Posted by joe on March 19, 2007 at 21:46:27:
Hi KJ,
Thanks for mentioning Ray’s book. I think my partner has a copy but neither of us are very good in reading nor very patient. I know that I learn a lot from an interactive forum such as here than trying to read a book. It took my 5 years to read the Rich Dad Poor Dad book.
Thanks
Buying a strip shopping center and need HELP! - Posted by Joe
Posted by Joe on March 09, 2007 at 21:25:25:
I have invested in Single family residential real estate in the past and also worked as real estate agent for a while but when it comes to commercial I must take a humble approach and admit that I don?t know a thing about it. I searched the archive using some choice keyword and read some of the articles on this site in regards to due diligence and it was were very helpful. But I still need a whole lot of help. I want to buy this strip shopping center in northern California that has 15 stores where 5 of them are vacant and the remaining have either a month to month leases or leases less than 3 years. Some of the leases are NNN and some are gross leases where the owner takes a percentage of the tenants gross.
The owner has provided some income and expense figures that looks great but I have the following questions:
-Is there a common rule of thumb in the commercial real estate to determine the true value of the property?
-There is a great article on this site about the due diligence process which is priceless but I don?t feel comfortable to execute those steps myself. Are there any professional services that typically perform the due diligence for an investor?
-Is the month to month lease common in the commercial world?
Thanks in advance.
Re: Buying a strip shopping center and need HELP! - Posted by Frank Chin
Posted by Frank Chin on March 10, 2007 at 05:39:51:
Joe:
My dad owned a property with several stores since 1963, and I’ve looked into buying retail properties as well, though I haven’t bought any myself. I stayed with doing small residential multi’s.
If almost all of the stores are on month to month, and 5 vacant out of 15, it suggests to me that it may not be the best location for retail stores, the area may be overbuilt for retail stores.
What I do is check out an area, say a half mile radius to see what other vacancies there are. I might even pose as a “potential retail tenant” and ask local lease brokers about deals. If the answer you get is “there’s tons of places for rent”, then you’ll know the area is overbuilt.
Month to month is not common. Retail tenants cannot easily move and retain the same customers unless they know the landlord is not in a position to dispossess them. Is this good??
You might be able to get this place for next to nothing, cash flow with half the units rented, no down and so forth. In this case, you might not have any downside, and then look into what the upsides are.
Frank Chin
Re: Buying a strip shopping center and need HELP! - Posted by Killer Joe
Posted by Killer Joe on March 09, 2007 at 21:55:10:
Joe,
There is a commercial board on this site that is hosted by Ray Alcorn. You could post these same questions on that board and perhaps get some additional good insights. Additionally, I would strongly suggest if you want to get involved in commercial RE you should purchase Ray’s book titled “DealMakers Guide to Commercial Real Estate”. It is by far the the best info you could get regarding the subject.
The answer to your first two questions is yes. The third question regarding month to month leases for commercial is that it is not that common. I had a month to month commercial lease for over 12 years for one of my businesses, so I know it happens, but it is not the norm.
You will need to be very careful about this property you are looking at. The way you laid it out raises some red flags. You would definitly not want to take this project on without the proper knowledge of how things work, and how they are likely to unfold. Ray’s book will really be an eye-opener for you and give you the majority of the wisdow you will need to succeed in this endeavore.
Best of luck,
KJ
Re: Buying a strip shopping center and need HELP! - Posted by Joe
Posted by Joe on March 10, 2007 at 23:21:52:
Thanks Frank, I like your recommendation and I will go ahead and assess the vacancies in the area. I read Ray Alcorn’s articles on how to determine the Cap rate which was phenomenal. The asking price for the property is $4,900,000 and the total NOI of $411,419. Applying the formula from the article with the assumption that I would put down 30% and finance the rest at 6.5% for 20 years (I am not sure about these financing terms) the price of the property comes to $6,440,497. At this stage the deal sounds encouraging however Ray mentions that don?t stop at this point and continue with the due diligence to assess all the Risks and that?s where I fall short in expertise and lack of skills to do a thorough due diligence.
The initial paper work indicates that the owner guarantees rent for the vacant units? Hmmmm?.this sounds very strange to me!! I am not sure why the owner would do such a thing? And how long is he planning to do this, especially if these 5 vacancies hang around for a long periods of time? Is this normal in the commercial real estate? When I was a residential real estate broker in NYC, I can?t even recall an instance when a seller would sell a condo or a Brownstone to an investor and guarantee rental income if the unit were to be remaining vacant.
Also who is typically responsible for the management of the parking area in a strip mall? The owner or the tenants?
Thanks in advance
Re: Buying a strip shopping center and need HELP! - Posted by Joe
Posted by Joe on March 10, 2007 at 23:23:23:
Thanks KJ.
Re: Buying a strip shopping center and need HELP! - Posted by Frank Chin
Posted by Frank Chin on March 11, 2007 at 09:58:12:
Joe:
Another issue as to how competitive you strip is as it compares to the competition.
You said 5 vacant. How many is that compared to the total??
It’s odd that he guaranties the rent, and I can only see it for a short while, and is only as good as his creditworthiness. I looked at deals and haven’t seen one yet where the owner guaranties the rents.
