All Forum Posts by: Jonathan Marcus

Yes, on large commercial deals you will routinely encounter this. Here in NYC properties listed with say Eastdil Secured, Eastern Consolidated, CBRE, Cushman-Wakefield they will tell you that buyer pays buyer's commission. They will not split whatever commission they get from the seller. 

I tell my buyers upfront that they have to cover my commission even if I am dealing with an off market property. I never get resistance from my buyers because most have already purchased a large commercial property before so they know how the game is played. Now the commission can be built in the transaction and does not necessarily need to be paid separate from the deal. It will be spelled out in the LOI.

Another suggestion which worked for me a few times is writing the owner directly. Check the tax records to get the owner's mailing address and mail the owner an LOI. Let the owner know that you're not an agent and that there would be no commission to payed by him should you buy the property. Until you get to sit down face to face with the owner will you know the real story if your offer is good or not.

Well said @Shane H. Here in NYC I have clients that will buy really low cap deals because they are not after cash flow. They're going after the location then would change the use of the property from say office to mixed-use (retail plus condos) as an example. 

Anyway, I think I spent too much time on this...good luck in your deals. Listen to your gut, it never stirs your wrong.

Bob, this in response to your point that increasing rents does not affect cap rates. My contention is that it does. On this particular deal 4.5% is not market cap rate but simply what this particular seller wants to give on this deal, maybe because of the owner financing tied to the deal. And it is not a delayed closing because there is no purchase and sale contract drawn up but rather a lease and an option agreement, which I am sure you know it merely gives the optionee the right-to-buy the asset but not the obligation. 

He doesn't necessarily need to sell the building at 4.5% Cap (same as when he bought it). He can sell at 5 Cap taking a little less profit. He can do so because of the increase in NOI (keeping his purchase price the same) from the improvements he is applying; hence, the increased cap.

Or if he decides not to sell at all but completes the purchase by exercising his option, the lender would be looking at the newly increased NOI and his purchase price of $2 million and using our example, cap is 6%. The lender would not looking at the old NOI of $90k.

His acquisition Cap is 4.5% but by increasing his NOI, as we both agree the value goes up. But his purchase price remains the same at $2 million. When you apply the new NOI to his price of $2 million, CAP goes up to 6%. Now, if he then decides to sell also at 4.5% Cap based on the increased NOI he gets to pocket $666,667.

If he has an option to buy at $2 million, which he says is at 4.5% Cap NOI would be $90K. If he increases his NOI 25% to $120k, Cap goes up to 6%. ($120K/$2 million)

Networking would be the way to go. I am a commercial agent in NYC and by networking relentlessly it allowed me to meet and now deal directly with some of the biggest movers and shakers of commercial real estate investors and developers in New York City. 

You definitely want to avoid broker chains. Strive to always be direct to the seller and/or buyer.

If the seller stated that income is his main motivation, I would explore that route. Consider doing a Master Lease with an option on the entire portfolio. Lease the entire property and give him his present net income and sign an option contract for his asking at the 4.5% Cap. 

Once you have control start making your improvements to increase rents and find ways to lower the property's expenses. Once you do this, you effectively increase your Cap rate and of course, you pocket the new cash flow that is created. Then exercise your option to buy or just flip your contract and take your profit. 

@Dustin Barr Do you know why the seller is selling? If not, find out his motivation for selling such great cash flowing properties. Find out if he has a mortgages on these properties. If he has can they be assumed? If they can then all you need to come up with are the equity balances on each property. 

If he is selling because he is tired of managing the property but likes the income, ask if the owner will consider owner financing the properties; providing he doesn't have large mortgages on it. Or would the owner consider doing a master lease on the entire package, so he gets one check from you equivalent to his present net income; you make your money from the increase in rents and have a long term option agreement to buy at a great price. No banks needed on this one; just some cash to make the realtor happy. 

Lastly, the seller is most likely will be doing a 1031 exchange to defer his taxes; if you're able to buy the properties in the traditional manner, he would be looking to re-invest into a bigger type property. Great opportunity for you to potentially co-invest with someone who is cash heavy into a bigger apartment building.