Commercial Property Education

[JIT]

10 Questions on Commercial Property...

Hi Chris,

I will endeavour to attend the seminar, if I am in Melbourne on that date. I'm sure a few here on the forum will attend.

Generally speaking, some things to address for beginners to commercial property investing - either on the forum or in seminars or books, could be:

(1) Commercial property cycles: typical patterns for each sector (office, retail, industrial) and where we are at the moment in each sector's cycle in Melbourne/Victoria as well as other capital cities/other states. Any general comments about the nature of each sectors cycle, eg, how long they are, how it progresses and the key influences on each cycle...?

(2) What is the best sector to start in for someone investing in commercial property for the first time, and why? The pros and cons of each sector for a beginning investor?

(3) What are the entry price levels? Is it worthwhile investing at lower price levels - aren't you taking on a significantly increased risk due to having smaller businesses as your tenants?

(4) Purchase as vacant possession vs going concern - pros and cons?

(5) How do you determine the best cities/suburbs/areas to buy properties in each of the different sectors? Eg, Melbourne vs Sydney, CBD vs inner vs outer vs regional vs rural cities/suburbs/towns? Ie, say you decide to start off in office property, where is the best place to start looking for them, if you have say 250k, 500k, 1Million, 2Million dollars etc to invest...?

(6) What are some important criteria in individual property selection, for each sector?

(7) Important aspects/clauses involved in negotiating contracts to purchase and lease agreements, as well as financing.

(8) How do you value a commercial property? What data is needed to do this, where do you find this data?

(9) Learning by doing is important, but is there any other essential information that one should read about or know, before jumping in? Any pitfalls, dangers, any obvious things that one should be aware of?

(10) MOST IMPORTANTLY, worked examples of commercial property purchases, with a focus on showing why you chose that property, how you valued it, how you negotiated the purchase, found the tenant, negotiated the lease agreement and financed the whole thing.

See this worked example, started a few years ago, which was very helpful - http://www.somersoft.com/forums/showthread.php?t=288 - a great way to understand commercial property investing in a practical, staight-forward manner.

Thanks!

GSJ

 

[silas]

Great questions GSJ. Having talked to a few investors I have found it difficult to get an answer on cycles I understand the supply and demand aspects of commercial cycels but would like to understand more of the length of a typical cycle and where we are up to at the moment.

Silas

 

[grossreal]

hi all
here is a little excel for you to get an idea of equity lending of comm property
this is very rough figures and are just to give an idea of how it works and you can change the amount to start as required.
I am not great at excel but as long as you get the idea thats the main thing

 

[JIT]

Hi grossreal,

Some of the numbers in the H column don't quite make sense to me, but as you say it's rough - nonetheless, I understand the basics of what you're saying in the spreadsheet. The equity lending and 'double investing' as you call it, certainly seems quite logical and effective.

GSJ

 

[Chris Lang]

10 Questions on Commercial Property ...

Hi GJS:

Thanks for your 'shopping list' of queries.

It's been one of those days for me -- so I won't be able to come back to you on them till tomorrow, if that's OK. But I should be able to contribute something worthwhile on most items.

Let me put it together overnight.

All the best ... Chris

 

[JIT]

Thanks Chris,

I don't expect you to answer all the questions, that was just a general outline of what I think many people starting off in commercial property investment would probably want to know.

Some of these questions have been addressed on the forum and also in your book, to different degrees - and I suspect you will cover some of these areas in your upcoming seminar late Feb.

Any further comments/answers you, or anyone else, may have to them, I'm sure would be much appreciated by all here on the fourm.

GSJ

 

[Chris Lang]

10 Questions on Commercial Property

Hi everyone :

The other day, GJS posed a number of key questions on
Commercial Property. And apologies for not replying sooner.

What I've tried to do is briefly address each query. And,
where possible, give you some links to read further -- if you
would like more information.


(1) Commercial Property Cycles

In Australia, the dominant Property Cycle is for CBD Office --
which has historically run for 18 years from peak to peak. The
shorter cycles are the Industrial (about 9 years) and Retail
(about 6 years).

