All Forum Posts by: Michael Schmalzer

@Kenneth Morff, I apologize I'm late to the conversation. As others have mentioned: in your situation it sounds like you should be working with a commercial bank.

There are times, if all the other aspects of the deal make sense, you can use a hybrid of a historical and proforma P&L if there are <12 months rental information. Your lender will need to see the executed lease as well as proof of the historical expenses, as well as, a well considered extrapolation of expected future expenses.

I'm a commercial lender in Andover / Blaine; happy to help.

Take care,

Mike

@Sam Steadman is a realtor & investor, so he'll know what you're looking for. He's on 7 days a week and has great connections to all the different facets you'll need down the road. Great with off the market transactions.

Will PM contact information.

Happy to make the introduction.

Best,

Mike

@Bilal A., I have a very good agent I work with in CRE. He has significant experience in retail and the company he works for has management services in-house. Their focus is to provide a hands off investment property for their clients. I'd be happy to introduce him to you! Let me know.

Hi @Steve Dye,

I do not think you are being unfair here.. is this a single tenant property?  Am I understanding correct that this would end up being owner occupied?

Business valuation = 3-4x NOI + inventory.

Building valuation...

The two most important questions: (1) what is the financial strength of the tenant / what do their trends and industry viability look like? I'd assume this is pretty solid if you are willing to purchase the business and property all in one transaction. (2) the length of the initial lease is very important. 10 - 20 years is a very large range. A 20 year initial lease on a business that is growing in an industry that will only get bigger with a strong lease guaranty would have a significantly lower cap rate than a 10 year lease with a struggling company you're looking to turn around.

That being said... as I started: I don't believe you are being unfair. Start 11-12% and negotiate down so everyone feels like a winner.

Best,

Mike

@junaid khan,

As previously noted, the construction costs will likely be significantly higher than $1MM. Typically, we see lower end apartments built for around $165-$175M a key = $1.5MM.

I'd be curious to know the lot size, as you could potentially find some creative ways to increase cashflow from the property with rentable outbuilding space, or split and sell the lot to add more cash down to the deal.

To add some numbers to@Tim Swierczek very salient point about ability to service debt. Assuming $1.5MM project cost, 75% LTV, 4.75% rate, monthly payments are as follows: $7,312.38 over 20 years or $6,458.49 over 25 years, if you're able to find a 25 year am.

But don't lose hope! The solution here IMO, if you are comfortable with your feasibility analysis, projected NOI, and the overall project risk: is to find a partner. You will need someone willing to sign a personal guaranty who has the ability to service the debt, as-is, and best case scenario would be to find a partner who could double as a mentor and show you the LL and construction ropes. I believe this project is a no-go without that. The other advantage to this: you will have a second set of eyes on the deal looking at it, unemotionally, as an investment. If you can't find anyone willing to partner with you on the project, there is likely a reason.

Best of luck!

Mike

Karl,

This one may be difficult.

Where are you located?

Do you have a lender you work with for the dairy equipment / activities? Is this a financial institution, or a dealer financing program? Have you tried running it past your existing banking relationship yet?

Thanks,

Mike

In your inbox.

Mike

Second vote for @Sam Steadman. The guy is an absolute ace.

@Sherry O.- based on the little bit I see here it could make sense. One question I would examine is how did you get to your NOI, and is this truly a reasonable projection? Did you account for vacancy, taxes, insurance, escrow for roof / HVAC, legal fees, repairs, management fees, etc.? Get boots on the ground and objectively decide if it is truly turn key and bring a highly reputable inspector to verify. If you accounted for all this and you're still running an NOI of $29,000, it seems like a decent deal.

A little different way to think of it: 

$415M PP = $104M per rentable unit.

$29M / 12 months / 4 units = $604 monthly cash flow / rentable unit.

I recognize this is a somewhat futile exercise as you're comparing apples to oranges, but:
If you are looking to hold this property long term and you look at it on a strictly cash flow basis... It beats the heck out of many NE MPLS SFR in cash flow right now and you're managing 1 roof / project, not 4. However, how do these numbers compare to the duplexes you were referring to? Some closing costs would be doubled, but would it be wise to pick up two duplexes instead and diversify some of your building risk? If you are going to self manage, how do you personally weight managing one building vs. two?

Contact the owner of the 4-plex that just sold for $380M and pick their brain. Find some other 4-plexes in the area and befriend them in the name of building your local network of investors and see if you can compare numbers. Some investors are surprisingly open and helpful.

Just some ideas. Best of luck!

*Disclaimer, I am biased towards 4-plex and greater, so this probably skews my objectivity to a certain degree.

@Chris Fargo - speaking of neighborhood classification, as someone who lived in NE and looked extensively at investing in N: those are two totally different animals IMO!

I'm a commercial lender in Minneapolis and we will typically see 15-20 year am, 5 year fixed, lesser of 75% LTC or 75% LTV.

Differentiation in amortization is based on Debt Service Coverage Ratio and condition of the property. Major things banks will look at is age of roof, age of HVAC, exterior and interior conditions, secondary uses, etc.

From a banks perspective, the last thing we want to do is own property. So, first we'll look at cash flow. Then we'll look at the collateral. Then we'll look at the guarantor. 

The questions in my head, as a banker:

1a) Does the borrower have solid character? This is mainly determined from credit score. This is most important because character pays back loans... not cash flow. You could have all the cash flow in the world, but if you don't feel the need to pay back your debts, we'll incur a whole bunch of costs. So this isn't necessarily a gradation of rates or terms, but a pass fail (at this point).

1b) Does the property cash flow at or above 1.2 DSCR? Does it still cash flow when reasonably stress tested?

2) Is the property saleable? If this property is mismanaged or something happens beyond the borrower's control, can the Bank get out NOW? Otherwise we'll have to pay for winter heat, taxes, realtor fees, attorney fees, our time and sanity of trying to get rid of the property, etc.

3) What is the strength of the guarantor? Could they float the building for a bit (most)? Could they float it for the life of the loan (some)? Could they cash out immediately, in theory, (few)?

I hope this offered some insight into our brains. Best of luck! Feel free to ask any follow ups.

P.S. - yes banks will need personal guaranty.

Mike