Is this deal a 10 or what?

[JasonEtheridge]

Hi All,
I have a private sale tied up and would love everyone to pick it apart.
It is a commercial 2 story building with zoning to add a 3rd with comm or residential.
Long term tenants, the anchor tenant is a class a tenant and wants to take over more space as it becomes available. Building is on pape ave in toronto north of danforth in a very high density area that is growing.

Tied up at $1,700,000.00
Currently grosses $205,000/year. Rents are below market. Room to improve as leases expire.
New roof. New heating and cooling systems. All brick, solid building in very good condition.

Expenses are as follows:
Taxes $43000
Insurance $5000
Hydro $2800
Water $3100
Gas $3300
Cleaning $5000
General repairs $10,000
Vacancy amount?? This is a hot area and easy to rent. All tenants but 2 have 2 years min left on leases...some have options. Others do not.
Management will be done by myself.

I haven`t done a deal of this size and Any feedback is appreciated.

 

[GaryMcGowan]

What are the sellers intentions? Why do they want to sell? Will they hold all the paper? part of the paper? How are you going to finance this? Maybe there are more opportunities here than you think if they are willing to finance it.

 

[JasonEtheridge]

QUOTE (GaryMcGowan @ Feb 4 2010, 07:15 PM) What are the sellers intentions? Why do they want to sell? Will they hold all the paper? part of the paper? How are you going to finance this? Maybe there are more opportunities here than you think if they are willing to finance it.


Seller wants to return to his homeland overseas. NO paper can be held. I`m looking at financing options.

 

[Rickson9]

I can only speak for myself (obvious, I know, but some readers assume otherwise), and with regards to the numbers that you have posted, I would pay no more than $1.2M for this property.

Others would be willing to pay more or less for the same property, but I think that goes without saying.

 

[gwasser]

QUOTE (Rickson9 @ Feb 4 2010, 06:44 PM) I can only speak for myself (obvious, I know, but some readers assume otherwise), and with regards to the numbers that you have posted, I would pay no more than $1.2M for this property.

Others would be willing to pay more or less for the same property, but I think that goes without saying.

How many stores are involved? What is the square footage, is it all rentable?

Cleaning costs only $5000?
What about landscaping and/or snow removal?
Is there pest control required?

Were there dry cleaners, photo processors or other chemical active companies located in the place?
what about nearby or adjacent gas station(s). Is there environmental liability?

The numbers sound good initially, but how deep did you dig? i.e. due dilligence?

Did you have a building inspection done?

Talked to neighbors?

 

[invst4profit]

Big question is can you go for a year or more with your major space vacant. This is common in commercial rentals and must be factored in regardless of whether you know this is a hot area or not.
How long has it been on the market, is there potential for new construction to be in competition in the next few years.

 

[JasonEtheridge]

QUOTE (gwasser @ Feb 4 2010, 09:06 PM) How many stores are involved? What is the square footage, is it all rentable?

Cleaning costs only $5000?
What about landscaping and/or snow removal?
Is there pest control required?

Were there dry cleaners, photo processors or other chemical active companies located in the place?
what about nearby or adjacent gas station(s). Is there environmental liability?

The numbers sound good initially, but how deep did you dig? i.e. due dilligence?

Did you have a building inspection done?

Talked to neighbors?

Tenants are responsible for the upkeep of their units. Cleaning is for stairwells and main hallway.
There is no landscaping frontage right on pape. Snow removal is a number I need to get.

As far as I can see no pest control is required for the tenants, but a good point.
No drycleaner, no gas station within 500m.
I have to commit to my due dilligence by the 17th...which will cost several thousand. Im still on the fence.

There are 3 storefronts and 8 offices. 5000sqft per floor.

Could this place carry without a tenant or 2 for a year. Yes.

It is a high density area with further development in the works.

 

[housingrental]

This is a pretty low cap rate to justify my interest for that type of property
Proceed with caution
Only go on if you have big $$ behind you to weather the storms and offer material leasehold improvements when needed.