For a more in-depth explanation, you may perhaps like to have a
look at one of my client eBulletins [if you're not already a
Member on my website, you'll need to quickly subscribe -- but
it's completely free].

As to where we are in the current cycle, I covered this in some
detail in my December eBulletin -- showing the position you are
at for each capital city.

(2) Which is the best Sector for investing?

To some degree, this will be determined by your own personal
preference. But that aside, here are some personal views:

• Retail ... In most capital cities, Retail property is
  currently fully priced and not something I would pursue.
  You may discover some "spot bargains" in some outer-
  lying suburbs - particularly in the Provincial cities.
  
• Industrial ... This has made a comeback over the past 5 years,
  and still has some good growth left - generally, Australia wide.
  
• Offices ... Melbourne and Sydney look fine; whereas Brisbane &
  Perth are overheated - as mentioned in the December eBulletin.

To give you an idea of total sales in all Commercial sectors
over the past 10 years, you may like to look at today's posting
on my blog.

(3) What are your entry price levels?

You're right -- there is more risk in buying the lower priced
properties -- for two reasons:

• There are far more people competing for properties under
  $1 million, than over $1 million - so you end up paying a
  very full price.
  
• Smaller tenants do tend to move more frequently - more so
  with factorettes.

You see, smaller businesses are more often start-ups. And they
tend to quickly head in one of two directions - either rapid
expansion, or early demise. Both eventualities can lead to your
property becoming vacant more often than with larger properties.

Over the years, a growing number of our smaller clients have
realised this problem. And, therefore, they have asked us to
help put them together with one another, into private syndicates
- enabling them to step into the "big league", and obtain better
returns.

This may be something you may consider. Because, with only 10-
15 people involved … you have a direct involvement in property
choice, and the ongoing activities of the Syndicate.

(4) Vacant possession Vs going concern?

To a large extent, this depends upon your personal circumstances.

If you don't need an immediate cash flow, buying with vacant
possession will generally provide you with discounted price.

You also need to remember that you pay GST with vacant
possession; but not if it is a going concern. (This is again a
cash-flow issue, because you can claim the GST back when you
lodge your first BAS return.)

(5) Determining the best cities/suburbs/areas to invest

To be fair … the complete answer to this query cannot really be
covered here, in the detail it requires.

Perhaps, people could bring "live" propositions to the Forum;
and then a number of us can provide our collective wisdom.

(6) Important Property Selection Criteria

One thing we cover in some depth for our clients, is the need
to have a clear understanding of both your Investment Objectives
and your Buying Criteria.

And then, how to combine the two into an Interactive Matrix -
which then makes it easy for you to quickly rate the properties
you're looking at.

(7) Successfully Negotiating your Contracts

Whether it's a Purchase or Lease contract, you need to realise
there are usually 5 or 6 variables available for you to
negotiate. So, don't simply focus on the price, or rental.

The trick is … you need to first discover what is important to
the other party -- so you can help him (or her) satisfy that;
and, thereby, secure yourself a great deal overall.

I will be covering this in some considerable detail at the
February Workshop. So, in fairness to those attending, I may
leave it at that for the moment.

However, you're more than welcome to download a free eBook
about Negotiation from my website.

(8) How do you Value a Property?

To become a qualified Valuer, it takes you 4 years of full-time
study. So, I'm not going to be able to cover this in too much
detail.

Basically, a valuation involves the gathering of sales, yield
and rental evidence from comparable properties. From there, you
analyse and extrapolate that information -- so that it can be
properly applied to your chosen Property.

In arriving at a final figure, Valuers generally use three
methods of valuation:

• Direct comparison,
• Discounted cash-flow, and
• Summation (ie: Land Value + Building Value).

In most cases, one method is the more appropriate. But the
others will provide you with a check against gross error.

A couple of good sources for your evidence would be Commercial
Real Estate monitor from Property Web; RPData; and the Valuer
General's office in your state. All can be obtained through
subscription. (Perhaps a good place for you to start maybe
Land Victoria).

