CIP Worth considering or look elsewhere?

[emptyvessel]

Folks,
wondering if you can share some pointers/questions I should ask as I run a high-level ruler over a CIP that has been waved under my nose?

- Capital city fringe
- Under 100m2 unit
- Rents at $500/m2. Tenants pay outgoings.
- Current asking price would be around 8.2-8.3% nett return by my calculations. Would obviously be negotiating price and terms, so this could look a bit better, but I doubt it would hit 9%.
- No lease yet, I presume this would be up to me to organise, market and negotiate with potential tenants.
- Professional office space in brand new building. Only 4 other tenants all larger than 110m2, less than 190m2.
- Strata title (Could be community title from the, which I didn't know existed in CIP)
- Very trendy area with zero vacancies.
- Excellent transport options. Multiple modes.
- Lots of parking. Both dedicated and shared. Unit has 2 dedicated spots
- 3 story building. Unit is on the ground floor.
- Other tenants are all owner occupiers. I don't know what type of businesses they are yet.
- Clearly this is the last unit to go. Ground floor, smallest.
- Foot traffic would be low I reckon. It is 100m from the main foot traffic area. So you would have to know it is there to go to it.
- There really isn't any land available to do this type of development. So probably not likely to be any competing space in the same area for a few years.

Questions;
Is this just the wrong type of CIP to start with? I don't have the capital for the $1M+ purchases.
Is the yield too low to bother? Or is 8.3% for a first foray worth it?
What sort of due diligence questions should I be asking now to reveal the major risks?
How smart is it to negotiate a long (3-5 month) settlement while I work on bringing in a tenant? I recall some talk of getting the tenant in, getting it revalued because it is worth more with the tenant signed up. And then rinse/repeat.

Certainly not smitten with this and am ready to walk away at the drop of a hat. More curious to see where it leads in terms of learning. I foresee CIP in my future somewhere.

Ta,
EV

 

[HiEquity]

- No lease yet, I presume this would be up to me to organise, market and negotiate with potential tenants.

Hi EV

This is a bit of a screamer to me.

It sounds like you aren't able to fund this 100% yourself? If that is the case, you may have trouble getting funding for this at a reasonable LVR / interest rate, in the absence of a lease. Obviously the owner occupiers are in a different boat here... I would be having a chat to a good finance broker about how much hurt money you would need for something like this.

Also $500psmpa net seems pretty high for "capital city fringe", even if it's brand new. I would want to see some convincing evidence for this claim. if everyone around you is an owner occupier where is the evidence of the market rent?

Personally we looked at an awful lot of deals before eventually jumping into CIP-land. That way you can see how the market (and the banks!) values different risks (such as the absence of a lease) and compare it with how much you value these risks so you can get a bit more targeted about what you want to pursue. There are a lot of deals out there.

For example, I find the market is prepared to pay way too much for the average RIP for the privilege of owning something "low risk" so I don't go there anymore. Far too many mums and dads making emotional decisions who are prepared to mortgage the next 20 years of their life just to step up to their "dream" home.

However, the number of people pursuing industrial units or offices is comparatively small and they are not usually (with a few notable exceptions!) disposed to the same level of sacrifice to gain the privilege of ownership. So the yields are higher - people perceive higher risk but that doesn't mean the numbers don't compensate you more than enough for taking it.

In this case though, it seems you need to do more research and see more potential deals for you to be able to answer these questions. Some may perceive what you posted as a bargain and others as a rip off - you are the one responsible for your finances so you are the one who has to be convinced it's a good deal. The only way I could get that level of confidence was to research a lot of other potential deals first - just don't forget that you do need to actually buy something to make money out of it - the only thing better than research is experience!

 

[Scott No Mates]

- Rents at $500/m2. Tenants pay outgoings.

Either there is a massive scarcity in the area or someone is smoking something funny!

That is a retail rent, not a commercial rent - are the premises a shop? I have to enquire as to how sustainable that sort of rent is esp if it is not A Grade commercial office space in the CBD.


You really need to due your DD on this one. I could point you in the direction of a lot more sustainable deals which are returning 7%+ in commercial (not vacant).