 

[JasonEtheridge]

QUOTE (housingrental @ Feb 5 2010, 02:14 PM) This is a pretty low cap rate to justify my interest for that type of property
Proceed with caution
Only go on if you have big $$ behind you to weather the storms and offer material leasehold improvements when needed.


What cap rate did you come to?

 

[JasonEtheridge]

QUOTE (housingrental @ Feb 5 2010, 02:14 PM) This is a pretty low cap rate to justify my interest for that type of property
Proceed with caution
Only go on if you have big $$ behind you to weather the storms and offer material leasehold improvements when needed.


What cap rate did you come to?

 

[Thomas Beyer]

...

 

[Thomas Beyer]

QUOTE (JasonEtheridge @ Feb 4 2010, 03:39 PM) It is a commercial 2 story building with zoning to add a 3rd with comm or residential.Long term tenants, the anchor tenant is a class a tenant and wants to take over more space as it becomes available. Building is on pape ave in toronto north of danforth in a very high density area that is growing.

Tied up at $1,700,000.00
Currently grosses $205,000/year. Rents are below market. Room to improve as leases expire.
New roof. New heating and cooling systems. All brick, solid building in very good condition.
...
I haven`t done a deal of this size and Any feedback is appreciated.
a 5-6% CAP rate is common in top location is top cities. I arrive at about 65K in expenses, so net income of 140K. 140K/1.7M = over 8 percent CAP rate.

THIS IS A GOOD DEAL !!

if (and only if)
a) the area is as good as you describe it, and
b) if you are confident rents can be increased, (or at least will be flat) and
c) if vacancies can be kept low, and
d) taxes won`t go up soon

Next step: most leases are triple net, i.e. TENANTS (and not you !!) pay: taxes, condo / share of common area fees and share of utilities, usually pro-rated by square footage.

Thus, on lease renewal you should include all your expenses, plus a management fee of 10% of gross rent, onto the leases. This is normal. Of course, you have to do some research in the area as to comparables. So if you charge $25/ft plus $10 in taxes/utilities/common area costs i.e. $35/ft all in, and most other, similar areas charge only $28 you may get vacancies.

Thus: research similar offices/retail store front close by to see if you are in line, too low or too high.

Bank financing will allow you anywhere from 50% to 65% loan-to-value at decent rates (say 5.5% to 6.5%) .. and once you go over 65% LTV likely 6.5% to 8.5% interest rates .. 15 year amortization, usually.

Enjoy the next 2 weeks finding bank financing and doing market research on LEASES but this seems a decent deal to me !! You`ll be busy .. but @ $1M/week this is an excellent hourly "salary" ! Why $1M/week ?

Once owned, add a 3rd story .. and send us all a postcard from paradise once that floor is leased up and the building is worth $4.0M !!

This is the road to wealth: buy sharp, improve the asset .. re-finance or sell .. likely $1M in this deal EASY .. possibly $2M .. if the facts are as presented by you (i.e. rent upside, 3rd story option and low vacancy)

Good luck .. do loads of research before you waive conditions .. add $120 onto the "cash to close" item list as you`ll be sweating a lot and need 2-3 new shirts after conditions are waived !

 

[housingrental]

Factoring in some management expense to pay yourself or hire another company you have a potential 7.05% cap rate.
And if things go poorly it`ll be less than that.
Without knowing more on specific market - rent upside - and everything else hard to give an accurate detailed answer beyond what I`ve wrote. Disclose more for additional thoughts. I have some familiarity with certain parts of the GTA market.



QUOTE (JasonEtheridge @ Feb 5 2010, 02:45 PM) What cap rate did you come to?

 

[JasonEtheridge]

Thanks for the feedback Thomas. I ll keep you posted.

 

[jaccker]

Just wonder do you get the deal done?
QUOTE (JasonEtheridge @ Feb 8 2010, 11:47 AM) Thanks for the feedback Thomas. I ll keep you posted.

 

[JasonEtheridge]

QUOTE (jaccker @ Mar 5 2010, 10:24 AM) Just wonder do you get the deal done?

The building is still tied up and we re going thru the DD... nothing final yet.