Posted by JohnBoy on April 19, 2000 at 21:35:24:
On a commercial property you should lease it on a Triple Net Lease. This means the tenants would pay the $1.25 per foot as “NET RENT” to the landlord PLUS taxes, insurance and common area expenses.
commercial retail property situation??? - Posted by Curtis(sdca)
Posted by Curtis(sdca) on April 19, 2000 at 12:27:01:
I have stumbled across a storefront property that is an awesome location and over 9000 sq. ft. It is a Bank REO and was on the market for 1.3 million and did not sell they have just reduced it to 7 hundred thousand dollars and the broker says he hase some people who want to rent out the bottom floor (4500 sq ft) for 1.25 a sq ft and upstairs we can get $1 per sqaure foot and has a few people who are interested. I figure the mortgage on the property to be about 7,000 per month with 3,123 gross income coming in… It sounds good to me but a little scary… I could not afford to pay the mortgage if someone did not pay rent…
What should I do??? He said I could get 2 weeks due dilligence to find renters, should I ask for a month?
WHAT ARE SOME OF YOUR THOUGHTS AND IDEAS ON THIS PROJECT AND THE WHOLE COMMERCIAL RETAIL THING???
THANK YOU
CURTIS GABHART
Re: commercial retail property situation??? - Posted by ray@lcorn
Posted by ray@lcorn on April 19, 2000 at 13:27:33:
Curtis,
I can’t follow your math. If the property is renting 4500 sf for $1.25 psf per year (which is how that term is used in commmercial re), then the income is $468.75 per month. (4500 x 1.25 = 5625/12 = 468.75) The portion at $1 per sf would yield income of $375 per month. That’s total income of $843.75 per month, which is far short of the $3123 you’re quoting above. Where did the number come from?
Even with the $3123 per month income, you’re deducting a payment of $7T per month, and are making no allowance for insurance, taxes or maintenance. You’re in a negative cash flow before you start, and you’re excited about it? Is San Diego THAT hot?
What gives?
ray
Re: commercial retail property situation??? - Posted by JohnBoy
Posted by JohnBoy on April 19, 2000 at 22:16:07:
Hi Ray, What’s Up Dude???
It’s been my experience in CA that commercial retail spaces are quoted on sq. ft. by the month. Back here in the mid-west it’s quoted on an annual basis. The $1.25 Curtis is quoting would be equal to $15.00 per foot on an annual basis. That sounds low to me for CA., but I’m not sure on San Diego’s market. Orange Co. is running between $2.50 - $4.50 per foot based on monthly rents. That would be $30 - $54 per foot on an annual basis. These were on retail strip centers with and without major markets in them. At least that’s what the rents were going for when I was there in the 80’s. Those were all triple net leases also.
The guy I worked for in CA. opened a new store that was 2200 sq. ft. The base rent was $4.50 per ft. triple net, or 10% of gross reciepts. Which ever was more! The rent was $10,400 per month with everything on 2200 sq. ft. The business had to gross $8k a week just to break even, and that was with no debt service on the business. He paid cash for everything.
Those landlords have caught on and are getting their cut on the small businesses there.
The same owner had another location in the same city that he signed a 15 year lease on 1968. It was 1800 sq. ft. with a base rent of $600 or 8% of gross reciepts. When the lease was up they would only give him a 3 year lease where the base rent went up to $2500, after that they gave him another 1 year lease with base rent at $3600 and put a clause in that gave the landlord the right to cancel the 2 one year options if the tenant wasn’t meeting certain sales quotas and paying the 8% overage. After that it went to $5500 a month base rent. Last I heard they tried raising the rent again so high that the tenant told them to take a hike and just vacated when the lease was up. A $600k asset down the drain because of a greedy landlord. He couldn’t even sell the business because of no lease and this landlord wouldn’t approve anyone to take over the lease if he would have tried selling it. The landlord had no problem getting another tenant in there willing to pay after he left!
Pretty wild huh?
JohnBoy
Re: commercial retail property situation??? - Posted by curtis
Posted by curtis on April 19, 2000 at 17:37:26:
What I meant is the price per square foot is 1.25 x 4500 per month if the norm is to use per year fine. anyways the mortgage payment would be aroung 6500-7500 per month (includes the 20-25% down payment I would borrow) so if I rented the bottom 4500 sq ft for 1.25 sq ft per month it would = 5,625 per month gross income plus 4500 sq ft of the second floor at $1 per sq ft per month or 4500 for a total gross of 10,125 per month not including taxes etc. So I dont think I will have 3,100 dollars in taxes per month and will have tenants pay utilities. Sorry for any lingo confusion again I am new to the whole retail/commercial real estate thing but I do know math and it looks like this adds up thanks for the feedback, keep it coming…
Re: commercial retail property situation??? - Posted by ray@lcorn
Posted by ray@lcorn on April 20, 2000 at 10:11:42:
Hey JohnBoy!!!,
Long time, no hear!
Should have known the left coasters would have their own language… don’t guess it makes any difference that every broker, lender and investor in the rest of the country quotes psf rent as an annual number… must be the earthquakes… quote space by the month because who knows how much space will be left, or where it will be, after the big one!
How’s the clean’n biz? Twisted any more landlord’s arms lately?!!!
ray
Re: commercial retail property situation??? - Posted by ray@lcorn
Posted by ray@lcorn on April 20, 2000 at 10:06:06:
Based on your numbers, and some estimates on my part, the deal pencils out this way:
$121,500 Gross Income (pro forma)
$-20,000 Property Taxes and Insurance (pure guess)
$- 5,000 misc. expense (there will be some)
$ 96,500 Net Operating Income
$-72,000 Debt Service (560T@ 10% 15 yrs.)
$ 24,500 Net Income (pre-tax)
24,500/ 140,000 (dn pymt)= 17.5% cash on cash return
Above calculated on full lease year with no vacancy, landlord utility expense, and minimal maintenance expense. I think these are unrealistic expectations and would not make an investment based on this scenario. Even if the investment would do what the pro forma numbers show, the return is below my current criteria for commercial space.
In short, I would advise that you temper your enthusiasm with some real world research before venturing into commercial real estate. Ask yourself some questions like “Why is this property being discounted?” “How long has it been on the market?”
Then look at the market you are considering. The questions I would have would include how long the space has been vacant, how much vacant space is in the market, market rates on space, population trends in the market, etc. How much deferred maintenance is required?
The consider an offer. If $700T is the asking price, then you don’t know where the bottom is yet. Market research and deferred maintenance can change that value in a heartbeat. In addition, I think two weeks to find tenants is completely unrealistic, unless this is in one of the hyper-market areas, in which case I don’t think the property would be offered at a 45% discount from the original asking price.
ray