(9) Obtaining other Essential Information

You're right, nothing beats experience. However, that can
often prove to be an expensive teacher.

I guess that's why I co-wrote the book "How Commercial Property
Really Works". Simply because:, after some 37 years, you can
appreciate there are a number of things I've come across that
work; plus those that don't work.

From memory, there are several pages (with links) devoted to
useful Investor resources.

(10) A Worked Example

The example GJS gave was a good one; and walks you through that
particular issue step by step.

Unfortunately, I've run out of time for today. But, over the
long weekend, I'll prepare some thoughts on a rather fascinating
deal I put together for a small group of clients. It involves …
how to change the Buyer perception for a property, using some
clever "stealth marketing". And by doing so … increase its value
(in this case) by some 170% in just 3 years.

Being new to this Forum, I'm not sure whether what I've covered
here, is what you were after. But, hopefully, some of it will help
you "fill in a few blanks".

Anyway, enjoy the weekend.

All the best … Chris Lang.

 

[JIT]

CP deals...

Wow, thanks Chris - those types of replies are exactly what we are after here on the forum. I certainly appreciate some of the topics are a bit too broad to discuss in one hit, and I know you have covered some in your book and e-bulletins.

You mentioned private syndicates - I think they are an ideal investment for self-mananged supernannuation funds, given they generally have a medium to long-term time frame (5-10 years), generally are illiquid investments, and more importantly seem to not allow leverage of your investment funds - which is not allowed in a SMSF anyway. Furthermore, you know exactly where your money is being invested (as opposed to LPT's, where they are 'stapled' and have various business activities) and you have can have some degree of control of the investment given there a smaller number of investors, and one or only a few properties being invested in per syndicate. Perhaps also, the invesments performance may be more predictable and less volatile than that of a LPT. Also, for people approaching retirement, these syndicated commercial investments can provide a secure, reliable, inflation-hedged income stream, with some capital growth potential - and without out all the hassles and added risk of buying individual commercial properties on your own.

I think the best way to learn more about commercial property investing, apart from doing of course, is for people to start threads describing any potential commercial property deals they are looking at, and then as Chris suggests, let others on the forum make suggestions/contributions and develop a discussion from it.

If you have any deals you are looking at, it may be better to start a new thread for it and post them in this commercial property forum.

Mike's old thread, 'Estimating Buy Price - Part 2', I suggested earlier is a good example of this, as was grossrealisation's thread 'welcome to my world':

http://www.somersoft.com/forums/showthread.php?t=26433

Look forward to reading about your deal Chris, and anyone else's...

GSJ

 

[grossreal]

hi all
not sure if we can post deals or deals we are doing in here
as I think they need to a go to caveat emptor and b they are sailing very close to the asic 2/20 rule and if you don't understad what that is I can explain it at this stage I take you understand the rule.
comm uses syndicates in lots of very diffent ways and is the most popular form of investing and as a sophisticated investor ( and you need to say you are one of those to get involved in most of these syndicates) you can get access directly into projects that you cant get into as a normal rule.
you evaluate the same as if you are buying yourself just the numbers are larger.
The trouble with syndicates and I like them
is that they are not restricted to property and the 2/20 rule is not restricted to any market so I will be very generic with any information.
example only
most people see 3 mil in comm as alot of money but between 3 thats a 300k each input and the lender covers the rest
so loan 2.1mil interest 151k and an income of 310
thats 53k each on a 300k investment about a 17% return on your money in
plus 1/3 of any growth plus 1/3 of any annual increases.
I am interested in the cycle for retail mainly the shopping center market and chris's view on the current sydney center market as there is a few on the market with good returns with very good anchor tennants not sure of the reasoning for the sales.

 

[silas]

Thank you Chris for your reply it is very helpful

Silas

 

[The Y-man]

Being new to this Forum, I'm not sure whether what I've covered
here, is what you were after. But, hopefully, some of it will help
you "fill in a few blanks".


All the best … Chris Lang.

You might very well find an increase in the number of attendees to your workshop with informative posts like this!

