In the beginning....

[aaarghhh]

Hello

Every since joining this forum I have always wanted to get my hands on some form of commercial property. I've read quite a few posts from other forumites who invest in commercial and now have the chance to start my commercial property journey.

I'm looking at a few retail shops and wondering what do I need to look out for when purchasing commercial real estate.

I've got a few questions

(a) I want a tenanted investment, a going concern, which means I don't pay GST on purchase price, is this correct? (Just GST on everything else)
(b) Security deposits - Are these more in the realm of industrial properties and large national corporations. The reason I ask, I have seen a few retail shop leases and none of the lessees pay a security deposit. *Seems strange from the res IP world where tenants pay bonds* Is this common with retail shops and other small operators? I haven't seen any retail leases that do pay a security deposit.
(c) Anyone have any special clauses that are worth adding to a lease?
(d) Has anyone frankenstein'd their own commercial lease with a specialist commercial lease solicitor?

Thanks
Aaron

 

[Raddles]

Hi there
with retail shops - you can sometimes see a bank guarantee from the tenants rather than a bond

the special clauses are dependant upon the type of business in the premises

as for the actual lease it does depend how complex you want your lease - whether you are looking at shops in a small block, larger block etc and what you can ask your tenant to reimburse you for - it is all negotiable

you might want to look at the retail shops legislation to see what you can't contract out of

In my experience with both acting for landlords and tenants - the more complex leases tend to be in larger complexes such as the Westfields or Myer Centre in Brisbane - the simpler leases might be the corner store in the suburbs. I suggest you work out your budget for your lease - then go shopping for a solicitor to act for you - have seen them range from about $700 for a transaction to $5000 for a transaction.

as for gst see http://www.ato.gov.au/businesses/content.asp?doc=/content/78730.htm

thanks

 

[quoll]

Have you thought about small industrial sheds?

Regards
Graeme

 

[Mr. Fabulous]

Back in the beginning,
Back in 1955,
Man didn't know about the rock n roll show
And all that jive

White man had the money
And black man had the blues
Everyone knew what they were gonna do
Tchaichovsky had the news

And he said said 'let there be sound'
And there was sound
Let there be drums
And there was drums
Let there be guitar
And there was guitar

LET THERE BE ROCK

The gospel according to AC/DC

 

[davidmeister]

Darwin Opportunity

I've recently moved up to Darwin for a few months and realised there's massive opportunity up here. Currently there's a number of buildings for sale and with the growth potential of Darwin in the future I think someone's going to do well out of some of the commercial opportunities. I would like that someone to be me, however there's one problem these properties are going for millions and with my limited residential property being only to the value of half a mill financing would be risky and hard to get.

I was speaking to the bank the other day and they didn't run at the idea of lending 100% provided I could cover the mortgage with the income of the property. Does anyone know of anyone doing this? (anyone with my limited financial backing that is, not someone with a large portfolio and millions in the bank).

 

[boods99]

Aaron/Davidmeister,
Have you thought of the possibility of offering to purchase one of these properties using vendors finance as the deposit? In a market that you are confident will move upwards, this is quite a handy strategy, if you can get a vendor to agree to your terms. Eg; property for sale for $2mil. You offer to purchase for $2mil with 30% vendors finance ($600k) for 2 years at 1% above banks variable rate interest, capitalising for that period. At the end of 2years, if, like you say, the market has moved upwards, you refinance to pay down the vendors finance. It has it's risks, however, can be rewarding with the right market conditions.

Boods.

 

[davidmeister]

So in your example you would borrow $600k from the bank and borrow the rest from the seller. I would be paying back both the bank and the vendor using two different loans for a time period, say two years, then I could refinance if the market's gone my way and pay back the remainder I owe to the seller and get the bank to take on the remainder of both loans?

Is this common? From the sellers point of view it would be a last resort I'm guessing as they would prefer being paid initially, but if they're stugling to find a buyer they may be open to it.

Have you done this in the past Boods?

David

 

[boods99]

David
No, you would borrow 70% of valuation from the bank and the other 30% would be covered by the seller, ie, they would only recieve $1.4mil initially and then at the end of the 2 years, you would refinance to 70% on new valuation to pull out the equity (which hopefully covers the vendor finance including capitalised interest - if it does'nt, you are in trouble) Because of this need to refinance, you need to be very confident in your DD showing the potentrial for exceptional growth. It pays to understand the Lease(s) in place and the likeliness of favourable rent reviews as one of the main components of commercial valuations is the effective gross income.
Sellers are varied in their attitude to deals like this...some don't understand the process and flatly refuse, others (especially in a slow market, and who have a heap of equity in the property) understand and will play along.
The company I work for makes offers like these regularly, with mixed results. We have had some success though in the past, not so much lately.
Boods

 

[nonrecourse]

In the past we have used the equity in our other properties to borrow up to 120% of the commercial properties purchase price. The last one was in 2005.