I would consider it if it’s go some upside, such as:
If this is the case, why would he sell, and would be a good selling point to mention.
What worries me more is if there’s newer strips going to be built nearby with better parking. Did you check with the local planning people, particularly if there’s land available??
As to parking, around here, the owner manages, and depending on the lease, charges it back to the tenants.
I would check out the viablity of the strip more carefully before doing due diligence of the financial and legal aspects. For instance, if there’s going to be a brand new strip with better parking to be built a short distance away, it’ll be bad news regardless how good the numbers look today, and how solid the info you dig up.
Frank Chin
Re: Buying a strip shopping center and need HELP! - Posted by Joe
Posted by Joe on March 11, 2007 at 21:02:17:
Hi Frank,
Thanks so much for the pointers. I have to look into all of these. According to the broker there are new city development coming up soon. I need to learn more about by talking to the city planning. The strip is located in the stressed area that is up and coming around mountain view CA. Answer to your question: there are 5 vacant units out of 15. The rest are hair salon, barber shop, book stores, T-mobile, liquor store, restaurant, bakery and so on.
I haven?t seen the place as I live in NYC but my brother lives in northern CA and he has briefly seen the strip. I am planning to take a trip in April to see the place myself before we get serious. All the articles and interactions on this site are giving me a good starting point and hopefully by the time I go there, I would be able to ask the right questions and pay attention to important details.
Ray Alcorn mentions in his due diligence article to have an environmental study. Would that apply in this case?
Also I know in the residential deals sometimes you can get 80/20 or 80/10/10 loans. Do you know if that?s applicable in the commercial real estate? I want to put down as little as possible if the NOI can support most of the debt service.
Thanks in advance.
Re: Buying a strip shopping center and need HELP! - Posted by Frank Chin
Posted by Frank Chin on March 12, 2007 at 03:56:08:
Joe:
There is a world of difference between residential and commercial financing.
Normally, commercial mortgages require 30% down, shorter amortizations, many I’ve seen are 20 years, with equal principal payments. In other words, a $1,000,000 mortgage would require a 50K principal payment of principal on year one PLUS interest.
This is one problem I encountered looking at commercial deals, because with low cap rates these days, and short amortizations, equal principal payments, it’s difficult to cash flow from the beginning even at 30% down.
One common approach is to NNN lease the entire strip with an option to buy later on, when hopefully you’re locked in at a good rate, and the rents goes up, which is not that likely with such a high vacancy rate. This approach works with older sellers unloading near retirement, but maybe not for someone younger looking to take the money do the next thing.
If it’s an older strip, it might make sense to do a phase one environmental, just to make sure things are on the “up and up”, that there’s nothing buried there that you don’t know anything about. The place could be a toxic dump site years back for all we know. If it was pristine farmland before, then it’s another story.
KJ mentioned “an anchor tenant”. Usually you don’t have them for small local neighborhood strips, the type of stores that you described. The credit tenants go for the regional or larger ones, that requires a much larger footprint and parking.
A visit to the local planning board can never hurt. I was looking at a local strip, and when I mentioned the location to them, they told me the restaurant in the strip did not ahve the proper permits, and the parking available was not adequate, and they wanted the owner to pave over an empty lot behind the place for parking, and get an easement from the owner next store to get to it. There was some regulation requiring so many parking spots for so many seats in the restaurant. They knew the property was for sale and expected the buyer to take care of it. Yet, when questioned, the seller insisted the municipal parking was adequate.
As to new developements, you’ll have to see how far down the road it is, and what the local opposition is. You can go broke waiting!!
With commercial, there’s so much more you have to know about local zoning, geography, econcomics, planning and devlopment, demographincs, that it would be difficult to do from across the country, and just looking at some NOI numbers. With commercial investments, you have to be on the ground asking questions.
Frank Chin
Re: Buying a strip shopping center and need HELP! - Posted by KJ
Posted by KJ on March 11, 2007 at 22:51:28:
Joe,
Don’t know if you’ve done this already, but if you google Mountain View, Ca and select the ‘map’ function, then ‘satillite’, you can zoom in with very good detail for that area. Starting at the address of the building you can get a good look at the overview of the area, as well as the property itself. This will give you a picture of the parking lot, traffic patterns, divided streets, neighborhood, ect.
Regarding the vacant spaces, one feature that is common with a lot of strip centers is that they have a credit tenant as an anchor store. If one of the vacancies is a store that has been vacated by a credit tenant, or anchor store, you should find out why that is the case. It is the anchor store that has the largest draw, and if that is missing you will have long term issues that can affect the viability of the local operators in the other stores. If your anchor store has only a short time remaining on their lease, and may choose not to renew, you would definitly want to know that in advance, as they are your ‘franchise player’, and filling that store if it is dark can be a daunting task.
Regarding the environmental study, you should be able to get away with a Phase One Study. Unless that study requires a Phase Two the costs should not be overwhelming. It is generally the remidiation of the problems found in a Phase Two Study that can eat into your wallet. You can call around to get ballparks for the Phase One.
