This is Retail Center a deal? Please advise

Commercial Real Estate Investing
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This is Retail Center a deal? Please advise

Greg P.
Los Angeles, CA · Member since 2009 · 717 posts · 50 votes

Hello, I was offered this opportunity and I think it may be a good deal.

Retail Center : 5600 sq ft (NNN) Triple Net
2 National Tenants - Radio Shack and Sherwin Willaims

Price: $700,000
Down Payment: $106,485
Gross Income: $77,503
Expenses: $12,979
NOI: $64,524
Loan Payments: $37,871
Pre Tax Cash Flow: $25,653
Principle Reduction: $9,890

Summary:

Positives:

- The bank is willing to finance with only 15% down and 4.5% interest rate and no balloon.

- There will be no personal guarantees (non recourse)

- Radio shack is paying 2,000 a month less then what they should be and if they go out of business or leave when their term ends in 2016 then the Income will go up by 24k once the new tenant is found

- Anchored by the largest/busiest grocery store in a town with a population of 25,000.

- Cash on Cash approx 20%

Negatives:

- Sherwin Williams lease is up in 3 years, but they have been there for over 30 years.

- If Sherwin or Radio shack leaves then there will be TI money needed to redo space.

- Lastly, the expenses are without a management fee, and vacancy reserve so with that included it may be a lower NOI. Also there is no snow removal accounted for. From my understanding, the tenant pays for everything else.

Please advise as this is my first possible commercial deal.

Thank you very much.

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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
14y

Not excited about Radio Shack or Sherwin Williams.At least in my state those brands have been dying off and closing down.

You need to drive a 2 mile ring radius and know what COULD go in there if they fail and for what price after TI improvements.

Non-recourse is great but you still have to put a chunk of cash down so have to make sure and protect the down payment.

For paint unless you are in an affluent area most people go for Home Depot,Lowe's,Wal-mart for cheap prices.Same thing with Radio Shack unless it is a specialty part you cannot get anywhere else.

I would really want to see their financials for that location of both businesses and how they have been performing over a span of time.

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  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    14y

    Selling at a 9 cap in a small town with good tenants - sounds like a solid opportunity. Passes the first test, now time for real due diligence!

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  • Greg P.
    OP
    Los Angeles, CA · Member since 2009 · 717 posts · 50 votes
    14y

    Thanks Don, I'll take your word for it. Can you describe some of the things to do during a due diligence period? I know the basics, but I just don't want to forget anything. Thanks again.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    Not excited about Radio Shack or Sherwin Williams.At least in my state those brands have been dying off and closing down.

    You need to drive a 2 mile ring radius and know what COULD go in there if they fail and for what price after TI improvements.

    Non-recourse is great but you still have to put a chunk of cash down so have to make sure and protect the down payment.

    For paint unless you are in an affluent area most people go for Home Depot,Lowe's,Wal-mart for cheap prices.Same thing with Radio Shack unless it is a specialty part you cannot get anywhere else.

    I would really want to see their financials for that location of both businesses and how they have been performing over a span of time.

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  • Greg P.
    OP
    Los Angeles, CA · Member since 2009 · 717 posts · 50 votes
    14y

    I agree, the last time I drove by there it was dead in both stores. I wouldn't mind Radio Shack going out because they are paying under market rent by almost 2k per month, but if Sherwin Williams went out then the whole place would be dead because 90% of the income is coming from them. What if they say they can't give out financial etc for Sherwin?

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  • Stephen Masek
    Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes
    14y

    When was it built?

    What is nearby (especially filling stations and dry cleaners)?

    How does the Phase I Environmental Site Assessment look?

    2Reply
  • Greg P.
    OP
    Los Angeles, CA · Member since 2009 · 717 posts · 50 votes
    14y

    I'm in a tough spot because the realtor is convincing me to buy the property because of favorable terms, but I can't tell if he's helping or trying to sell me. I just don't know if I should buy it or not.

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  • Greg P.
    OP
    Los Angeles, CA · Member since 2009 · 717 posts · 50 votes
    14y

    1958, the face of the property looks somewhat dated. It's in the busiest retail area of the town anchored by Culvers, and the main grocery store. Also, by the busiest liquor store. This is a college town. Haven't done the phase 1 since we are still in negotiations about to enter into due diligence. No gas station or drycleaners in the same strip mall but about a 1/2 mile a way. This is the busiest strip center in the area bar none.

