Newbie Investor and Seeking help on this possible deal

Commercial Real Estate Investing
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Newbie Investor and Seeking help on this possible deal

Michael Hoss
Investor · Dallas, TX · Member since 2013 · 17 posts · 0 votes

Hi everyone,

Thank you in advance to all the help and advice you provide on this great forum.

I am looking at a Shopping Center in Dallas that is for sale, possibly going under contract today but before I do that I need some input and analysis of how to go about this without major mistakes.

1- Older Shopping Center Built in 1969 in Downtown rough area

2- % 100 leased with leasing contracts extending for 2 to 4 years - Long term Tenants

3- Exterior painted in 2012

4- Roof repaired in 2011

5- New Signs in 2012

6- Resurfaced lot in 2012

7- 13,314 SF with 2 legals - 7 stores - I have a copy of all leases

a- Liquor store since 1984

b-Grocery store since 1999

c-beauty shop since 2011

d- barber shop since 1969

8- Utilities are seperate metered and paid by tenants, tenants do own repairs

9- Seller pays Taxes: $12000/Year, Insurance: $7000/Year, Exterior and Sign Electric $1800/Year, Parking lot daily cleanup $3600/year, management fee is 12000 / Year ( I can eliminate that and do it myself?), Lawn care: $2400

10- Original Asking price: $850K

11- Accepted price:$650K if all cash offer and close in a month, seller husband died(verified) and she just wants out

12- Price per Sf at $850K is $63.84, at $650K is $48.20

13- 2012 Gross Income: $106,080

14 Operating Expenses: $20,840, $12,000 of that is management fee

15- NOI: $85,240

16- Pre tax cash flow: $81,840

17- Cap rate at asking price of $850k is %10 higher if i get it at $650K

18- Cash to invest $500K, I own a paid off home worth $175K, talked to a lender who can get cash out of %80 loan to Value at %3.5 - 15 year loan

so I can get $130K from House and $20k borrow from family to come up with the $150k short to pay the $650K

19- 2013 Current rent collected increased from $8500 to $10090


Breakdown: Rent collected: $10,090

Monthly Expenses with current management company: $1730

Gross: $8360/Month = $100,320/Year

Tax: $12000

Insurance: $7000

NOI: $81,300 with management company - add $12,000 if no management company used

Please let me know how to proceed, good deal or stay away? How to get a proper inspection on a commercial shopping center with 7 tenants, who to hire, an attorney for the contract?

I am in TX

thank you

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Chris Winterhalter
Investor · Chicago, IL · Member since 2009 · 566 posts · 274 votes
13y

You definitely can't forget about management fees. Do you have experience with retail leasing? If you don't good luck filling your vacancies properly. Properly leasing your shopping center takes experience, from having the right industry contacts (retail tenants) to being able to properly structure the lease and underwrite the deal. The first thing I would do is reach out to a management company in the area that deals with these types of complexes (C and lower). Get their opinion on the investment and make them a partner in your due diligence i.e. verifying financials and helping build realistic projections.

Secondly I would call your local banks for financing. I know the offer accepted is based on all cash however you need to know if you can obtain financing. Also you are missing out on a lot of safeguards put in place by lenders with paying all cash. You need to underwrite the deal just like a bank would...with professional inspections, financial verifications, an appraisal, possibly an environment phase 1 study etc. Also find an experienced attorney and CPA (in CRE) that can help you through the transaction as well.

As @Jon Klaus pointed out it looks like you are spending a lot of your money on one deal. Make sure you have the proper reserves set in place for WHEN unexpected expenses come up the first two years. Good luck and keep us updated!

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  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y

    Michael, the first thing that jumps out at me is that you are planning to spend all your money, mortgage your house, and then some, to buy this property that is in a bad area.

    Second thing is that the expenses seem low. Where is the vacancy reserve? CapEx reserve? (roof, foundation, etc.) Also, don't take out management fee just because you are going to provide it. There is still a real cost to it.

    How does crime and vandalism figure into the equation?

    Do you have any commercial or retail experience?

