kana learns to buy CIP

Discussion in 'Commercial Property' started by kana, 11th Sep, 2013.

  1. kana

    kana Grasshopper

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    Hi hi,

    I have zilch experience with CIP's and hopefully this thread evolves over time to help others like me.

    My goal is to get good at conducting due diligence (also referred to as DD on the forums)

    Here's my plan:

    1. Search for CIP's in Melbourne in the <$500k range
    2. Pick some that I like based on a combination of Location, Yield, Tenant and Gut Feel
    3. Review all the info that I can get from the agents
    4. Draft a purchase offer with a price
    I'll post them up as case studies for people to look at and comment on. Since this thread is going to be a work in progress, I'll try and post updates at least once a day.
     
  2. cu@thetop

    cu@thetop Member

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    Looking forward to the thread.
    The lease is the most important part of a tenanted commercial property IMHO. The agent must supply a full copy for you to first review and understand before committing to a contract.

    Good Luck. There are a couple of posters who are a wealth of knowledge as regards these matters.
     
  3. MTR

    MTR Bling Bling

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    Good Grasshopper:)
    I am interested in following this thread
     
  4. D.T.

    D.T. Property Lookerafterer

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    Do you normally have an advisor / professional review the lease for you or do you understand it? If the former, who would that be, a conveyancer, a property lawer, etc?
     
  5. Aaron_C

    Aaron_C Finance Broker

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    A property lawyer will have to go through it with you who specialises in this area. However, it requires commercial acumen to make it work.
     
  6. kana

    kana Grasshopper

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    Cip 1

    I'll post updates as this progresses

    --------
    11/09/2013

    This one is a small retail joint. It had a good feel to it because the tenant seems to enjoy what they do and have good feedback - which is a good thing for sustained, steady rental payments I guess.

    SMS sent to the REA (Real Estate Agent) requesting a copy of the lease - decided cu@thetop's advice was as good a place as any to start. And it makes sense from a filtering perspective. Waiting for them to get back to me.
     
  7. kana

    kana Grasshopper

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    Cip 2

    I'll post updates as this progresses

    ------------
    11/09/2013

    This one looks like some sort of storage/showroom area for bulk goods. I like the location. It has it's own parcel of land.

    SMS sent to the REA (Real Estate Agent) requesting a copy of the lease - Got a call back saying that the place is vacant :( and that the listing was incorrectly placed showing 'Tenanted'.

    I'm not sure where to go from here. For the sake of education, I'm thinking I might call back and request for a copy of past rental receipts? Or would they need me to make a formal offer first before they invest any time into giving me documentation. That raises the question of how I can make an offer without seeing the receipts... Suggestions?
     
    Last edited: 11th Sep, 2013
  8. kana

    kana Grasshopper

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    Cip 3

    I'll post updates as this progresses

    --------------------------
    11/09/2013

    Another small retail joint. The location is great for foot traffic. The business seems a bit seasonal. Cheapest asking price of the four and lowest net yield. Though I'm not sure if I'm calculating it correctly (Annual rent/Asking Price) Anyways, this one probably needs a bit of work and potentially asking for vacant possession because I think the space could be put to better use to generate better rental. But that would mean having to think about what other tenant could use it and then having to go through the process of finding interested parties.

    SMS sent to the REA (Real Estate Agent) requesting a copy of the lease - Agent got back to me and said will email Sec 32 and copy of the lease.
     
    Last edited: 11th Sep, 2013
  9. kana

    kana Grasshopper

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    Cip 4

    I'll post updates as this progresses

    --------------------------
    11/09/2013

    This one's interesting. It's a retail joint but with permits to build an apartment on top and keep the ground floor for commercial use. The location's alright and I think it might have value. Of course, it would mean delaying cash flow at some point to do the development and realise that value.

    SMS sent to the REA (Real Estate Agent) requesting a copy of the lease and permits/plans
     
    Last edited: 11th Sep, 2013
  10. kana

    kana Grasshopper

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    Lessons/Notes/Checklist

    To try and keep all the gems on the first page of this thread. Will update as we chug along.

    post count +1 :p
     
  11. cu@thetop

    cu@thetop Member

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    Well I'm a lawyer so I've got a bit of an inside track here. The usual lease is about 30 pages long. A good starting point is to read the whole thing and ask if you can answer the following questions (only a few as I'm a bit tired but we can add to them):
    What is the rent?
    How is it reviewed throughout the lease?
    How is it reviewed if an option is exercised?
    If a "market review" do you understand the process where a dispute arises as the landlord thinks market rent is one thing and the tenant thinks it is lesser?
    Who pays for the outgoings?
    What are the Outgoings?
    How long is the lease and how many options are there?
    Who fixes the aircon/electric rollerdoor if it breaks?
    Does the tenant have to make good when they leave?
    What is make good?
    What parking spaces come with it?
    Can the landlord relocate the tenant or demolish the building?


