Commercial Real Estate-retail due diligence evaluation
This is the initial email from my broker. I live in California. The property is in Chicago Heights, IL. My broker is in California. I appreciate your perspective and feedback. Thank you in advance.
This is a very good deal and very safe with one of upside. It will take time to get it to the upside but the numbers are very attractive. The property cash flows well with a huge pop at the end of the lease. Ironically this property is 10 miles from your Advanced Auto property.
NAPA Auto Parts-Chicago Heights, IL
- Corporately Guaranteed lease - Napa is owned by Genuine Auto Parts which trades on the NYSE and does about $19billion in revenue
- 8.32% return - you can't beat that return in the real estate market
- The tenant has been at the location since 1997 and keeps extending. Tenants only extend if they are doing well there. They extended again in 2021. 3.5 years remaining on the lease plus 1 x 5-year option for renewal.
- This is not on a corner, it is 1 parcel over from the corner with visibility to 26,000 cars/day
- Over 60,000 in population within a 3-mile radius
- Ridiculously low rent per SF at $0.17/SF. It seems impossible that they could ever pay less, which makes it safe. The market rent is $1.17/SF. Even if you only got half - $0.60/SF - it is a 28.8% cap rate.
- The bad thing is that there are no increases during the 3.5 years of lease or the 5-year extension option. It is more than likely that they will extend because the rent is so ridiculously low, it would be better if they left but I doubt they will. So no increases for 8.5 years. So in 8.5 years, you earn about $212,160 (8.5 x $24,960/yr). So you get roughly 2/3s of your money back in 8.5 years at a very high return and then if you even got half of the market rent, your returns skyrocket on a new lease to 29%. If you get $0.30/SF (1/4 of the market rent) you would still get a 14.4% return - you just can't beat that. Once you do the new lease you make it a NNN lease as this one is NN but also with the landlord contributing some to the property taxes
- The other concern would be the condition of the property. You would want to get this inspected as the landlord is responsible for the roof and structure. The roof had a new silver coating applied about 3 years ago. The asphalt parking was redone 2 years ago.
- And we have to check easement rights - I believe this should be fine but we will double-check, as they have been using the neighboring property as an easement for over 25 years.
Here is what your returns would look like with no loan."
| Price | Down Payment | Net Income | Cap Rate | Yrly Loan Payment | Cash Flow | Cash-on-Cash Return | Year 1 Interest Payment | Year 1 Principal Reduction | Total Return w/Principal Reduction | Total Return | Additional Yrly Depreciation |
| $ 300,000 | $ 300,000 | $ 24,960 | 8.32% | $ - | $ 24,960 | 8.32% | $ - | $ - | $ 24,960 | 8.32% | $ 5,769 |
Nobody has a crystal ball but theoretically here is what your return would look like at $0.60/SF.
Fast forward a month, the deal is under contract. We had the purchase sale agreement vetted by our lawyer ($4000) retainer. I found him through my family real estate lawyer. Got a general property inspector to look at the property ($1250). The property has a lot of deferred maintenance. Also got the roof inspected by two inspectors. One of the inspectors charged $600.
This is what my broker said today in an email.
From what I am looking at, here are the estimated expenses.
Paving: $7,500 Roof: $41,000 -$72,500
I would say it is safe to say another $5,000 in general repairs if not more. I know no building is in perfect condition and there will typically be something that needs to be repaired. I just feel that about $53,500 to possibly up to $85,000 on a $290,000 purchase is difficult. It makes the purchase a $343,500 to $375,000 purchase. It means you are really buying a 7.3% return in the best-case scenario. Is that a bad deal, no, it is still a good deal with a very strong proven tenant with very low rent. I just feel there are other deals out on the market which will give you a similar or slightly better return with less headaches.
What are your feelings? Why? Thank you. This would have been an all-cash offer (if you still think that it would have been worth it).