Cheers,

The Y-man

 

[JIT]

comm uses syndicates in lots of very diffent ways and is the most popular form of investing and as a sophisticated investor ( and you need to say you are one of those to get involved in most of these syndicates) you can get access directly into projects that you cant get into as a normal rule.
you evaluate the same as if you are buying yourself just the numbers are larger.

Yep, I like it. Just need to meet the 'sophisticated investor' criteria first by income or net worth, then I will certainly look into these investments.

GSJ

 

[yadreamin]

WOW
Today l finally had the time to read through and take in this great thread . Well done to those for getting it off the ground and for those informative posts to date. Thankyou.
I would like to put a question up regarding the CP syndicates. Like it has already been said the numbers are a bit more manageable for those just thinking of starting in CP. I also think it would be a good way to learn how the nuts and bolts of CP works without signing away millions
So could we have a bit of a brief run down of how one of these syndicates starts, selects CP, and operates.
Pros and Cons of this avenue of CP investing
cheers yadreamin

 

[grossreal]

hi all
to start the term sophisticated investors is a very grey line reason being if you consider yourself to be a sophisticated investor then you can climb that wall it is an area that I don't think has been tested as far as I have seen because no body has need to test it.
how are people selected is relatively simple.
people on boards like this say I would like to invest in shopping centers and then some one says I am investing in balarat shopping center and a group is organised it is that simple and the crude at this stage also real estate have alot of people that want to sydicate to buy a property in comm it is very common and most property that you are buying is from a small sydndicate group.
as you move up the investment arena you get emails saying we have this project are you interested ( again very crude but very effective)
and then you move to the groups that recruit for there syndicates usually a banks, macq etc or similar and they do it via their data base and the use of a listed trusts.
most small groups are groups of investors that get together and invest in a project very simple.
with regards the operation
a new company and trust is setup $3,000 the investing people or group buy a unit in the trust and the company buys the property
depending on the groups that are in the company decides the type of trust and the return is distributd depending on the split of the trust
as is the case with any company.
if the trust is a large enough and has over 5 mil in assets then you look at listing and that is a whole new ball game.
you then have these unlisted trust that are setup with the aim of turning into a listed trust (called a reit ) again this for me is very new and have not got one that has listed as yet. but understand the fundamentals and the process required and I am in one that is just going thru the motions at the moment and before nayone asks no sorry already full hence the reason for the other disclaimer post that I don't wish anything but generic information.

 

[JIT]

I also think it would be a good way to learn how the nuts and bolts of CP works without signing away millions

Yep, I agree. Seems a sensible way to get your feet wet.

I'm sure Chris Lang will also be able to add to grosssreal's comments here as I believe he is involved in syndication.

GSJ

 

[APerry]

I'm sure Chris Lang will also be able to add to grosssreal's comments here as I believe he is involved in syndication.

I think you'll find that Chris's syndicates and Gross's are very different. W working with Chrisith Chris's the syndicate members elect board members of a trustee company and manage the investment themselves, with Chris's assistance. Gross can correct me f I'm wrong but I think he would manage his. Each would be treated very differently by ASIC.

One of the most attractive things about Gardner & Lang syndcates is that the members gain a lot of hands on knowledge, as well as finanical gains, from working closely with Chris and his team.

Regards
Alistair

 

[Chris Lang]

Here's the Case Study I promised you

Hi everyone :

Thanks for all the feedback on the answers I provided to GSJ's
10 Questions. A few of you raised several good issues relating
to Private Syndicates - on which I will come back to you with a
few thoughts.

However, I did mention to you a Case Study last week, which you
may find both interesting and useful in what you're doing. So,
let's take a look at it.

It was a rather plain-looking Property

Some of you might know the Gordon & Gotch building in Highbury
Road, Burwood (Melbourne). Built in the 1970's … it comprised a
3-level office building, attached to a 2-level warehouse behind.
As well as a parcel vacant land at the rear.

Because of the slope on the site, each warehouse was
effectively on ground level. And a ramp (to the roof of the top
warehouse) provided parking for some 220 cars.

The views across the valley from this roof-top car park were
quite stunning.

