Hi there, have seen a commercial property for sale which the asking price is affordable and located in an up and coming suburb. In terms of due diligence, negotiation and contract inclusions? What tips would forumites suggest to ascertain whether this purchase may be a good deal? Yield approx 8% Tenants in place.
Cheers
* How long to run on the lease?
* How solid is the tenant (ie likely to remain in business)? What bond/guarantee do you have if the tenant disappears or goes bust?
* What are the lease conditions with respect to increases (percentage increases or market review, or combination)?
* How does the current lease amount compare to market? (Check with other real estate agents and valuers – the truth is probably somewhere in-between the optimism of agents and conservatism of valuers.)
* If this tenant went bust or the lease expired, how easy would it be to get a new tenant, and how much would a new tenant be likely to pay? (This is usually expressed in $ per square metre per year. So if you ring an agent and ask what office rents are in that area, and he answers "about $100", that means $100 x (square metres) per year.)
* What does the lease say with regard to outgoings. (Usually in commercial, tenant pays outgoings, but best to check.)
* Why is the property being sold?
* Any chance of some vendor finance?
* Any opportunities under current zoning to further develop the site?Plenty more – but that's a good start!
Pretty well summed up Trakka, although I'd add rent reviews could also include annual CPI, fixed, fixed + %, market and ratchet clauses.
Do your homework especially with regard to what current market rent is, it doesn't always mean that it will increase. I have seen many which have now dropped 15-20% since the expiry of their leases ie below what their commencement rents were 3-5 years ago.
Ensure that the bond/bank guarantee/any security will be transferred into your name (new bank guarantees/personal guarantees etc should be issued)
Confirm that the bond is at the appropriate level (ie has been adjusted with the rent and is inclusive of gst where applicable).
Check out vacancy factors in the area & the average time to relet.
Confirm agency letting and management fees (if required).Thanks guys for your input. Great stuff.
Leased until Oct 2009 at approx 8% yield.
Tenant is a hairdresser in a boutique strata titled complex with Doctors, Physios pharmacy etcWill use your tips to gain further information.
Just wondering how are these properties valued?? What makes up the purchase price??
Thanks agin for your help
Purchase price is based on the 'capitalisation of net income', that is cashflow is analysed over the long term factoring in net rent, rental growth, vacancy factors, risk, interest, inflation etc, with a secondary methodology used as a check measure (most likely either summation or direct comparison).
As the premises is a retail shop in a centre, the lease will be governed by the retail leases act.
Adding to the risk is the premises is a strata shop in a complex. Study these carefully before you put your hand up…..You have no control over the tenancy mix, no real retail strategy inplace, there is generally no central leasing agent, centre management only handles basic issues of security, cleaning, strata issues etc.
The risk being that if a tenant seeks a shop and a number are vacant then the tenant can play off 2 or three shops/agents to get the best deal as opposed to centre management ensuring that a fish shop should sit next to a hair dresser rather than in a properly planned fresh food market precinct. You never know what the owner next door may accept just to lease out their shop (and centre management has no control over it, only the mighty $).
Strata works for industrial or commercial space but definitely not for retail uses.
Thanks Scott No Mates, The space is zoned commercial so would that reduce some of that risk? Tenants in the 6 unit complex are long term with good solid history. Floor space is small at 58m2. There is a small bond in place $1600. Lease is 3 x 3 with renewable option but outgoings are not included.
Does this information raise any further eyebrows and potential questions to consider??
Thanks mate
As the zoning is commercial you should be fine for a number of uses (existing use – retail) as well as office use (eg accountants, solicitors etc) but it would be worth checking with council what the zoning allows.
The complex is small – this reduces your risk of too many interests in the centre (ie there are only a handful of owners, not dozens).
What does the lease say about the bond? $1600 may only be 4 weeks (if that is what is prescribed in the lease, there is nothing you can do about it) – just ensure that it is the right amount.
Gross lease – rent has been increased to offset the cost of rates, insurance etc. Just make sure that the tenant is paying for water consumption (install & read your own meter if necessary).
Thanks again Scott, I have asked for a copy of the lease and will get check out some of the finer details and will be sure to check all the points you and Trakker have suggested.
Hopefully the lease checks out in my favour.
Cheers
Hi, checking the rents is the best thing you can do. My shops are recommended $200/m2 but my rent is only $175/m2. The CPI increases will be applied definitely. I didn't put up rents for 4 years.
You might find someone like that wanting to sell.
My sister bought the shop next door & the rent was double of mine. Her tenant left 4 years on in a 6+6 lease. She's still lucky because this tenant is not bankrupt so he can be made to pay for the cost of retenanting.
My sister made the mistake of not checking with me what my rents were.
so what you can do is check what other shops in the vicinity rent for.
Incidentally, don't be put off by what they look like. What's more impt is whether tenants want them.
Good luck,
KY
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