    0Reply
  • Michael Seeker
    Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes
    13y

    I'm seeing conflicting numbers for the rental income...what rental income can you expect long term? From your description I'm seeing a range of 8,840 to 10,090. If rents were 8,840 and are now 10,090, I'd be asking why the 14% increase since last year. That seems pretty high unless they just filled a major vacancy.

    0Reply
  • Michael Hoss
    OP
    Investor · Dallas, TX · Member since 2013 · 17 posts · 0 votes
    13y

    Thanks Jon,

    I don't have any experience in commercial or retail experience, crime and vandalism is a factor that i need to consider, since you are in the Dallas area, this property is close to the Fairpark area.

    The tenants have been there for years, some locked in to leases till 2017 and i don't think they are going anywhere but i never say never.

    I am open to learn and not make mistakes, that is why i am here. I wish I had a better way to finance this deal or any deal, i don't like the idea of taking a mortgage on my home and would like to avoid it if possible.

    0Reply
  • David Beall
    Oceanside, CA · Member since 2013 · 1 post · 0 votes
    13y

    Michael,

    The numbers you have put on the post seem to work out. Good to see that major upkeeps have been done in the last couple of years. A couple of things jump out at me as just advice tips: 1) Are you willing to trade time for money? Cutting out the management fee will give you more income but do you want to be a "manager" or business owner? I would keep the cost incorporated in order to account for it if you later decide it is too much for you to do on your own. 2) Just a tip, check with the city planner's office to see if any future plan is going to interupt the flow of business, i.e. major road construction, new zoning laws, new construction.

    Good luck,

    Dave

    0Reply
  • Michael Hoss
    OP
    Investor · Dallas, TX · Member since 2013 · 17 posts · 0 votes
    13y

    Michael,

    Yes they did fill 2 empty vacancies in the last months with lease contracts expiring in 2016 adding $2400 extra cash flow

    the highest paying tenants are the grocery store, $4000 leased till 2017 and Liquor store $2000 leased till 2015, Barber college $1500, bails bond: $940 leased till 2018, a beauty shop, resale shop and barber shop leased till 2014 adding another $1650 total $10090

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y

    Why can't you get a commercial loan on it? Have you talked to banks? If no bank wants to do it, find out why. Maybe you don't want to do it for the same reason.

    Beyond the numbers, the area could be extremely tough depending on where in Fair Park it is. Have you studied the crime reports? Talked to the tenants? Spent time there? In the evening?

    I don't mean to be all negative here, but this could be a very tough deal that is hard to get out of when the time comes to sell.

    0Reply
  • Edward Burns
    Rockford, IL · Member since 2013 · 330 posts · 62 votes
    13y
    Originally posted by Michael Hoss:
    Hi everyone,

    9- Seller pays Taxes: $12000/Year, Insurance: $7000/Year, Exterior and Sign Electric $1800/Year, Parking lot daily cleanup $3600/year, management fee is 12000 / Year ( I can eliminate that and do it myself?), Lawn care: $2400

    14 Operating Expenses: $20,840, $12,000 of that is management fee


    Breakdown: Rent collected: $10,090

    Monthly Expenses with current management company: $1730

    Gross: $8360/Month = $100,320/Year

    Tax: $12000

    Insurance: $7000

    thank you

    OK I admit it, you got me thoroughly confused.

    Expenses listed in #9 add up to $38800 or $3233/month. Seeing that you left out taxes and insurance in #14 (operating expenses) to be able compare adding them in yields $39840. Further when you look at the breakdown you get $39760 (after adding taxes and insurance). The numbers do not add up.

    I would ask to see the real expenses etc before continuing.

    0Reply
  • Michael Hoss
    OP
    Investor · Dallas, TX · Member since 2013 · 17 posts · 0 votes
    13y

    I am sure i can get a commercial loan on it, i didnt apply, the seller wants out quick and accepting the offer if we can come up with cash quick, her husband who owned the property suddenly died in Sept 2012 and it was in litigation till last month when it was listed for sale. Don't commercial loans take a longer time and wouldn't the home loan be cheaper rate?

