Input on SW Florida Commercial Property (Strip Center)
8 Replies
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes10y
Not big on office month to month. Sounds like office makes up a big part of this mixed use building.
A lender will count this a mixed use and not straight retail. The income from a bunch of small business offices can highly fluctuate.
What is the cap rate at purchase price on verified income?
- 10yErik R.Real Estate Investor · Northville, MI · Member since 2014 · 52 posts · 10 votesOP
As we continue to run the numbers, the risk of income reliance with the month to month office tenants is becoming less desirable. The 3 retail tenants are solid, but the ROI and cash flow is heavily reliant on the month to month offices, which may turn us away from this one. Here are some of the numbers-
Cap rate based on current income and expense statement from seller is 6%. The broker we have been communicating with has stated this market's current cap rate is approx 6% for this type of property.
With 3 long term retail clients on first floor, and 9 out of 13 leased offices in 2nd floor, current total income is $126k. Not sure on their debt service, but the 6% cap rate assumes a 4.7% 30 yr amm rate and 3% vacancy loss. Note that we've also estimated $5k/yr for a Capex expense budget, which is also in this cap rate. This property is a total of 6,100 rentable sq ft, 3,050 per floor.
We think with bringing the retail rents to market (which we have solid comparable to support), cap rate could improve to 6.3%.. But cash flow does not seemingly substantiate risk with the office tenants, unless they can be signed to long term agreements (which I'm not thinking will be probable)
To the concern of high office space mix- 60% of current income is in those offices.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes10y
How much down what LTV at 4.7% and 30 year amortization? How long is the loan fixed for and when does it come due?
Mixed use typically have to put more down and amortization schedules are not 30 year amortization. The lender wants less of an LTV and also wants accelerated pay down on mixed use to curb risk.
3% vacancy loss is not even realistic. The turn rate of the tenants will make this number much higher. Another consideration is if lease rates are at market, above market, or below market.
6% cap rate I believe the cap rate is much lower after standard underwriting is used. This doesn't really appear to be that great of a property from what you are saying.
Office type properties that are not medical office trade at very high cap rates now like 9 or 10 or higher. People can pull up a truck and in one night vacate the space. Other asset types you are more insulated due to difficulty in moving, longer business shut down times, and availability of other locations that are just as good. Offices pretty much except for a few business models you can use space anywhere.
- 10yJeff TumbarelloPro MemberReal Estate Broker · Fort Myers, FL · Member since 2008 · 1k+ posts · 323 votes
Assuming the retail tenants are NNN? How long are the leases? 6 cap is weak
- Investor · Wichita, KS · Member since 2015 · 769 posts · 279 votes10y
I lived in Ft Myers 05-06 which is about an hour away from Marco. My job at the time took me there quite often. Nice place, however not much for industry/business at all that I can remember, primarily vacation homes and retirees, all very wealthy mind you (likely a lot of 1%'s in the area) but I'd think this place would be much higher risk than a city with more economic activity going on than tourism and snow birds.
Id guess it's over priced at a 6 cap and you could do much better somewhere else. I dont know if Collier County's - Naples/Marco RE market crashed as bad as Lee County (Ft Myers/Cape Coral) I've heard from some folks I keep in touch with down there it has recovered some but not to where it was by any means.
- 10yErik R.Real Estate Investor · Northville, MI · Member since 2014 · 52 posts · 10 votesOP
I appreciate everyone's replies, very helpful. As I do not have much of any commercial real estate experience, its good to get the input from those which know this market and know the key 'pinch points' for evaluating a mixed use property like this one.
I obviously let this one alone, however the property remains on the market and most recently dropped $200K; Cap Rate has now improved to 7% with 3% total vacancy loss; 6.5% with a 10% vacancy loss. (New asking price is $1,550k)
@Joel Owens, you had previously mentioned that 3% vacancy loss is far from realistic considering 40% of this property's rent roll was office space (on 2nd floor).. note that this vacancy loss is not based on current available rent, its a de-ration to the current actual rented space (which there is 90% vacancy on current space)... so effectively there is a total ~13% vacancy loss considered. Make sense?
@Jeff Tumbarello, you mention 6% cap rate is weak.. it looks like you broker in the area; what is a reasonable cap rate for this type of property on Marco Island? We've had difficulty comping a cap rate on Marco; Naples is closest and has more to compare, but is seemingly a different enough market.
The value add to bring in Medical or a more permanent tenant on the 2nd floor is to add an elevator, which the property currently does not have. It is also sandwiched between 2 of the most successful restaurants on the island; connecting the parking lots and charging the neighboring businesses for after hours use could bring more revenue.
I'm trying to understand what a reasonable cap rate and market price for this property would be, re-assess the risks and understand actions to mitigate those risks, and potentially explore this one further given that a strike price hasn't been met yet.
thanks again for everyone's input, and appreciate any additional
Erik
- Commercial Real Estate Broker · Tampa, FL · Member since 2014 · 216 posts · 86 votes10y
We have one 2 story retail/office we manage now and have had others in the past. We are in Tampa, but I can't believe the tenant profile varies much bw the Tampa Bay area and the Marco market. Having an elevator makes a big deal in terms of vacancy.
The second floor is always a challenge. If it has an elevator, I assume maximum potential occupancy is 75% of the available SF. If it doesn't have an elevator, I would assume 50% of the 2nd floor SF is maximum potential occupancy. There is no real estate book that tells you this. It has just been my experience in dealing with these types of 2 story centers. Unless you are in a very dense, high traffic, preferably walking area, the 2nd floor will have functional obsolescence. If you eliminate that additional square footage in the underwriting process, I think you have a better idea of functional SF to do your calculations. I am not sure trying to find a comparable CAP rate when a significant part of the building will not be sustainably leased will give you an accurate picture. If you don't like my rule of thumb elimination of space, ask the owner for 5 years of rent role. He probably had to provide that info to the bank. That will give you a little better picture of the turn and vacancy rates.
I will also add, that most of your problem tenants will be on the second floor....a lot of start up, mom and pop's...they come, they go...frequently without notice and leave you high and dry. Your more solid tenants want to be on the first floor, particularly in retirement areas like Marco. Your turn rate on the second floor will be significantly higher than the first floor.
- Syndicator and Fund Manager · Victor, NY · Member since 2012 · 760 posts · 345 votes10y
@Erik R. you say that the cap rate is Calculated from some debt service assumptions... The debt should have no impact on cap rate and is not considered in this calculation. Cap rate is simply calculated from NOI and purchase price.
Also most lenders are going to underwrite the income using market level vacancies, especially on the month to month tenants.
This could be a value add play however if the MTM tenants are below market and you can convert to long term tenants at market rates.
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