Commercial Property Purchase in ST Kilda Road

[sivakumar_sr]

Guys

I am new to commercial property investment and found this deal as good in current market. What is your opinion?

Here is the detail

Private sale Office Suite in St Kilda Road, 58 SQM, One car park, currently owner occupied but willing to lease it back for 16,000per annum + outgoings for next 3 years with 2 year option and the asking price of 250K. There is also CPI index rate increase every year. Owner is also willing to provide personal guarantee to backup the lease term. This office is partitioned into 3 rooms and recently fitted with new carpet. Recent rate notice assessment has the valuation for 275,000.

Is this a decent deal? How much bank will lend for these properties? Any one has any idea

Regards
Siva

 

[Player]

Hey Siva,

you need to read the (future) lease that the vendor (prospective tenant) is proposing, assuming one exists at this point.

You should ascertain what the lease rates are for similar sized offices in that 3004 postcode. I had a very quick look and the rent on a sq m basis looks about right for newer (flashier) offices. However I have found this:

http://www.realcommercial.com.au/property-offices-vic-melbourne-5810303

Significantly lower rent for more floor space and two car spots, which is a premium in that area (St. Kilda Road and Queens Road). If we capitalise that rent of $11,250 at 6.4 % like your find, then it would have a purchase price of approx $176,000. It will depend on whether this example is indicative of the type of office/building you are looking at.

If possible try and find similar offices in that building (or similar calibre buildings) and work out what they are renting for or asking as a lease rate.

The problem with leasebacks (sometimes) is that the initial rent is high to cap the purchase price at a higher level so the seller gets more up front. Doesn't always happen, however exercise care that this is not occuring.

The net yield is not that flash at 6.4 % however for the buck$ involved it may be on the money. Try and work out what others with leases of that size are selling for and see if the yield is indicative of what you are looking at with your purchase.

The lease (if it exists) should also document all outgoings, how rent reviews will be conducted and what sort of notice the tenant will give for option exercise. Make sure all outgoings are paid by them. A cash bond would be better than a personal guarantee as they could own nothing in their name. Hard to line up all these ducks with an entry level comm office, however do as much due diligence as you can. You don't want to overpay based on an inflated rent and then have a market review see your rent drop by 30-40 %.

I've been looking and in my neck of the woods on larger assets, the leasebacks are certainly a learning experience. The rents are so hyper-inflated and even some with long leases have a rent review to market built in half way thru a fixed term lease anything's worth a try I guess

Good luck

 

[cu@thetop]

When looking at these leases I ask the following:

Bond (3-6 months needed)
Rental- your due diligence should let you know a fair market rent
Review- needs to increase yearly- the higher the better; cpi or 4%currently
Must be a market review every 3 or 5 years (depends on length of lease)
Option- the less the better (if you need to redevelop) but realistically the more options the better for your financier
Who pays outgoings? (answer- tenant)
"Make Good" clause - what does tenant need to fix during occupation or on vacating
Good as landlord to have a demolition or relocation clause
Keep signage rights to yourself
Carparking rights- check esp if common areas


Need the lease terms before committing- no such thing as "standard" terms so read signed or proposed lease 1st.

Pip Pip Tally Ho and off you go!