    I am looking for advise and weighing my options and don't mind paying for experice if someone in the Dallas area can do a walk through with me

    0Reply
  • Chris Winterhalter
    Investor · Chicago, IL · Member since 2009 · 566 posts · 274 votes
    13y

    You definitely can't forget about management fees. Do you have experience with retail leasing? If you don't good luck filling your vacancies properly. Properly leasing your shopping center takes experience, from having the right industry contacts (retail tenants) to being able to properly structure the lease and underwrite the deal. The first thing I would do is reach out to a management company in the area that deals with these types of complexes (C and lower). Get their opinion on the investment and make them a partner in your due diligence i.e. verifying financials and helping build realistic projections.

    Secondly I would call your local banks for financing. I know the offer accepted is based on all cash however you need to know if you can obtain financing. Also you are missing out on a lot of safeguards put in place by lenders with paying all cash. You need to underwrite the deal just like a bank would...with professional inspections, financial verifications, an appraisal, possibly an environment phase 1 study etc. Also find an experienced attorney and CPA (in CRE) that can help you through the transaction as well.

    As @Jon Klaus pointed out it looks like you are spending a lot of your money on one deal. Make sure you have the proper reserves set in place for WHEN unexpected expenses come up the first two years. Good luck and keep us updated!

    1Reply
  • Chris Winterhalter
    Investor · Chicago, IL · Member since 2009 · 566 posts · 274 votes
    13y

    @Michael Hoss who is the grocery store tenant?

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y

    I'd be on the phone today shopping a loan. With good financials, you can get under 6%. Feel free to PM or email me the address.

    0Reply
  • Michael Hoss
    OP
    Investor · Dallas, TX · Member since 2013 · 17 posts · 0 votes
    13y

    Sorry for the confusion:

    August 2013 Expenses:

    Management Fee: $1000

    Electric Bill for Sign: 150

    Clean up: $320

    Lawn:$200

    General Maintenance: $60

    Then add Insurance: $583

    Tax: $1000

    Total: $3313 per month $39,756 per year

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y

    @Joel Owens do you want to weigh in on this?

    0Reply
  • Michael Hoss
    OP
    Investor · Dallas, TX · Member since 2013 · 17 posts · 0 votes
    13y

    The grocery store is called Grand City Grocery

    I don't know if i can post the address of the property, or its against the rules or someone will actually jump on the deal if there is one (:

    Its not the best of area, hence who the tenants are and I will def. get the inspections done, do you recommend anyone to work with in the DFW area?

    These are hard earned money, actually all i have and i do have a job so if a month or 2 i had to supplement for expenses.

    Jon brought up a good point, my exist strategy will be tough if the area doesn't improve, but it looks like it will from the condos they are building 2 blocks away.

    right now it is rough though but the tenants cater to that crowd-

    0Reply
  • Michael Hoss
    OP
    Investor · Dallas, TX · Member since 2013 · 17 posts · 0 votes
    13y

    the management company is the listing agent as well and they are willing to stay and manage the property at the same rate of $1000 a month

    0Reply
  • Chris Winterhalter
    Investor · Chicago, IL · Member since 2009 · 566 posts · 274 votes
    13y

    @Michael Hoss

    Like @Jon Klaus stated I would be on the phone shopping loans this morning. I would also be on the phone calling management companies that are suited to this area and type of property. The current management company is more inclined to paint a better picture because they are also the listing agent. They do also understand the current tenants however I think it is extremely important to get a non-bias opinion from a solid management company in the area.

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y

    Michael, I'd feel a whole lot better about it at $500k. Think there's a chance of that? The seller does sound motivated.

    0Reply
  • Michael Hoss
    OP
    Investor · Dallas, TX · Member since 2013 · 17 posts · 0 votes
    13y

    I am meeting the listing agent/manager today at the property and I will discuss it with her.

    Thank You everyone for your inputs, I take every advise to heart to learn and ask questions-- If do get into this deal I will update this thread-

    0Reply
  • Carlos Flores
    Commercial Real Estate Lender / Syndicator · Dallas, TX · Member since 2011 · 888 posts · 309 votes
    13y

    To me, the beauty of commercial is the ability to pass nearly everything to your tenants. In this case, the owner pays CAM, insurance, taxes, etc. While I wouldn't classify these three as variable as utilities, insurance and taxes do go up. These increased costs may not coincide closely with lease expirations or step ups.