Since then we have kept our hands in our pockets because the rapid appreciation that we have seen in the last 3 years in our view is not based on sound value but rather in an over heated market that will bring many speculators down.

IMHO this is not a time to put yourself at risk. Sit back and wait. In the next two years your going to see a lot of distressed commercial property owners. Many will be happy to do what your suggesting. In the mean time build up your war chest so you have a reserve before you committ yourself.

 

[contrary]

I would concurr with nonrecourse.

We bought industrial land in 2001, and built warehouse on it. The land value has appreciated over 100%. Basic industrial property in sydney is insanely priced. We were looking to expand earlier this year but instead rented the extra space needed and wait for land values to fall 20-40%.

 

[Mary-Sue]

I'm looking at a few retail shops and wondering what do I need to look out for when purchasing commercial real estate.

Hi Aaron,

You might be waiting a while. I've met plenty of investors in my time, and not once have I ever come across anyone who has made a decent return on commercial property. If the tenant leaves - and in this recession that's a pretty high likelihood - you are pretty much stuffed.

One of my girlfriends bought a small shop, and had a hairdresser in there. Everything was going fine for about 8 or 9 months, then they gave notice and took off to a larger regional centre. She was left with an empty place for over 7 months before having to sell at a fire sale price to satisfy the Bank.

I've heard it's an OK yield, if the tenant stays, but if they don't you could stay empty for a year or more. Where's the cashflow then ?

We've always bought houses on green title land, and it's never been vacant for more than 2 or 3 weeks, max. More stable, and the Banks definitely like it more.

Just my opinion, but that's what we have found.

 

[Perp]

I've met plenty of investors in my time, and not once have I ever come across anyone who has made a decent return on commercial property. If the tenant leaves - and in this recession that's a pretty high likelihood - you are pretty much stuffed.

With respect, Mary-Sue, I don't think a small shop where the tenant can "give notice" is what most successful investors think of when they think commercial property. When I think commercial property, I think of a property with a 10-year lease (preferably 8 or more years to run), with 6 months' rent provided via bond or bank guarantee, and tenant wearing all outgoings. The kind of thing Dazzling would have negotiated. (Please come back, Dazz.) And actually, the most successful investors that I know hold commercial property - quietly. They may not be as visible as us, but I suspect that's because they're busy tripping around the globe enjoying the fruits of their investments.

I think even Dazzling would agree that the rental yields aren't high enough to be cashflow positive at 100% lends, but Dazzling made a spectacular amount of capital growth on his portfolio in a very short period of time - like tens of millions the past few years. He started with a few resi IPs; with a financial base that many Somersofters would already have.

 

[Mary-Sue]

With respect Tracey, I thought my experiences and example that one of my friend's had to endure was very relevant to what Aaron, the original poster was asking for. He was asking about some retail shops - which is also what I was talking about.


As for the rest of what you wrote, I am totally confused as to what you are referring to. What's "Dazzling" meant to mean, is that a person ?

 

[Perp]

With respect Tracey, I thought my experiences and example that one of my friend's had to endure was very relevant to what Aaron, the original poster was asking for. He was asking about some retail shops - which is also what I was talking about.

I just think your friend didn't make a very good investment, to be blunt! And that experience says more about how not to invest in commercial property, rather than being a reflection on investing in commercial property per se. I know Aaron - he's smart - and I doubt he'd invest in a commercial property unless he had the tenants tied up in a commercial lease, ie long term, big penalties for breaking, and vacancies unlikely.

I was also trying to provide to some balance to your statement that "I've met plenty of investors in my time, and not once have I ever come across anyone who has made a decent return on commercial property."

As for the rest of what you wrote, I am totally confused as to what you are referring to. What's "Dazzling" meant to mean, is that a person ?

Dazzling has recently left the forum, after contributing enormously regarding his commercial property successes. He had a - ahem - particular style (called a spade a f***ing shovel) but was very generous in sharing his experience. Anybody who wants to learn about successful commercial property investing, would be well-served searching for some of his old posts.

Aaron and I (and some other Somersofters) had the pleasure of sharing dinner with Dazzling when he was in Brisbane last year. He's a very successful commercial property investor, and a good bloke to boot.

 

[contrary]

"Dazzling has recently left the forum..."
Along with Quiggles, who may have blown himself up investing in the US which is still imploding as we type.

"...regarding his commercial property successes."
Over how long ?? 5 years during a massive boom hardly is a long term track record.

"...tenants tied up in a commercial lease, ie long term, big penalties for breaking, and vacancies unlikely..."

