Author Topic: Would you do this deal?  (Read 1111 times)

WSUCoug1994

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Would you do this deal?
« on: April 26, 2018, 02:23:46 PM »
Mixed use residential (7 condos)/commercial (3 units) - 16,800 sqft on 1.21 AC built in 2006 in California = $6.25M (I would be offering $5.5M)

Net Operating Income - $339,000 - 5.5% Cap Rate
All three commercial tenants are on the front end of 5 year leases and have all been in the building for more than 5 years.  One tenant is a Gym (large, national chain), Retail Investment Management Office (public company) and Massage/Nail Salon (national chain).
Residential - 5 are month to month and two are 1 year leases - majority of tenants have been there since 2015.

I have a lot more detail but just trying to get a gut judgement from the crowd.  I would be putting 25% down and financing the balance at 5.5%.






 

« Last Edit: April 26, 2018, 02:26:48 PM by WSUCoug1994 »

sammybiker

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Re: Would you do this deal?
« Reply #1 on: April 26, 2018, 09:11:53 PM »
Go cougs.

Any idea how the debt service will be amortized/what your annual debt service payments will be?

With that amount of debt and the limited details provided, I can't see the cashflow being worth the cash locked up in the down payment without significant value add opportunity or anticipated appreciation.

I'd definitely like to hear more details if you're able to share.

WSUCoug1994

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Re: Would you do this deal?
« Reply #2 on: April 27, 2018, 08:27:20 AM »
That is my exact hesitation.  Assuming no surprises this 30 year loan at 5.5% essentially makes this a push with the 5.5% Cap Rate.  With no major issues - it would return 4% against my down payment and I wouldn't have any real plans of paying it down earlier.  Over that payment term the cost of the building balloons to over $10M and I don't believe that there is going to be more than standard appreciation.  I am really looking for cash flow and this particular property doesn't ring the bell.

sammybiker

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Re: Would you do this deal?
« Reply #3 on: April 27, 2018, 10:43:06 AM »
Are you committed to purchasing local?

That $1.4mm down payment for a $5.5mm deal will by itself produce solid, non-leveraged cashflow in B class multi-fam in many parts of the US.  Just not the Bay Area.

I'm not a fan of leveraging up for 4% cash on cash returns and then sweating through eventual tenant turnover with $25k+ in monthly debt service payments.

waltworks

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Re: Would you do this deal?
« Reply #4 on: April 27, 2018, 10:49:37 AM »
I have zero experience with commercial stuff but just based on those numbers, no way.

-W

WSUCoug1994

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Re: Would you do this deal?
« Reply #5 on: April 27, 2018, 11:27:25 AM »
Thanks for the feedback guys - I could see myself falling in love with the mixed use aspect of this property and I just wanted to validate that it didn't make sense financially.  Would love to have the commercial/residential mix in one facility.

I am not against other geographies - I just don't know how to get a good feel for what is a good deal in these other locations.  I would also prefer local for management reasons but I am not against it. 


Cwadda

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Re: Would you do this deal?
« Reply #6 on: April 27, 2018, 12:02:30 PM »
Seems like a lot of cash tied up for minimal cashflow. I don't see how so many people can invest in these kinds of areas without cashflow. They have a lot more money than I ever will, so what can I say?

Michael in ABQ

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Re: Would you do this deal?
« Reply #7 on: April 27, 2018, 07:29:14 PM »
Well if you get it at your price that's a 6.16% cap which seems pretty good for the bay area. However, we're definitely past the peak of the market for commercial real estate and heading towards the contraction phase. I expect the bay area will still do pretty well but I wouldn't project much income growth over the next few years.

tralfamadorian

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Re: Would you do this deal?
« Reply #8 on: April 27, 2018, 08:06:40 PM »
Is the debt fixed over the lifetime of the loan at 5.5%? Or will the terms have to be renegotiated in ~5 years?

If it's fixed, I vote no because the return is not very good and California liability is crazy but would respect your reasons to want to go for it anyway. If the rate will reset with a new loan in 5 years, hard no.

Papa bear

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Re: Would you do this deal?
« Reply #9 on: April 27, 2018, 09:54:41 PM »
I have zero experience with commercial stuff but just based on those numbers, no way.

-W

+1

The terrible cap rates on commercial property (non residential) is the reason I don't own any. 


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Another Reader

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Re: Would you do this deal?
« Reply #10 on: April 27, 2018, 10:22:31 PM »
Looked this one up on Loopnet.  Your commercial tenants are second and third tier.  Edward Jones, Massage Envy and Anytime Fitness are not Class A tenants.

There is mention of a second building which can be purchased with the first for a total of $9,000,000.  Would that be the second retail office building?  It's not clear.  The subject property is connected to the second retail office building by a second floor walkway.  Would have to see the operating agreement and the CC&R's to see how maintenance is handled.  The parcel map shows two parcels, but the Assessor's map included in the offering brochure shows a single parcel. 

The garages for the apartment/condo units are located in the far corner of the lot, well away from the building.  Very inconvenient.

The fire damage from last fall's fire may have reduced retail traffic in this center.  Some nearby residential areas were completely destroyed.  Your residential units will be 100 percent occupied at solid rents for several years because of the housing shortage up there.

Not enough information to comment on the proposed operating statement.  Generally those are optimistic.

About the only nice thing about the property is the frontage on Highway 12.

It's a hard pass for me.


WSUCoug1994

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Re: Would you do this deal?
« Reply #11 on: May 02, 2018, 04:38:56 PM »
Wow, thank you for the detailed analysis.  I decided to move on but I appreciate the comments.