    Paperwork on loopnet shows the two largest anchors did not pay a security deposit. Actually only 2 of 7 tenants paid a security deposit.

    Looks like the current owner bought it about 2-3 years ago. How long has it been on the market? Talk to the previous owner. I'm sure he knows it's for sale because he owns one of the businesses in the strip center. You can find this under history on DCAD.

    Per loopnet, they're offering 3% to a buyers broker. Why aren't you taking advantage of that? Get a skilled commercial broker on your side. Perferablly someone that's very familuar with that area.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    "4- Roof repaired in 2011"

    What does this mean?? Probably a crap patch job. Flat roofs can have all kinds of issues and are very expensive to replace.

    I don't like the premise that you buy this property and do the PM work and then putting all this money down this property will support you. Typically lenders will only count the primary term of the lease. If the tenants renew a short option the lender drops down the amort. schedule to limit their risk. Since it's in a rough area many lender will not have an appetite for it.

    The 2 new tenants just signed up you can't really count that income. They could do great or could falter right away after you buy it. You have to dig in to their guarantees and assets and sales history to assess the risk.

    You counting on getting 80% ltv on your house is also a mistake. I have seen his before when buyers plan on a certain amount and the appraisal comes back lower than expected and they are scrambling to get the deal done. If you need to close this in 30 days I do not see a loan happening unless you try hard money. Typically you have to get the appraisal, phase 1, site inspection, title work, negotiate issues found, survey etc. Especially with the holidays coming things could be delayed more.

    If you have 500k to invest maybe you start small just too see how things work and hold onto your cash. It sounds like none of these tenants are corporate but mom and pop type.

    I just think you might want to pass on this and look for more quality.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    When I do these deals for clients 45 days is amazing but typically 60 and if title issues and survey issues could go 3 to 4 months depending on what is found to close.

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    WebsiteView Page
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  • David Beard
    Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
    13y

    You do seem to have a very motivated seller, so at this point a very low offer is potentially appropriate, as Jon K. suggested. As far as your home, just FYI, I'd think you could get a HELOC for 60-70% of MV done quite quickly (perhaps a week, these are retail loans done in the branch, often with no formal appraisal).

    Even if you were to strike a deal at $500k cash, you need to immediately start calling banks and commercial mortgage brokers to determine financing options on this property, for a future refinance, or to enable you to sell without having to take a huge cash-only discount on it. You'll find out if lenders are effectively red-lining this area or this property type.

    I'd try to lock it up on a low cash offer with time to do thorough inspections. I'd analyze traffic volume (or preferably hire someone to do it), into the center by store over a sampling of days and times, and make note of excessive loitering or other issues. I assume that all of these tenants derive all of their revenue from walk-in retail traffic. Certainly a call to the local police precinct captain would be in order. I think stores in these low-income under-served densely populated areas can be decent. There appears to be a nicer center nearby across the street, with a Subway, which is a good sign.

    Good luck with it.

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y

    Did you get this under contract today, Michael?

    0Reply
  • Michael Hoss
    OP
    Investor · Dallas, TX · Member since 2013 · 17 posts · 0 votes
    13y

    I met with the listing agent at the property, did another walk through and got introduced to the tenants. I also contacted my bank loan officer that deals with commercial loans and his team is doing a study on the property numbers to see if they can even finance it. I am leaning towards an all cash offer contract and took the idea of cashing-out on my primary residence out of my head, taking the advice of most of the posts.

    The property has an all steal roof which the listing agent said is in great condition, the parking lot is in good shape, there is a newer apartment complex next door which i consider a big plus--there is also a dance club from the other side. Also a nicer center across the street

    I did mention to the listing agent that my bank will probably not finance the property so it will have to be an all cash offer at $500K contingent upon all inspections done within 60 days- she said she will talk to her seller and get back with me.

    At $500K cash an ok deal?

    no contract signed yet, seller thinking about it

    0Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    13y

    if NOI is really in the $80'sK I like it at $500k.

    0Reply
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