All Forum Posts by: Michael Hall

All good comments on this so far particularly about reviewing the lease. Another important point to consider in due diligence is what deferred maintenance is present in the building, at lease renewal or when the current tenant vacates you will need to make the space ready and do you have adequate cash reserves to do so. 

Since it appears this is your first purchase of this type of asset I want to encourage you to dig deep into the creditworthiness of the tenant and their commitment to this property. NNN leased assets are in very high demand (due to 1031 exchanges and a large amount of PE and REIT funds committed to these type of assets) and have experienced significant cap rate compression over the last several years. (end of 2018 average cap rates for McDonald's is 4.22%, KFC is 5.5%, Taco Bell is 5.37% etc.) If the property has been on the market awhile or is at a cap rate significantly over these cap rates then I would be suspect that people know something that you do not. KFC and a number of other users are actively closing and subleasing corporately owned stores throughout the United States. All that to say when evaluating NNN leased assets make sure you are comfortable on the ability of the property to be leased if the current users is to leave at lease expiration, we have all seen the poorly located former Hardee's or Wendys that is now a vapor store etc.

Richard, 

Welcome to Louisville. I think there is a market for updated upscale rentals in Old Louisville. With that being said I would offer the caution that all of Old Louisville is not the same. Street by street and block by block have very different characteristics that could significantly impact your ability to command premium rents. 

For your inspection make sure that your contractors and inspector are knowledgeable about Old Louisville specific requirements as it pertains to the exterior of your property i.e. box gutters, wooden windows etc. as this is a designated historic neighborhood those items will need to remain and be maintained. I would for sure have an electrician and plumber come, most houses in Old Louisville have had multiple generations of renovations, not all of them by licensed and competent tradesmen so you can quickly get into trouble with wiring and plumbing issues. 

Harry, 

You have some good advice here from a variety of people. I believe you are correct in that the value for this property is in the land/building not in the business your father has been operating. The two main items to understand is the zoning as well as the environmental condition of the property. Particularly with old service stations / C-stores, there is concern over Underground Storage Tanks (UST) I would do some preliminary research on your site on the state database of Storage Tanks  (https://mydatcp.wi.gov/Home/ServiceDetails/4a17152...)  and see where you are. As a condition of closing most buyers will require that those tanks are removed and the site is eligible for participation in some sort of brownfield/UST remediation fund and liability protection. Starting the conversation with a commercial broker knowledgable about these types of properties will be a good place to begin, but I would seek outside counsel from an environmental firm to better understand the property you are marketing/developing so that you can adjust price expectations accordingly. 

For a landlord in a commercial lease when you agree to the fixed renewal rate you are not guaranteeing that rate as your renewal rate, rather you are setting the ceiling on how much the lease rate will be in the option period. If FMV is significantly below what the renewal rate is set at then a sophisticated tenant will recognize this and negotiate to FMV. If you have had difficulty in leasing the space, then I would not be afraid to set the lease rate out to 6 years (initial plus first option) with market rate increases (2-3%). Another option would be to seek addition initial term, so push them to a 5-year lease with renewal at FMV.