Negotiating the Deal

The Vendors had it on the market in early 2002 for $8.6million.
After much to-ing and fro-ing, we reached agreement to buy
it for our clients at $7.75 million; with a 21-day due diligence
period.

During the due diligence, we discovered a physical impediment
that would not affect the integrity of the building structure …
but could cost $500,000 to $600,000 to rectify. And we also
found out that it had caused an earlier sale to fall through.

Anyway, as a result of this, we managed to re-negotiate the
Contract price down to $7.24 million - showing a net passing
yield of around 8.7% pa.

The Investment Strategy

The Gordon & Gotch lease over about 67% of the building, ran
through to 2010. And two other solid tenants, also had long
leases.

So, the initial strategy was to develop and sell-off the rear
land - releasing around $2 million in equity. Doing that would
then raise the 8.4% initial yield, up over 12% pa.

After settlement, we spent about 6 months re-negotiating two of
the leases to allow our clients early access; plus we explored
several ways to develop the vacant land.

However, to calve of the rear land would require the creation
of a Body Corporate. And that could ultimately constrain the
redevelopment of the current existing buildings at some future
date.

Therefore, we recommended our clients create a long-term Master
Plan for the entire property. After discussion with a leading
Architect, the Council was approached about granting a permit to
refurbish and extend the existing buildings; plus develop a
series of new industrial and office buildings, on the vacant
rear land.

The Council's initial stance was that the existing buildings
were too old, ugly and ought to be demolished. Finally, after
much persuasion, the Planning Officers agreed for the Architect
to return with some concept plans of what we had in mind.

They seemed rather "blown away" with what was presented. So
much so, that a Permit was issued in about 9 months - something
that generally takes 15 to 18 months to obtain.

Scope of the Final Permit

The overall re-development would involve:

• Subdividing the 3-level building into smaller strata-titled
  offices;
• Relocating the cars (on the roof) into a 2-level car park in
  the lower warehouse;
• Adding a further level to the upper warehouse, to create 4
  conventional office buildings with views over the Valley;
• Developing a series of factorettes and mews-style offices
  on the rear land.

What started out as a modest $3 million building project for
the rear land … had now escalated into a $45 million+ major
re-development project.

Being close to Monash University, the Council just loved the
wide mix of uses - including "incubator" style accommodation for
new start-up businesses. As such, the project was named the
"Matrix@Burwood".

What Was The Best Step Forward From Here?

The syndicate of 11 members were not developers - they were
probably better described (affectionately) as "wealthy amateurs".

Clearly, they had their hearts set on a longer-term involvement
with the property. So it took the Architect and me about 6
months to convince them (in mid-2004) of what we saw as their
most profitable strategy.

That being: To sell the property with the Permit in place; and
solid leases running until 2010. But with negotiated access for
re-development, with six months notice after June 2005.

The challenge was how to Market what was merely a "Concept"

In physical appearance, the property hadn't changed since its
purchase in 2002. However, we had secured a rather exciting
Permit.

To give substance to the Concept, we obtained an independent
Market analysis; plus a formal Valuation. But, equally
important, we had to provide buyers with simplified plans; plus
colour perspectives of what the completed development would look
like.

A Traditional Marketing approach uses extensive daily media;
glossy Property Reports and Brochures; plus generic appearances
on Property portals.

Our "Stealth Marketing" uses modest daily media; a
comprehensive website; plus an extensive (personalized) email
campaign - both to 39 targeted builder/developers, as well as
our 5,000+ database.

Let's Look at the Outcome

The success of the final outcome revolved around a complete
change of focus.

Traditional Marketing focuses upon drawing buyer responses from
the daily media.

Stealth Marketing focuses upon delivering all the relevant
information directly to the Buyers' desktop (on day-one), via
the dedicated website. But the real plus is that we can track
every response - both by their source, and for easy follow-up.

My apologies for all this detailed background. But I think it
was needed for you to fully grasp how the final selling price of
$12.3 million at the end of 2004 was orchestrated. And, as you
can appreciate, our clients felt the $4.9 million increase, in
just 2.5 years … was a great outcome.