 

[Aaron_C]

Agreed $500 per sqm seems very high for rental that is not in a prime CBD area, especially if it is not retail.

From a finance point of view you will face two problems:

1) Low valuation because there's no lease.
2) Low LVR given because there's no lease.

However, if you have the cash for a very low LVR purchase and can find a good tenant in the meantime it will be a good arbitrage opportunity for you. But I would definitely review that anticipated rental figure.

 

[emptyvessel]

Yup, the rent does seem ridiculously high. I reckon they misquoted and I misread.

Probably more like $500 per week, which would bring the yield way down below 7%. In which case, it ain't worth the risk.

Good point on the finance. No tenant would make it real hard.

Thanks for the help, will pass on this one.

 

[emptyvessel]

An update on the rents, an idea on the finance and clarifying "city fringe".

Apparently CBRE have fully stocked a bunch of nearby leases at $900-1000 per sqm. Higher grade building, to be sure. But those are big numbers. Especially when little me is looking at $500 per sqm.

I had an idea on the finance. What if I had the vendor sign up to a lease as part of the condition of sale? Thus the bank sees the lease they need, I get my finance and the vendor gets a buyer. Of course, it would require some very good leasing terms to provide the flexibility of me being able to terminate the lease and bring in a new tenant.
Is this a realistic business option, or just a dodgy deal fraught with disaster?

Perhaps I need to clarify "city fringe". The location is 3km from the centre of the capital city. Am I using the term "city fringe" as colloquially accepted?

 

[Piston Broke]

I had an idea on the finance. What if I had the vendor sign up to a lease as part of the condition of sale? Thus the bank sees the lease they need, I get my finance and the vendor gets a buyer. Of course, it would require some very good leasing terms to provide the flexibility of me being able to terminate the lease and bring in a new tenant.
Is this a realistic business option, or just a dodgy deal fraught with disaster?

This is the difference between talking BS and doing biz and making deals.
What you posted is the former, not the latter.
Now complain to the mods that i called you names and have this post deleted, but the truth will still stand.
Have a nice day.

 

[emptyvessel]

This is the difference between talking BS and doing biz and making deals.
What you posted is the former, not the latter.
Now complain to the mods that i called you names and have this post deleted, but the truth will still stand.
Have a nice day.

Piston, thanks for offering your thoughts. I didn't take it personally for a second.

As I am trying to learn about CIP here, and you have some expert knowledge, is it possible you could offer some constructive advice on how to make something like this work?

The great thing about ideas is that they are free. And mistakes are valuable lessons if viewed by the right learner.

I am also curious as to why the idea is complete BS? Is it because it is not legal? (I'm not a lawyer). Or is it because there isn't a snowball's chance in hell of getting a vendor to do this type of thing? Or perhaps it's because a bank wouldn't consider it a "real" commercial lease. I don't care if it is one or all of these, I just would like to know.

Thanks for your help. I am flattered you even read the post!

 

[Piston Broke]

Because:
A good deal is a good deal.
A bad deal is a bad deal.
That's it. Period.

You need a real tenant paying market rate (or better).
Their is no point fooling the banks to get loan when fact is you purchased a $hitbox with good money returning nothing or just about.
A good deal is when the guys at the bank start saying "Looks like you got yourself a pretty good deal there" without making things up.

Have you not noticed all these bank bailouts happening because people can't pay their loans?
The bank gets the bailout, the borrowers get repoed.
How many people lost their house cause they fudged the no doc loan app, or the broker did it for them?

 

[emptyvessel]

Hmm, not really constructive feedback. But thanks for stopping by and making an effort.

Not sure what your beef is, but I don't believe you can offer any value to this conversation. It's a shame, you sure seem like someone that could offer real value to others if you really wanted to.

 

[Aaron_C]

I think what PB is trying to say is that if you have to resort to strange structures/techniques to get the deal over the line, then it probably isn't a good deal in the first place. Which I think is true.

 

[Piston Broke]

Hmm, not really constructive feedback. But thanks for stopping by and making an effort.