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  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    14y

    If it is the busiest strip center leaving tenants should be replaceable. Sherwin Williams has developed a new niche in higher end paints - I wouldn't write them off just yet. In most retail spaces the stores must report sales to management - make this report part of your due diligence, than see how these stores stack up against same stores nationwide, adjusted for rent. The more you learn about the individual business tenants, the sounder your evaluation will be. Check vacancy rates in your town, new business formations, get a feel for demand for retail space. Recognize the importance of tenant mix.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    "1958, the face of the property looks somewhat dated." That year of building is probably running galvanized pipe from the water meter at the street sidewalk to the building.

    Those usually rust internally and start leaking underground.To replace that line with copper can be very expensive especially if the line runs under the parking lot.You would need to cut up the road,take out the line,put the new copper line in,and then fix the road.

    This can cost tens of thousands to over a hundred thousand depending on length of the run to fix.I would be concerned with a building of that age with hidden problems discovered once the current tenants leave doing TI.Could have asbestos,roof problems,sewer problems with the cast iron system,lead paint,etc.

    With retail buildings usually have a life cycle of 30 years so they are usually torn down and regenerated instead of a 50's vintage still standing.

    Regardless if it is a great location and not a dying part of the old town where the growth has moved then eventually a developer would be interested in partnering with you and building new or buying from you outright.

    You have to really look at these types of deals from all angles and work with someone looking out for your success.Not someone wanting to just "sell you something".

    I view instead of selling people on things to get one off commissions to instead help them make long term sound purchases.If one is successful then it stands to reason a relationship will be formed and they will buy more off of that success.

    If a broker/agent sticks someone in a bad deal then later business from them and referrals will be non-existent.Some of these brokers only representing corporations as sellers do not care about the buyers or if they buy right.

    This might could be a good deal for you.Just think of the multiple exits as much as you do about the purchase.

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  • Tod R.
    Investor · Southlake, TX · Member since 2009 · 950 posts · 338 votes
    14y

    Location would have me interestd.

    I would want to make sure you completely understand the leases in place, including any and all remaining obligations and rights of tenant and landlord through the termination of the lease.

    I agree with Don Konipol that you should make sure you understand your market. What are the potential replacements if your current tenants left.

    Joel Owens also makes good points about property condition, and potential redevelopment.

    Just make sure you've studied the downside and have a contingency plan for any potential challenge.

    1Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Sounds like bank REO and a price set on the income. Inspect the RE, consider functional obsolesence (style, materials, age, etc.). Just glancing at the numbers I'd say offer 610K with the same terms, if it all checks out.

    You need to vet the owners of the franchises, they are most likely good business folks as getting these franchises is not a walk in the park so that means they should have decent personal financial statements. Is there a personal guarantee on the lease?

    Radio shack is hot here as they are big in the cell phone retail side with several programs. Look to the owners and how long in business. Ask the bank (orowner) for an estoppel certificate showing the actual deal between the landlord and tenants.

    That grocery store takes alot of juice to run it, check the electrical service carefully for code compliance in an older building.

    Good luck....

    1Reply
  • Greg P.
    OP
    Los Angeles, CA · Member since 2009 · 717 posts · 50 votes
    14y

    Would the inspector take care of the issues Joel is talking about? Would would I have to talk to some kind of specialist?

    Thanks for all the help.

    0Reply
  • Tod R.
    Investor · Southlake, TX · Member since 2009 · 950 posts · 338 votes
    14y

    For commercial acquisitions, you should have a property condition inspection/report. This will give you an assessment of the remaining useful life of the major components of improvements and recommend a certain level of reserve. Usually the lender will base their required initial and monthly capital reserve escrow payments off of this report.

    0Reply
  • Stephen Masek
    Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes
    14y
    Originally posted by Tod R.:
    For commercial acquisitions, you should have a property condition inspection/report. This will give you an assessment of the remaining useful life of the major components of improvements and recommend a certain level of reserve. Usually the lender will base their required initial and monthly capital reserve escrow payments off of this report.
    I'll second that, as I helped write parts of the original ASTM E2018 standard for PCA as an active member of the task group which developed it.

    You need a Phase I, PCA, asbstos survey, lead survey, and miscellaneous toxic materials survey (mercury, PCBs, etc.).

