Help with a Commercial Deal...

8 Replies

I'm looking at an off market commercial deal. It's a combination of office and industrial space. Leased by a solid, publicly traded company for the next 10 years. Would love to hear some feedback. Thanks.

9,600 sq. ft. on 4 acres
NNN, 10 yr. lease
$240,000 NOI/yr.
Asking price is $3,000,000

That's an 8% cap rate, which isn't bad at all for office/industrial (nationally). Do a little research as to what the going cap rates are in your area, that'll really be the way to tell if you have a good deal. Try Loopnet. That's always a helpful resource.

@Jessica Zolotorofe Yes, the 8% cap rate is pretty good for the area. I don't have a lot of commercial experience, but the 10 year lease is very attractive. However, I feel like I'd be paying a premium for that lease in place at $312/sf. I'm looking into if I can build additional units on the property down the road. 

I'm trying to get to ~$2.5M for a 9.6% cap rate. If the company stays solid, I see it being fairly low risk for the next 10 years. The company has been public for 15+ years and is in the natural gas space. 

You would be paying a bit of a premium, but it's worth it for a good tenant. The only gamble is if this tenant is a fluke and the space is in a location or a configuration that a replacement tenant would be difficult. Otherwise, if all else looks good, I would say go for it!

@Adam M. How old is the building ? What was the original lease 20-25 years? This needs to be considered because if the tenant leaves and the lease is up your pretty screwed.. and they may consider leaving if the building is getting old.. I mean you are risking if an all cash deal $3M and you retained in cash flow $2.4M in 10 years.. your only out of pocket $600k but you own the building/land assuming it is a fee simple transaction.. Also consider a plan B exit strategy if the tenant leaves. Reposition, tear down rebuild, add other buildings etc.. A lot of things to consider Good luck

@Hai Loc The building will be brand new. It's a built to suit and the developer has this tenant locked in. I would be financing the deal. I did dig into the land and it can have additional buildings on the property and also can be subdivided. 

Thanks for your feedback. 

@Adam M. Then it's a pretty solid deal at that cap rate. Only due diligence left is will the company be around in the next 20-25 years? Do they have an excellent piece of the market share or bottom feeders and still growing to get there ? It's almost like reading up on a company to buy stocks.. You are essentially buying the leases that are backed by the credibility of the company. Good luck my friend

@Hai Loc I'm trying to see the build out plans to determine plan B. Will the company be around in 20 years??? Great question, my research on them is they've been up and down over the last 5 years and just recently finally posted a profit. If they could last the entire 10 years on the current lease with no issues, I'll be sitting pretty. I would have a lot of equity and would still cash flow positive even at $17/ft if I had to drop to find a tenant. My target price is still $2.5M

How much debt do they have?  Will they survive the coming Corporate Debt Bubble?

https://www.forbes.com/sites/jessecolombo/2018/08/29/the-u-s-is-experiencing-a-dangerous-corporate-debt-bubble/#ae25436600e0