All Forum Posts by: Michael Knudsen

Quote from @Matt Hogge:

Greetings

I am looking to set up a lease on a residential zoned property with four units on it. House is approximately 100 years old but in good shape overall. I plan to rental arbitrage the property and run a short term rental out of the units.

The landlord is requesting a triple net lease. Wondering what the communities thoughts are on structuring NNN on an old residential property ?

Thanks!

Structure it like a shopping center NNN lease.  TTs pays for pro rata share of taxes, insurance, and CAMs (including short term roof, HVAC and parking repairs).  Taxes and insurance obligations are based on prior year’s statements with a year-end reconciliation.  I would try to cap pass tax throughs in the event of a sale and inevitable reassessment, although this was more of a concern one to two years ago, lol.  Long term deferred maintenance on roof, structure, HVAC and parking remains LL obligation.

@Michael Knudsen you’re* ... excuse the typos, not exactly a maestro typing on my iPhone.

@Kathryn Morea With the amount of equity she’s dealing with, with regards to retail STNL in this environment, she’s effectively relegated to dollar stores or tertiary, franchisee-backed fast feeders.

You could either buy a couple low-rent, high cap double net DG's in proven markets with 7-10 years remaining on the lease and 10% bumps every five (albeit very tertiary ones, as in 3,500 people in a 3-mile radius), or a brand new, absolute NNN DG in a similarly sized market with 15 years remaining on the base lease (flat rent though for 15 years until the options) at a lower cap.

Keep in mind this is effectively a secure cash flow play with a lot of inflation risk if you buy a newer, NNN deal. Your buying a metal building on a concrete slab in a very tertiary market, and if you lose DG, half of your principal is wiped out. This is why we like to focus on double net deals in markets where DG has shown a commitment to the market via lease modification agreements.

I'd put the remaining equity into a DST if you go the triple net route.

@Michael Lowe Because they’re lightweights.

Initial thoughts: 

-As a general principal, I'm not a fan of purchase prices that exceed $200 PSF for value-add/repositioning plays, but when you consider that there are 1,500 SF Starbucks drive thrus trading at $1,700-$2,000+ PSF in today's market, I can overlook this if the site has potential.  That said, how much can there really be?  How large is the lot?  I'm assuming it's not big if it's in an old, densely populated suburban area on a triangular parcel with only 10 surface parking spaces. -Triangular lots are not desirable within the net lease space -- even if the property is in a strong location, a triangular layout is going to adversely cap its future redevelopment potential due to setback/parking/potential drive-thru queuing limitations

-Is there any type of guaranty language in the lease?  My guess is no.  It's obviously assignable to another entity as evidenced by the fact the current operator has only owned it for 3 years.  Either way, the guaranty would be considered very weak by future buyers regardless of whether or not the lease guarantees one location or all 50+ locations being operated by the franchisee.  That said, in two years, if you decide to re-up the current tenant, you need to negotiate as air-tight of a guaranty as possible to optimize the property's value on the secondary market. 

-That leads me to my next question -- is the rent significantly below market?  If so, you could be sitting on a nice cash flow play if the current operator is doing very well.  Which leads me to my next question: 

-Do they report sales at this location per the existing lease agreement?  If not, you want to ensure they do if/when you renegotiate this lease in two years.  To make the site as marketable as possible for a future sale, make sure this doesn't exceed 7% of gross sales.  Ideally, it should be below 5%.  If they currently report sales and their rent to sales ratio is in the double digits, and the site wouldn't be desirable to a superior tenant, walk away.

-What's the lease structure?  My guess is double net with tenant reimbursing for property taxes, paying the property insurance and interior maintenance/short-term HVAC maintenance/parking lot sweeping, trash and utilities directly, with landlord responsible for roof repairs/replacement, structural repairs/replacement, and parking and HVAC replacement.  If it's not "modified" triple net with tenant at minimum reimbursing for all expenses including replacement of building systems, I would have rather tied this deal up well above a 10 cap.  

-Is there existing pylon signage? 

-What are the growth trends like within this part of Philly with regards to population density and median HH income over the past several years?  

-What are the combined traffic counts at the intersection? 

Preliminary thoughts: 

You're probably limited to a franchisee-credit regional player at best due to the property's layout, as well as the size of the existing structure and likelihood the lot size is also quite small.  That said, if the location is as killer as you say it is and you have over 15,000 SF of land, perhaps Starbucks would take a look at it in a couple years for their small drive-thru prototype if you can make the car queue work.  In that case, you might be sitting on a gold mine, but realistically, you're probably limited to renegotiating a longer lease with the existing operator.  Happy to take a closer look if you want.  

Best,

Mike Knudsen

Originally posted by @Colin Wu:

Dear all seasoned real estate investors and commercial real estate brokers,

Before getting started, everyone's advice will be appreciated and all opinions will be considered. 

We are developing retail centers in Southern California and would like to attract national tenants by connecting to those who are representing national franchises specially restaurants or retails. Instead of having a listing broker find us those tenants, how are we able to touch base with tenant representatives of national tenants? 

Again, thank you. 

Colin W. 

Colin,

It's a pleasure to make your acquaintance. Feel free to give me a call at the number in my signature below, and I'm happy to have a conversation with you on the subject offline.  

Originally posted by @Whitney Hutten:

@Joel Owens That is a valid point. MF interests me. I'm looking to build a SFR portfolio to trade up into MF at a larger scale.

@Michael Knudsen thank you! I would love an intro!  

Whitney, thanks for the response, and I'm happy to set that up.  Can you please email me with your full contact details at the address in my signature below?  I'll take it from there.  Talk to you soon! 

@Cameron Dye

Hey Cameron,

Man, if I was your age and knew what I know now, lol...

Glad to see you’ve discovered your passion at such an early age.

Start by reading this: 

What Every Investor Needs to Know About Cash Flow - Frank Gallinelli

Good luck man, stay focused, stay passionate, and you’ll reap the rewards of your hard work in due time.

No problem, best of luck on completing the exchange.  

Here are a few other salient points to consider: 

(1) Find an accommodator ASAP. 

(2) ID Period: you have 45 days upon close of escrow of your downleg property to identify your upleg property or properties by sending a letter to the IRS (handled by your accommodator).

@Michael Knudsen

If you acquire a property less than $720K in my scenario, you would have to pay cap gains tax on the “boot”, or the difference between the downleg value less closing costs, and the value of the upleg property (or properties).