I’m currently looking at a property that will come up for auction in a fortnight’s time so my time frame is quite tight. I’m trying to establish a realistic upper limit to purchase price and am running into problems trying to work out realistic rent and yield.
Property is in on main road near largeish Shopping Centre with good passing traffic, parking behind for staff and close by for customers. Currently disposed as 87 sqm showroom and 103 sqm office, etc. One of the offices could be used as extension of showroom.
From the floor plans, it may be possible to turn it into 2 shops which would more nearly suit the other shops in the area. Would have common kitchen and wet areas at the back, though.
I have looked on internet and newspaper. Rents for similar properties range from $2.5-$8/sqm/week. Retail yields seem to average around 7% with quite a wide range around this depending on age of property, position, marketability, etc.
Can anyone give me some guidance here so I can crunch my numbers.
Also, I will need to use an expert to draw up lease(s) and to find tenants. But, does one need a property manager afterwards? And what is a normal charge for all of this? Need these to add to the number crunching.
Thanks for the help, folks.
Margaret
Hi Margaret,
I can only offer you generalist type suggestions given the info provided, so here goes ;
1. Highly recommend with your first foray in CIP’s to purchase a “going concern”, where the prop. has a good paying tenant in situ. Buying a building and then looking for tenants whilst paying holding costs really is jumping in the deep end.
2. Why are the vendors selling. Most CIP Lessor’s if they can’t find a tenant put it up for sale. When the prop. is tenanted under a good lease there is very little motivation for the Lessor to sell.
3. If I know nothing else about a market, I use a cap. rate of 8% to work out the price of a prop. However, you are in the unfortunate position of not even knowing what the prop. will command on a nett rental basis. So many things are thrown into this melting pot to arrive at a 8% figure, it can be spot on, or it could be woefully inaccurate. One needs to do in depth due diligence before treading these waters.
4. Why do you need an expert to write a Lease ?? I just finished writing one and I am by no means an expert. I am reminded of an expert being someone who is slightly more knowledgeable than yourself in some particular area.
5. I’ve found though, for about $ 1,500 one can have a standard comm. lease drawn up….pretty expensive for a 40 page word document that could be emailed for free….but then lawyers have expensive portfolio’s that they need you to support.
6. The clause in our lease places the cost of the lease being drawn up on the Lessee. Nice one. Residential tenants won’t cop this, or any cost as usual…probably why you are looking.
7. We found a big 6′ x 4′ coloured sign ($220 for 6 months and looks smicko) and small ads in the paper did marvellously well. Business people wanting to lease your premises scour every where for good business premises to start up. They will find you.
8. Get out you tape measure and triple check all of the sqm figures. CIP’s live and die by the NLA (Nett Lettable Area). You don’t want to be diddled out of 10 sqm….the onus is on you to check this. You can bet the REA hasn’t checked it. Little infra – red survey thingoes are invaluable for accurately determining this.
As a final comment, really have a look at your particular market…have you got most of your info from the selling agent or not. I’ve found over time that you know the property and what it can really achieve for you when the agent cannot tell you anything about the prop. that you don’t already know. Verify everything they say with independent checks of your own. They don’t legally stand behind what they are verbally telling you….note the fine print at the bottom of the brochures.
Once again, why not go with something that is already tenanted and whet your appetite with this before taking on something more substantial.
Good luck Margaret.
Thanks for the info, Dazzling.
1. The property is up for sale as deceased estate.
2. I understand your reasoning re buying with an established tenant. I have added that question to the list to ask – why sell now when they could have sold 6 months ago with a tenant.
3. Re leases, since this is my first, I thought I would get someone else to write it to ensure I didn’t leave anything out due to ignorance. Are there copyright issues if I take the first one and revamp it for subsequent leases? When you wrote your own, how did you go about all the extra stuff that isn’t in residential leases? What if I buy a property already tenanted and use the existing lease as a pro forma when negotiating subsequent leases?
4. Thanks for the tip on measuring everything. Walls on older places are rarely square and lots of double checking look like being on the cards. I haven’t used my drafting skills in a while so it will be good for me.
5. So far, I have not asked the selling agent much other than obtaining the brochure. Although he said they would show me through any time I wanted, they wouldn’t open up for the first couple of options I gave them. Looks like I will have to make myself available when they want rather than the other way around. What info I have gleaned so far is from other publically available places like newspaper and internet ads.
6. I think I will try and learn as much as I can on this, set myself a low price, attend the auction, and be very happy to lose out to someone with more money. Then, what I learn on this will help with the next investigation.
And any and every bit of help will vastly improve my knowledge and be greatly appreciated. Once again, thank you.
Margaret
Great post Dazzling (I knew thos red stars ment something! [
])3) There shouldn’t be any copy right issues (as leases are pretty standard things). Usually you can buy them through your RE agent or Real Estate Institute. Otherwise it’s just a normal contract between two biz’s. In my area I get away with one page specials! (though the margins are way wide, and I use a small font!).
Hellman
Hi Mum,
In addition to Dazza’s voice of reason….
Make sure you know if council will allow for extra offices/showroom as this may incur the need for extra car parks, etc. Generally, the more people you can fit into a piece of turf, the better your yield will be.
Management fees, I know some like to manage themselves, but just ask around for quotes! 4% of collected fees would be a guide.
As for a possible price, after you’ve done your numbers remember to add in that it is a vacant prop and not only will you have a vacant period, you will also need to pay GST which can be quite damaging on your cashflow.
Munjy
Good post Dazzling.
Traps I’ve experienced with commercial leases :
place controls on the lessee doing subleasing or selling the business to a new owner, ensuring the outbound owner has fully complied with all terms of the lease before being allowed to move on, especially in regards to maintaining the property or passing on the tenant’s obligations to return the property to it’s original condition in the event of tenant vacating. Ensure you have the option to decline the tenant the use of your property if you disagree with any change or intended change in the nature of the business conducted therein.
Check the rent increase method, graph it out to 5 or 10 years hence, see what you’d be getting, ensuring it contains adequate options for the lessor to increase the rent if the market has a major increase.
What are your options if the rent is overdue ?
Are they enforceable ? Can you lockout the tenant ? Can you remove the tenant’s goods and place them in storage in order to allow another tenant access? Who insures the goods then ? Transport costs ? Storage costs ?
Get bank guarantees for tenant bonds if pos.
Cover every angle, like who pays for what in the event of an incident – breakdowns – broken loos, blocked drains, vandalism, storm & tempest, roof blows off, water entry, Council work or whoever blocks access, interruption to energy or water or phone supply, think negative thoughts and cover them in clauses. Try to get a peep at as many commercial leases as possible. If you intend using an agent, ask them for copies of other leases similar to your planned situation with blanked out names & addresses so you can do some planning.
good luck
cheers
thecrestthecrest | Tony Neale - Statewide Motel Brokers
http://www.statewidemotelbrokers.com.au
Email Me | Phone Meselling motels in NSW
Thank you, thecrest.
You have been really useful. Begs the question as to how much of your additions to the leases comes from bitter experience of your own or others close to you.
Have you had many commercial tenants get really picky over who does what to whom and when?
And, how often does a lessee sub lease or sell their business and you don’t like the new owner of the business or even the new business that comes in?
Thanks
MargaretA quick update – the property was withdrawn from sale this morning.
Thank you for your help everyone. I have learned heaps.
Margaret
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