Commercial Property Due Diligence

[John Pu]

Hi everyone! Glad to be part of Bigger Pockets community and I am looking for some help on my first potential commercial real estate deal.

I am looking to acquire a shopping center that is profitable but not in best of shape with some differed maintenance in the common areas (parking lot and landscaping primarily). The center does not currently have any major chains in it and have a couple larger spaces 10-20K sq ft) with potential to have some medium sized retail chain possibly (drug stores, dollar stores, or even auto parts stores). It is only about half rented now and brings in about just north of six figure NOI so I believe it has a lot of potential by increasing the occupancy rate and taking care of the maintenance items which will allow for rent increases down the road. I have the following questions I would appreciate some feedback on:

What is the typical due diligence process you would need to do?

Does the property command a lesser cap rate if it does not have a big name chain?

How much of a discount should I expect due to the deferred maintenance needed which is significant ?

What is the process of getting a big chain to come to a property and how long should I expect it potentially could take?

The owner is willing to do owner financing but with about 30% down. I think this would be about the same as a commercial loan. What are the advantages of taking the owner financing vs. getting my own loan?

What is the typical cap rate for retail shopping centers that you are seeing in the market place now?

Thank you in advance for your help! And Of course any other advice would be appreciated!

John

[Joel Owens]

Talk to a retail property management in the area that works on turning around centers. They often have some good insight.

You are asking a lot of questions. Basically wanting to do a value add retail deal without the experience or it appears that way by the post. Typically in those situations you have to PAY for that knowledge. Whether that is getting a company hired on as  consultant, giving some equity to the property management company coming in to turn it around, etc. 

There is a lot of work to stabilizing a center.  A regular loan is usually not available on un-stabilized ( typically under 85% occupied) centers. Owner finance, bridge debt,etc. can be options.

It's not just the 30% down the seller wants. You will have tenant improvement costs, typically free first few months rent on occupancy, attorney legal fees to negotiate the lease ( property management company usually just does LOI), tenant rep broker commissions for bringing the tenant to your center,etc.