All Forum Posts by: Kim Hopkins

We're trying to make an offer on a property with a seller by offering him seller financing. 40% down payment. He owns it in cash so he doesn't have any loan to pay off.

Can he do a 1031 exchange in this scenario?

Would it just be on the actual proceeds amount (i.e. sale price LESS seller carryback amount)?

Any tips on how to structure?

Trying to make this easy for him to say "yes"!

Thank you,

Kim

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Thanks @Charles Carillo I had something similar so just added a sentence to remove it from the listing and other websites!

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Quote from @John McKee:

I agree with the multi tenant strategy. Sounds like it served you well in the industrial space. New insurance costs are passed onto the tenant, that's the Beauty of NNN. I rarely pay TI but I'm always willing to give out free rent if they need time to build out. Let the tenant deal with the costs, contractor headaches, delays, and nuances of getting the space ready. This way you don't have to calculate the cost you will never truly find the answer to and the tenant will improve the space for you on their dime!

@Kim Hopkins

Hi @John McKee,

I really appreciate this story. We always do the same in our multi-tenant industrial buildings - if the tenant wants TI, they almost always pay for it and we give some type of free rent accordingly.

In this multi-tenant retail deal, I was questioning my usual TI practice. It was built in 1976 so a few years older than we typically buy (1980 is our typical cut off).

The current owner remodeled several of the units "down to the studs". He also mentioned (via the broker) that when he started to renovate the first unit, he noticed the electrical looked "shabby and outdated" so decided to redo the electrical as well.

I did a WAG estimate that it could be $35k per unit to white box them to this level (total guess).

I started to wonder if -

A) Everyone in MT retail does a full white box for older units, and

B) If we need to underwrite these huge remodel expenses into our underwriting.

This already kills a slim deal. We're seeing 7.4-7.65% interest rates and 50-60% LTV requirements. COC is 4.5% on an offer we put in that's already way below the asking price.

What are your thoughts on the remodel situation above?

What are you seeing for rates and returns on the deals you're analyzing?

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Quote from @Joel Owens:

K-mart, Rite-Aid, Sears no credit to junk credit.

My clients buy BBB- or better Standard and Poors rated investment grade credit. Very, very low default rates over 50 year spans.

I would take a strong credit tenant with predictable yield over lots of small tenants where some will go out over time. Once you model out TI, leasing commissions, attorney fees unless there is massive upside rents to new tenant and stronger tenant it's a lot of work for nothing.

TI varies based on what you are doing with the space. There are not set rules and hard numbers it's all situational to the tenant and the area.

Example a dark coffee shop where another chain coming into the space might require 10 a foot to convert. On the other hand a medical tenant might want the space and takes 50 a foot.

If I have Starbucks coming in I know they will be there and pay the rent over term of the lease. If I have one operator unit tenant or small franchisee they may not last so I would be more careful about upfront leasing commissions and TI being paid. Again it's all situational and comes with experience dealing with those assets day in and day out.

Building from 1976 would pay attention to the roof and when last redone. if gravel has to be sucked off the labor can get very expensive.

Roof is brand new, tear off too. Parking lot is redone.

We can talk about product preference in another chat but right now, I don't see how one would do any financing with a big credit tenant at the cap rates they come with. Again, not the purpose or question of my post though.

Back to the topic. Any idea how much on average it costs to do the following (PSF) for a unit?

- Redo electrical wiring and lights

- Redo all drywall

- New floors

- New insulation

- New ceiling deck

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Hello!

I was considering adding to our LOI template a requirement that the seller cease marketing the property, including on any real estate websites (broker website, CREXI, Loopnet, etc) once the LOI is signed.

I've never done this before, but I was wondering if anyone else has and if it sounds reasonable? I don't want offers coming in while we're trying to negotiate a contract.

Thank you,
Kim

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Quote from @Joel Owens:

The real question is what are market rents and how well is your neighborhood retail center positioned in the marketplace?

You could have national tenants leases coming due in a couple years that have their eyes on a stronger location and then you will backfill with more regional and mom and pop and lose cap rate value due to tenant quality.

Also current rents per foot with leases for box sizes versus what the market is doing. You need to know for instance if in place rents are 20 a foot before CAM then what is market now 15,25? Where is it trending flat, down, up?

How often are taxes re-assessed in the city or county? Upon a sale, every 3 years, 5 years, etc.? If owner owned long time taxes could be lower. Tenants could get CAM shock from higher taxes that push all in CAM up 2 to 3 dollars more a foot.