    Those of us who collect and restore old radios lament the current state of Radio Shack as a battery and cell phone store with few parts. However, they seem to be doing several things right, as there are plenty of them in business all over the USA. I wonder how much they are making per square foot?

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    The paint shop seems to a concern having been there "forever", they carry lots of thinners, cleaners as well as paint and some from years ago were nasty stuff (probably still are). They may require a more indepth inspection environmentally.

    0Reply
  • Greg P.
    OP
    Los Angeles, CA · Member since 2009 · 717 posts · 50 votes
    14y

    What do you mean Bill, can you clarify? Thanks.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    Greg the pipe is usually at the street or side walk for the meter.Your plumber can check if galvanized or copper is going to the building from the meter.

    If the sewer is cast iron the plumber can run a scope from the toilets to the street.

    I would also worry about the Environmental part of the property.Typically though banks BEFORE they foreclose order a phase 1 environmental report and look at the findings before taking back the property.

    If the phase 1 finds something the bank will pay for the higher and more expensive phase reports.So you need to ask them if they can provide a copy of the Phase 1 Environmental report if one was ordered.

    If they foreclosed likely nothing was found.The banks do not want to foreclose on a property with high environmental cleanup costs.They can justify and document losses on paper easier than throwing more cash into a property to fix problems.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Thanks Joel, except around here and in DFW area the bank doesn't pay for anything for a lending decission....better check with your lender...

    And, if the grocery store has a harware/gardening type section, it too could be more of a problem.

    Being as old as it is, is the place on a septic system or city sewer? Today it's rare for commercial to be on septic,but there are some.

    0Reply
  • Stephen Masek
    Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes
    14y
    Originally posted by Joel Owens:
    ...bank ...provide a copy of the Phase 1 Environmental report...
    You want you own report. Banks like to use consultants who "understand their risk tolerance." The bank's risk tolerance and your risk tolerance are two very different things. The most they can loose is the loan balance. The most you can loose is the cost of cleaning-up a contaminated property, up to your net worth.
    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    I am not referring to the lender who you might get a loan with for the report to purchase.

    I am talking about a banking institution that is looking at whether or not to foreclose on a property they have a loan on.I run into this with commercial property when I am doing short sales.

    The bank will order full appraisals every 2 to 3 months or so and the environmental I would put weight on how old the report is from.

    The phase 1 reports I have been provided by the asset managers on these short sales are very detailed by a professional company (some up to 60 pages long or longer).

    The point is you can get a copy of this report sometimes which is a bonus for a buyer looking to purchase.After viewing a report a buyer can decide if they want to pay for a more involved report or pay for another phase 1 by a different party.

    Of course you can get as many inspections or reports as you want as a buyer but it all costs money.

    The lender on your loan will most likely require a phase 1 anyways on your purchase buts it's good to extract free reports from the bank before throwing out a bunch of money for inspections.

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  • Greg P.
    OP
    Los Angeles, CA · Member since 2009 · 717 posts · 50 votes
    14y

    The owner who is the bank is also going to be the lender. Should I get a phase 1 if they have it already?

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    Ask them if they have the phase 1 and how old the report is.

    Also ask for the appraisal.Some will not share but some believe it or not will show it to you.

    I would think since they are keeping this in house they have ordered a phase 1 to know their liability before foreclosing.Otherwise they would have just sold the note off to get rid of it at a discount and let someone else deal with the problem.

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  • Stephen Masek
    Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes
    14y

    All Phase I reports are lengthy, with all of the attachments, but it is not a good idea to value them by the pound. I've seen reports which missed very significant things, yet were thick documents.

    Instead look at who actually did the site visit and data analysis. You want those tasks to have been done by an "Environmental Professional" as defined in ASTM E1527. All commercial and industrial investors should obtain and read a copy of E1527 (available for a few bucks on the ASTM web site). One other sign of a good report is plenty of photos.

    2Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    Stephen I agree that could happen. The reports I have seen have been very good quality and very detailed.I especially like looking at the the aerial pictures over 60 years to show how the a property changes over time going from raw land to developed product to a change to a different product etc.

    Some might find things like that boring but if you love real estate it is fun.

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  • Stephen Masek
    Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes
    14y

    Agreed - seeing history unfold is fun. The fire insurance maps are also wonderful for seeing how thing changed over time.

    Trivia - W. Buffett probably made a bundle buying the Sanborn fire insurance map company very cheap and selling it to EDR.

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