Another strip mall buying question

Came across an online listing for another strip mall near Tampa, FL which is currently empty…was finished about a year ago but am not sure why it’s still empty.

How do I evaluate the price of an empty strip mall?

The strip mall is about 9,000 sq ft with 40 parking spaces and if I assume $100 construction cost - would it be safe to say the appraisal cost would be $900K or should I discount it?

The listing price(from the broker) is $480K and I don’t know if this is negotiable.

  1. Any caveat buying empty but brand new strip mall?
  2. Would bank/credit unions offer loans on the value of the real-estate alone(or with 20% down) provided I make diligent effort to find tenants to lease the space?

Hi,

How do you evaluate the price of a full strip mall? You review the financials!

In an empty property you have to perform forensic analysis which is basically researching and rebuilding a full set of property financials using properties of the same type and size around your subject property.

You will first figure how many units are in your 9,000 sq. ft. space? What are comparable lease’s per square foot for other properties around you within 1/4 mile if available but you could go out to 1/2 mile or a mile if necessary. You want current lease information so your research is looking for current less than one year old data but preferable 3 months or 6 months is better.

Call your agent, get local comparable property for sale packages which should contain all the financials! Use these properties for sale and their financial packages to rebuild and support your financial assumptions. Remember to factor in for vacancies!

An appraiser may notate replacement cost basis but primarily value is based on cap rate as income against expenses.

Being empty a bank would probable loan the money with 25, 30 or 35% down but you will have to prove you have sufficient income to pay the banks payments! While normally a bank or lender would use the properties income to qualify the properties ability to pay, in the case of an empty property they will look to your income!

Good luck,

             GR

Thank you for your reply.

Did additional research yesterday. The next closest strip mall is about 3 miles from this one and is much much larger, close to 70,000 sq ft and is about 80% full so has 20% vacancy.

The leasing rate at the larger strip mall is about $10 to $15 per sq.ft per year depending on the location.

With the current strip mall, the asking price per sq ft = 480,000/9,000 = $53 per sq. ft which am thinking is too high.

Assuming, fully leased - I maybe looking at a five year period to breakeven($53/( between $10-$15))

Is there a rule of thumb when it comes to buying strip mall based on leasing rates?
In the sense, if its leasing at $10 per sq. ft then you shouldn’t pay more than 3x or 5x times the leasing rate?

You have a myriad of questions here, so let’s take them in order:

  1. Valuation; you need to do your own set of proforma books and determine a. potential income and b. ongoing costs and expenses (taxes you can get if public, and insurance you can call your agent to get a ball park), as for the rest you will need to know the area to set them up (for illustration below I used 50% of Gross Rents as your total expenses – there are arguments on both sides of this method); and derive your own proforma NOI. From which you can extrapolate an asset value using an appropriate cap rate for the area. I present some ideas below:

                                        8.5% cap rate		$15/foot		$10/foot		1.25x DSC
    

Gross Rents $136,000 $135,000 $90,000 $162,050
Vacancy (20%) $27,200 $27,000 $18,000 $32,410
Net Rents $108,800 $108,000 $72,000 $129,640

50% rule ($68,000) ($67,500) ($45,000) ($81,025)

NOI $40,800 $40,500 $27,000 $48,615

Debt Service ($38,892) ($38,892) ($38,892) ($38,892)

GACF $1,908 $1,608 ($11,892) $9,723

DSC 1.05x 1.04x 0.69x 1.25x

Effecitve Cap Rate 8.50% 8.44% 5.63% 10.13%

Asset Value (8.5% cap) $480,000.0 $476,470.6 $317,647.1 $571,940.2
Price/Sqft $53.3 $52.9 $35.3 $63.5
Rent/SQFT $15.1 $15.0 $10.0 $18.0

*I derived the gross rents to get to the NOI to support the $480K value assuming an 8.5% cap rate (which is low)
*I used a 25year am, 6.5% rate of the debt service, using the full purchase price amount; which if vacant you may only get a 20year am period.

As you can see on a very rough evaluation this project doesn’t really cash flow (when leased) at its current price.

  1. I am assuming your $100 in construction cost is really $100K, in which case what are you doing to a property and how will that impact rents and occupancy; and if it was just built what is wrong with it; are you referring to tenant improvements? Your 900K for the appraisal, which I think you mean $900, is far too low for a commercial property; I would assume over $2K for the appraisal; if you go with a bank for lending you are going to have a bunch of fees and costs, so I’d estimate at minimum somewhere in the range of 3-5% of the purchase price.

  2. You ask about the caveat to buying an empty property; the question back to you is how long can you cover the debt payments, taxes, insurance, etc, based on your current cash reserves. Anything less than 24 months, walk away.

  3. Banks will loan on commercial property, typically its 25-30% LTV, based on the lower of cost or appraisal; again the property will be the driver of this and your background/ capacity. Also note that banks typically lend at a DSC of 1.25x or greater; so your cash flow needs to be able to support the loan.

Based on my cursory review of the property:

A. The price is far too high; determine what you want for a cap rate, calculate the cash flow and NOI and derive your own asset value.
B. What are you doing to get it leased up, if the next closest property is 20% vacant, what will drive (tenants to you versus that building. (Traffic Counts, population trends, etc.)
C. Not knowing your financial situation; I would be weary of carrying this property without any cash flow unless you have sufficient liquidity reserves or personal income.
D. Your break even seems to be flawed, because you are not taking into account the expenses of the property (taxes, insurance etc), and you have to factor in insurance to that (ie a 25 year amortization period), etc.

Good luck

Thank you for the detailed analysis. I’ll go thro’ in the next day or two but wanted to get back to you on few things.