KJ
Re: Buying a strip shopping center and need HELP! - Posted by Joe
Posted by Joe on March 13, 2007 at 22:24:56:
Frank,
Thanks again. I like your idea of NNN lease the place with option to buy later. As you said it is very hard to do this across the country. I feel this opportunity has given me a chance to learn some basics about the commercial real estate; also it encourages me to get off the side line and try to learn the process.
I am soon moving to California so hopefully I will be there in person and start all the due diligences. Although this being my first deal I probably would like to hire a professional service to do it for me as I learn along the way.
Would you happen to know if there are professional services that will do the due diligence for the investors? If so what where should I be looking for them.
Thanks in advance.
Re: Buying a strip shopping center and need HELP! - Posted by Joe
Posted by Joe on March 13, 2007 at 22:14:48:
KJ,
Thanks. Between you and Frank, I am getting some good insights. I will check the Google site, I think it is a great idea.
Would you mind to elaborate a little more about the credit tenant and anchor store? I am not sure what is a credit tenant?
Thanks in advance
Re: Buying a strip shopping center and need HELP! - Posted by Ron
Posted by Ron on March 14, 2007 at 21:52:37:
A commercial realtor, representing you as the buyer.
Re: Buying a strip shopping center and need HELP! - Posted by Frank Chin
Posted by Frank Chin on March 14, 2007 at 03:46:37:
Joe:
A “credit tenant” is a tenant in the commercial world with what they call Triple A credit, something like a person with a 800 credit score.
If you deal in commercial real estate this is important since banks extend credit based on the creditworthiness of your tenants. For instance, for a small neighborhood strip, which this sounds like, a national bank establishing a branch there where give you a tenant with a AAA rating.
In other words, with “credit tenants”, you’ll get a higher LTV.
I knew a commercial investor with a property with low rated tenants, month to month as you have, he actively marketed his property, and got Sears to open up a “business service store”, and a National Bank to come in. Then he refi’d.
Frank Chin
Re: Buying a strip shopping center and need HELP! - Posted by Joe
Posted by Joe on March 15, 2007 at 16:17:10:
Hi Ron,
I am a residential real estate broker and I am aware of that. Not sure if I understant the point of this?
Re: Buying a strip shopping center and need HELP! - Posted by Joe
Posted by Joe on March 14, 2007 at 07:37:09:
Good morning Frank,
Thanks again, this is very useful to know during my due diligence. So the anchor store that KJ is talking about is the store that credit tenant rents?
I have already made an appointment to go and see the town planning folks.
The seller wants me to put down $20K as a good faith deposit, sign some paper work before I can start the due deligince. He stated the time line for DD is 30 days? Does this seem reasonable?
Thanks in advance.
Re: Buying a strip shopping center and need HELP! - Posted by Frank Chin
Posted by Frank Chin on March 14, 2007 at 08:28:13:
Joe:
Don’t be so anxious if you haven’t scoped out the retail environment on the ground, or spoke to the seller face to face, or checked out the planning department. After you done that, you may want to run from the place. Paying air fare, and hotel bills is plenty enough.
You can find out plenty from public info without without paying 20K. You can get places like this at 33% vacancy all day long.
I was investigating some commercial strip by phone and was told there’s 3 vacancies. When I showed up to check the place out, there was in fact five, and the seller claims his PM was not up to date.
And the bad news for me was, there were several more empty stores up and down the avenue, with a new strip, 12 stores being built, plenty of parking a quarter mile up the avenue. And the municipal lot in the area was empty in the middle of the day.
And when you visit, you can see how busy the place is during the day, the type of customers coming in, type of cars they drive etc. You don’t need to pay 20K to get this info.
Meanwhile, you can get census bureau data for free off the net.
I wouldn’t pay for anything sight unseen. As to this phase of things, YOU would have to do it, and I wouldn’t trust a “third party” to do it for you.
Frank Chin
Re: Buying a strip shopping center and need HELP! - Posted by Joe
Posted by Joe on March 15, 2007 at 16:24:37:
I agree! Since my brother lives there and a visit to him and his new baby is due, it makes it easier to justify the air fare 
I have seen some pictures of the place over the net and my brother said the strip is in an up and coming area similar to South Bronx. Based on all the information you and KJ have given me so far, I feel a little secure going there and check it out.
Thanks again
Dept of Redundancy Dept - Posted by KJ
Posted by KJ on March 15, 2007 at 17:32:23:
Joe,
Once you have inspected the property you will have to make the decision to proceed with the purchase or let it go. At that point, if you decide to purchase, your time frames for performing will become critical and comparatively short relative to the magnitude of the dollars involved. Your ability to have important ‘criteria filters’ at your finger tips could mean the difference between successfully negotiating a good deal and cutting your legs off at the knees.
I hope you gave the suggestion regarding Ray’s material enough thought as to have actually purchased his book. Trust me, you won’t regret it as it will be an invaluable source of wisdom, and a terrific guide for making the proper decisions on this deal. And that is true even if you end up not buying the property for all the right reasons. I can’t stress this point strong enough at this stage of your investing, so please forgive my being redundant.
Happy hunting,
KJ