Commercial Deal - what do you think?

Question

Small office/retail center in growing area of N. Georgia - starting to become more of a tourist center.  Site located right across the street from tourist train depot depositing upward of 50,000 visitors per year.

Buidling renovated with new systems about 10 years ago - pretty good condition, etc.  100% leased presently

Rents (6 tenants) - $42840 ann.
Expenses - Management - $3500
Taxes - $2000
Water - $720
Insurance - $3500
Vacancy $3500 (+/-)
Repairs $2500 (tenants responsible for interior maintenance - LL is only shell of building and HVAC systems)
No common area utilities - all seperate metered

NOI - $27120  (8.34 CAP) - with zero down.

Although it shouldnt matter in the deal eval., seller has agreed to finance $100 K (on a second to close after I do the first mortgage) at 0% interest for 5 years (principal pmts.  amortized on 20 year. schedule - $416.67/mo)   They need to sell due to health problems.  I can finance the balance at 7.75 on 10 year note with 20 year Amort. schedule.  Looking at $325K purchase price.

I am interested in holding the building several years while the area matures and grows.

What do you all think?

Will Barnard · Answer

Keep in mind that you should be calculating the tax based on your purchase rate and not the current seller's figures. Your tax basis will almost alwyas be higher due to either the purchase price or re-assessment. - Just food for thought.

I am from CA, but am not surprised of the lower prices you mentioned in Georgia. So long as your numbers work, I believe the buy and hold strategy there will deliver nice benefits to you in the future.

I particularly like the low interest owner carry note as well on this deal. I would look to get it at a better cap rate for that area. (My opinion)
Good luck with it.

John Blankenship · Answer

This is Georgia (a rural but rapidly growing county) in the North Georgia mountains that is getting a lot of people from Atlanta and Florida buying second homes and retirement homes.  Don't know the rate, but I took it straight off the tax bill.  We are always having people from California tell us how CHEAP things are here (also why the people who can get out of Florida are trying to escape here now) :D   Thanks for the input

Will Barnard · Answer

Looking at the figures you provided, the taxes seem very low. What is the tax rate there? The tax figure you quoted would be much less than 1%. Remember to calculate taxes on your acquisition price (some states taxes based on assessed value & others on actual purchase price). The taxes currently being paid are lower than your acquired tax bill when purchased (via re-assessment or purchase price as the case may be).

Also, you left out administration costs, accounting, state business taxes, legal fees, and the cost of an entity (assuming you will use one for this property).

Assuming the new tax basis will be at least $3250, and adding in the other expenses, you are looking at an NOI of $23,542. Thus, your purchase price cap rate is 7.24% (too low in my opinion). Also, the amount you put down has no bearing on the cap rate, only on the debt financing and ROI.

If your maximum cap rate you are willing to pay is 8.5%, then the max offer price should be $277,000. The owner carry is a big advantage as you can get into the deal with very little down, but you should (in my opinion) look for a better price.

Good Luck.

John Blankenship · Answer

I'm sure on the expenses being accurate and representative - they are what they are... Of course, something COULD aways come up (and probably will) - AC unit goes out, roof needs replacing etc etc.  but I have followed this building for several years and know that there really is not too much else to it.  Everything is stated accurately and the average maintenance costs includes allowances for these items.

Will Barnard · Answer

Food for thought: The owner carry at 0% interest is great. Other than that, you are overpaying for the property. Commercial property operating expenses average between 40%-50% of AGI (agusted gross income) therefore the listed expenses are incomplete (they show only 31%) and thus the NOI is incorrect (too high) Furthermore, the Cap rate for that type of building in that area seems a bit expensive to me (I could be wrong about that). Of course, the real question is, what amount of return do YOU want? I would be lookiing for a 9% cap or better on the true figures. Do not forget to add in accounting expenses, potential state taxes, corporate expenses, and misc. expenses. Also, I always want at least one upside potential. Where is it here? It is 100% occupied so no potential there! Can you increase the rents, change the usage, or add another income stream from the property?
Sorry to burst your bubble, but for every 100 deals that come across your plate, there is only 1 good one.
Best of luck to you.

John Robertson · Answer

Well, you know that area a lot better than I do, but I didn't read a single reason "why not."  If you have the money for it, from what I read there, it only makes sense.