Commercial property in Queensland- SWOT

[geoffw]

Dazz posted this in another thread- I thought it might be worth discussing as a way of learning something about commercial property. It's on the New England Highway in Queensland.

It is under contract, so it's all hypothetical at this stage.

This Tenant is signed up for 10 years with 3 x 5 year options available after 2017.

The asking price is $ 1.05 million.

They pay $ 2,315 in rent per week, and have been for the past 6.5 years.

At a conservative 50% gearing, the mortgage cost would be about $ 600 per week to hold, so it would put $ 1,700 per week positive cashflow in your pocket.

http://www.realcommercial.com.au/property-retail-qld-allora-500846771

Some of my thoughts- and I'd be happy to be proved wrong. I have very little experience in commercial, but I'd like to learn more.

So my thoughts on SWOT (Strengths, Weaknesses, Opportunities, Threats)

Strengths:
.An excellent return
.A very long potential lease
.It appears to be an excellent highway location


Weaknesses:
.Only 3.5 years until the first option expiry. As well as sleep at night factor, it may be difficult if there was any borrowing required for longer than the 3.5 years
.There appears to be weakness in the retail fuel market- outlets have been declining for some years
.Insurance may be expensive given the above ground tanks- and insurance may be a condition for a loan

Opportunities:
.If the tenant were to leave, it may still make a good retail outlet given its apparent highway position. Takeaway food plus a small petrol outlet may be a good option for tenant(s)

Threats:
.Lease may not be renewed in 3.5 years
.Bypasses or traffic diversions could hit through traffic

I don't like it though as there are a few risk factors. Of course I would need to see the lease but a single tenant retail- not the major player in the game. If another station opens 5km upstream you can watch your tenant's sales halve.

- insecure rental terms/tenant
- limited capital growth/demand in area
- inflated rent which will come down at market review
- if tenant went bust, how easy is it to get another paying the same rent?
- or it's just mispriced

 

[handyandy]

Well it certainly made me take notice.

If I was to follow it up then the first think I would do after checking out on the Web is to drive/ fly up and put some leather on the pavement.

I would certainly go to the business and have a mozzie around, ask some questions of the proprietor. It's amazing what people will tell you particularly if they think it's a one time contact.

Just looking at the surrounding fuel supplies. Allora is located close to Warwick which has at least 2 fuel stations.

The way to Brisbane does not pass this fuel station. So it seems to only cater to the local population.

The above ground fuel tanks seem strange. This could be a side business that they actually supply fuel to the local farmers.

Would want to see the P&L of the business.

Per say don't care about the cap growth but very much care about the longevity of the cash flow.

Cheers

 

[geoffw]

Thanks for your thoughts HandyAndy.

Checking it out on the ground would be a must.

Although it's not on a road to Brisbane the a does say it's the primary road transport link between Sydney to North Queensland.

Another thought I had is that the return may reflect the risk- including the distance from a major city, where perhaps returns might be lower and more secure, and the availability of similar land close by.

Also, in this situation, might it be possible to renegotiate a lease at a lower rent but a longer period?

 

[pinkboy]

(Heresay) Heard lending on fuel stations was <60%LVR if lenders even consider.

Other long term considerations are: tenant moves out, you might be left with a block of 'contaminated' land.

How long will fuel stations be around? Technology is progressing all the time, and fossil fuel might also fossil out.

Just a few considerations to spark debate.

pinkboy

 

[geoffw]

Thanks Pinkboy.

Ok, that raises another question.

What's a typical LVR allowed for a commercial property? What sort of range might be given for what sort of properties?

 

[pinkboy]

I've been advised to base my calculations on 65% LVR, 15year P&I term.

Obviously there are variations dependant on your own circumstance, but this is my staple calculation.

pinkboy.