You may care to take a look at the Matrix@Burwood website -so
you can understand just how the development concept was packaged
up, and sold as a "totally new" product to the marketplace.

When You Look At The Website

Because of the confidential information on the website, you
first need to register as the site is password protected.
(That gave us each prospect's contact details to follow up).

Then, while you read the "Executive Summary" on the home page,
you will be emailed your actual password. Once you receive your
password, you can proceed on to the full website.

You'll see there is a fair amount of information including ...
the contracts and a valuation, along with other reports; plus
copies of plans & perspectives of the proposed redevelopment.
(Make sure you click the three "pink dots" P1, P2 & P3 on the
landscape plan -- to view the various perspectives of how the
development concept would look.)

In fact, you'll see there is even provision for Buyers to email
to their consultants -- directing them to specific information
on the website, for which they require advice.

If you sit back and think about what this Case Study covers …
you'll realise that it involved 6 or 7 key elements for you to
successfully acquire commercial property.

More and more clients have been asking me to flesh these out in
further detail - which is what prompted the February Workshop.

Anyway, have a look through the Matrix website, and give me
your thoughts on how you felt it came together.

All the best ... Chris Lang

 

[JIT]

Great example

Hi Chris,

That's a great example you've given us.

So my summary from this is that you/your clients had negotiated/acquired an older style, mixed-use commercial property (with offices + warehouses + vacant land), that was conveniently located, leased to solid tenants on long leases, and had significant development potential.

The property was purchased in 2002 at a price discounted for the cost of a 'physical impediment' (that didn't affect the structural integrity of the building) - which was discovered during the initial due diligence period.

11 syndicate members split the initial purchase price of $7.24 million - so approximately $658k investment per syndicate member in cash/equity - with an initial passing yield of 8.4%.

Rather than the syndicate doing the >$45 million development themselves - which would be difficult to say the least for 'wealthy amateurs' - you had simply obtained a development approval/permit from the council, then effectively 'stealth marketed' this to potential buyers (builders/developers), and on-sold the property with the permits in place for a significant profit - $4.9 million in 2.5 years, between 11 syndicate members is approximately $445k per syndicate member.

Furthermore, you had already negotiated access with the existing tenants for when the development was to occur, making the offer even more attractive to potential buyers.

Also, if the council had refused to give the permits, or if the syndicate members were not agreeable to this strategy - it would appear that with this particular property there would have been several other options still available to help maximise the syndicates return on investment - such as the initial plan to simply develop/sell the vacant land to increase the yield to >12% pa.

Clearly it is not as simple as it sounds, and required a lot of negotiating, time and expertise from your team in the background. However, for the syndicate members themselves the whole process seems relatively straightforward and without too much hassle. They are still involved in the process and have control over key decisions, but the rest of the hard, nitty gritty stuff, is handled by someone else with more experience - and at the end of it all the syndicate members pocket a handsome profit. A bit like the 'armchair developer' idea that Michael Yardney describes with Metropole's residential developments.

I will also have a look at the website soon and comment further.

Thanks,

GSJ

 

[JIT]

Matrix Burwood Website

Hi,

Just had a quick look at the Matrix Burwood website.

Very easy to use and functional, and A LOT of information!

I think I will need more time to read it fully! - the detail here is perfect for anyone who has not seen this stuff for commercial properties before (ie. contracts of sale, leases etc...), and would be a GREAT EDUCATION TOOL, definitely worth looking at.

Of note, the property was valued at $11.2 million, before taking into account the DA/permits - but purchased at just $7.24 million - not sure how there was such an increase in value here, ?bought at a huge discount, ?improvements, ?capital growth - might have to read the valuation report for more info. when I get a chance...

GSJ

 

[silas]

Thanks Chris for all the information. Just a question on the nett passing yeild. If the net rent is 1,065,983 PA (from web site) and the cost was $7.24M (from the post) how do you arrive at a nett passing yeild of 8.7%. Its possible that I don't understand the term. I would have anticipated that it would have been 1,065,983/7,200,000 x 100 equalling 14.8%

Silas