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REAL ESTATE Commercial office building

yveskleinsky

Bronze Contributor
Speedway Pass
Jul 26, 2007
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So I spoke to a Realtor today and she said that there is a building they just got listed. The building has a 3 year triple net lease, they are asking $240k and collecting $3200/month rent. The lease is with a cable company- I think their plan is to only rent out half the building at the 3 year point as their contract will be expired then. ...I found a local bank who would be willing to finance this with 10% down and at 8.25%. What do you guys think? Anything else I should be aware of? How would I go about renting the other office space at the 3 year point?
 

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yveskleinsky

yveskleinsky

Bronze Contributor
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Jul 26, 2007
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...I just wanted to add that if I seem to have the focus of a shotgun blast it's because I do right now. I just discovered commercial real estate, and that jumping in is totally doable and I am trying to learn everything I can as fast as I can- mainly because I find it all fascinating. I apologize if I am exhausting you guys with my questions and potential opportunities I keep finding! Rest assured that every bit of info that y'all have responded with has been filed in my brain. I know I need to focus, I'm just not sure on what. I eat, sleep and breathe real estate. I know it's not healthy, but I am obsessed with it- mainly the creative part of seeing how all the pieces fit together.

...How did you guys decide on what avenues of commercial real estate to focus on?
 

ProInvestor

New Contributor
Aug 15, 2007
82
10
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Australia
---Reply to 1st Post

Off the top of my head - Mortgage is going to be around $24K per yr (based on 10% I.O.),
Rent is $38,400 p/yr, meaning +CF of $14,400 per yr.

After 3 years, Rent falls to $19,200 - $24,000 = -$4,800 (thats minus), or rent drops to zero because they don't renew (or you add all your profit for 3 years into the building and then you are say $19,200 - $20,000 = -$1,000 (minus), assuming they rent out the building...

You are going to have to look at the research with a focus on where the market will be in 3 years. Is there going to be demand for that type of building, etc. Find out growth stats for the area business and work out in a down turn whether the building would still be rented.

Most commercial landlords would see no tenant after the three years, and I would approach it in a similar way (that way it avoids unpleasant shocks). Lastly look to make sure there were CPI/inflation rises in the contract. if there are none sometimes it's a sin that the landlord was perhaps desperate to sign a lease - and why? because they needed a tenant to pay the mortgage. Work out whether you would be in the same predicament.

Talk to commercial real estate / property management firms about the area. Are they seeing strong demand? Is employment growth increasing in the area? Is the local area reliant on one industry/employer??? If so is it strong enough to last a while???

---Reply to 2nd Post

Commercial Real Estate encompasses many different types of real estate - retail (big box retailers to strip malls to individual shops), industrial (warehouse, factory, etc) and residential (multifamily and accommodation -hotel/motel) and lastly offices.

Residential is the easiest to get (as it really is an offshoot from the normal 'residential' market). Residential/Multifamily is considered commercial because of the financing. it is seen to be safer because you have multiple rent sources and it is relatively easier to research and decided to invest. Leases are not so important compared to the payment history of tenants (most residential leases tend to be short term, less than a year, rather than say a 9 year lease on industrial).

Retailing can be a very specific market and trends tend to be very important - for example in a small market the opening of a Wal-Mart can destroy small malls / strip malls in the area. So focus must be made on whether the market can handle the amount of shops (consumer spending is a very important stat) and whether the market is growing and how it is changing. Leases are important when valuing.

Industrial is the hardest option to deal with, because owning a massive industrial complex in the middle of nowhere can be almost impossible to rent out or sell. It is important to look at the dynamics of an area to work the best industrial investment and take a look at the whole business environment and the specific industry. it is better IMHO to buy in city not rural area. Leases are absolutely vital in these cases.

Offices - look at (white collar) employment growth. Look at the local, state and national economy. Look for large population centers and/or pro business, fast growing areas.
Lease importance is in between industrial and residential. Very important but strong demand can balance out a short term lease.

---

My thoughts anyway.....

Rgds.
ProInvestor
 

andviv

Gold Contributor
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Jul 27, 2007
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About the first question I think ProInvestor already gave you the answer.

About how to find the type of RE I wanted to deal with.... I will have to start with a little background.

