Industrial Building Beginner / need opinions on deal

16 Replies

Hi, I am a beginner just starting into real estate and am trying to learn at a quick pace. I have priced up various different deals and learnt a decent amount from doing so, but I would love to hear a few of your opinions on a deal I have came across. The industrial building is in a great location and is selling for 2.2m. As of right now it is renting to two different companies, one at 9$ per sq/ft for 4000 square feet(lease ending in 1.5 years) and the other at 13$ per sq/ft for 12000 sq/ft(lease ending in 2.5 years). Our agent has told us that the 13$ per sq/ft company is willing to take over the whole building for 15$ per sq/ft after the other companies lease is up. They would be willing to sign for a 5-7 year lease. This is of course word of mouth. My real estate agent also insists to involve him with the renewal of the lease to raise it up to $15. What would he charge for this, and is this something I could figure out myself ? I am also thinking about taking the real estate course. This is also a triple net lease. 

My calculations before the lease is taken over:

Net profit= (9x4000) + (13x12000)= 192,000                 Monthly = 16,000

Sale price = 2,200,000                                          Down payment= 25% = 550,000

Loan amount = 1,650,000

Monthly payment on 25 years with 5.5% interest = 10,132 yearly = 121584

Cap rate = .872 = 8.87%

DCR = 192,000/121,584 =1.58

COC = (192,000- 121,584) / 550,000 = .1280 = 12.80 %

The numbers look good to me but I am confused about a few different things. For example the loan is paid over a 15 year amortization instead of 25 the COC and DCR would drop drastically. So when I see on forums that a good COC is between 8-12% and a good DCR is over a 1.4, it confuses me because this could change depending on the amortization. Any tips or help would be greatly appreciated!

Borrow as much as you can for as long as you can to increase COC returns.

Look over the lease, not all NNN are the same.

Are these credit tenants?

Make the sale contingent on signing the new lease.  Your realtor will likely want a percentage of the entire lease amount.  That could be $30-60k payable up front!

Are you sure on the 25% down?  Lenders often want 30% for inexperienced investors.

I’m an industrial broker in Atlanta and the commission for renewals can vary greatly by market. For Atlanta, the owners rep would receive 2% of the net rental payments for the entire term and if the tenant has an agent, they would receive an additional 2-4% of the net rents for the term, all payable up front.

Thanks for the replies! If I borrow as much as I can wouldn't that mean id be paying more interest in the long run ? Trying to minimize that by using what i'm making to pay it off quicker. I was just confused by how some can consider 8-12% COC a good investment but do not specify with what amortization.

I will mention the sale contingent with the lease to the agent, I was thinking the same thing. That seems to be quite a lot, is this something I would just deal with myself or is there a lot behind doing so? 

Yes I am sure about the 25% down, as I have investors with reliable equity.

Thanks Austin, I will keep that in mind. Like stated above, is this something I could figure out myself or do most people go through an agent for it ? 

If the tenant is a local company many times you can negotiate with the broker for them to get their commission over time.  That way if the company goes belly-up the broker doesn't get the commission for the whole sale.

That is a good idea, but is this something I can avoid by just doing myself with the renters or is it a complicated process ? @Matt Boettinger

Also if anyone else has answers for the other questions I asked that would be great !

@Mike C.   I don't have a lot of experience with industrial/flex space leases it but these leases can be quite complex.  If I were in this position I would use a broker to help walk you through the details of the contract and help negotiate and learn from the broker.  This is just me.  You may have experience with complex contracts and feel comfortable with it.

The numbers look good on this deal! That’s true even if the higher rent doesn’t happen.

I’d suggest you use a broker to negotiate the lease. You say you are a beginner and he will earn his fee if he can get you such an increase and you will learn in the process too. There are plenty of details that can mess you up

You likely need to put 30% down. Check out tenant credit worthiness. How do the rents compare with nearby similar properties? Do tenant pay on time?

You might in my opinion be better off getting it under contract and go to contract without a higher rent contingency. hopefully you can secure it at a discount this way based on current rent as presented to you and then work on the increase later on with a broker once you own it. The discount you get could pay for the broker and improves the numbers even if the increase doesn’t happen.

