Need help analyzing this deal - strip mall

8 Replies

Hello all,

Need advice on below, would like to know from experts if we are missing anything and how is this deal overall.

We just started researching about investing into commercial real estate and stumbled upon this property. It is a retail strip mall - amazon proof tenants.

Below are the financials 

List price: $3.5MM

Total leasable area: 9000 SFT

NOI: $239K (if fully occupied)

Total Units: 4

Occupancy: 83%

Land: 1.5acre

Parking spaces: 80

  • 1. One of the unit is occupied by a national known sandwich shop (corporate lease) - this is 17% of total space and they are in the building from 2006 and their lease is till 2026
  • 2. 53% is occupied by a (local to state) bar and grill - their lease started in 2007 and expiring in 2022 - next 5yr extension option with 10% increment. - They have around 25 - 30 locations in the state.
  • 3. CBD shop occupying - 13% - start in 2019 and initial lease till 2025
  • 4. Vacant

All NNN lease with expenses reimbursement from the tenants.

seems like a good location as it is just off of freeway and there is Chuck E Cheese, Apple Bees, Raising canes and other  good retail around the location.

We are trying to get the latest income statements from the realtor to assess if the tenants are doing good (mainly from the bar which is occupying 50% of the space and lease coming to an end in 2022)

According to our calculation cash-on-cash is around - 8.5% if the building is 100% occupied 

Assumptions: 25% down payment and 75% loan from the bank @4% interest rate 30year amortization 

Operating expenses included - Property taxes, Insurance, CAM, Management fee.

Are we missing anything from the calculation ? Do we need to consider any other expenses ? What is the % used to calculate the unforeseen expenses ? (we haven't reviewed the lease terms yet so not sure if HVAC is a LL expense or tenants) 

One more thing, in addition to above property the same owner has a 1acre+ land which they want to sell along with it .. they are ready to cut almost 30% off of land price (I did quick research on the surrounding land postings online and this property listed for substantially lower price already)

If we get a good deal along with the land may be around 3.75MM (include the land as well into same loan ??) and even with current occupancy rate we will be able make debt payments and save around 5% or more (cash-on-cash), our plan was to ground lease the empty land or build a storage units or something after few years.

Please suggest if we are missing something here in our calculation.  

@Kishore Ginjupalli What I see as something you are missing is the fact that with a cost segregation study on the newly purchased property, you will have between $210k and $350k in state & federal taxes you will not have to pay in year one. Or, you can roll part or all of that forward if you do not have enough taxes owed in year one. Don't pay more in taxes than you need to pay. 

@Kishore Ginjupalli it appears to be a pretty good deal as long as you can withstand the negative cash flow with the vacancy. One thing that is not entirely clear though is you said leases are NNN but then you mentioned operating expenses later - in a NNN the tenants pay for taxes, insurance, maintenance, etc.

You should also examine the other vacancies in the area - how does your space compare? Are you going to be able to get a solid tenant in? I’d be looking at salon, spas, tanning, or dance/gym type studios to see if there is room in the area to attract something like that.

Thanks Tim for the reply. Yes operating expenses will be recovered(reimbursed) from tenants. Sure we will check the general vacancy around. 

do you think we need to consider any other expense? Not sure what other expenses land lord is responsible for in NNN lease.

thanks again

You cannot underwrite potential rental income, thats just ludicrous. You have to buy as-is existing cap rate. If you don't have a leasing broker, you need to hire one. They will have contacts with national tenants. Is your projection including enough TI for any new tenants? what $ psf ?

Originally posted by @Ronald Rohde :

You cannot underwrite potential rental income, thats just ludicrous. You have to buy as-is existing cap rate. If you don't have a leasing broker, you need to hire one. They will have contacts with national tenants. Is your projection including enough TI for any new tenants? what $ psf ?

 There is a master lease on the vacant unit by seller, so seems like they are trying to find the tenant for the vacant space already. Assumption is that it will be occupied before we close. We are yet to read the master lease terms and conditions.

We wanted to negotiate the sale price and include TI costs in our negotiations. If the seller fills the vacant unit before we take over then I assume there won't be any costs on us.

Master lease are typically crap.

If seller is giving you money as credit that is one thing. If they are trying to COUNT as income something they are master leasing for 1 year the lender will laugh at them.

They will underwrite with appraisal that the space is VACANT and that it might never lease up especially for what a seller selling the property is trying to put for a lease rent value per ft on it.

Even if seller wants to give you a credit to cover future lease up of the space the lender still has to approve it or will just say they will reduce loan proceeds which really does nothing for you.  

Even if something is NNN with retail center you have base rent and then CAM expenses. There can be cam caps annually on expenses for controllables and cummulative vs non-cummulative conditions. The bar might not have to give income statements per the lease.

You have to assess RISK with the property and if it makes sense. Getting 25% down and 4.0% rate seems optimistic for the tenant base you are describing.

That's more for Aspen Dental, T-mobile, Starbucks with brand new 10 year leases and strong guarantor companies. Even then it is usually 30 to 35% down.

I think your numbers are optimistic at best.

There is so ,so much more to cover on retail centers. I can't comment further. I don't do consulting as it's a waste of my time. I work on transactions with exclusive clients.   

@Kishore Ginjupalli in your pro forma I would also assume that insurance is going to rise quite a bit, estimate higher snow removal and lawn/landscaping maintenance and any other expense that uses labor as those services are going to continue to go up with labor shortages and higher wages.