what they plan to do prior to the deadline in most cases.

James Storey, CCIM

Hey Tony,

You definetly have a lot of opportunity cost in this asset especially with it having no debt on it. Couple things to consider. Cap rates are great to quickly analyze the value of an asset based on todays NOI but for most circumstances it fails to take into account general rent growth and overal future setiment for a particular asset. This is why sofisticated funds value assets on discount rates and not cap rates (except for proforma cap rates) and can purchase an asset and position it to be worth a heck of a lot more in 5 years. That said if you think you are pushing the max rental rate capacity and feel you have been a great manager and feel we are at the top of the capital market, then it might make sense to sell. You just want to make sure there isnt a lot of money being left on the table from future growth.

Investing is risky and selling and repositioning is risky also. However, sounds like you made a decent amount on your investment. Congratulations!

James Storey, CCIM

Location is everything for big box tenants. I would look more into the demographic trends in the immediate area since this is how retail tenants chose their locations. We track all of the tenants requirements that way we can chose our replacements if a tenant decides to move. 

I would also hire a mortgage broker on this deal to see if they can get you a better rate. We were just quotes something in the low 6% range from one of our brokers. Might be worth you looking into.

regarding the lease, just make sure it is a true NNN lease and not have a bunch of landlord responsibilities. I would also look more into the condition of the building because you don't want the tenants to dangle large capital improvements in front of you before their lease renewals.

James Storey, CCIM

As some others here has said, QSR's specifically are not in the business of real estate and their cost of capital and opportunity cost is much higher that was typically real estate can return. Location development and expansion is typically what is going to bring the brand more revenue through a franchise model or direct model.

James Storey, CCIM

Most of my clients are looking at a combination of deep value add over 3-5 years as well as potentially getting some seller carries for 3-5 year terms. Most of the people I am working with agree that rates will likely decrease in five years so the likelihood of refinancing is a big play they are taking in their analysis. 

James Storey, CCIM

It depends on the type of deal and the borrower but the best I've seen for investment commercial real estate is 25% down. For some investments, it may require 30%-40% down. 

On the other end, if you are buying commercial property and occupying at least 50% with your business, you can get a loan with 20% down or less depending on the loan product.

James Storey, CCIM

James Storey, CCIM

In order to compete on this one, it would need to be all cash in my opinion. I work in this space and can say that most buyers under $2M are paying all cash and most of the time it is either 1031 exchange funds or someone who is restructuring their large portfolios into an alternative investment like real estate.

The only way I would buy this one is if the location was absolutely non replaceable to the point that re-tenanting the building if needed would be a guarantee. Also, the other risk as John had mentioned above is that CAP rates are more than likely on the rise at a macro level however, that doesn't mean all property will see a huge expansion in CAP rates as some spaces just have so much demand that the space market outweighs the capital markets.

Other than a 10% increase at options, are there anymore rental increases during the remainder of the term? If not, I would say waiting for a 10% increase in 11 years and 5 years after would make it were realizing a 6% proforma CAP would take 31 years without any other increases. To me that is a long time to realize a cash flow that is equivalent to some longer-term bonds that you will be able to buy at the beginning of 2023.

The type of building has a lot to do with the analysis also as well as the underlying local economy. The STNL properties are driven mostly by the underlying market, location, visibility, and building use. I never advise to buy a property because of a specific tenant but rather the underlying asset and the economy in which it resides. After all, it is a real estate investment not a tenant investment. If we were investing in tenants, we would just buy their corporate bonds.

Anyways, these are just my thoughts. Feel free to reach out if you have any other questions or ideas.

James Storey, CCIM