I was doing mostly SFH deals. I live in the Washington DC area, where properties are really expensive and + cash flow is almost impossible to find (yeah, I've heard of people having positive cash flow on the properties they bought 15 or so years ago, but I got to this country only 7 years ago). Rents for a 3/2 may be around 2K while prices are around 500K for a property like that. My first deals worked out because of appreciation, as I bought while the market was going up in crazy ways. In one of my deals I had the property empty for two month on purpose, as when my renter left I notice the property value kept going up 10K per month, and sold when I ran out of cash to make the next mortgage payment.
Then, as I couldn't make it work in my area, I decided to buy out of state. I found a deal in Tampa, FL where I did cashflow... but only if the renters paid on time, and because I was not in the area had to rely on my PM. I had three PMs during those two years and none of them really worked fine for me. The last one I had was a professional project manager doing this full time. When I complained that I was not getting his attention for my property he told me he had bigger customers, who had many units and they were the bulk of his income. I started talking to him about this and explained to me that multis was the way to go as there were just so many advantages from the property management perspective, and that it was easier buying a property at that time that everybody was buying SFHs. That made start thinking on multis. I then went back to do research and try to learn from those that are doing it successfully. I saw it as a natural progression from the SFH as I had learned a lot from those properties. I understood the renters market, I also knew about the basic rules and regulations pertaining residential properties, so it was a 'simple' transition from one type of properties to the next. Also, most of the issues that I had with my rentals were the lack of control on the rentals and property values (My SFHs were as valuable as the next door property, no matter that I was putting time, effort and money in keeping them in great condition) and property management (it is more difficult to find a good PM for one single unit as they make only 10% of the monthly rent and one month when the lease is signed, while in multis I can achieve economy of scale here).

Also, I had bought some land and was planning to develop them (small things like buying 1.5 acres to build a luxury house on it, or 2 .25 acres to develop rental properties) but they did not work out for me.

So, short version of how I chose multis: I got tired of SFHs and saw that the negatives in SFHs were actually good things in multis.

What I learned out of all of this? That I just spent four years following different types of deals (actually any deal that seemed good for me, like rehabs, rentals, flips, land, be a hard money lender, etc) and I did not become an expert at any.

This whole thinking process took more than a year from the 'idea' until I actually acted upon it and started making contacts with people that have done it.
 
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yveskleinsky

yveskleinsky

Bronze Contributor
Speedway Pass
Jul 26, 2007
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What is a standard lease on a commercial building? This lease just started, and seems short- but what do I know! ...This particular building is about 2 minutes from an Air Force base on the main drag through town, so there seems to be huge potential there. There are 6 office "suites" and a storage yard out back which the cable company keeps their vehicles. The growth in my area is on an incline. There is talk of base expansion, and we are getting in lots of retirees. I like the idea of planning for a 0% occupancy in three years. I suppose I could start advertising for a tenant now and see what happens. Any thoughts on what businesses would work well by a base?
 

tchandy

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Aug 16, 2007
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What is a standard lease on a commercial building? This lease just started, and seems short- but what do I know! ...This particular building is about 2 minutes from an Air Force base on the main drag through town, so there seems to be huge potential there. There are 6 office "suites" and a storage yard out back which the cable company keeps their vehicles. The growth in my area is on an incline. There is talk of base expansion, and we are getting in lots of retirees. I like the idea of planning for a 0% occupancy in three years. I suppose I could start advertising for a tenant now and see what happens. Any thoughts on what businesses would work well by a base?
You would want the commercial buisness to be in a decent neighbordhood (ie not run down, people hanging outside the area, etc). Not sure if the Air Force, still starches their duty uniform but a cleaners would be one. Restaurants are also good since everyone needs someplace to eat for lunch or grab a quick bit to eat. :smx7: A grocery store would also be good (7 eleven, am/pm store, mini mart, etc). Everyone always stops for coffee, drinks, snacks, etc. :smx6: I hope that helps.

Tom
 

ProInvestor

New Contributor
Aug 15, 2007
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Standard lease is usually 3x3x3 - so thats 3 options of 3 years. Although I have seen 10x10x10 leases, but thats for large retailers. Really the lease term (with options) can be anything you want it to be, just so long as your tenant agrees to it.

Is white/blue collar employment growing?
What are the major industries in town? Because they will likely be your next tenants.
What are the prospects for those industries?

Also you may be aware that a growing company could take the other half of the building and if they grow too fast demand you kick the other tenant out or they will leave.
Many times they will have stronger finances than the other tenant.

Also you say cable company. Are you sure it is the local cable company and not contractors that are employed by the local cable company? Just checking all aspects of the deal.

However it sounds pretty good. Just make sure that business is growing in your area (the commercial real estate market is unconnected to the residential real estate market).

Rgds.
proInvestor
 

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