100 other items.

Are you paying cash? Interest rates at 7 percent plus. Why would you do all that work for a center when can go investment grade NNN at same or higher cap rate?

Maybe it makes sense with owner finance at below market interest rates.

Hi @Joel Owens, these are great due diligence questions, all on my list already. My questions were specific $ amount questions for underwriting. If you have answers to those, that would be greatly appreciated!

To answer your question on a shopping center vs investment grade NNN, risk. If you have a single tenant and they go bust, that's it, you're underwater on your loan. Multiple tenants spread the risk. The smaller they are, the faster they lease and the more of them there are in general. Worked very well for us so far. K-mart? Rite Aid? Sears? Not interested...

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Quote from @John McKee:

1) Leasing can be easy if you have a class A location. Drive around and look at the other close by centers and see if they are full as well. what makes your center unique? The fact that yours is full is a good sign. Does the center have any anchors? To answer your question though it will take a little longer than flex

2) If you have a class A site, typically not much TI after all your just renting out a box. sometimes free rent is a good idea to help those that have larger build out costs. Its all negotiable stuff regardless

3)it depends on your building needs and infrastucture. 2-4 a square foot range or sometimes you can just do a special assessment

4) 15% increase Just shop around

5) Dont really need a property manager on a small center, but factor in your time 5-10% and yes its a part of your nnn/opex

6) read your current leases. The devil is in the details. watch out for capex expenses like roof, hvac, parking and landscaping

Thanks @John McKee -

1. It's non-anchored. This property is mom-and-pop which we like, and next to anchors, which we like.

2. It's NOT a class A site for sure. Building was built in 1976. Owner did major renovations - new roof, paint, new doors, HVAC, parking lot, etc. There are only 4 "legacy" tenants left, each 800 SF, and representing 15% of the space, in total. I'm guessing their units are very outdated. What would be the range of $/SF/Unit you estimate for small non-anchor retail tenants like this?

4. Regarding property insurance, did you pass that 15% on to the tenants without issue?

Thanks!
kim

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Hello!

We are experts in multi tenant industrial but we're looking at some neighborhood non-anchor retail centers to purchase. Would love some help from the pros here on assumptions to make for high level underwriting (in order to decide if we want to make an offer and at what price).

Here are the facts:
• 20,500 SF
• Small tenants ranging from 800 - 2,400 SF.
• ~$5.5M purchase price. 6.75% cap rate.
• All tenants are NNN.
• 2023 OpEx stated at $4.50 PSF or 22% of base rent income.

Here are my questions:
1. How long does it take typically to relet a space? (For MT Industrial, it's 1-2 months for example).

2. What is the typical TI ($/SF/Yr or other formula) for new tenants on rollover? And who typically pays it or how is it structured? (E.g. LL always pays or tenant pays but is amortized or...)

3. What do you typically reserve ($/SF/Yr or other formula) for other reserves and/or capex?

4. How much did your commercial property insurance increase (%) this year and are there any strategies to mitigate?

5. How much do you typically pay for property management (% - please specify if it's on base rent or gross rent including NNN reimbursements)?

6. Is there anything else we should know or look out for that comes to mind? E.g. always check.... X.

Thank you!

Kim

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Quote from @John McKee:

I think I just got lucky. A friend forwarded me the listing. He just didn't have enough money to put into the deal to make it worthy for both of us so I stretched a little bit to do it myself. I'm always willing to partner on these deals especially since it was multi tenant and these type of units are the most in demand over any other asset class.

That's awesome. I'm also just amazed at that interest rate and also the LTV! Haven't seen that anywhere.

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All Forum Posts by: Kim Hopkins

Kim Hopkins has started 48 posts and replied 254 times.

Post: 1031 Exchange with Seller Financing - Possible? Easiest structure?

Post: 1031 Exchange with Seller Financing - Possible? Easiest structure?

Post: Requiring Seller to Cease Marketing After Signed LOI?

Post: Calling All Neighborhood Non-Anchor Retail Pros!

Post: Calling All Neighborhood Non-Anchor Retail Pros!

Post: Requiring Seller to Cease Marketing After Signed LOI?

Post: Calling All Neighborhood Non-Anchor Retail Pros!

Post: Calling All Neighborhood Non-Anchor Retail Pros!

Post: Calling All Neighborhood Non-Anchor Retail Pros!

Post: "Good" Cap Rates for Non Residential Commercial Acquisitions in 2023