strip mall value?

Question

I am purchasing a strip mall for in Ohio.

FACTS:

• Roughly 10,000 sq ft 
• 33 parking spaces
• very busy road - great signage/visibility
• surrounding areas can be questionable (growing subsidized housing)
• 3 long term tenants (subway, metro PCS, optometrist)
• Optometrist currently owns building and occupies 70% of space.  They will sign a 5 years lease
• triple net lease but I pay all expenses then get reimbursed from tenants every month
• I make a 15% management fee on all of the triple net expenses
• Yearly net income - $114,000

Can you give me an idea of what this property should sell for?

THANK YOU ALL!!!!!

Ash

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Ash Patel · Answer

One month post closing update:

Joel Owens hit the nail on the head.  The optometrist is growing rapidly and they wanted the real estate off of their books.  The numbers verified by received rent checks are as follows:

$620k purchase price

NOI - $115k

100% NNN with long term leases in place now.

I purchased this property at an 18.5% cap rate.

This is not to brag but there is a valuable lesson to be learned here.  Every single day for the last three years, I look at the MLS and loopnet listings for several surrounding counties.  This commercial property was listed by a residential realtor who does not understand cap rate.  I found this listing (original sale price $645k) on a Friday night and blew up the Realtor first thing Saturday.  We had a signed contract first thing Monday morning for $620 and soon after the Realtor received several full price offers.  Before my closing I had an offer to flip the paper for $1.15m which is still a 10% cap rate.

This same diligence allowed me to purchase a lake property for $70k under asking simply because an out of town realtor did not understand how to price homes on and off the water.

I know we often read the success stories and wonder, how did people get so lucky.  My luck came after 3 years of relentless searching.

Best of luck to all BP'ers.

Joel Owens · Answer

Sounds like the optometrist is pulling money back out to invest in their business.

I typically do not like situations where one tenant out of 3 takes up 70% of the space for cash flow.

There is a lot of risk in that type situation. You would need to look very heavily at that business.

You need to check the leases as they generally CAP the CAM expenses a tenant will pay by a certain percent.

Is Subway and Metro PCS corp or franchisee??

Do the lease require tenants to disclose annual sales volume??

Cap might be higher but it needs to be for those markets.

Example getting a 8 cap retail center in Austin, Texas is great but in Ohio not so much. So it's all relative.

Randy E. · Answer

Great deal, Ash!  Your patience paid off, but it's not like you were just sitting around doing nothing.  You kept checking new listings, made your calculations, and when the time was right, you didn't waste any time with needless worrying.  Congratulations.

Deals like that make me excited for what my group might accomplish later this year.

Jeremy Cyrier · Answer

Awesome persistence in searching for deals and for knowing how to correctly calculate the cap rate.

Martin Z. · Answer

sounds like u hit a grandslam, congrats

Tim Shoultz · Answer

If you are willing, I'd be happy to chat more about this.  I can't imagine anything really selling for a 13% CAP rate, but I'd be happy to give you a more direct opinion 1:1.  Message me offline if you want to chat more....and let us know what response you get!  Good Luck!

Ash Patel · Answer

Thanks Tim,

I would say its a Class B location.  cap rates around here are 7-8% for newer strip malls in Class A locations.  I would like to flip this so I will offer a 13% cap.  The only kicker is its not true NNN since there is some management overhead.

Ash

Tim Shoultz · Answer

You really need to figure out what CAP rates go for in the market.  Without more information like an address or an area it will be hard for anyone to tell you much.  Is it a new or old center? Is it in a A class location of a C class location.  In the Seattle markets, strip centers can sell for less than a 7% CAP depending on where they are.  Is it anchored, shadow anchored or in any other way have major draw?  I can't imagine if it is in a decent area you are going to pick it up for anything more than an 8% CAP.  A stable building with long term tenants and 100% occupied is attractive to a lot of people.  May even be closer to a 7% depending on area.

The biggest concern I would have is if the current owner is inflating his rents a bit in order to increase the building value.  If you buy it make sure is 100% wiling to sign a guarantee on the lease and push them to a 7.5 or 10 year lease if possible.

Ash Patel · Answer

Thanks Joel,

I agree with your points.  The optometrist is one of the largest regional optometry groups in the country.  This is a very profitable location for them and they have been there since '94.   Subway has been there since 91.  Subway and Metro are franchised.

I dissected the leases and no cap on cam charges.   No disclosure on volume.  Thoughts on value?

Ash Patel · Answer

Let me add:

With $114,000 NOI - a $900,000 purchase price - The cap rate would be 12.6%.

I guess the real question is how much would the area and lack of parking discount the price if at all?

strip mall value?

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