 

[investor2009]

Risk? What if: borrow 100%, use profit of $1300p/w to pay down debt over 3.5 years = $235k. Some sleep at night factor. Nothing in life is guaranteed. Personally I'd prefet a comm investment thats half the pricr with a lesser return in a safer location

 

[Scott No Mates]

No one has mentioned doing your due diligence for soil contamination. This is your biggest problem with any petrochemical site. What is the cost of site remediation? Who bears the cost? Can you prove who is responsible?

 

[pinkboy]

No one has mentioned doing your due diligence for soil contamination. This is your biggest problem with any petrochemical site. What is the cost of site remediation? Who bears the cost? Can you prove who is responsible?

I think the good looking gent in post #4 touched on that SNM!



pinkboy

 

[dex]

I wouldn't touch a petrol station with a barge pole. The potential contamination from leaking tanks/ tanker spills etc and remediation work if the EPA audits you is massive. Trust me, they are much riskier enterprises than most.

 

[pinkboy]

Risk? What if: borrow 100%, use profit of $1300p/w to pay down debt over 3.5 years = $235k. Some sleep at night factor. Nothing in life is guaranteed. Personally I'd prefet a comm investment thats half the pricr with a lesser return in a safer location

You would only pay a whooping ~$26k off the principle in your quoted scenario.

Using round numbers: $1mil PP, 6% IR.

Income: $67,600p/a
Interest: $60,000p/a

3.5yrs: $26,600 off the principle.

Again, very round numbers not taking into effect of the compounding decreasing rate of the principle 3.5yrs into the term.


Best scenario (again in round numbers)

Borrow 35% using equity in form of LOC and pay IO.
Remaining 65% borrowed for the purchase at PI (because lenders want debt paid off on commercial due to higher risk).

3.5yrs paying P&I on the 65% loan will lower it more significantly as it will be a 10 or at most 15yr term.

Ill let you work out the numbers, but you get the idea.

I also feel 3.5yrs remaining from a 10yr term is going to be pushing it for a lender to have high confidence, so you wont get a higher LVR. And, as Dex says above, bugger going for a fuel station with all the extra headaches it could present on vacate.

pinkboy

 

[geoffw]

You would only pay a whooping ~$26k off the principle in your quoted scenario.

Using round numbers: $1mil PP, 6% IR.

Income: $67,600p/a
Interest: $60,000p/a

3.5yrs: $26,600 off the principle.

Actually the $1300 pw was the profit, not the total income.

The gross income mentioned in the ad was $120,000 pa.

With interest of $60,000, that's $60,000 pa which could go towards paying off the loan. So something over $210,000 paid off in 3.5 years. More than that if you had equity on resi property, and I haven't allowed for reducing interest on paid off portion of the loan.


Land tax would depend on the land valuation and the ownership, but I'd be guessing perhaps something around $4kpa.

 

[pinkboy]

Aha, I stand corrected. I saw $1300 income.

My point still stands that you will be paying P&I on the borrowed portion of the loan anyway, as it's not optional, and a much shorter loan term of 10-15yrs anyway.

With regards to Land Tax, again without the lease it would be hard to determine what to offer. LT May well be paid by the tenant. Good if it is there.



pinkboy.

 

[ComIP4Me]

Would want to see the P&L of the business.

Cheers

What are the chances the tenant would openly provide the financials? I don't see why they would have any inclination to provide this, who owns the property would have little effect on them as the tenant. If they were part of a large chain of stations would the P & L be of any benefit (presuming it would be a group based P & L rather than the one station in question)?
What if this station is profitable but the group as a whole is not?

 

[Waldo]

With regards to Land Tax, again without the lease it would be hard to determine what to offer. LT May well be paid by the tenant. Good if it is there.


pinkboy.

The advert specifies LT paid by the owner, all other outgoings by the tenant.

 

[Dazz]

Good idea Geoff. I think inherently there are a few people who are interested in this topic. Who knows....

A good start on the SWOT. What I've found in the past is that any strength can quickly be turned into a weakness if not managed properly, and vice versa a threat can easily be turned into an opportunity and then strength if managed properly.

See my contribution in blue.