  1. The $100 was construction cost per sq.ft. If it takes(assumption) $100/sq ft to build then to build 9000 sq. ft strip mall would take $900K. Although, am thinking construction cost is closer to $70 - $80 per sq.ft

  2. You are right about covering debt payment. My thought right now is to be able to lease enough units so it may cover any financing that I get(either thro’ bank or owner financing) so I don’t have to put anything else out of pocket.

  3. Other than lowering rents to attract tenants and maybe offer 1-5 years lease, not sure what else to do when the closest property is 20% vacant.

The county has appraised the value of the property to be $320K and taxes about $9500 which is on the higher end.

Appreciate your thoughts!

Thanks for the clarification, regarding the construction costs of $100/sqft; but again I ask what is wrong with the property? Your original post indicated that it is finished, but vacant. One would presume that deferred maintenance should be minimal. I would think that maybe some tenant finish is needed, but $100/foot seems excessive for this property. I guess the question is, what are you trying to determine? The cost that the owner/ developer paid to build the property? A quick evaluation tells us that $480,000/9,000 = $53/foot, so he obviously paid less than that to ensure a profit/BE with holding cost factored in. Clarification of your intent would be helpful.

How many units are enough? This needs to be based on your purchase price and at minimum debt service? Are you going to be able to get an interest only line during your lease up? If so, remember the greater the risk, the greater the cost will be (hard money or a bank, your interest rate is going to be of higher). For example, if you could do an interest only period for 12 months, and paid $480,000 for the property; assuming you get a 6% rate for the 12 months you are still looking at annual debt $28,800. SO if we assume that you take no profit from this project, your NOI is going to need to be $28,800(ish); and thus your nets rents need to be $57,600. Let’s now assume you want to target a $10/foot rate to get people in there, which means 5,760/sqft needs to be rented or 64% of the space. That really is a large percentage for just “enough” units.

Terms and rate are good starts of getting tenants, but there are other things that help. Location, potential traffic, amenities, etc are the others. A new building you would think should have a good look and set of amenities, but perhaps its location is not ideal. This is something you need to determine. What is around the property? And again, why is that other property 20% vacant? Further, what makes this potential property a better location for a tenant?

Based on the county appraisal, which really isn’t worth much other than establishing your taxes, the $10/ foot seems to be a good estimate for rate. And as the prior analysis showed, results in an estimated value of $317K.

I will stick with my initial assessment and say pass. This place is vacant for a reason, and given that it is recently built raises a big red flag. It is overpriced; and to get it to cash flowing to cover the debt the purchase price needs to be much lower price and 80% leased at $10/sqft. So again you are stuck with the out of pocket to get it leased to a break even level (which at a minimum is 12 months; and more likely 24-36). Again how much liquidity do you have and why shell it out for this dog?

Good luck

After much thought, I have drawn up a LOI for $380K with 150K downpayment and another 200K at a 10 year note at 6% and the remaining amount of $30K paid after 12 months and have submitted to the seller.

The seller has not accepted the offer but has instructured via his real estate agent that he wants a formal contract with $5K earnest deposit.

I wanted to perform due diligence on the property like hire an inspector or general contractor to checkout the property and provide estimates on what needs to be done after the LOI and then submit a formal offer.

Is there a risk at submitting a formal contract not knowing what the issues are? I’ll make sure the contract provides provisions for inspection etc.

Also, How much does a real estate attorney charge to draw up a contract? or is this something that I can do on my own.

Thanks!

Wow as soon as I posted this message an article “Strip Malls Are for Stupids” came up during my online search. Interesting read!

Link: http://www.creators.com/lifestylefeatures/business-and-finance/taking-stock/strip-malls-are-for-stupids.html

Tampaite,

Have you ever marketed and leased a strip center?
Do you have a mentor to walk you thru the paces?
It doesn’t sound like it.

Do you have suffcient income to cover this albatross until you can lease it out or sell it?
Possibly for 10+ years with negative cashflow if any?

Residential RE has a built in market that makes it relatively easy to rent.
Every single person needs a place to live.

A strip mall is a magnet for every person who’s ever dreamed of owning a business but doesn’t have the sense to write a business plan and analyse their dream for sustainablity.

I would highly recommend you get your feet wet with residential before trying a strip center.

Ideally find someone who has purchased an run one successfully and have them mentor you. I have never had success at finding this person but I sure wish I could.

Good luck!

Nope, no experience with strip malls but experience with real estate rentals.

I was looking at 5 year ROI and could have sustained for that long.

Update: My offer was turned down since I had requested owner financing for a large portion of the offer…

Onto other opportunities :smile

What is the address for this property ?

If the property is vacant, use the sf pricing method. In SW Florida, in the past 14 months, we have closed on a little over 200,000 sf of commercial space.
When leased up, you can work on CAP rates.

Vacant, we work on SF price. We have paid as little at $20sf for shell to $54sf plan vanilla finished.
Cost to build means nothing. That “stuff” was used in every purchase we did from the seller or the agent.

Remember this: “All of the upside belongs to the buyer.”
If it was easy to get the property rented up, why isn’t it rented now?

When doing projections, use comps of course, but remember you will need to “encourage” occupancy with tenant improvements, rent credits, discounted rents, etc.
Then, you have lease up time, and you still need to carry the CAM.

As a side note, there are programs and databases out there to help you locate tenants. You can get a list of expiring leases of potential tenants, terms, etc. Gives you an edge to target market potential tenants … but life I said earlier, you will need to “encourage” them to move.

Good luck.

Is it a corner lot…or…mid block strip mall?

Is it on the “Going to work”…or…Going home side of the street.?"

Can make a big difference in your tenant base and lease up.