Any commercial/industrial investors in here?

Question

Greetings, all. I notice that most of the talk in here centers around residential property investing. Are there any commercial investors knocking around in here by chance? Would be great to tap into a resource around that world, if possible. If you are, please chime in! I've got a commercial deal I'd love to soundboard to some knowledgable folks. Thanks!

Jessica Zolotorofe · Answer

Well, best of luck and do keep us posted!

Rj Kro · Answer

Thanks Jess. Those are great thoughts there on due diligence. I'm gonna try to pull as much of the financials on the business as I can; what I do know looks good. $58M in annual sales, good growth, industry has good long term prospects. I do not know if this is a renewal period. I had a talk today with one of my commercial guys; there's some blind spots in my knowledge base of the location. It's got some strong prospects, but it's also got a possibility of competing product coming on the market, in theory. It's not "landlocked". But the upside is that per square foot, it'd be almost impossible for someone to build for cheaper, so this prop has that going for it. In my market, there's a lot of vacancies in office. I don't see much proper retail for sale now, at least with a tenant. I frankly don't think I have the stones to purchase a vacant prop and put a retail tenant in it; I'm looking for something turnkey, at least now.

Jessica Zolotorofe · Answer

Personally, I don't love industrial. I think it's too small a class in a lot of cases, so the risk is much higher. I'm a fan of real commercial/retail/office because vacancies are so much easier to fill, but everyone has different preferences. But I like the NNN, of course, and depending on who the tenant is and how they are doing there, you could be ok and they could renew (assuming that's an option). Ask for tenant financials and see how they are doing there as part of your diligence, maybe? Is this their first term there or a renewal period?

Rj Kro · Answer

Thanks Jessica! Haha, well, I am interested, but I'm not 100% sure I want it yet. I still have some due diligence to do. Ultimately, I may decide to wait it out for a better option over the next 6-12 months. Don't know yet; got a call with my agent today on it. Right now the numbers do look very appealing(particularly a 6yr lease in place). Would be great to hear what kind of deals other commercial investors are jumping on, passing on, sound good, sound bad, etc. Please feel free to chime in to provide some national context! (I'd love to know what length of leases are folks looking for? do folks favor cap rate of lease length, or vice versa?)

I just took a look at the JLL report. It looks like Columbus' average cap rate is 6-6.5%.

Jessica Zolotorofe · Answer

JLL just put out their industrial report for 2017. It's interesting, if you want to take a look, here it is JLL Report. Sounds to me like you want this property and you just want someone's approval :) If you've already worked out the possibility of carrying a vacant space, and the numbers are ok, then go for it. Key is to get the price negotiated to a place that you are comfortable, so start there, and you always have the due diligence period to reconsider, but the biggest factor will be what you can get it for, so I would make an offer and see what happens.

Rj Kro · Answer

Thanks, Jessica! I appreciate it.  SO good to get another set of eyes and ears on this!

The initial lease term was-to my knowledge-a 10 year lease. In your experience, is a 6 year commitment at time of purchase "short"? I ask this sincerely, as it seems that most of the properties I have seen around HERE come and go have a lease in place are in the MAX 5-6 years range, usually under. A property I was interested in just went under contract last week; 10% cap rate, 2 years left on lease.  I literally cannot think of another commercial prop on the market here that has an actual, committed, 10 year lease in place. But maybe this is a regional/market difference? What kind of leases are in generally in place in your market at time of sale? (also, cap rate: what's bad/good/great in your market, i'd love to know!)

As an aside, the vacant property next door is FSBO; they don't seem to want a tenant. The occupied property is 100% leased, it's just a little out of my price comfort zone, no leases beyond a 2 year commitment, and a cap rate in the 7% range.

Yup, true NNN. Tenant pays direct, so when the R.E. taxes swing from the sale, they eat that.

Yes-I may not get a great deal on it, but personally, i never want to let great be the enemy of good. at list price, it's an 8.6% cap rate at year 1, with rent bumps baked into the lease. the pride of "i got the deal of a lifetime" thing isn't a big deal to me; good money NOW can beat waiting around for great money in the FUTURE, to me at least. i see no reason i couldn't carry the prop for at least 2 years in 2024 with a vacancy. probably more.

