FAQ’s regarding retail property assignments

Weekly I get questions from my J.V. Partners with specific questions on Single Tenant Retail deals. Here’s a list I keep and continuously email out to the Partners. Knowledge is power.

1) What type of properties should I look for and which should I not pursue your Fund?

You need to focus on single-tenant properties that are vacant in your own back yard. (You will line up a tenant, who will increase the value and get paid based on that increase/spread in price difference)

You should not pursue occupied properties with National tenants already in them with long-term leases (There is not enough income with these as they sell at a 4 to 6% cap usually)

You should also avoid looking for properties that are not in your own back yard (meaning within a reasonable driving distance from where you live). You will be unable to show them to potential Tenants.

2) What is the end goal of this strategy?

The end goal is simply to have a single-tenant property under contract and then line up a national tenant with an LOI that will increase the value of the building because of the income, the type of tenant, the length of the lease, and the corporate guarantee that you negotiate with that tenant.

3) How do you determine the "right" low price to offer a Seller/broker of a vacant single-tenant retail property?

You may never truly know the best exact low price to offer. In my opinion, whatever price the seller or listing broker is asking for the property is almost irrelevant. The entire strategy is based on your ability to line up a national tenant with an LOI that will increase the value of the property and will create a spread between price under contract and value with Tenant’s lease

4) What are the steps to get the property under contract at a lower price than increase its value by getting a Tenant lined up with an LOI?

1) Identify the vacant property and their listing/asking price

2) Look for the neighboring for sale vacant properties and what they are asking for per square foot (to sell)

3) Look for the neighboring for sale occupied properties and what they are asking for compared to the income they receive to figure out the cap rate of the area

4) Look for neighboring for lease vacant properties and what they are asking for per square foot (to rent)

5) Figure out based on these comparables what would be a realistic lease income that a national tenant would pay yearly

6) Divide that net income amount (NNN) by the cap rate of the area to come up with the approximate value for the property once the lease would be signed

7) Negotiate a lower purchase price (see Q2)

8) Call tenants following the system I give you, until you have an LOI from a national Tenant with the lease terms I share with you

9) Assign the purchase contract to my fund and get an assignment fee based on the spread between the lower purchase contract price and the new increased price of the property based on the added value of having a national tenant lined up to lease with a corporate guarantee for 10+ years etc.

4) How can we ensure a spread between the price we offer to purchase the vacant property and the new increased price when we line up a Tenant with an LOI?

Work the numbers backward:

1) Find out what the rental income would be based on comparable rents

2) Figure out what the property price would be if it produced that income

3) Offer the Seller/broker a lower price

4) If not accepted:      

a) Look for another property            

b) Put it under contract anyway (If it is a prime location with no vacancies in the area) but ask for higher rental income and if you get it within the due diligence period, you have increased the property price/value by a nice spread