    On top of all this you need to know what legislation, if any applies. A retail shop has rules(under the Retail Sops Leases Act QLD) that can over ride the terms of the lease.

    Start your research.

    No such thing as a standard lease.
     
    srini likes this.
  12. kana

    kana Grasshopper

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    Tell me about it. I got copies of the leases for two of the properties and man... my brain hurts.

    I think it's going to take me all weekend and a couple of reads to make sense of the jargon :confused: And the leases are a piece of cake compared to the proposed contracts of sale.

    Ah well... back to it. Wax on. Wax off.
     
  13. srini

    srini Member

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    Great post! We've got 3 IPs and are sitting on about $100k of equity.

    We're looking for how best to invest it. So, this is very timely.

    Kana, have you thought of what structure you'll invest in? Do you have the structure(s) setup already?

    Thanks
     
  14. kana

    kana Grasshopper

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    Hi srini,

    Thanks for the encouragement, and great work on building up that $100k equity :)

    Re your question, I've only bought my current IP's under personal names. Had my first meeting with an accountant last week to understand how to claim depreciation and other nifty things I could do to make the investments work for me. He seemed to think that going forward, I'd need to establish a family trust as the most flexible vehicle to deal with the properties.

    If you haven't invested in one yet, I'd suggest looking for an accountant to advise you on the matter. Preferably one who has a couple of IP's as well.
     
  15. Trogdor

    Trogdor Member

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    If I could give you one tip on lower value CIPs its to "understand" market rent and what this means for the economics of your tenants, not just take it at face value.

    I.e. many smaller business seem to "tread water" between rent and staff costs - staying open for two to three years, and then going under or selling out for a nominal amount.

    In our two CIPs (since late 2009) we've had 4, soon to be 5 tenants across both. Mostly a seamless transition (sale of business or fit out) with a continuation of rents and no readvertising (with only one exception) - but you do get the sense that the name of the game is to extract every last cent from the tenant without sending them under too prematurely. Good retail seems to have a bunch of people lining up to try the next thing if the last thing didn't work.

    The issue is buy prices on CIP tend to reflect this - so you need to be as hard on the tenants as the last owner was. As long as you get paid its OK (which you will if you do your homework i.e. tenants with financial standing, guarantees and own property, etc... and are happy with this), but just remember, not a game for the soft hearted.

    To put it another way don't expect all (or most?) of your tenants to make lots of money over the longer term and come out happy at the lower end of the CIP market.

    Next time around will definitely purchase in the $2m+ range to try and deal with "corporates", though not regreting these two purchases either.

    Still much better cashflow with lower hassles than resi!!
     
  16. Dazedmw

    Dazedmw Member

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    Critical point.

    Assuming the OP is in Melbourne its the Retail Leases Act 2003 which needs to be reviewed. In particular the sections on what outgoings can be claimed and Section 37(2) which covers the Market Rental review process. This section can/will usually override any special conditions included in the lease favoring the landlord with a market rental review.
     
  17. kana

    kana Grasshopper

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    Hey guys,

    Back on the forums. Just had our first baby - amazing how much effort it is to take care of one.

    @Trogdor - thanks for the advice on understanding market rent, the effect on the tenant and balancing it against return.

    @Dazedmw - thanks for the heads up on the Retail Leases act. Yes, I'm from Melbourne, so it applies. Will take some time to read it.

    I've been trawling through the interwebz for sale lists, and it's quite an interesting process going through and filtering them out.

    The initial questions I ask myself are:

    1. Will the rent cover the monthly repayments on the loan?
    2. How many "For Lease" properties are there in the suburb?
    3. Is there an opportunity to improve the site? (Sub-divide, redevelop)
    4. Is it a freehold property?

    Once a site has passed through these, I need to start asking questions in line with the advice that's been given so far, especially about the tenant's lease, the tenant's business and perceived longevity.

    After speaking with someone who has had some success with RiP, I'm a bit apprehensive about the issues he raised with the one CiP he tried his hand at, namely:

    1. If a tenant leaves, it's difficult to re-lease a CiP and cash flow hurts you
    2. It is difficult to sell a CiP that is not tenanted
    3. There is too much dependence on the tenant's business
    4. It's high risk and the reward isn't that much greater

    I'll keep going with the search, but am feeling a lot more cautious now.
     
  18. Deltaberry

    Deltaberry Member

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    Sub $500k commercial likely to be not very high quality - probably quite troublesome type of investment if you're not careful. You may want to reconsider getting a medium-quality residential instead.