Commerical Deal Analysis (Beginner)

21 Replies

Hi,

I am analysing commerical property with 2 mom pop tenants stores, NN lease, 14% cap rate, 4 year remaining, and seller is one of the tenant.

What all should I look for along with condition of the property?

also, read about performa, it would be nice if someone can share sample copy of it.

not sure if am missing any warning signs.

Thanks

Ray

This should be a pretty easy deal. You want to look at their business P&L to be sure they would be good tenants.

Check the lease carefully as well. Are you getting financing from a bank?

Google: Proforma, profit & loss statement

Seller is willing to rewrite the leases at closing, so avoiding any potential lease issue.

currently no security deposit by either tenant.

can I request books of both tenants? Is this normal and customary request?

I would have the lease agreed on BEFORE closing and have the close as a "close w/ a lease back".

Vacancy in retail stores have become a major concern for me.

Originally posted by @Ray Bansel :
@Ronald Rohde

Yes, this would need some kind of financing - which I still need to work on.

What's typical for commercial RE - 20% down?

 At least, plus a personal guaranty from a balance sheet guarantor

How much is the purchase price?

The seller being one of the tenants could be problematic if their business is not doing well. They could be trying to cash out the asset and shut down the business post closing eventually. You really have to review years of returns and financials to see how they are trending an what monthly rent they can support.

Retail is generally 35% down especially since this is a 2 tenant property the underwriting from a lender is usually one tenant goes dark there is not enough rent to breakeven paying the mortgage like if you had say a 4 to 5 tenant center (usually 30% down). The breakeven occupancy on that center is less. You could like lose 1 to 2 tenants and still service the mortgage without coming out of pocket.

There is a TON to negotiate on leases. Generally there is a commercial retail attorney that does that on your behalf. There is not usually 20% down as that is more multifamily assets and retail is underwritten differently as an asset class. I have a great commercial retail attorney in GA I use often.

Ray,

Look up Carter Stout Attorney.

In regards to lenders likely a small local community bank. Anything under 1 million loan most lenders are not interested in. They like larger properties with strong regional to national tenants and newer builds.

Michael,

Mixed use the interest rates are generally higher than single asset types because you have multiple income streams to manage from various asset classes. What kind of loan you can get varies with deal size, location, and a ton of other factors. Make sure you know what financing you can get before you settle on a sales price with a seller.

Lots to look for...

  • -Obtain estoppel certificates from all tenants
  • -Check their renewal options to make sure you aren't stuck with low paying tenants
  • -Who is responsible for building systems? If HVAC goes out, who's on the hook? You or tenant? 
  • -Personal guarantee on the lease is pretty important. Need to pierce that corporate veil in the event of default.
  • -Get address or drivers license of Officers of the Corporation(s) in case you have to take anyone to court
  • -Ensure all leasehold improvements committed by the landlord are complete and you aren't on the hook
  • -Check title - (not sure if they have this in the US) make sure there are no Liens on the property or property taxes in arrears (or utilities for that matter)
  • -Check with city to make sure the use of the building matches what they have on record... don't want to pickup a non-conforming use! 
  • -Get floor plans, copies of all/any applicable occupancy permits or building permits that were completed. 
  • -Any existing contracts? (with maintenance? snowplowing? irrigation? cleaning staff?)

And many more... sounds like some others on this forum have great input as well!

Best of luck

@Ray Bansel Why is the seller interested in selling the property? What is your estimate of a 14% cap rate based on? Historical financials? Typically, mom and pop operators like this don’t account for a management fee or replacement reserve in their historical financials. When I appraise properties like this, the historical financials rarely match reality due to the fact that the operator’s business expenses and property expenses are commingled.

The lender you choose likely has their own list of approved appraisers they use for which you do not get a say in the selection.

If you want an appraiser to just give an opinion of value not related to a loan that is different. For that you can engage an appraiser for an appraisal or a BPO (brokers price opinion). Those are often less detailed and intensive as a commercial appraisal but can be substantially cheaper. Appraisals in commercial can be thousands of dollars.

That is the problem with smaller properties is that you do not have scale so closing and due diligence costs can be really high as an overall percentage. So an a small deal like this could see maybe up to 8% or so in closing costs where a 10 million deal might be 1.25 to 1.5% closing costs.

@Josh Ridpath

14% based on rental income/lease. Yes it would have some expenses since this is NN and not NNN.

Seller/Tenant selling as he has another property which he wants to develop and lease out ( Not necessarily I believe this, but my point is to rightly analyse this, and be cautious enough to not invest Incase this is huge risk or not to miss the opportunity Incase this is a gem - and this is where am struggling.)

Talk to economic development department for city or county. Look at current and future land use maps. Study traffic counts and state DOT road projects. Look at violent crime levels and trends for an area.

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