Commercial Bldg - One AAA tenent

[LIGHTBEING]

Howdy,

Just wondering what your thoughts are on this deal?  The numbers look amazing.  I'm just a little iffy space for 1 tenent.  

This is for a dept of corrections and lease is good through June 2010 with the possibility of a renewal for 5 yrs.  3% lease annual increase.

List price - $4.8 mil
NIO is $627,000
DSCR = 1.5 (based on 100% financing at 7.5%)
CAP = 13% (based on list price)

Still waiting to get more info on this but don't the numbers seem too good to be true?

[LIGHTBEING]

Also, should I be concerned that it is only in contract for the next 4 years?  

[Keith Palmer]

light,

if you can verify the numbers do not be concerned. you are looking at a great deal. Also, i don't think the dept of corrections will be going anywhere anytime soon. you seem to have strong income with a strong tenant. financing for you should not be a problem. but, make sure you VERIFY the numbers. i hope this helps.

[LIGHTBEING]

Hey Kieth,

Thanks for the response.  I just sent you an email.  These calculations seem correct so far.

822,114 - base rent
267,569 - total expense reimbursement
1,089,683 - Gross Income

462,505 - Total Expenses
627,178 - NOI

Tenent pays all expenses over $4.225/sq ft.

3% annual rent increases.  Also annual reimbursement increases.

[Keith Palmer]

Light,

At that cap rate, you are buying it for what it is worth (NOI / 13%), not much equity. But, an update appraisal will verify that.

Still, It seems you have a good deal $$$ on your hand. You should not have trouble with financing.

[LIGHTBEING]

Do you do loans for a property like this?  I sent you an email last night.

I don't think the NIO or Cap rate determines what the property is worth.  IMO, it's worth much more then it's listed at becuase of the ROI.

Even, if it was listed at 6 million the Cap rate would still be over 10%.  Plus the annual increases make the property's value appreciate.

email me if you can help secure financing

Jordan

[Wes]

While the numbers look good from an evaluation standpoint.  Your financing might still be a problem.

I have no doubt you could get a loan based on this particular tenant.  But you mentioned 100% financing.  
Unless your seller is owner financing the whole thing, I would doubt you will see any lender offer anywhere near 100%.

I would think 15% down would be about the least you would have to put down and 20% being a more likely number.

Also you have a single tenant that has a lease ending in 2010.   You might have an issue with that fact with lenders, as they would be concerned your only tenant might decide to move in 4 years.

Unless you can show you are capable of paying the note with the property generating "0" income for some period of time, this could be be an issue...

Just a few things to consider and questions you might want to get answered from your potential lender before you jump into a deal that looks good on the surface.

Regards,

Wes,
wesloans@earthink.net  

[LIGHTBEING]

Hey Wes,

I was only using 100% financing to show that it still cashflowed using the most leverage possible.  But I honestly don't have 15-20%.  Although, I think the seller may be interested in a carry back of 15% and I could possible come up with 5%

Jordan

[kmrei]

sounds like a great deal

[Wes]

Sounds like a good deal but the fact you can only come up with 5% or so of the downpayment is going to cause you difficulty in financing.

However, this is a case were a possible idea would be to find a (money) partner.  Set up an LLC for this property and the Money partner would obviously have a larger ownership interest in the LLC than you.  But, you could still have a percentage ownership in the LLC for your part in what you can contribute as well as you finding and putting together the deal.

I know of individuals that have done this on 100+ unit apartments that were purchased at multiple $1,000,000's of dollars and the individual never put a penny of their own money into the deal.  However, they ended up with 10-20% of the deal based on them finding and putting it together for other investors.

Just a thought for when you do not have enough funds to do it on your own...

[Keith Palmer]

Hey Jordan,

I got your email. I don’t think finding financing will be a problem. But, check the lease from the department of corrections. In researching a program for you, I found that state leases have BIG loopholes. Please get a copy of the lease agreement and REVIEW IT CAREFULLY. You may be stuck with a tenant that could leave on one day’s notice. Let’s talk via email this weekend.

[Apartment King]

I would have to agree with Wes and Keip007.  There are almost always loopholes in the leases from State Agencies.  I also have to say that I have heard of a very few lenders who can do 100% financing.  I have inquired about a few, but no one ever performed.  If this were true of the 100% finance option, it would only be possible with a networth equal to the loan amount you are trying to acquire, or enough personal income to cover the loan payments.  Lenders are all about risk, and a borrower with no real interest in a property (other than ownership), is the biggest risk a lender can take.  They need a commitment from the buyer to show they have something at stake if the property is run into the ground.  I can't see this being done without a partner.

[LIGHTBEING]

Thanks for all the responses.  The information I have regarding the lease is that they need to give a 9 month notice before they leave.  Pretty good right?  

Yeah, I have also looked into 100% financing numerous times, and they all have fell through.  

[propertymanager]

Lightbeing,

I have experience dealing with government contracts.  To me, the key point in your case is whether or not you could make the payments on the loan for this property if the contract went to someone else.  I estimate that the payments would be about $35,000 per month!!!  In addition, you should know that commercial properties can stay vacant for literally years.  Therefore, in my opinion, most (if not all) or the mortgage should be paid off during the term of the lease.  

Another important factor in dealing with government contracts is that politics, friendships, family ties, illegal bribes, etc all come into play.  Most government contracts have to be rebid at the expiration of the contract.  Unless the contracting officer and all other pertinent persons involved with the government are honest, then you can lose the contract unfairly.  Moreover, someone else could underbid you and the result would be the same.  

Good Luck,

Mike

[LIGHTBEING]

Mike,

You make very good points.  One of the main concerns I have is that it is a single tenant lease.  I'm really interested in apartment bldgs but found this deal by chance.  If one tenant leaves a midsize apartment bldg compared to if one tenant leaves a single tenant bldg is drastically different.  However, I have yet to see a midsize apartment bldg with this type of ROI.