Also look at the price you are paying per square foot and compare that to similar properties to see if you are paying market , above or below on that basis.

Originally posted by @Mike C. :

Thanks for the replies! If I borrow as much as I can wouldn't that mean id be paying more interest in the long run ? Trying to minimize that by using what i'm making to pay it off quicker. I was just confused by how some can consider 8-12% COC a good investment but do not specify with what amortization.

We all have a finite amount of cash, so cash on cash returns should be your #1 metric. If you are going to pay it off early, your COC return number goes lower. Do the numbers on paying off that entire loan over 10 years vs. paying the minimal and acquiring more properties. What will ultimately return a better yield? "But I don't want to get over leveraged", then don't, keep enough cash on hand so you are not over leveraged.

The renters have already word of mouth agreed to raise the rent up to 15 per sq/ft, so I feel as if there wouldn't be much negotiating behind this. I was just more or less wondering if there was anything complicated besides the negotiations part of it within paperwork. By discount do you mean on the price of the property? @Richard B. ? 2.2m is the lowest they are willing to go according to my agent. And I have compared it to the pricing of others. The main point that sticks out as an advantage to me is the company leasing is well known and willing to stick around for another 5-7 year lease.

@Ash Patel

I understand what your saying. So if you pay it off over a longer amount of time you can leverage your money to invest in other investments. Makes sense, I appreciate the input! 

Yes - I thought you might do better on the purchase price. Seems like a solid deal.
Good luck!

I am at the final stages of closing the deal and have a few more questions. I understand the knowledge of a real estate agent in this case could be handy, but he has already told me he is aiming to raise the rate from $13 to $15-17, and he said any amount he raises he would take 20% of. I feel as the negotiating part is something I could do along with a few experienced business family members. A lease contract has already been done, which could be reused with the change of the rate. What else would my real estate agent be doing besides negotiating ? @Ash Patel @Richard B.

P.S the loan got accepted @ 25% down and 4.5% interest which makes this more of a steal ! Any other advise is appreciated!

If the Realtor has added value along the way, I would consider throwing them a bone.  If they have not really added much value, do it yourself.  I believe RE is a game of relationships, not commodities.  

this seems a very good deal and getting the higher rent ... well that makes it a great deal. Good financing. Congrats.

I’d close the deal and then decide whether to handle it myself. Trying to build a strong broker relationship is important. You might need him later to rent the space or he will find you the next deal. If it’s simple as you say you might try to negotiate the fee down - maybe a flat fee. It can be a win-win.

The deal has been closed, we are now in the process of negotiating a new lease with the company who occupies 12000 SQ/ft to take over the entire 16000. Our real estate agent wants 20% of the TOTAL annual rent for negotiating, this comes out to around 50k. I have talked to a experienced appraiser as well as the old owner of the building and both have said that uping the lease to $17 per sq/ft seems unreasonable but our real estate agent insists it is not. The old owner said we could probably get it up a dollar or two more but that is it. Our appraiser also showed pricing of all buildings around and there was none that were at that high of a price, although our lot is unique with the amount of land it has. No matter how much our real estate agent is raising it he gets 20% of the total annual rent. 

Right now if anyone has any advice on negotiating the lease with the company owner who wants to rent all 16k sq/ft, and if we should bother with the real estate agent negotiating for us.

One thing you need to be aware of on industrial deals if you haven't done one is the deal costs as they can eat away at your yield quickly and are VERY different from residential. 

While it might be a triple net lease a savy tenant will probably come in and ask for some TI dollars (which is market for industrial). They will probably ask for some improvements in the realm of $1-$2 on a warehouse in order to renew the lease. If they are represented by the broker that will be some additional deal costs, and often times lease review is more onerous than in residential so you may have to pay some legal bills as well.

Also I've found sometimes people say its a "NNN" lease but landlord is still on the hook for roof, structure, and parking lot. All things to make sure you cover in underwriting and making sure you have enough money outside the loan.

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