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 with 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 the 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

5) How do you negotiate/persuade the Seller/Broker to drop the price if they know what the rental income would be?

When I, as a buyer, call in and get the listing price, I always ask the seller or broker how they came up with that price.

By way of example:

A broker may tell me that the asking price is $1mil

So my response is: “How did you come up with that price?”

The responses vary but usually, they are along those lines:

a) The comparable recent sales were X

b) The property could rent for Y and that would make the property valued at $1Mil based on the cap rate of the area

My rebuttal is:

1) But it is vacant now so it has no income

2) The property may take quite a while to rent

3) I am not so sure it will rent for Y

4) I will have to pay a broker’s commission for the lease

5) I may have to give the tenant credit for tenant Improvement expenses

6) I cannot buy based on proforma (future value)

Here is my best offer XX and I will send you the Proof of Fund letter so please send me the contract

There may be further negotiations from that point but it becomes more based on the market and how motivated the seller is.

6) Do you normally get the seller to name his/her price first? Or do you throw out your own number when starting the negotiations?

I always ask the seller to name his/her price. A Seller should have a price unless the market is so hot that they are just hoping for bidders. If this is the case, I do not make an offer and suggest you would waste your time on such deals.

7) As a buyer, how should I value an un-priced listing? In the hot and competitive San Francisco market with multiple offers, I am dealing with a listing where the Seller is expecting offers without naming his/her price!

The strategy I use for Single Tenant Buildings makes the listing price completely irrelevant. You can offer them any price that gets them excited. With the Proof of Fund you have, you can lock in a $10Mil dollars property under contract. The key element is whether you are going to bring a national tenant that will add value over the price you offered. Because if you do, you can assign it to me based on the added value, and if you don’t, you can just walk away without risking a penny. If the location is such a prime area, then this may work to your advantage.

8) If a Seller is asking $2Mil for a building and you as a buyer back out $400K for your own profit as a buyer and another $300K for the cost of tenant Improvement and paying a commission for placing a Tenant etc. Then will you capitalize on the $1.3Mil to get a value you will pay for the building?

The breakdown offered on the webinar with Jim carter, the broker when he backed out the numbers; is NOT the breakdown we use when acquiring a single-tenant property.

We do not buy vacant properties without a Tenant lined up that can add value to the property.

I do not expect you to credit $400K on the selling price of a $2Mil property.

I expect you to place it under contract at the lowest price you can negotiate and then work on getting a national tenant to send you a Letter of Intent to Lease that would increase the property value way over the purchase price you have under contract.

That is the way to calculate the numbers on a single-tenant retail property.

9) How do you determine the local market per sq. ft. rent?

1) Ask the Seller or Broker to tell you

2) Contact other sellers or brokers and ask them

3) Drive around the area and call on other commercial properties that have a “For Lease” sign

4) Go online (www.Loopnet.com) and check what the other properties in the area are renting for

5) Online you can also check the for-sale properties and look at what rental income is stated based on the size of spaces to deduce the per sq. ft. rent.

10) Is it better to use my own RE Broker to represent me when searching for these vacant single Tenant retail properties?

I would not recommend it. But let me explain further:

When it comes to making the offer on the property itself, you can certainly use a broker to represent you. I personally like to talk to the “listing” broker directly and not involve a Buyer Broker because, through experience, I concluded that dealing directly increases my chances of getting a lower price. This is obviously due to the fact that the listing broker could keep all the commission. The listing broker who does not have to share commissions is quite often also a bit more flexible regarding extending the due diligence period and getting me access to the property etc. I would even add that the listing brokers who have the opportunity to represent you as the buyer become friendlier and more helpful again because they will make a full commission.

Finally, there have been quite a few students in the past that worked through brokers to represent them in finding vacant single-tenant retail properties and their negotiations did not go far!

11) Should I work with a broker to get me a tenant?

Brokers would rather go list properties. If I could call a broker and get them to focus on lining Tenants for me, then everything would’ve been different, more specifically I wouldn’t have started the Joint Venture program and paid the referral/assignment fees to the students.

With that said, I want to mention that there are two other kinds of brokers:

1) Brokers who work exclusively for a specific Tenant. They are who we are looking for and there is no commission to be paid.

2) Brokers who are independent but have contracted with large retail brand companies to find locations and negotiate leases on their behalf. These brokers get paid a commission from the owners of the commercial properties (If you use one of these brokers then obviously there will not be enough room to pay you and them!)

12) What should I be doing daily weekly to achieve the goal?

1) Get a single-tenant retail building under contract at the lowest possible price and the longest possible period

2) Look at the neighboring tenants and make a list of the type of tenants that would add value to the location based on the usual cluster of tenants (watch for these tenants clusters in malls)

3) Get on the website and access the tenant's list

4) Prepare an email and a package as instructed by me in the training

5) Call tenants following my system till you get an LOI

6) Assign and repeat

13) What is the sequential timeline of the LOI to the actual lease signed? When do I involve you and is the LOI binding?

The timeline is as simple as follows:

1) Get the property under contract (Do not involve me in this step as you must deal with the seller and/or broker directly. My assistance in this step is of no value since I cannot tell from a distance the potential of any property. There is NO VALUE to any property for me that is under contract until and unless you get a National Tenant interested)

2) Get the Tenant to send you the LOI (This is when I can add value. As soon as a response/communication begins from the tenant side, then you can involve me as I could assist you in the negotiation and getting the LOI)

3) Once we have an LOI then I buy the property and pay you an assignment fee at closing

4) Once I purchase the property then I sign the lease (cannot do it when I have not closed)

The LOI is not binding but it is very seldom if ever that a National tenant goes through all the steps with me then pulls out and not sign a lease. Not the way I do it especially with over 15 years of experience dealing with national Tenants. At any rate, if this occurs it would not be a problem for you, as you would’ve assigned the property to me and I would’ve closed (Closing is done usually all cash within 72 hours to finalize a lease with Tenant)

14) I define a Joint venture as something we can split profits on. Is that your definition as well?

If you got a property under contract at $600K and then lined up a tenant that will pay X per year for 10 years NNN with the corporate guarantee that makes the property increase in value to say $1,000,000

There is a $400,000 spread.

You as a JV Partner will share the profits with me: 10% to 25% of that spread and I will pay you at the closing.

15) How about apartment buildings, mobile home parks, storage facilities? Would you be interested in any of these if they are exceptionally great deals?

I am not interested in any commercial properties, aside from single-tenant retail, at this time. Do not waste your time presenting any of these to me, even if you think you found something at 50 cents on the dollar. These kinds of properties require intense and ongoing marketing, management, accounting, and legal support.

I prefer retail properties as I described in the Joint Venture Program herein and in all the archived webinars and online documents including the video training.

To our success,

Cherif Medawar

http://www.cmrei.com/crepartnerprogram/