Considering sub 500K commercial office in Brookvale, Sydney

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Phiber

Hi guys,

Long time reader but first time poster, I have a couple of residential investments and have been pretty satisfied with the journey so far.
I am looking at the next step and I am thinking that could be into commercial.

At this stage I have started looking at the following:
- Sub 500K properties
- Office type
- In Sydney
- Leased
- 8% minimum net return

For this type of properties, I am basically looking at suites within office complexes. I have been looking at a suite in the complex below:

http://www.lifestyleworking.com.au/brookvale/index.html

It's a recent built, nice building with great facilities, good energy ratings.
Location is in Brookvale, Sydney's northern beaches.

I used to work not far from Brookvale and would drove through on my way back home. There are a few things there, but as everywhere in the northern beaches, it's not exactly a massive park.

I've got a few questions for you guys:
- Should I just forget commercial for this kind of money - below 500k?
- What do you look for in a complex when purchasing an office (what makes a complex particularly attractive for office tenants)?
- Any advise/experience on how the region is performing (growth/stagnation/decline)?

A question that I have been asking myself: Why would an investor sell a relatively well performing property bringing in good return and that's currently leased? Of course people always pursue new opportunities, but it is still puzzling to me. In resi i understand why people need to sell: bigger family, downsizing, moving closer to work or getting into the zone for a particular school.
I am pretty conservative when it comes to risk so, at the moment I am trying to evaluate commercial opportunities before moving ahead.

Keen to hear your thoughts!
Cheers
 
Brooky is well located both for bus connections & a nearby shopping centre. That complex houses a fee IT/advert companies one in particular takes a sizeable chunk of the ground floor.

Outgoings will be quite high considering the onsite facilities - you will still need to keep your eye on them even with a net lease. You will need to do a proper due diligence on the lease as well (on the commercials not just the legals).

This is a premium building in a good location.
 
Hi guys,

Thanks for the quick replies, much appreciated.

James, thanks heaps for the reply, it's great to see you have had direct hands on involvement in the complex. Let me send you a PM to discuss further. Keen on hearing more about your experience, the complex, the local market and the reasons behind you selling.

Scott, thanks for the reply.
Good points you have here: for sure given the facilities on site, the outgoings are going to be significant.
Any specifics I should be looking for when doing due dilligence?
My experience in this matter is limited to residential: I usually check for any potential issues with the building, any defects and upcoming repairs. When the property has an existing tenancy in place, I check how long the tenants has been living in the property, if they have been paying in time, and if there as been any issues with the tenancy so far.
I am not sure what to look for in commercial though.

If you asked me I guess I would try to look at the tenant: what is its business, how long has it been operating for, type of company (local, national), try to find out whether it works with local (brookvale) businesses or business across the city/country, somehow try to see how the business has been performing (although that could be pretty hard), how many people is it employing, if there are clues that it could be moving soon.

I'd like to hear your opinion about the building: being a premium building with good facilities, it has high outgoings. Looking at rather small suites in size, I am looking at mostly small businesses for my tenants. In your opinion, do you think small businesses (typically with a lower income) would be willing to pay the premium price associated with being in this building, or do you reckon they would rather tend to go with a cheaper option?
I am a bit divided on that, ultimately I guess it depends on the business and the owners. Still I'd like to hear other people's views about what the average small business would do.

Thanks heaps for the help guys - this is very exciting stuff :)
Trying to get into commercial without overlooking any of the big things while learning the rules of the game.

Cheers
 
Would you rather have a small business tenant generating a net profit of 200k pa, or a national tenant losing 20 million a year?

Plenty of good small business tenants after quality premises.
 
Hi Phiber,

Just a few things I'd advise you to consider:

Not 100% sure if this goes against privacy laws but perhaps you could ask to see a copy of the lease? This will show you what bond is being held, what exit clauses are there, if there is a make-good clause (if not they could leave all their crap there and could be costly to remove if the next tenant doesn't want it) etc.

Also look at advertised rates within the building to ascertain whether your current rental is above or below market rental. The current tenant may be paying 25% above market value, which will really stuff you up when they leave. Alternatively, they may be paying 25% below market value and might have 10 x 10 year options with very low annual rental increases.

Also look at what guarantor is on the lease. Some businesses will not give personal guarantors - the business can go bust and although you have a signed lease for the next 5 years you can't get a cent out of anyone.