Not sure what your beef is, but I don't believe you can offer any value to this conversation. It's a shame, you sure seem like someone that could offer real value to others if you really wanted to.

That's because you are blinded by greed with $$ signs in your eyes and think that buying a non leased CIP, and making up numbers to get a loan will make you rich.
Go ahead, i want to turn up to your bankruptcy sale and buy it for half what you paid
Surely i couldn't have made it any clearer.

Although someone making a commission on your deal (regardless of outcome) may think differently.

 

[shuggy]

Pay cash for it then give title to the bank as security to get 60-70% back through a LOC.. it might work

 

[emptyvessel]

Thanks shuggy. I am guessing is the "arbitrage" exercise that an earlier poster recommended.

JV territory for most small investors. Which then brings other deals to the table.

 

[emptyvessel]

That's because you are blinded by greed with $$ signs in your eyes and think that buying a non leased CIP, and making up numbers to get a loan will make you rich.
Go ahead, i want to turn up to your bankruptcy sale and buy it for half what you paid
Surely i couldn't have made it any clearer.

Although someone making a commission on your deal (regardless of outcome) may think differently.

PB, take it elsewhere, please. You know you are being antagonistic. I can see from the other posts you have made on this forum that this is just your style. To what ultimate end, I don't know. Perhaps by haunting the threads of learner investors and ridiculing them, you figure you are making the world a better place? *shrugs*

You have an axe to grind and it is being misdirected at a noob learner like me.

Sorry mate, we talk different languages. I needed a translator to understand what you were saying. Obviously that's my fault and you are a far superior being to me. Forgive me your highness, for I am not worthy.

Damn, if only we could use your powers for good instead of evil, the world might be a slightly better place. Very disappointing human being.

 

[emptyvessel]

I think what PB is trying to say is that if you have to resort to strange structures/techniques to get the deal over the line, then it probably isn't a good deal in the first place. Which I think is true.

Thanks for the simplification.

Ok, so the idea was a little too radical for our financial system. Fair enough. I had no idea if it was a strange structure or just the normal thing that people did. Thus the completely reasonable question.
I have come across many, many resi deals where the owner/builder leases the property off you. Of course, they charge for this in an inflated buy price, but the fact of the matter is, it is normal and you get the loan. Interesting that it is regarded as a bizarre suggestion in the commercial world.

I have spoken to 2 retired developers that used techniques far more radical than this, they managed the risk of the deal and it worked out marvelously. I suppose it could be viewed as dumb luck.

For a small deal like this, what length of lease are the banks typically looking for? Obviously longer is better, but is it 3+3 at a minimum or no deal without a much lower LVR?

 

[Dazz]

For a small deal like this, what length of lease are the banks typically looking for? Obviously longer is better, but is it 3+3 at a minimum ?

Hi,

The Banks usually couldn't give a rats about any options, as nothing is guaranteed. Banks only look at what is guaranteed.

A 5+1 is a hell of a lot more valuable to the Banks than a 3+3.....and if you get a good Tenant, it's a hell of a lot more valuable to you as a Landlord as well.

 

[chilliblue]

Hi,

The Banks usually couldn't give a rats about any options, as nothing is guaranteed. Banks only look at what is guaranteed.

A 5+1 is a hell of a lot more valuable to the Banks than a 3+3.....and if you get a good Tenant, it's a hell of a lot more valuable to you as a Landlord as well.

And that is one of the reasons as to why never issue an option for any period under 5 years.

ALso, the calibre of the tenant and the terms of the lease will add or detract value of the building.

 

[emptyvessel]

Right, options mean zero. Got it.

Giving this one a wide birth. Got the radar up for more.

 

[Player]

Right, options mean zero.

Not to the tenant. They give the tenant all the control. To you they mean less than zero especially in a down market where market reviews to rent may see them enjoying tenure for a greater discount. Can be overcome with ratchet clauses, although difficult to achieve with smaller assets and any retail under circa 1000 sq m depending on the state/territory and the applicable retail tenacy acts

Got it.

Giving this one a wide birth. Got the radar up for more.

Yes, keep looking.