So my thoughts on SWOT (Strengths, Weaknesses, Opportunities, Threats)

Strengths:
An excellent positive return
The Lease has already been executed, so it gives the Buyer who knows nothing and needs time to learn 3.5 years breathing space
A very long potential lease
It appears to be an excellent highway location
Stability of the Tenant over the past 6.5 years gives confidence
Underlying demand for fuel doesn't appear to be dropping anytime soon
Tenant may have paid a large Bond, perhaps 6 months of cash ( $ 60K)
Tenant liable for all outgoings except Land Tax


Weaknesses:
Only 3.5 years until the first option expiry. As well as sleep at night factor, it may be difficult if there was any borrowing required for longer than the 3.5 years
There appears to be weakness in the retail fuel market- outlets have been declining for some years
Insurance may be expensive given the above ground tanks- and insurance may be a condition for a loan
It has been sold....so someone thought it didn't have too many weaknesses
Market reviews are all capped at only a 3% p.a. increase....not good.
Tenant not liable for Land Tax

Opportunities:
If the tenant were to leave, it may still make a good retail outlet given its apparent highway position. Takeaway food plus a small petrol outlet may be a good option for tenant(s)
If the options are taken up, adds hugely to the value of the property, not to mention the long stable positive cashflows
Can negotiate a longer term. Instead of accepting a 5 year option, can always sit down with them and sign up a new 10 year lease.
Lease may have a ratchet clause, protecting the downside so rents cannot go down.
Lease may state the Tenant is liable for all contamination clean up issues
Has passed, as it has sold
Can always negotiate a lower sales price than that being asked

Threats:
Lease may not be renewed in 3.5 years
Bypasses or traffic diversions could hit through traffic
Bank may not support your finance application
Lease may not state the Tenant is liable for all contamination clean up issues

 

[Scott No Mates]

I think the good looking gent in post #4 touched on that SNM!



pinkboy

Even if he does say so himself.

 

[Trogdor]

Actually the $1300 pw was the profit, not the total income.

The gross income mentioned in the ad was $120,000 pa.

With interest of $60,000, that's $60,000 pa which could go towards paying off the loan. So something over $210,000 paid off in 3.5 years. More than that if you had equity on resi property, and I haven't allowed for reducing interest on paid off portion of the loan.

You forgot tax on the surplus cashflow. The $60k would need to be reduced accordingly before it can be used to pay down the loan.

 

[geoffw]

You forgot tax on the surplus cashflow. The $60k would need to be reduced accordingly before it can be used to pay down the loan.

Yes, a good point.

And as all of the $60k was able to be used to pay down the loan, there must already be a fair taxable income, so a high marginal rate.

 

[Dazz]

Has everyone forgotten what they are talking about ??

People are looking for every conceivable risk and every conceivable little bump or wart. Hey - this is property investing, she's not risk free, no guarantees. No-one ever said anything about that.

This supposed 60K p.a. profit generated from this one property is like a second wage, another man on your team working for close to the Aussie average salary.....based on the investor putting absolutely diddly squat into the investment....not a brass razoo, and having the Tenant pick up virtually every cost to hold the investment including interest on the full 100% mortgage, having a free carry completely.

The profits per annum are so large that one can realistically look to paying down the loan. That can never be said about houses and flats. A house would never generate enough rent to pay for interest on 100% of the loan required to buy the house, let alone any rates, water rates, insurance or maintenance costs....so nothing left, no profit at all for paying down the loan, not for many years, and even then, inconsequentially small amounts compared to the loan size. No extra man in your corner beavering away every day to help you get out of your job.

Give me a gaggle of these in the portfolio, all beavering away in my corner so I don't need to. Remember, these are tiny little entry level properties. This is the start of the road, not the end. What will blow your cookies is when you come up against properties that are 10x the size of this one, with better Tenants, better leases, less risk and 10 or 15x the free cashflow available. This is when your job becomes a joke, you can afford to give the boss the flick and start running your own life and get into some serious life changing investing.