There are 2 big assumptions there : firstly that having a long term lease assures you the tennant will not walk and secondly that you will be able to extract the big penalties. I can think of 2 situations where this will be tested, generally both occur during a recession :

1. Your tennant goes broke.
2. Your tennant doesn't go broke and walks. You threaten them with legal action and they say, see you in court. In an interesting interview last month Gerry Harvey said he was getting fed up of rental increases during a retail downturn. As one of the cornerstone tennants in many of the centres, he knows the value will go down if he walks. Then they will have to find another tennant at lower rent, so do they REALLY want to do that ? There are break fees but he wonders whether the owners will cave in, as they would have to bring the bad news to their shareholders/owners and well, Gerry is confident he has the cash to string it out in the legal system until the owners are broke.

Yes, a good lease is worth something but don't over-estimate what it is worth. It is imho likely commercial property owners be very adversely affected in a downturn, and some of them may even have long leases with good tennants.

 

[Player]

I stand to be corrected, however I was under the impression that Harvey Norman head franchisor owned it's stores (freehold) whilst selling off franchises to their tenants (franchisees).........similar to the McDonalds model.

 

[contrary]

HVN doesn't own the stores. Most listed retailers and banks have divested their properties in an LPT like structure (eg Bunnings warehouse property trust). McD's is in the very minority of large companies that still own their stores. Gerry controls the empire by handing out to the franchisees cash for the projects he outlines.

I found the article interesting. Sounds like :
1. Gerry is implying he wants to make an example of someone so he can renegotiate some overinflated leases on underperforming stores. Other retailers will want to do the same. He doesn't like being the person in the middle getting done over. It is business after all and not fantasyland, so if his margins are vapourising and he can put the foot in to get lower rents then he will.
2. He doesn't say it but he and most retailers are aware there is a huge overhang of commercial/retail/office property/infrastructure from Centro, allco a slew of second tier failed property ventures. The banks are currently holding onto it and hoping to sell it in an orderly manner.
3. There is a mexican standoff between the banks (who hold the assets of bankrupted property companies), the remaining landlords (which if they are overlevered LPT's the banks have by the balls) and the retailers. If the banks have a gun put against their head they will sell. It's an interesting situation. My guess is the banks won't be able to keep it together with remaining piece of string.

AK: And what sort of pressure are landlords putting on retailers at the moment? I’m hearing that cap rates are moving to the point where some landlords are in trouble with their banks and they’re transferring that pressure onto their tenants.
GH: Well, see, I’ve got an interesting one at the moment where a large institution is owned virtually by super funds. We’ve got two stores where they’re the owner – the landlord and both of those stores are losing quite a lot of money and so I’m saying to them look, you know I want to close these stores and they’re saying you can’t close and your rents going up and we won’t even talk to you. So this is going to come to a bit of a showdown with these people, because they’re the fund manager looking after the super funds’ investment and so what’s going to happen? If we close those stores, they have to write down the value of that property which they haven’t done at the moment and will not do unless forced to and not only will we not be there, their other tenants in those centres will be severely impacted because Harvey Norman’s the anchor tenant and won’t be there. So that’s an interesting little scenario coming up.
….
GH: Well, there’ll be a lot of people that are not Harvey Norman in this situation, but they’ll just close or go broke and they won’t be pursued by the landlord because blood out of a stone story, but Harvey Norman’s a different situation.
AK: I’m hearing about landlords that aren’t owned by super funds, they’re just property owners that are geared up and they’re in trouble. Obviously the super fund owned landlords aren’t geared, or usually aren’t geared, but the ones that are geared they’ve got problems, haven’t they?
GH: Well, a lot of landlords have obviously got problems out there, but they’ve got a lease that says, you know, your rent goes up by CPI or five per cent or four per cent every year and there is no way those tenants can afford that, but in 99 cases out of 100 they’ll put the rent up anyway.
….
GH: Oh sure. All the obvious things, obviously. You know like you cut advertising, you cut people, you cut wages, you just cut expenses and you go back and look at a lot of these rents with these people and you start having fights with them about, you know, why should we take all the pain and lose all the money and you get all the rent, take no pain and keep putting the rent up?

http://www.businessspectator.com.au/bs.nsf/Article/KGB-INTERROGATION-GERRY-HARVEY-LZ5BQ?OpenDocument

 

[Player]

Hi contrary,

appreciate your reply and for the article link. That's a nice web site, I've just registered. Thanks for providing that.

In your opinion how over-priced is Sydney industrial land and what is the play with supply/demand at present, say around middle to outer west and south west areas?

Also anyone else's opinion on the state of play with industrial and commercial markets in Sydney, Melb and Bris and where in the cycle they believe they are at? Any ideas and opinions would be appreciated.

As indicated in the post above, I now stand to be:

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