All Forum Posts by: Scott McElhaney

This deal aside, when you have a cap rate of 5.75% you're looking at negative leverage relative to the current interest rate environment of +7%. This now means you're coming to the table with much more cash (lower LTV) to meet a lender's DSCR of 1.25…some lenders have now raised this to +1.30, which means an even lower LTV.

I’m not saying a 5.75% is necessarily bad.  If you have a top flight location with high credit tenants it might well be worth it….. Especially for investors who are farther along in their investment careers & want to take a longer view (stability is also a factor) and have the cash to park indefinitely.

I agree 100% with Jonathan’s response & advice to you Zach.  Personally when I’m hiring a Broker to either lease or sell a Commerical property I don’t even think about brokerage firms who do both Commerical & Residential brokerage. I look for a firm that not only specializes in Commerical leasing & sales, but also specializes in the particular asset class within Commerical real estate. In other words if I have a retail unit I’m trying to lease I want a broker that specializes in retail leasing.  In my experience going with this pointed approach means you have a broker on your team with intimate knowledge of that asset class & a deep network to boot.

Tenzin, I’ve never heard of Peter Harris. Frankly, I’m skeptical of any investor who allocates a large portion of their time peddling mentoring/courses versus doing deals. Bottom line, you don’t need this guy. Punt on this mentorship program, if you still can. Instead read lot of books & listen to podcasts on commercial real estate. A good starting place would be to read “confessions of a real estate entrepreneur” by Jim Randel. A good podcast is “America’s Commercial Real Estate Show” with host Michael Bull.   On mentorship, start networking with people in Commerical real estate…brokers, real estate attorneys & lawyers…do this long enough and you’ll build relationships where the mentoring is organic. Case in point- my first mentor was a 70+ year old broker/investor….I literally found an ad in the Washington Post advertising his Commerical real estate consulting services for $60/hour. I did my first Commerical deal 10+ years ago through his guidance and we’ve done many since then.  

This all depends on your tolerance for risk. If you elect to NOT partner with a very experienced investor OR be involved in a syndication AND truly know nothing about real estate, as you mentioned, I would suggest:

1) Find a stellar Commerical Real Estate Broker to help you with your search.  It almost always costs you nothing (seller pays traditionally) and will educate you on the market(s) and tenancy profiles. 

2) Buy a property(s) with long term (10+ year lease);

3) Look for corporate credit rated tenants (think Walgreens, Starbucks, etc) on a Triple Net (very minimal LL responsibilities- think roof & structure) OR Absolute Triple Net Lease (no landlord responsibilities).

4) Most credit tenants are experts in location selection (which again, minimizes your downside risk).... but as a rule of thumb I always prefer locations on traffic lit, hard corners with great/easy access and high Vehicle Per Day counts.

My 2 cents.  :-)

My portfolio is all retail NN and NNN property. That said, I have loans with larger, national lenders and even very small credit unions. The bulk of them won't go below 1.25 DSCR or 75% LTV. I've had some cases where the lender has stretched to 1.20 DSCR if the location and tenant credit is stellar...however, this has typically only happened when the appraisal comes in lower than expected and the lender really likes the deal...they then lower from 1.25 DSCR to 1.20 DSCR to close the deal with us.

I suggest Reverse Engineering your search. Here's what I mean via a hypothetical example: Depending on the amount of cash I have on- hand for the purchase I tailor my search according to a typical 1.25 DSCR & 75% LTV. What I mean by this is if I hypothetically have $500,000 cash on hand to invest I'm looking for a $2,000,000 property. Let's say that prevailing market loan terms are 4% based on a 25 year amortization schedule. This then puts my annual debt service at $95,016/year.

I then need to factor in asking cap rates as they relate to my 1.25 DSCR, 75% LTV and annual debt service of $95,016. Using this example the lowest cap rate deal I could purchase is 5.95%, which would be an NOI of $119,000/year (For simplicity sake I'm assuming the lease(s) are Triple Net NNN). The DSCR calculation on this example is $119,000 NOI/$95,016 annual debt service = 1.252 DSCR.

Hope this helps! :-)

I would ask them what they would like to see in terms of POF? Are they looking to see that you have an adequate cash on hand to get a loan at 65-75% LTV? My guess is this is what they're seeking as most buyers use leverage (debt) to buy commercial property.

Carrie-

Your offer of only 5 year loan terms most likely has to do with one or a combination of these factors: 

1) financial strength of tenant(s); 

2) strength of location; 

3) remaining lease term and any other  lease factors that may strengthen or weaken the lease. For example: an early tenant “kick-out” clause the tenant may have would weaken the lease.

Personally, we've financed multiple NNN and NN properties this years. We've been offered a myriad of loan term ranging from 5-10 years. Again, the offers depend on the above factors I mentioned & probably some I neglected to mention in this post. I will say, as Joel mentioned, the loan term you ultimately choose depends on your goals. For example- If you're adding value & plan to do a cash-out refinance at your earliest opportunity, it most likely isn't worth paying a higher interest rate for a 10 year term. Your focus might be more on minimizing initial loan fees, prepay penalties, etc.
Best wishes in your investing endeavors!

Thomas,

Bob is correct, the answers to your questions will be within the existing lease agreements. If the retail is vacant, generally speaking, retail is run on a Triple Net (NNN) basis where the landlord is reimbursed monthly by the tenant for their prorata share of property Tax, Insurance and Common Area Maintenance.  This is also referred to as TICAM reimbursements...Retail tenants also pay their own utilities.  Thus the deal is 100% net to the landlord.

So, hypothetically, if the retail takes up 2/3 of the total building, it would be possible, upon full stabilization of the property, to be reimbursed for 2/3 of the property's TICAM.  The studio apartment- you'll foot the bill for their portion of property tax and insurance, general maintenance and common area maintenance....which in our hypothetical example is 1/3.

If the retail is not currently run on a Triple Net (NNN) basis you "might" have a hidden opportunity to increase your NOI by converting existing tenants to NNN. I say "might" b/c as Bob said above a lot of this depends on your market's given conditions AND the exact location of the property....I say exact location as retailers can be very persnickety about the location of their business, traffic counts, visibility, ect.

Hope this helps! :-)

Scott

@scott_mcelhaney

David,

What you need is called a "Property Condition Report."  This would be done by an engineering firm that has this specialty in the greater Memphis area.  Some commercial lenders require these reports as a condition of granting a loan.  Although in my experience it hasn't been often.  I would ask some local commercial lenders.  I would also ask some commercial real estate brokers.  

Given that it's retail you should gather all HVAC, roof and repair records from the existing owner...including any warranty and service contracts on existing equipment.  

Hope this helps!

Scott McElhaney

@Scott_mcelhaney

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