All Forum Posts by: James Storey

Don't know the structure of your lease or what state this is in, but here in Indiana we can get a property tax reduction for non for profit occupants. If this is available in your state, it could be a starting point to alleviate on their expenses if the tenant is responsible.

@Jasraj Singh a really good and simple starting point without getting a good agent involved is using https://www.zillow.com/home-va... and do some simple market analysis on a zip code and census track basis. This will give you a starting point of the absorption rate in the areas (days on market) and where property values are generally going in each area. This website also tracks the foreclosures and rent payment and would be a good way to indicate how an area is performing. This isn't a very technical approach but it's a way to start without going to an agent that has access to supply and demand data that is owned by the mls.

After you have done your initial study of these census tracks with this data, I would start to build relationships with some really good Realtors that are willing to work with you and share the mls data of inventory (listed homes) over time vs demand (sold/pending homes) over the same time frame for those particular areas. You can use this raw data and compare to the finding on the site above and come to some conclusion about where the market is moving. In the end it's a supply/demand formula and as there are more sold homes and/or active buyers for homes being listed, prices will go up and days on market will shift lower and lower. It is vis versa for the counter.

Beyond that, you can get into more technical analysis on employment and population that would be more relevant for commercial and larger investment properties but would be still applicable determine the changing demographics  and economic employment base in each area. It encompasses more advanced statistical analysis that is way to complicated to describe in the forum if you don't want to fall asleep but it basically calculates how a new job/employer created would create "x number" of new jobs and thus would create "x number" of new population which would create "x number" of new active buyers (demand). It takes a long time to build these models and probably wouldn't be worth the time it takes to create unless you were doing larger investments and developments.

I hope this helps and wish you the best of luck.

James Storey, CCIM

Keller Williams

Indianapolis, IN

@Zak Thompson yeah I think it would be tough to refinance right after building the property in that circumstance unless you want to come to the table with $400k ($3.1M-$2.7M) to close. What kind of property is it?

Seller financing will help alleviate the capital gain burden by not making it due all up front in the tax year the property is sold. As an installment sale, as seller financing is considered, the capital gains will be due over the amount of years the property is paid back in the financing structure. I.e. a little bit at a time relative to the amount of the payments.

In the end, seller financing simply defers the capital gain payments in increments over many years instead of all at once.

James Storey, CCIM

Yes you will want to take the LTV into account as lenders will limit funds based on a percentage of the after build value. Base on what I am hearing, if I'm understanding you correctly, you are estimating an after build stabilized value of $5.1M (at least after 5 years) and you are assuming a loan of $3.1M to cover cost of build which is basically 60% LTV of after build value and approximately 77.5% of cost. I don't know the dynamics or information of your deal but that should run under the lines of feasibility in most cases.

Assuming you refinance and pull cash out of the deal, you could essentially pull out your original investment and would increase your return I.E. reducing your investment in the deal.

James Storey, CCIM

@Courtney Duong If the leases permit the tenants to pay for property management and you decide to self manage, you can charge the tenants for you to manage the property. Not all NNN properties include property management which is why I never include it in the expenses on these types of investments until later in the due diligence. If after reading the leases you determine that the tenants are responsible for property management, you will need to prepare a property management agreement with those tenants to determine how much you want them to pay. Keep in mind that the more expenses you create for them, you will make the space less and less desirable at future renewals so I wouldn't go overboard with charging them. I have a lot of clients that do this as well.

@Courtney Duong yes the tenant can be responsible for property management as well but it's not always apparent. If the landlord wants to hire a property manager to operate the property, he certainly can do so but for underwriting purposes it wouldn't be applicable to determine the value since a majority of investors buying single tenant absolute net leases will elect to self manage since they a merely collecting a NNN lease check and depositing it into their business account. If a NNN property had more robust CAM expenses that a landlord had to manage and bill back to the tenant and multiple tenants, then a property management fee would be more applicable.

If it is an absolute NNN lease, then the landlord should only be responsible for accounting fees (tax prep) and legal fees.

Also, you want to read the lease to see if the landlord is responsible for any capital improvements. If they are, you might want to add a capital reserve expense to your underwriting although its not a true operating expense i.e. capital. If its a 4% CAP, I would be hard pressed to believe landlord has any responsibility.

Building relationships with agents that specialize in your product type in the areas you are looking to purchase is a good way to find deals. Especially ones that know a lot of different owners and aren't afraid to make calls to those owners. It's not guaranteed they will always have what you are looking for but once they come across something, particularly off market, you can make it where you are the first one they will call especially if you show them you can perform on the close.

When I first got started in brokerage, I found out which investors were the serious buyers quickly after sending great deals and they would snatch it up right away. At the same time, I found out who the tire kickers were, where it seemed like the deal was never good enough for them. As I always say, the great deals always goes to the ones who can perform and has the most meaningful relationships.

In my experience, a lot of commercial investors will defend an investing strategy if it is something that made them wealthy with not realizing that trends change slowly over time. I can't tell you how many times it financially makes sense to sell a property after the going was getting good but the owner will find reasons to hold and continue until it's too late. Long story short, it's hard telling how your dads retail investment will far through this pandemic and into the future without knowing the details. This could be a Rockstar property in an amazing location that can be repurposed from retail.

Right now, commercial investments, particular retail purpose commercial is in for some hurt in my opinion. The mixture with low interest rates compressing CAP rates and demand for retail space diminishing, we will more than likely see stagnant rent growth and rising cap rate (as interest rates increase). Really, this is typical of the end of any business cycle but retail is just another mix and will go through some major changes. Just my two cents.