All Forum Posts by: Tony Albanese

Let me break this down into a few parts:

Roof, Parking Lot, Building Structure - generally, while the Landlord is responsible for actually maintaining these items, the COST of maintaining these items AND the COST of replacing these are put back into the CAM charges, and are not really an expense to the Landlord. Usually the cost of replacement of these "capital" items are amortized over the useful life of each for the purpose of CAM charges.

Lighting, Trash, etc. - These are almost always billed back to the Tenant(s) in CAM charges and are not a Landlord expense.

The big issue is vacancy. If you have vacancy than you are eating the CAM, Tax, and Insurance charges for the vacant space.

Typically I will look at the market vacancy rate for the area the center is in and use that in my proforma for a vacancy rate...both for calculating rental loss and for NNN losses.

You should also assume a 4% of NOI Managment Fee, some of which may be reimbursable through CAM, depends on the lease.

Also, watch for "controllable CAM caps" in the leases. Sophisticated tenants will have caps on annual CAM increases...these can kill your NOI.

Anything I missed?

Jimmy,

If it were my project, I would map all the big banks in the are (BofA, Chase, Citi, etc) and see who has a presence, but doesn't have a branch nearby. Before closing, I would call all of those banks to try to negotiate a new lease ahead of time. I would not accept a lease buyout before I have a new lease in hand. I have done this before, with great success, but it's tricky.

Tony

If the FDIC takes over and they force a merger with another bank, then the new bank must honor the lease. If the FDIC "shuts down" the bank, I believe they can kill the lease, but I'm not positive. I've only had experience with the former scenario. The FDIC website allows you to check on the health of any bank in the US.

I think the specifics of the deal are going to determine the willingness of a lender to go out beyond 10 years. Smaller banks are your primary target for a deal that small IMO. They are also going to charge you and interest penalty, though. Might not be worth it.

I'm looking at a MF deal right now that goes like this:

200+ units
Currently 95% leased
~$1.25 effective rents (after concessions)
NOI ~ $1.7M
6.5% Cap

This is a GREAT deal for the following reasons:

1. It is Class A project in a desirable sub-market with low historic vacancy

2. The city it is in has stable job growth

3. It is new, with no deferred maintenance

4. I can get 4.7%, 30 yr amort, non-recourse debt at 80% of cost

Cash flows about $350k

In five years, if I can grow the rents to $1.50 (reasonable), I can refinance and pull all of our equity out

The key is the debt. MF is the only product type I can get 80% non-recourse at those rates.

Jeff,

Since Chase "purchased" WaMu, they were required to honor all of WaMu's obligations. If WaMu was restructured in BK court, the trustee could "reject" certain obligations, including leases. Given the heavy-handedness of the FDIC, I doubt we'll see too many BK proceedings from banks, but more forced sales are probably imminent. That's why bank leases are so great. The worst (real) near-term risk is that you end up with a BIGGER bank on the hook!

Joe, I represent buyers of CRE properties in Texas and would be happy to help with some advice. As an example, I just closed a NNN bank deal at above a 7 cap with first time CRE buyer. If nothing else, I would be more than happy to help you understand the process and expectations as far as pricing, debt, risk assessment, etc. Feel free to follow me and PM me.

Tony

I just closed a NNN bank ground lease deal in North Texas for a client and am working on 2 more NNN deals right now. Here's my take:

Risk is not just based on the credit of the tenant, but also on the value of the underlying real estate. Example:

Bank A is a 60k sf pad site in front of a high volume grocer in a stable suburban market. The Tenant pays $75k NNN lease, so ($75k NOI) @ 7% cap is $1,071,428. That's $18 to the dirt.

Bank B is a 60k sf pad site at a major urban intersection where the Tenant pays $150k NNN ($150k NOI) and is offered at a 6% cap, $2,500,000. That's $42 to the dirt.

To me, Bank A is less risky. If all hell breaks loose, I'm pretty confident I can get better than $18 for the dirt on Bank A, and not confident at all that I can get $42 for dirt at Bank B.

So, credit is one part of the equation, but not ALL of the equation.

I also really like convenience stores with corp backing, 7-11, QuickTrip (in my area), etc. My clients aren't players at anything under 7% cap rates, so we have had to find things that are off-market. (the NNN bank deal we just closed was @ 8%).

1031 buyers are still keeping Cap rates low on these types of assets, so going off market is really the only way to get a decent Cash on Cash yield.