All Forum Posts by: Joshua Leite

 No argument there. My TI amount was just an example. It is very dependent on local market, comparable deals and class within cre (retail, industrial, office).

How do you know it is valued at 700k?

While there are many great facets to commercial real estate there are also many differences compared to residential (SFR or multifamily). Before you consider getting into the commercial side, I urge you to research and make sure you know what goes into the following:

Leasing – Tenant Improvement allowances (what is the current market offering) are a major difference from residential. A landlord may end up needing to put in $2 per square foot of leased space in improvements to get a space leased. This takes a bit of free cash.
Leasing – Broker Commissions – Commercial leases (office, retail, industrial) many times have multiyear terms (3-5, even 10 years) which commercial brokers typically get paid a percentage of total value on. This adds up when leases are valued at $500k+ in total.
Commercial loan escrows – commercial loan servicers often require escrow accounts for taxes and insurance costs. This can reduce your monthly cash flow if you don’t take this into account going into a project.
Management – commercial leases are more complex than residential. You have a breakdown of maintenance obligations, cost recoveries, annual reconciliations. A good management company can stay on top of these items as well as the day to day operations. Make sure you know the leases inside out so you are not leaving cost recoveries on the table.

Hi David,

There are a few common ways to obtain market rent data for commercial properties. 

-Costar or Loopnet (which is owned by Costar) are websites that have comp data available for commercial properties albeit at a monthly fee which may not make sense if this is a one off commercial deal or your first commercial deal

-Commercial real estate brokers - they have a good pulse on the market or at least knowledgeable ones do and they will have relationships with other brokers to share information about deals/leases that have just been completed, what TI allowances are common for the current market, etc. Some brokers or brokerages also release periodic/quarterly market research for different markets in the US (and internationally) with research on market rates, vacancies, construction, absorption, etc. (CBRE, Cushman Wakefield)

I would say that yes, commercial is very different from residential. Good luck on your endeavor. 

Josh

 I've only had a handful that didn't pay their shortfall and they typically went bankrupt or left the building due to nonpayment of rent. Less than 5 out of 100 on average.

 I agree with Joel. In SoCal this is also typical for modified gross office leases and net leases. Tenants pay their share 1/12 estimated annual expenses each month. Reconciliation happens by April of the subsequent year typically.

Josh

 Daniel,

I disagree in saying that a ground lessee does not own the building. It depends on the ground lease as it could very well be the case that the lease gives the ground lessee the right to build and ownership of the physical building in place. Ownership of the buiding could also mean that at the end of the term is needs to be demolished or removed or as previously stated it could turn into the land owner's property.

Josh

Hi David,

If you don't mind sharing - is this deal in Orange County?

Hi Ajay,

I work as a commercial property manager in SoCal, retail, office and industrial. PM me and we can chat.

Josh

@Joel Owens

 Another good thing about the strip centers that you like is that your exposure is less with each vacancy. 

To add to what you are saying - single tenant properties are simpler in terms of operations though financing can be tougher to obtain because lenders worry about vacancy exposure. One tenant = one source of rental revenues (unless you lease the roof for solar..but that's another topic).

At a property with multiple tenants/buildings/suites the owner then has the ability to absorb the financial loss of a vacancy while having other spaces bringing in revenue. This also allows the owner to structure leases with different expiration years which can give the opportunity to complete deferred maintenance or capital improvements incrementally instead of a chunk of change at one time.

You make a lot of good points and your posts are always informative. Keep it up!

Josh

Commercial Property Manager