Jessica Zolotorofe · Answer

The biggest red flag I see if the short term lease. Especially in the market you describe (no offense at all to your broker, but if she could easily find a tenant, she would probably go find one for the other similar vacant building and make a few bucks, in all fairness). How long was the lease initially? What are the chances this tenant will stay?

Is it a true NNN? Tenant pays directly taxes, insurance, utilities? Landlord doesn't have to collect and then pay, or pay first and get reimbursed, right?

Other thought is that while I am not too familiar with Ohio laws or process, if your property is zoned industrial but it's in a more mixed use area then if you can't get in a tenant, you can usually get a variance for some other, more commercial use. If you are in the middle of an industrial park, you may have some more difficulty.

Only other thing that could be turning people away is environmental? Could there potentially be an issue when this tenant moves out? Did you say what kind of tenant? With industrial uses, that's sometimes a concern.

Always go with your gut. If it's been sitting and you aren't feeling confident about this many aspects of the deal, I'm not saying don't go do your diligence if you can agree on a decent purchase price, but also make sure you are going in with open eyes. Like you said, when something sits for a long time, there is almost always a good reason. Speak with other agents. Over-confidence from any agent always worries me. Especially with vacant spaces in the immediate vicinity.

Also keep in mind before you invest so much time that if the owner truly doesn't need to sell, you aren't going to get a great deal here. Make sure you really run the numbers and determine how long you could realistically carry the property with no tenant.

Rj Kro · Answer

Hey Jessica! Thanks much. Ok, good to know; in that case, I'd love to put a possible deal out there, and see what you commercial folks think(others, feel free to weigh in too!) about it, and if there's any questions I may be overlooking.... Here's the specs on a property I'm considering:

PROS:

-24,000+ sq ft industrial space on about 1 1/2 acres. The property itself is in good condition; new roof 3 yrs ago, 3 phase elec, solid HVAC, 16ft drive thru, 2 roll ups, 2 docks. needs no current upgrades(technically, everything except roof, structure and parking lot is tenants responsibility).

-triple net lease. 6 yrs left on current lease.

-tenant has a very solid reputation. multiple locations throughout the midwest. i like the business, i like the long term prospects for the industry.

-depending on sale price, cap rate will be in the 8.8%-9.3% range. tenant paying under FMV; my agent thinks this could draw rent to equal 10-11% cap rate in 2024. probably gonna be in the $3.50-3.85/sq ft range.

CONS:

- the location is not a bad neighborhood per se, but it is a solidly industrial neighborhood of Columbus, Ohio. There are two buildings for sale in close proximity; one with tenants, one without. I can't say with complete confidence that I could put a tenant in it in 2024 if need be, but my agent seems very confident I could. I frankly don't know this side of town THAT well; I'm trying to do my due diligence as best I can on that.

-It's sat on the market for almost a year. Either there's been offers and the seller doesn't wanna play ball, or there's something on this property I'm missing, cause good commercial deals don't sit very long right now in my market. I was told by the seller's agent that the seller "doesn't care if he sells it or not", because it's a solid earner and zero maintenance.

To give context, I could get a longer lease with marginally higher cap rate( 10 yrs at  9.5-9.8% or so), but be in a neighborhood I don't feel NEARLY as good about the long term prospects of. There is a long history of industrial usage in the neighborhood of the prop I'm considering. Some MAJOR commercial players are based in this immediate vicinity, like 100k sq ft facilities and up. Also, I'd be paying ALOT more per sq. ft. To be in a slam dunk neighborhood here, I'd be in the $5-6/sq. ft. range.

I've tried to stress test this deal as best I can, and seeing what's come and go on this market for the last 12 months, this one looks pretty strong. There's been higher cap rates/better neighborhoods/longer leases on other deals, but those things move inversely to one another.  At this point, I need to either come up with a good argument for waiting on a better property to come down the pike, or to try to put a deal together on this one.

Thoughts? Thanks!

Any commercial/industrial investors in here?

Most Popular Reply