I hope this provides some insight for you :)
 
Hi guys,

Thanks for all your replies, valid points here!

Jonno, thanks for the tips, definitely worth looking into especially when it comes to guarantors and conditions attached to the lease if possible.
Any opinion on the premium building thingy?

Scott, I am not sure what you imply? If rent is over market I would tend to think the tenant was keen on securing the property, not the other way around...?

Another thing I was wondering about is whether we have access to tools like the RPdata, residex and APM property reports, past sale history and such when it comes to commercial?

Thanks everyone!

Cheers
 
Phiber said:
Scott, I am not sure what you imply? If rent is over market I would tend to think the tenant was keen on securing the property, not the other way around...?
Click to expand...

Circumstance A: Property rents for $40,000 per annum for a 3 year lease. $120k

Circumstance B: Property rents for $45,000 per annum for a 3 year lease, but the owner gives the tenant $15,000 cash to help them get started. $135k - $15k = $120k.


At the end of the 3 years they've still got $120,000, but with Option B, on paper it shows $135,000 worth of rent.
 
Hi Jonno,

Gotcha - makes sense.

Any clue on the RPdata and such for commercial (available to regular blokes not only for REA)?
 
Jonno92 said:
Circumstance A: Property rents for $40,000 per annum for a 3 year lease. $120k

Circumstance B: Property rents for $45,000 per annum for a 3 year lease, but the owner gives the tenant $15,000 cash to help them get started. $135k - $15k = $120k.


At the end of the 3 years they've still got $120,000, but with Option B, on paper it shows $135,000 worth of rent.
Click to expand...


The incentive is there to encourage the tenant to take the space (not necessarily blatant increase but sometimes can be negotiated that way).

The outcome is totally different:

A: If it is leased at $40k pa @ 8% return, then value is $500k

B: If it is leased at $45k pa @ 8% return, then value is $562,500 and it only cost the owner $15k to increase the cap value by $62.5k


Hmmmm, something for nothing????? I'd be looking at the incentive free figure.


As for access to RPData - speak to a commercial agent, they will help you out if it will secure a sale.
 
Scott No Mates said:
The incentive is there to encourage the tenant to take the space (not necessarily blatant increase but sometimes can be negotiated that way).

The outcome is totally different:

A: If it is leased at $40k pa @ 8% return, then value is $500k

B: If it is leased at $45k pa @ 8% return, then value is $562,500 and it only cost the owner $15k to increase the cap value by $62.5k
Click to expand...

Exactly. It's a fantastic way to increase value (as long as a valuer isn't brought in who picks up that it is above market).
 
Incentives are excluded from your market rent review (generally). There is usually a ratchet clause as well at exercise of option preventing the rent from dropping. A naive tenant will blindly exercise the option and be caught by a fixed %, cap & collar etc at commencement of the new lease.

Your DD will determine what premium has been paid for the incentive and how much is reflected in the sale (asking) price. ;)
 
Scott No Mates said:
There is usually a ratchet clause as well at exercise of option preventing the rent from dropping.
Click to expand...

Hey Scott,
I've been recently informed that ratchet clauses are illegal (from a reputable source). A quick Google confirms this is the case in QLD for retail leases:

Government plugs the Ratchet clause loophole
The Criminal Code and Other Legislation Amendment Act 2011 (Qld) was enacted on 4 April 2011 and amends the Retail Shop Leases Act 1994 (Qld) making ratchet provisions in a retail shop lease unlawful.

A ratchet rent review clause prevents rent from decreasing when a rent review is carried out. Ratchet clauses provide certainty for lessors that rental income will not suffer from market fluctuations beyond their control.
Click to expand...

Source: http://www.holdingredlich.com.au/property-projects/ratchet-clause-rendered-void-pursuant-to-statutory-amendments

And this source suggests it is the same for NSW:
http://www.leasehub.com.au/retail-lease/

I was under the impression ratchet clauses are illegal in Industrial leases as well but I'm too tired to find a reputable source to confirm/refute this claim.
 
the main questions to ask:

Does the property appeal to a wide range of tenants? (you don't want a 'unique property' that sits vacant for years)

Is is a quality building? or will you need to upgrade?

What is the market rent?

Is there demand for office space in this area?
 
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