Advice about deal/financing

General Real Estate Investing
1

Hi,
I am looking at the retail strip with following details:

Asking price: 800,000
NOI: 57,000
CapRate: 7.1
Size: 6500 sq ft.
No. of stores: 6
Paking: none, street parking and there is muncipal parking lot across the street.

It is completely leased with about 3% increase per year. Two of the leases are expiring in 2008 rest are longer term. Area is good and looks like it is growing. I spoke to one mortgage broker about it and he offered me the following. Nothing is on paper yet just verbal.

Terms

10 year fixed
25 year amortization
6.5-6.7%
25% down

Cost

$1500 non-refundable application fees when he gets me the LOI from bank.
Bank charges (no points, appraisal, environmental, inspection, engineering, attorney). approximately $6000
1% to broker at closing. approximately $6000
I am estimating the total cost to be $15000 to be safe.

At asking price following are my calculations:
Total price: Asking + closing = 800,000 + 15,000 = 815000
Down payment: 25% of asking + closing = 200,000 + 15,000 = 215,000
Loan: 75% of asking = 600,000
yearly Debt service (600,000, 6.7%, 25 year amortization) = 4126*12 = 49,512
NOI: 57,000
Cash flow: 7488
cash on cash return: 7488/215000 = 3.48% (Not very pretty)

Questions

  1. What would be reasonable offer for this.
  2. Loan terms sound right or it is off. I am little concerned about $1500 non-refunable. What are the possible ways to structure this. Ask owner for some financing etc.
  3. Any other comments as I am new to commercial and do not own any retail.
2

The terms sound reasonable and the $1500 is likely the broker’s non-refundable retainer fee.

I charge $2500 to assist clients with securing financing for commercial properties and clearly advise them that this fee is to cover my time & upfront costs of assisting them.

As for your LTV & closing cost calculations, best to check with your broker for the estimates. The LTV will be based on the appraised value as well as your purchase cost (not to exceed appraised value).

This means if you are purchasing the property for full market value (say that is $800k) and the lender is only going to finance 75% of the appraised value, your maximum loan amount will be $600,000.

Any fees, closing costs, third party fees, broker charges etc. will have to be paid out of pocket at closing.

Typically, if the appraised value is higher, conventional lenders will still require that you pay these costs out of pocket & will only finance 75% of the purchase price because they want there to be equity in the project as well as having you contribute capital to it to ensure you have a vested stake to lessen the possibility of default.

The only way that you can usually finance fees into a commercial loan (escluding upfront lender/broker costs) is if you are purchasing it for significantly below market value and the financing will be handled by a hard/private money commercial lender on a short term or bridge product.